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Optimization of Raw Material Cost: A Case of Valve Manufacturing Industry

Conference Paper · December 2017

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 Optimization of Raw Material Cost: A Case of Valve Manufacturing Industry
Yogesh Dhumal 1 S. N. Teli 2 Vijay Majali 3
1 PG Student, Sarswati College of Engineering Kharghar Navi Mumbai, [email protected]
2 Professor, Mech. Engg. Dept at Bharati Vidyapeeth College of Engineering Navi Mumbai, [email protected]
3 Professor, Mech., Engg., Gogte Institute of Technology, Belagavi, Karnataka, [email protected]

Abstract

Globally, small and medium sized enterprises (SMEs) constitute a major role in
industrial segment. However, their raw material efficiency potential has remained largely
untapped due to several barriers. The prevailing approaches on optimization of raw material
cost in industry is below par. In this study, an effort is made to develop a raw material and
vendor management system for SMEs by integrating technical and managerial cost (of raw
material) saving activities. The major gap found during literature survey shows that the
proposed raw material management system has rarely adopted a PDCA as a process approach.
For the validation of the proposed raw material management system, a case of small sized
Indian valve manufacturing industry was selected. PDCA has specific phases for its proper
functioning. The following case analysis showed a 30% optimization in specific raw material
cost. So, this work shows that the PDCA technique can be adopted in allied process like
purchase, maintenance, inventory control, transportation and delivery of finished products,
marketing, research and design. Also, this PDCA methodology can find a use in other
manufacturing industries.
Key Words: PDCA (Plan-Do-Check-Act) cycle, EOQ (Economic Order Quantity),
Optimisation of Raw Material Cost, Vendor Selection.

Introduction

Optimization of raw material is very important in various aspects. It is one of the most decisive
factors for the quality and cost of a product. Roughly speaking, half of the quality of a product
is determined by the characteristics of raw materials in the current production technology. Use
of proper raw material is critical for producing high quality at a minimal cost.

In manufacturing industries, there are number of optimization techniques are available to

minimize or optimize the cost of production like Inventory Control Tools, Value Stream
Mapping, Lean Manufacturing, Cost of Quality and many more frame works it can be possible
through raw material, wedges, inventory, transportation, investment, resources, minimizing
waste, minimizing over production, maintenance, etc. But raw material and wedges covers
more than 65% of production cost which can be minimize by various techniques. This paper
will discuss about the importance of raw material cost and how to optimize the cost of raw
material by using Plan-Do-Check-Analysis (PDCA) which is rarely used for optimisation of
raw material cost.
The global valves market is estimated at about $46 billion. All core sectors require valves for
expansion of capacities, maintenance and repair of plants. The demand for valves is growing
in almost all areas. The demand for control and self-acting valves is going up due to factory
automation. In addition, the industry in the developed countries is in a consolidation phase with
large companies purchasing family owned businesses and at the same time establishing
manufacturing plants in the low-cost countries like China and Korea. Cost pressure on Indian
companies therefore, the Indian valve manufacturing companies will face increasing
competition from outside India especially from China. This will result in pressure to reduce
costs affecting the bottom line of the companies. India as a manufacturing hub for MNCs Large
multinationals are now looking at India as manufacturing base because of a large pool of
technically qualified people, low manufacturing costs and English-speaking population. The
companies also recognize India's capability of manufacturing quality products. Several
companies including Crane, Audco, Flowserve, Durco, AK, KSB, Spirex Sarco and Xomox
have established manufacturing plants in India.

Methods Used for Optimization of Raw Material

After analysis of literature survey, it was found that cost of raw material was achieved by
various tools and techniques as shown in figure no. 1.

30

25
% METHODS USED

20

15

10

0
INVENTORY FRAME OTHER VSM LEAN COQ PDCA
WORK

Figure No. 1 Contribution of Methods Used for Optimization of Raw Material Cost
From this analysis, it can be concluded that major gap as in PDCA analysis which is rarely
used around 5% for cost reduction through raw material.
Experimental Methodology

In every cost reduction technique, it is important to review the status of functioning before
going for any modification on same time we decided to check the past scenario of production
for company in focus. The following important steps were taken to check the method of
purchasing of raw material.

Define: Defining the problem with past scenario

Past Scenario data collection: - In these steps we have decided to take complete analysis of
past scenario which will help to improve or to make changes for achieving the cost reduction
program. The following points were going to guide the previous status.
- Methods of purchasing - Total Cost measurements.
- Inventory of Parts / Components - Estimation of delivery time
- Methods of production

Action Plan: Development of reduction program

Action plan will be the second phase which gives the reduction program after collecting and
analysing the past scenario, here the following steps will take part to select the area to develop
the reduction program.

 Listing out areas of cost reduction

After analysis of past scenario, it is very important to list out the areas of cost reduction in
valve which will give the direction and guideline for a selection of specific area for
optimization of cost.

 Root cause analysis

In valve manufacturing industries, we have seen that valve is an assembly of number of parts.
From among themselves we will select the important and efficient parts from listed areas. So
this root cause analysis will clear out the actual problems for higher cost with reference to past
scenario.

 Checking for previous bill of material

After finalizing the area to optimize the raw material cost we will check for bill of material
which will properly guide to control the cost of raw material

 Outcomes from root cause analysis

This is nothing but the result of root cause analysis, this analysis will clear the idea and go to
root of the problem, so it will help to develop the new plan for actual work to minimise the cost
of raw material through selected raw material.
DO: Proposed Experimentation

After getting the result of root cause analysis, it is very easy to define the reduction program.
So here I have defined some important steps for optimising the raw material cost. As we cannot
do direct steps to achieve best results we have to do trial and error method. Same way I have
also defined some trial and error methods for different components which are as follows.

Trial method for first component: Trial method is one of best and efficient methodology to
perform any experimentation. In this step I have decided to do the following trails on the
components in reference with previous bill of material.

Trial 01- In-house Machining

Trial 02- Checking for price variation through different vendors
Trial 03- Negotiation with vendors
After getting the satisfied results, we will end the trial on components and will apply for the
other components, if the results will not be satisfied we will continue to experiment and apply
it for other components.

Check: Calculating and estimating the effect

Checking the business case and estimation of effect is the second last step of experimentation.
In this phase the following points will be taken into consideration to analyse the results of the
experiment.
 Testing and coordination  Setting-out new Bill of Material
 Prioritization of methods and parts  Comparison with past scenario

Act: Program implementation and coordination

Act is all about standardizing the best way of implementing the new things. Even though it is
the new standard and captures how things should now be implemented, it should be thought of
as something that will be replaced by the latest ‘standard’ way of operating. Documenting and
communicating the standard is an important part of this stage. Before moving on to the next
improvement cycle, consideration should be given to trying to prevent recurrence of any issues
and importantly, to holding any gains that have been made. There are some important steps
that have been defined in literature which is listed below.
1. Preparing the infrastructure. 5. Installing the production solution
2. Coordinating with the organizations 6. Performing final verification in production
involved in implementation
3. Implementing the training to employee 7. Monitoring the solution
4. Converting the data
Primary selection of areas

There are number of parts in valve’s assembly, from which some unfinished or finished parts
are ordered directly from outside vendors and if required the machining is done on some parts
as per requirement in their workshop and most of them are self-manufactured. So it is very
important to make analysis of total assembly of valve for proper direction towards valuation
and effective optimisation of raw material for saving of cost. So after analysis of past scenario
it is very important to list out the areas of cost reduction in valve which will give the direction
and guidelines for a selection of specific area for optimization of cost.

Below Figure No. 4.1 shows the listed area as per requirement of bill of material. In this I have
selected total eight parts where there are maximum possibilities to make changes. Now next
step is to make an actual analysis. These parts play a very important role in valves function and
having high cost of production, these components are where actually changes are required. So
the next step is for selecting those components where changes can be done for better
optimization as shown in figure no. 2.

Lip Seal

Body & Seat

Side Piece Retainer

Primary
Support
Top Plate Selected
Plate
Areas

Bearing Stem

Blind
Flange

Figure No. 2 Primary Selection of Areas

Root cause analysis

In valve manufacturing industries, we have seen that valve is an assembly of number of parts.
From among themselves we will select the important and efficient parts from listed areas. In
which analysis is to be done for better changes. In this selection I have done the analysis where
actually changes are required; these components are listed below in table in which one column
is for finally selected areas and second column will show the required analysis which is to be
done in that area as shown in below table no.I.
 Table No. I Root cause analysis

To Be Analyze Seat retainer Support plate Blind Flange

Present status Finished products Finished products Finished products
Present cost Comparatively high Comparatively high Comparatively high
Size ranges DN 200 to 300 DN 150 to 300 No
Inventory available 4 to 10 3 to 4 3 to 4
Inventory cost Comparatively high Comparatively high Comparatively high
Storage/space Available Available Available
Records of Quotation Available Available Available
Delay from vendor Yes Yes Yes

Phase IV - Changes to DO

 Proper/Required changes in Bill of Material

 Comparison of prices with past records for price variations in purchased order, and
Improper product costing
 Making inventory of parts/components for better smoothening of operations
 In house machining for possible components and proper utilization of resources.
 Outsourcing of required raw material
 Negotiation with vendor in prices for higher quantity of material.
 As high costs are paid for fully finished component that will be minimized by ordering
semi-finished components
 There will not be any delay in delivery of finished components, because of in-house
machining of components.

Trial method for Seat Retainer

The valve seat mates with the valve face to seal the combustion chamber. In addition to the
seat sealing function, the valve seat also removes a significant amount of the heat away from
the valves. Two common types of seats are integrally machine valve seat and the valve seat
insert. Method is shown in figure no. 3 and the results have been plotted in figure no. 4
 Figure No. 3 Trial method for Seat Retainer

16000
Cost of Raw Material Cost of Machining Cost of Saving
14000

12000

10000
Cost in ₹

8000

6000

4000

2000

0
Original Cost Trial 01 Trial 02 Trial 03 Cost of Saving

Figure No. 4 Effect of Trial method for Seat Retainer

Trial method for Support Plate

As per the analysis of past scenario same problem is with Support Plate that doesn’t have any
comparisons for price variation with different vendors or don’t have any changes in Bill of
Material so here analysis of Support Plate is as below. Method is shown in figure no. 5.
 Figure No. 5 Trial method for Support Plate

Cost of Raw Material Macining Cost Cost of Saving

16000
14000
12000
Cost in ₹ →

10000
8000
6000
4000
2000
0
Before Modification After Modification Cost of Saving

Figure No. 6 Result of Trial Methods for Support Plate

The above Figure no. 6 shows the result of trial and error method for Support Plate so it can be
defining that again the cost is optimise after implementing the method. So, after completion
and satisfaction of final product price for Support Plate. Also, this was just trial for one
component that is Support Plate. Now the same process is carried out for one more components
that is Blind Flange because this is also one of the costly and main components of valve. Let
us see the analysis for Blind Flange.

Trial method for Blind Flange

As per the analysis of past scenario same problem is with Blind Flange that doesn’t have any
comparisons for price variation with different vendors or don’t have any changes in Bill of
Material so here analysis of Blind Flange is shown below in figure no. 7.
 14000
12000
Cost in ₹ →

10000
8000 Cost of
6000 Saving
Macining
4000
Cost
2000 Cost of Raw
0 Material
Before Modification After Modification Cost of Saving

Figure No. 7 Result of Methods for Blind Flange

After completion and satisfaction of final product price for Blind Flange from Figure it is
decided to finalize supplier as a vendor number 04. From this methodology it can be say that
the results are purely optimise in cost of material. Now this process can be extended for setting
out new bill of material for various classes and checking for comparison with past data of bill
of material to plot the actual results of this methodology.

EOQ (economic order quantity) for setting-out new bill of material

EOQ applies only when demand for a product is constant over the year and each new order is
delivered in full when inventory reaches zero. There is a fixed cost for each order placed,
regardless of the number of units ordered. There is also a cost for each unit held in storage,
commonly known as holding cost, sometimes expressed as a percentage of the purchase cost
of the item.

Figure No. 8 Economic Order Quantity Model (Muckstadt J. A. 2010)

As shown in above figure no. 8, we want to determine the optimal number of units to order so
that we minimize the total cost associated with the purchase, delivery and storage of the
product. The required parameters to the solution are the total demand for the year, the purchase
cost for each item, the fixed cost to place the order and the storage cost for each item per year.
Note that the number of times an order is placed will also affect the total cost, though this
number can be determined from the other parameters (Muckstadt J.A; 2010).

A. Variables
 P = purchase unit price, unit production cost.
 Q = order quantity.
 Q*= optimal order quantity.
 D= annual demand quantity.
 K= fixed cost per order, setup cost (not per unit, typically cost of ordering and
shipping and handling. This is not the cost of goods)
 h= annual holding cost per unit, also known as carrying cost or storage cost (capital
cost, ware house space, refrigeration, insurance, etc. usually not related to the unit
production cost)
B. The total cost function and derivation of EOQ formula
The single-item EOQ formula finds the minimum point of the following cost function:
Total Cost = purchase cost or production cost + ordering cost + holding cost
Where:
 Purchase cost: This is the variable cost of goods: purchase unit price × annual demand
quantity. This is P × D
 Ordering cost: This is the cost of placing orders: each order has a fixed cost K, and we
need to order D/Q times per year. This is K × D/Q
 Holding cost: the average quantity in stock (between fully replenished and empty) is Q/2,
so this cost is h × Q/2

𝑫𝑲 𝒉𝑸
𝑻𝑪 = 𝑷𝑫 + +
𝑸 𝟐

To determine the minimum point of the total cost curve, calculate the derivative of the total
cost with respect to Q (assume all other variables are constant) and set it equal to 0:

𝑫𝑲 𝒉
𝟎=− +
𝑸² 𝟐

Solving for Q gives Q* (the optimal order quantity):

𝟐𝐃𝐊
𝐐 ∗= 𝐡

𝟐𝑫𝑲
Economic Order Quantity 𝑸 ∗= √
𝒉

Q* is independent of P; it is a function of only K, D, h.

Phase V - Program Implementation and Coordination (Act)

Act is all about standardizing the best way of implementing the new things. Even though it is
the new standard and captures how things should now be implemented, it should be thought of
as something that will be replaced by the latest ‘standard’ way of operating, the next time you
move though the improvement cycle. Documenting and communicating the standard is an
important part of this stage. Before moving on to the next improvement cycle, consideration
should be given to trying to prevent recurrence of any issues and importantly, to holding any
gains that have been made.

1. Project implementation focused on methodology. Here's how to plan ahead to avoid surprises.
Let’s look at the major steps associated with implementation. Note that many of these activities
need to be completed ahead of time. You cannot start planning for implementation while you are
actually implementing.
2. Preparing the infrastructure. 6. Installing the production solution
3. Coordinating with the organizations 7. Performing final verification in
involved in implementation production
4. Implementing the training to employee 8. Monitoring the solution
5. Converting the data

Figure No. 9 Project Monitoring Sheet

From this project monitoring sheet as shown in figure no. 9, we can conclude the solution
for future scope in further development or if there are problems with project it will give
the feedback for any required changes.
Result from New bill of material for Seat Retainer
The new bill of material for Seat Retainer is set and the comparison with previous record shows
that almost 61 % of cost on direct raw material is saved by using PDCA methodology. So the
results of this work is plotted with reference to the graph in Figure No. 10 as below.

Old Cost New Cost

₹ 18,68,347/-
2,000,000

1,500,000
Cost In ₹

1,000,000

500,000

0
BF-1 BF-2 BF-3 BF-4 Total Saving

Figure No. 10 Results from New Bill of Material for Seat Retainer

From above graph it can be seen that by using PDCA analysis, as per EOQ model where the
exact quantity is set as per the availability of inventory space as well as low inventory cost we
can see the difference in the cost. As per previous bill of material, total cost of product with
EOQ was ₹ 46,96,239/- which reduced to ₹ 28,27,892/- it means total cost of saving in order
of Seat Retainer is ₹ 18,68,347/-.

Result from Bill of Material for Support Plate

Also the new bill of material for Support Plate is set and the comparison with previous record
shows that almost 67 % of cost on direct raw material is saved by using PDCA methodology.
So the results of this work is plotted with reference to the graph in Figure No. 11 as below.

Total Old Cost Total New Cost

800,000
700,000
600,000
Cost In ₹

500,000 ₹ 4,01,080/-
400,000
300,000
200,000
100,000
0
SP-1 SP-2 Total Saving

Figure No. 11 Results from New Bill of Material for Support Plate
From this result it can be seen that by using PDCA analysis, as per EOQ model the exact
quantity is set as per the availability of inventory space as well as low inventory cost, so that
also we can see the difference in the cost. As per previous bill of material total cost of product
with EOQ was ₹ 12,18,68/- which reduced to ₹ 8,17,600/- it means total cost of saving in order
of Support Plate is ₹ 4,01,080/-.

Result from Bill of Material for Blind Flange

Again, the new bill of material for Seat Retainer is set and the comparison with previous record
shows that almost 62 % of cost on direct raw material is saved by using PDCA methodology.
So, the results of this work are plotted with reference to the graph in Figure No. 12 as below.

Total Old Cost Total New Cost

2,000,000

1,500,000
Cost In ₹

₹ 9,50,500/-
1,000,000

500,000

0
BF-1 BF-2 Total Saving

Figure No. 12 Results from New Bill of Material for Blind Flange

In this result of Blind Flange, it can be seen that by using PDCA analysis, as per EOQ model
the exact quantity is set as per the availability of inventory space as well as low inventory cost
and the difference in the cost. As per previous bill of material total cost of product with EOQ
was ₹ 24,88,000/- which reduced to ₹ 15,37,500/- it means total cost of saving in order of Blind
Flange is ₹ 9,50,500/-.

From the above results following points were found worth discussing on PDCA impact,

 Optimized raw material cost

 Minimized the usage of finished raw materials
 Reduced waste and cycle time
 Proper Utilization of Resources
 Appropriate Supplier Identification/Vendor’s section
 Achieved Continuous Improvement
Conclusion

Action plan was prepared and executed in valve manufacturing industry, with the help of
PDCA methodology to eliminate the all root causes were found in analyse stage. Process
control systems were suggested to sustain the results. New bill of material is set with the help
of EOQ model and the results are the raw material cost is optimised as in Seat Retainer it can
be seen that total ₹ 18,68,347/- cost is saved. Also for Support Plate the total optimized cost is
₹ 4,01,080/- and in Blind Flange the total optimized cost is ₹ 9,50,500/-.

This work demonstrates that as long as the organisation continues embracing PDCA cycle
within its continuous improvement culture and applies its concepts and principles to
systematically solve the problems, it is believed that benefits such as cost savings, increase in
product’s quality and customer satisfactions will be enhanced. PDCA cycle as a powerful
business strategy has been well recognized as an imperative for achieving and sustaining
operational effectiveness, producing significant savings to the bottom line and thereby
achieving organizational excellence. If implemented properly with commitment, PDCA cycle
can put industries at the forefront of the global competition.

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 Author’s Biography

Mr. Yogesh Dhumal is currently working as Assistant Professor

in Saraswati College of Engineering, Kharghar-Navi Mumbai.
He has 5 years of teaching experience. He has published 2
research articles and one book.

Dr. S. N. Teli is currently Professor, Mechanical Engineering

Department, Bharati Vidyapeeth College of Engineering, Navi
Mumbai. He has 20 years of Teaching Experience. He has
published 85 research articles and 12 books. His research area
is Quality Engineering.

Dr. Vijay Majali is currently Professor, Mechanical

Engineering, Gogte Institute of Technology, Belagavi,
Karnataka. He has 30 years of teaching experience. He has
guided 2 PhD students and 2 are ongoing. He has published
research articles in referred Journals and conferences.

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