Accordingly, in most cases a representative random sample from the production run is taken and tested and conclusions drawn about the production lot on the basis of the results obtained from the sample. One technique that is available for such type of quality control is known as, “Statistical Quality Control”.
Statistical quality control is a set of statistical techniques designed to indicate whether or not the quality of the product is under control and within the acceptable limits. The process involves sampling and construction of statistical control charts against which the sample parameters are measured.
Since, by law of nature all finished goods are not going to be exactly the same, some limits or tolerances must be set so that if the finished product falls within these set limits, then it can be considered of acceptable quality. These tolerances are set by statistical methods.
The process of taking a random sample of predetermined size from the production lot and determining the acceptance or rejection of the lot on the basis of sample measurements is known as “acceptance sampling”.
Acceptance sampling is simply a statistical method which enables us to make the decision of either accepting or rejecting the entire lot based upon the inspection of a sample of items from the lot. This technique has certain advantages. First, it is more economical as compared to 100 percent inspection, in terms of inspection costs.
Second, it may be more accurate than 100 percent inspection it allows less opportunity for “inspection fatigue,” which can be responsible for mistakes. Third, less product damage occurs since it requires less handling of the product. Fourth rejecting the entire lot on the basis of simply sample testing can motivate the suppliers of the product to improve their quality control standards and procedures. Finally, it is the only approach in situations where quality is tested by destroying the item.
For example, if we want to test the extent of damage a car incurs in a head-on crash at 30 miles per hour, we cannot subject every car to the test. Only a small percentage of the total cars produced can be so tested and the results applied to all cars.
A control chart is a graphic record of how closely samples of product or a service conform to established standards over time. The control charts are constructed to set the acceptable upper and lower limit of an aspect that we want to control in an item. For example, we may be interested in the average weight of Pepsi bottles. Let us assume that the average weight is designed to be 12 ounces in each bottle.
However, we shall accept the entire lot of these bottles produced in a given time period, if a random sample taken from the lot shows an average of no more than 12.10 ounces and no less than 11.90 ounces.
Then 12.10 ounces and 11.90 ounces set our upper and lower limits of control, known as the upper control limit (UCL) and the lower control limit (LCL). As long as the average weights of all the random samples fall within these established limits, the lots from which these samples are taken are accepted and the process is considered to be under control.
Inventory refers to the goods or materials available for use by a business. It is a stock of materials that are used to facilitate production or to satisfy customer demand. These inventories in the form of raw materials, work- in-process and finished goods must be adequately managed and controlled. Carrying of inventory is a necessity, and proper planning and control of inventories reduces the level of stock to minimum desirable. These inventories are necessary for the following reasons.
1. Inventories help in the smooth production of the end product. Lack of availability of parts and materials when needed can disrupt the production process.
2. The customer is served better and his goodwill obtained when the item required by the customer is in the inventory and is ready to be shipped.
3. Inventory serves as a hedge against uncertain lead time. A lead time is the time gap between ordering and receiving goods. If this lead time is long or uncertain, then it is necessary to keep adequate stock of inventory as a buffer against shortages.
Inventory control is concerned with systematic acquisition, storage and recording of materials in such a manner as to furnish the desired degree of service to the operating departments and to the customers at the lowest cost. Inventory control models are designed to achieve a balance between the risk of being out of stock and the cost of carrying excess inventory. While the cost of being out of stock is comparatively intangible in terms of loss of customer goodwill and potential sales, the inventory carrying costs are fairly quantifiable.
There are basically two types of costs associated with inventories. These are the ordering costs and carrying costs. The ordering costs are associated with time, effort and money involved in ordering the inventory items. The inventory carrying costs are the costs associated with holding the items in storage for future use.
Some of the carrying costs are: the cost of capital tied up, insurance premiums on inventory, possibility of obsolescence, possible pilferage of stock, deterioration and damage to goods, storage space costs and storage labour costs.
The economic order quantity (EOQ) method is a procedure for balancing ordering costs and carrying costs so as to minimize total inventory costs. The total inventory cost associated with a particular order of items is given as:
Total inventory cost = ordering cost + carrying cost.
The objective is to balance these costs and order such quantity as to minimize the total inventory cost. The more items are ordered per order, the less will be the ordering cost because there will be fewer numbers of orders in a given period of time and the ordering cost is the same irrespective of the number of items ordered. However, it will increase the carrying costs. Similarly, more frequent orders will increase the ordering costs but reduce the inventory carrying costs. The following graph depicts the economic order quantity that would minimize the total cost.
Using basic calculus, a mathematical model can be developed to calculate such economic order quantity. Such economic order quantity can be calculated by the following established formula.
This model is based an the following assumptions:
1. The annual usage of the item is known and is constant.
2. Material when received comes in all at once and instantly.
3. The ordering cost is independent of the size of the order.
4. No quantity discounts are considered.
5. The inventory time cycle starts with a quantity q and ends with quantity zero so that the average inventory carried is q/2. The usage of items over this time cycle is constant.
Since there are a variety of items and each item may have different value and different need, it may be useful to categorize items of inventory according to the degree of control needed. The ABC inventory method classifies the inventory items into three categories according to unit costs and the number of items in the inventory. These are:
This category of items has small number of items with high unit value and accounts for about 70 percent of the total monetary value of the inventory used. These items are kept under tight control and accountability.
Items in this group represent the next 20 percent of the dollar value of the inventory usage. These items, though less valuable, do represent substantial investment and are kept under moderate control.
Items in this group are less expensive and may require less frequent attention.
According to Peter A. Alcide, the classification of items can be determined as follows:
“Multiply the cost of the item by how often the item is used in a specific period of time. Then, list all items in order of the total dollar amounts. Items representing 70 percent of the total dollar amount constitute the A group, the items constituting the next 20 percent would come in the B group and the remainder would be in C group”.
The JIT philosophy of manufacturing and purchasing was initially developed at Toyota Motor Company in Japan in the mid 1970s; The Just-in-Time approach to inventory situations requires that arrangements be made to provide materials when exactly needed, thus eliminating the need for keeping inventories.
The system is mainly used to eliminate inactive production inventory through delivery to the production line, of parts and supplies exactly when they are needed, thus managing with “zero inventory”.
This approach requires a highly synchronized and dependable timing. This concept when applied effectively is a highly cost saving device. This strategy avoids investing large amounts of money in inventory holdings.
It also avoids consuming large area of warehouse space and shop floor space as well as extensive paper work and follow-up that is required to keep track of the inventory. However, in this approach, an extreme degree of coordination is required. In addition, it requires that:
i. All independent groups cooperate fully with each other.
ii. The suppliers must ensure satisfactory quality of their supplies, since there is no safety stock to draw from in case the shipment from the supplier is rejected.
iii. The delivery must be “just-in-time’”, because no buffer stock is available.
iv. Equipment must perform reliably.
v. Daily schedules must be realistic and the employees must be skilled and dependable.
vi. A good, clear and effective communication system, a team spirit and participative management style are extremely helpful.
Evidence suggests that just-in-time delivery arrangement have produced substantial benefits for U.S. companies. In a survey conducted in 1986, inventory turnover increased by an average of 97 percent, delivery promises kept increased from 67 percent to 83 percent and scrap costs’ declined by 40 percent.