11/3/2014

Session 7-8: Inventory Management

Learning objectives are :

Tounderstand:
9 Conceptsofinventory
9Toolsandtechniquesofinventorymanagement
9Tounderstandmaintenancematerial,sparepartsandstoremanagement
9Conceptsofdisposal

Inventory Management Techniques

Selective Inventory Control
Setting of various stock levels
Systems of inventory control
Reorder point and safety stock
Application of Computers to Inventory Management
Inventory Audit
Just-in-time inventory Management
Material Requirements Planning(MRP)
Economic Order Quantity(EOQ)

DependentversusIndependent
Demand
Item
Demand
Source
Material
Type
Method of
Estimating
Demand
Planning
Method

Materials With
Materials With
Independent Demand Dependent Demand
Company Customers

Parent Items

Finished Goods

WIP & Raw Materials

Forecast & Booked

Customer Orders

Calculated

EOQ & ROP

MRP

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InputstotheProductionPlan
Marketing
Customer
Demand

Production
Capacity
Inventory
Procurement
Supplier
Performance

Aggregate
Production
Plan

Management
Return on
Investment
Capital

Finance
Cash Flow
Human
Resources
Manpower
Planning

Engineering
Design
Completion

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RequirementsforEffectiveUseof
DependentDemandInventoryModels
Effectiveuseofdependentdemandinventory
modelsrequiresthattheoperationsmanager
knowthe:

masterproductionschedule
t
d ti
h d l
specificationsorbillsofmaterial
inventoryavailability
purchaseordersoutstanding
leadtimes

ThePlanningProcess
Master Production
Schedule

Production Plan

Material
Requirements
Plan
Capacity
Requirements
Plan

No

Realistic??

Yes
Execute Capacity
Plans
Execute Material
Plans

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TypicalFocusoftheMaster
ProductionSchedule
Schedule
finished product

(Repetitive)

Number of end
items

Typical focus of the

master production
schedule

Stock to Forecast
(Product Focus)

Assemble to
Order or
Forecast

Make to Order
(Process Focus)

Schedule
modules

Schedule
orders

Number of
inputs
Print shop

Examples: Machine shop

Fine dining restaurant

Motorcycles, autos,
TVs, fast-food
restaurant

Steel, Beer,
Bread Light
bulbs, Paper

BillofMaterial
Listofcomponents&quantitiesneededto
makeproduct
Providesproductstructure(tree)
Parents:Itemsabovegivenlevel
P
t It
b
i
l l
Children:Itemsbelowgivenlevel

Showslowlevelcoding
Lowestlevelinstructureitemoccurs
Toplevelis0;nextlevelis1etc.

MaterialRequirementsPlanning(MRP)
Manufacturingcomputerinformationsystem
Determinesquantity&timingofdependent
demanditems
1

Gross Requirements

20

Scheduled Receipts

Available

25

23

Net Requirements

25

15

33

33

8
7

Planned Order Receipts

Planned Order Releases

3
30

7
7

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MRPRequirements

Computersystem
Mainlydiscreteproducts
Accuratebillofmaterial
Accurateinventorystatus
99%inventoryaccuracy

Stableleadtimes

MRPBenefits
Increasedcustomersatisfactionduetomeeting
deliveryschedules
Fasterresponsetomarketchanges
Improvedlabor&equipmentutilization
Improved labor & equipment utilization
Betterinventoryplanning&scheduling
Reducedinventorylevelswithoutreduced
customerservice

StructureoftheMRPSystem
BOM
(Bill-of-Material)

Master Production
Schedule
MRP by period report

Lead Times
(Item Master File)

MRP by date report

MRP
Programs

Planned orders report

Inventory Data
Purchase requirements
Purchasing data

Exception reports

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MRPandTheProductionPlanningProcess
Forecast &
Firm Orders

Aggregate
Production
Planning

Material
Requirements
Planning

Master
Production
Scheduling

Resource
Availability

No, modify CRP, MRP, or MPS

Capacity
Requirements
Planning

Realistic?

Yes

Shop
Floor
Schedules

MRPSystems InputandOutput

Bill of
Materials

Master
Production
Schedule
Material
Requirements
Planning System

Item Master
Planned Order
& Other
Reports

Inventory
Status

Purchasing
Data

MRPandJIT
MRP aplanningandschedulingtechnique
withfixedleadtimes
JIT awaytomovematerialexpeditiously
Integratingthetwo:
Integrating the two:
Smallbucketapproachandbackflushing
Balancedflowapproach

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LotSizingTechniques

Lotforlot
EconomicOrderQuantity
PartPeriodBalancing
WagnerWhitinAlgorithm

ExtensionsofMRP

ClosedloopMRP
Capacityplanning loadreports
MRPII ManufacturingResourcePlanning
EnterpriseResourcePlanning

MRPinServices
Canbeusedwhendemandforserviceor
serviceitemsisdirectlyrelatedtoorderived
fromdemandforotherservices
restaurant
restaurant rollsrequiredforeachmeal
rolls required for each meal
hospitals implementsforsurgery
etc.

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DistributionResourcePlanning
DRPrequires:
Grossrequirements,whicharethesameasexpected
demandorsalesforecasts
Minimumlevelsofinventorytomeetcustomerservice
levels
Accurateleadtimes
Definitionofthedistributionstructure

EconomicOrderQuantity
MinimizesthetotalcostsofCarryingandOrdering
Assumptions
1.Demandisrelativelyconstantandknown
2 Th i
2.Theitemispurchasedinlotsorbatches
i
h di l
b h
3.Preparationcostsandorderingcostsareconstant
andknown
4.Replacementoccursallatonce

WhennottouseEOQ
Maketoorderwhencustomersetsthe
quantityneeded
Shelflifeisshort
Thereareotherlimitations
h
h li i i
Toollifeislimited
Rawmaterialbatchsizehaslimitations

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RelevantCosts
Annualcostofplacingorders
Annualcostofcarryinginventory
Astheorderquantityincreases
theaverageinventoryandthecostofcarrying
inventoryincreases
thenumberofordersperyearandtheannualcost
ofplacingordersdecreases

InventoryCosts
A=annualdemand
S=orderingcostindollars/order(setup)
i =annualcarryingcostasadecimalor
percentage(interestrate)
c=unitcostindollars
Q=orderquantityinunits

AnnualOrderingCost
=(numberoforders/year)x(cost/order)
=

A
Q

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AnnualCarryingCost
=averageinventoryxcostofcarryingoneunitforone
year
=averageinventoryxunitcostxcarryingcost
average inventory x unit cost x carrying cost
=

Q
2

TotalannualCosts
Thetotalofordering andcarrying costs
=

A
Q

Q
2

TotalCostsandOrderQuantity
Thereisanorderquantitywhichminimizes
totalcosts
Thelowestcostoccurswherethecostof
ordering equals the cost of carrying
orderingequalsthecostofcarrying
Thetotalcostvarieslittleforawiderangeof
lotsizesabouttheminimum

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TotalCostsandOrderQuantity

Cost versus lot size

EconomicOrderQuantityFormula
TheEOQisfoundbysolvingfortheorder
quantity(Q)wherethecostsofcarrying
areequaltothecostsofordering

EconomicOrderQuantityFormula
Qic =AS
2Q
eo

Q2 =2AS/ic

Q
Q

the
uantity
you order

Q=2AS
ic

10

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VariationsoftheEOQModel
MonetaryUnitLotSize
Doesnotrequireunitcost(ofeachitem)
AD=annualusageindollars
S = ordering cost in dollars (nochange)
S=orderingcostindollars
(no change)
i=carryingcostasadecimal(nochange)
EOQ=2AS (indollars)
i

QuantityDiscounts
Adiscountisgivenforordersoveracertain
volume
Mustconsider:
Purchasecost
P h
t
Orderingcost(usuallyannual)
Carryingcost(alsoannual)

Ifnoorderquantityisgiven,comparethe
discountquantitywiththeEOQ

QuantityDiscounts
Encouragesbuyingmorethannormal
Willincreasetheamountofinventory
Increasesinventorycarryingcost
Decreasesorderingcosts
D
d i

Savingsfromlowerunitcostmustbeenough
tooffsethighercarryingcost

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UseofEOQWhenCostsAreNotKnown
Orderingcostsandcarryingcostsaregenerally
thesameforafamilyofitems
Costsmaynotbeeasytodetermine
Q=2AD S
i
Sandi arethesameforallitems

UseofEOQWhenCostsAreNotKnown
LetK=2S
i
ThenQ=KAD

Kisusedasaconstant

AlsoQ=annualdemand
ordersperyear
ThereforeKAD =AD

PeriodOrderQuantity(POQ)
EOQassumesdemandisuniform
thisisusuallynottrue

EOQordersaquantity thatattemptstobalancethe
costoforderingwiththecostofcarrying
POQsetsatimeinterval thatordersthesame
numberoftimesperyearastheEOQ
POQcanreducecarryingcostsespeciallywithnon
uniformdemand

12

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PeriodOrderQuantity
POQweeks =

EOQ
averageweeklyusage

Example
TheEOQforanitemis2800unitsandtheannualusageis52,000
units.WhatisthePOQ?
Averageusage=52,000/52=1,000perweek
POQ=2800/1000=2.8weeks3weeks
Whenanorderisplacedtheorderquantityissettocover
requirementsforthenext3weeks

PracticalConsiderationsWhenUsing
theEOQ

Lumpydemand
Anticipationinventory
Minimumorderquantities
Transportationinventory
Multipleorderquantities

PracticalConsiderationsWhenUsing
theEOQ
LumpyDemand
EOQassumescontinuous,constantdemand
BettertousePOQ

AnticipationInventory
A ti i ti I
t
plannedbuildupforfuturecapacityordemand

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11/3/2014

PracticalConsiderationsWhenUsing
theEOQ
Minimumorderquantities
suppliersmaysetaminimumorderquantity
maybethevalueofthetotalorder
oftenforCitems

Transportationinventory
quantityorderedmybesetbytransportation
considerations
similarapproachtoquantitydiscounts

PracticalConsiderationsWhenUsing
theEOQ
Multipleorderquantities
constrainedbypackagesize

skidload
carton / case
carton/case
barrel
etc

OrderQuantities Summary
EOQassumesuniformdemand
Givesreasonableresults
ThetotalcostcurveisflataroundtheEOQ
goodguessesareclosetotheoptimum

Costsoforderingandcarryingcanbedifficulttodetermine
Costs of ordering and carrying can be difficult to determine
theEOQconceptcanbeusedforgroupsofitems

Orderquantityinfluencesthecostsofcarryingandordering
PeriodOrderQuantityisbestforlumpydemand

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ConceptofDisposal
Obsoletematerial
Absorptionofnewtechnologyordesignchange
Rejectionduetononconformancetostandardsasto
quality
Naturalwearandtearandphysicaldeterioration
Completelywornduetolongusage
Completely worn due to long usage

Surplus
Scarp
inevitableattimes,butmustbeminimized
Possesconsiderableeconomicworth

Cases:

Costmart Warehouse

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