Materials Management BUS 3 – 141 Ensuring Continuous Supply and Optimizing Inventory Levels Feb 11, 2008

Page 2 2 Agenda –Questions from Last Week –Forming Teams –“Ensuring Continuous Supply –Optimizing Inventory Levels –Continued MRP overview

Page 3 3 Case: Connecticut Circuit Manufacturers p 173 Due Feb 18

Page 4 4 Reasons for Carrying Inventory –Revenue  Have what Customers want, when they want it  Compensate for non-linear demand that doesn’t match your capacity  Buffer for upside demand  Buffer for when competitors cannot deliver  Buffer against unexpected internal supply problems Carrying Buffer inventory is necessary, but continuous, relentless efforts to minimize variability, and thus eliminate the need for the Buffers is greatly preferred

Page 5 5 Reasons for Carrying Inventory –Cost  Minimize shortages, to avoid delays and idle time  Optimize plant, people, and equipment utilization  Obtain volume discounts for favorable unit pricing  Hedge against future price increases Optimizing utilization and unit pricing are valuable only when the goods made or purchased will SOLD to a paying Customer in a reasonable time The cost of a STOCKOUT is hard to quantify, but is to be AVOIDED at all times

Page 6 6 Types of Inventory Raw Materials Work In Process (WIP) Finished Goods (FGI) Maintenance, Repair, & Operating Supplies (MRO) Resale Items Manufacturing All Egg Mix Water Cake Icing Chocolate Cake Finished Goods Subassembly (WIP) Raw Material Raw MRO

Page 7 7 ABC Classification – the 80/20 Rule Applied * From Leenders, Johnson, Flynn, and Fearon, Purchasing and Supply Management, Thirteenth Edition, McGraw Hill Irwin

Page 8 8 ABC Classification is not based on unit cost Unit CostAnnual VolumeAnnual Spend AHigh A MediumHigh AMediumHigh ALowVery HighHigh B LowMedium B BLowHighMedium C Low C MediumLow C C Items can still stop a production line and cause Customer Shipments to be missed!

Page 9 9 Costs of Inventory –Carrying Costs  Capital (Interest and Opportunity Costs)  Warehouses and Stock rooms  Personnel  Insurance  Damage and Loss  Theft  Insurance  Taxes –Other Costs  Ordering Costs  Setup Costs  Stockout Costs Lost Sales Idle labor and equipment Expedite fees

Page Lead Time Planning Ordering Materials Set up Production Transit Packaging Receipt Will be addressed directly in Later Chapters

Page Lot Sizing: The Economic Order Quantity (EOQ) Annual Cost ($) Quantity Ordered ordering costs carrying costs EOQ total cost CTmin A conceptual model that balances Carrying Costs and Ordering Costs. Somewhat limited, but often useful for C Items * From Leenders, Johnson, Flynn, and Fearon, Purchasing and Supply Management, Thirteenth Edition, McGraw Hill Irwin

Page Lot Sizing: Order Quantities Fixed Quantity Same quantity whenever material is needed Fixed Period Calculates requirements for n periods. Example = 4 periods E O Q Calculated to balance Inventory & Ordering Costs Supplier Multiple Similar to Fixed Lot-For-Lot Maps exactly to Requirements

Page Example of how Inventory is Consumed and Reordered lead time (L) ROP cycle stock INVENTORY TIME ROP = L × d * From Leenders, Johnson, Flynn, and Fearon, Purchasing and Supply Management, Thirteenth Edition, McGraw Hill Irwin

Page Forecasting –Estimate of future events Weather Future Sales Stock Prices Other –Several Methods Quantitative History and Patterns Leading Indicators (Housing Starts & Furniture) Qualitative Judgment Consensus Forecasts WILL be wrong – the goal is to predict as closely as possible

Page A Forecast serves many Purposes Region Product Line ChannelFeaturesProductCustomer Scheduling Factory Volumes Materials Planning Balancing Factory Capacity Assessing Direct Mixes Analyzing Absorption implications Revenue Planning Revenue Scenarios Allocation Criteria Commissions & Quotas Estimating TAM and Share Pricing Targets Programs & Promotions Mixes Message to Analysts Business Need / Benefit WHAT is done and WHY?

Page Forecast accuracy varies over time ………………………………………… +n Expected Errors Over Under Time in Future (Weeks) The further into the future, the harder to predict details with accuracy

Page Relationship of Lead Time, Forecast, Inventory, and Cost Need to Forecast Inventory Levels in Pipeline Cost to Manage Risk of Excess Long Lead Time Short Lead Time High Higher Low Lower

Page Just-In-Time (JIT) Will be addressed directly in Later Chapters

Material Requirements Planning Introduction and Overview

Page Highest Level MRP Logic Product Planning Demand Planning Material Planning Master Production Scheduling Production Delivery & Service Will have Italian Food Dinner on Saturday Recipes & Ingredients MenuCooking Eating! Business Terms: Life Terms:

Page MRP Logic is Constantly Balancing Supply & Demand What you NEED (Demand) Final Assemblies – Sales Orders – Forecast Components and Subassemblies: – Higher level Starts – Higher level Work Order Shortages What you HAVE (Supply) Stockroom Inventory WIP Stores Inventory Open Work Orders Open Purchase Orders What you NEED TO GET and WHEN you need to get it (MRP output) Planned Purchase Orders Planned Work Orders Rescheduled Work Orders Rescheduled Purchase Orders

Page MRP “Nets” Inventory Balance On Hand just like a Checkbook is Equivalent to:

Page MRP Netting Logic Illustration Quantity Per Assembly Quantity On Hand Lead Time

Page MRP is EXTREMELY DEPENDENT on ACCURATE DATA Open Purchase Orders In Receiving Open Work Orders In a higher Assemblies In the Stockroom In Finished Goods Shipped In a WIP Location In WIP EVERY time inventory is moved, a TRANSACTION must be executed The system MUST see ALL inventory in ALL of these categories at ALL times