MIM 558 Comparative Operations Management Dr. Alan Raedels, C.P.M.

What are the Functions of Inventory?

What are the Costs of Inventory?

Dependent Demand Systems Objectives of MRP To determine what, how much, and when to order and when to schedule delivery? To keep priorities current for inventory planning, capacity requirement planning and shop floor control Benefits of MRP Lower inventories Better customer service Better scheduling Early warning system for delivery Long range planning Notes

Mentor Graphics Example - Implementation Expenses Technical Computer 1988 1989 HP 3000 computer $300,000 $30,000 ASK software $120,000 $14,000 Data Integrity Bills of material $ 30,000 $ 30,000 Routings & work centers $ 10,000 -- Inventory records $ 25,000 $ 10,000 Master Prod. Schedule $ 30,000 $ 30,000 People Education & training $157,000 $ 25,000 Professional assistance $ 15,000 $ 5,000 MRP II Project Leader $150,000 -- Total Costs $837,000 $144,000

Mentor Graphics Example - Benefits Assumptions 1988 1989 European sales $50 million $60 million COGS $20 million $24 million Gross margin 60% 60% Burden rate 20% 20% Total purchases $16.7 million $20 million Invntry turns (w/o MRP) 2.5 2.5 Cost of money 8% 8% Profit margin (before tax) 15% 15%

Mentor Graphics Example Benefits 1988 1989 Inventory Reduction $376,000 $448,000 Inventory @2.5 turns $8 million $9.6 million Inventory @ 6.0 turns $3.3 million $4.0 million Inventory reduction $4.7 million $5.6 million Benefit @ 8% return $376,000 $448,000 Freight cost reductions $125,000 $150,000 Telephone cost reductions $ 40,000 $ 40,000 Reduce obsolescence $254,000 $304,000 Obsolescence @ 4% & 2.5 turns $320,000 $384,000 Obsolescence @ 2% & 6.0 turns $ 66,000 $ 80,000 Reduced obsolescence costs $254,000 $304,000 1% Purchase price reduction $167,000 $200,000 Customer service benefit $225,000 $270,000 1% sales increase due to MRP $500,000 $600,000 Gross margin less 15% R&D $225,000 $270,000 Total Benefits $1,187,000 $1,412,000

Mentor Graphics Example Progress History 1984 1987 Inventory accuracy 25% 99% Bill of material accuracy ? 98% WIP accuracy ? 100% Inventory turns 2 7 Order/delivery accuracy 60% 99% On-time shipments 50% 90% Accounts receivable 80 days 60 days Output/work week Doubled

Six Phases of a Project 1. Unbridled enthusiasm 2. Disillusionment and disappointment 3. Panic 4. Search for the guilty 5. Punishment of the innocent 6. Praise and honor for nonparticipants

Requirements for MRP Feasible master schedule Accurate inventory records Accurate bills-of-material Known lead times Unique part numbers Notes

Classes of MRP Class C MRP Master Schedule Inventory BOM MRP Prod. Plan Purch. Plan

Classes of MRP Class B MRP Capacity Requirements Planning Master Schedule Inventory BOM MRP Prod. Plan Purch. Plan Shop Floor Control

Classes of MRP Class A MRP Order Entry General Ledger Capacity Requirements Planning Master Schedule Accts Rec Inventory BOM MRP Prod. Plan Purch. Plan Shop Floor Control Accts Pay Payroll