Inventory Management 2

Current Trends Material Requirements Planning (MRP) Finished good, independent demands, previous models are most appropriate Demand for raw materials, components + sub-assemblies is said to be dependent on finished goods MRP is technique to manage dependent demand inventories - computer system using master production schedule for finished goods, bill of materials (assembly) and inventory records file

PRODUCTION Without MRP ROP SS WD ROP LT Finished Product Inv. level ROP SS Component Part WD Inv. level ROP LT Order

Re-order Point Re-order point R is level of inventory when order is placed R = L x D Where L is lead time Inventory position is stock on hand + size of outstanding order In reality:- demand fluctuates and lead time varies so most organisations build a safety stock (S.S) into their inventory policy R=LxD+SS

Re-order Point Cont’d EOQ assumes stock should be ordered when it falls below re-order level Buffer stock acts as a safety net in order to cushion the effects of variability in lead time The re-order point can be defined as the sum of demand during the lead time and buffer stock Therefore R=LxD+SS

With MRP ROP SS ROP LT ORDER

Modern Methods of Inventory Management Just-In-Time Kanban Systems Flexible Manufacturing Systems (FMS) Lean Inventory Control Agile Inventory Control Vendor Managed Inventory (VMI) Time Compression ABC – Inventory Priority

Just-In-Time To produce the right units in the right quantity at the right time Inventories are minimised – just enough components produced to produce final product. Traditional inventory systems, including MRP, are referred to as PUSH systems – once a sub-component has been produced as a result of forecasted demand for finished goods they are ‘pushed up’ to the next level.

A JIT system is a PULL system. A sub-component is produced only on request from the work centre that utilises the sub-component in assembly. Hence inventory is pulled through the system. Batch size:- in small – minimum safety stock. Therefore failure in production process at some point can cause entire production process to shut down. - Use assemblies utilising that component run out of inventory and have to stop - Assemblies that go into making the component have sufficient inventory build-up – not stop production

Effect of avoiding problems and solving them quickly The factory and its suppliers must be completely coordinated Suppliers must make JIT deliveries – smaller deliveries to accommodate the manufacturers production schedules Improved profile resulting from reduced inventory cost Improved quality Popular in Japan less so in the USA

KANBAN Systems Ordering of inventory from one production level to the next is frequently done using a KANBAN system. Ticket based, originated in Japan, keeps track of flow of component through the factory. 1. Component produced in a small batch , attached to a production ordering KANBAN which is shipped to an intermediary storage location (store). 2. The assembly that needs the component collects it from store to a holding area. Production order KANBAN is removed and replaced by a withdrawal KANBAN.

KANBAN Systems (cont’d) When a component is removed from the holding area for use in production the withdrawal KANBAN is placed in a KANBAN port. When a sufficient number of these are reached another delivery to the holding store is initiated. When production ordering KANBAN reach a predetermined amount, production of the component is resumed.

Flexible Manufacturing Systems (FMS) Computer – controlled machine, capable of performing several different operations in the production process as offered to traditional production line/assembly line where machine has dedicated function. Advantages:- Reduced WIP inventory Reduced manufacturing LT Reduced labour costs Reduced plant space requirements Increased machine utilisation Increased range of products produced However, increased cost of sophisticated machines.

Modern Methods Lean Inventory Control (cont’d) Lean refers to waste elimination form of NVA (non value added) stock holding seen as waste (sat on rack in store) Lean inventory stresses smooth, uninterrupted flow of product through the warehouse and down supply chain Note:- lean suited to conditions where supply chain cost rank higher than customer satisfaction. Main priority lies with elimination of NVA activity Unlike agile which aims for flexibility by allowing necessary non value added (NNVA) activity to be present

Modern Methods Agile Inventory Control (cont’d) Agile INV. (control differs from lean in that it allows non value adding activity to be present in the system. If necessary in order to gain level of flexibility i.e. inventory could be stored if related to flexibility this is known as necessary non value adding (NNVA) Agile approach to management of inventory suited to customers satisfaction as the main priority Marks and Spencer M & S classic example i.e. flexible inventory management approach of being able to react to large, fluctuating patterns suited to such an organisation

Modern Methods Vendor MGE. Inventory (cont’d VMI – An approach to inventory and order fulfilment whereby supplier, not customer is responsible for management and replenishing inventory Decisions made with retailer Suppliers take over task of stock replenishment by tracking product sales/inventory levels at customer Send goods only when stocks at ROL low Suppliers need to see stock levels at customers (often customer warehouse via EDI)

Modern Methods Time Compression (cont’d Time compression based on idea customer needs constantly changing Customers do not accept their needs cannot be met responsive flexibility needed to quickly adapt to demand changes Time compression not easy to implement. Re-eng of supply chain req’d Supply Chain more responsive, via fewer inventories held throughout supply chain, therefore less inventory to manage Reduced stock = reduced waste Move closer to “make-to-order” scenario which release working capital. Pressure on efficient warehouse

Modern Methods ABC – Inventory Priority (cont’d ABC analysis with a warehouse used to manage inventory relative to usage Allows manager’s time to concentrate, control more significant items of stock Class A –20% high usage = 80% total usage value Class B – 30% med.usage = 10% total usage value Class C – 50% low usage = 10% total usage value ABC analysis useful to organisations who have a wide variety of products with various different levels of usage and volume. The approach allows a better coordinated approach to these items