Quantity and Delivery Marketing 3860 – Purchasing July 20, 2004 Kimball Bullington, Ph.D. Associate Professor of Operations Management Middle Tennessee State University

Types of Inventories (1 of 2)  Raw materials & purchased parts  Partially completed goods called work in progress  Finished-goods inventories (manufacturing firms) or merchandise (retail stores)

Types of Inventories (2 of 2)  MRO  Resale Items

Functions of Inventory  Meet anticipated demand  Smooth production requirements  Decouple components (areas) of the production-distribution  Protect against stock-outs  Take advantage of order cycles  Help hedge against price increases or to take advantage of quantity discounts  Permit operations (operation lead time)

Concerns of Inventory Management  Level of customer service have the right goods, in sufficient quantities, in the right place, at the right time in other words, the customer gets what ever he/she wants when he/she wants it  Inventory-related costs ordering costs carrying costs

Objectives of Inventory Management (1 of 2)  Achieve satisfactory levels of customer service while keeping inventory costs within reasonable bounds  Two fundamental decisions how much to order when to place the order

Objectives of Inventory Management (2 of 2)  Possible performance measures customer satisfaction  number of backorders/lost sales  number of customer complaints inventory turnover  ratio of annual cost of goods sold to average inventory investment days of inventory  expected number of days of sales that can be supplied from existing inventory

Requirements for Effective Inventory Management  A system to keep track of the inventory on hand and on order  A classification system for inventory items  A reliable forecast of demand that includes an measure of forecast error  Reasonable estimates of inventory holding costs, ordering costs, and shortage costs  Knowledge of lead times and lead time variability

Inventory Counting Systems (1 of 2)  Perpetual Inventory (Continual) System Keeps track of removals from and receipts into inventory continuously  Periodic System Physical count of items made at periodic intervals

Inventory Counting Systems (2 of 2)  Universal Product Code - Bar code printed on a label that has information about the item to which it is attached  Cycle counting - taking physical counts of items and reconciling with records on a continual rotating basis

ABC Classification System  Classifying inventory according to some measure of importance and allocating control efforts accordingly A - very important B - mod. important C - least important Figure 13-1 Annual $ volume of items A B C High Low Few Many Number of Items

Demand Forecast and Lead Time Information  Reliable estimates of the amount and timing of demand  Lead time - time interval between ordering and receiving the order  Extent of variability in demand and lead time

Internal Order Cycle Order Request/Requisition Authorization signatures obtained Verification by inventory control Purchasing researches vendors, obtains quotes, etc. Order transferred to vendor Internal Order Cycle Order Request/Requisition Authorization signatures obtained Verification by inventory control Purchasing researches vendors, obtains quotes, etc. Order transferred to vendor Vendor Cycle Receives and enters order Manufactures or “picks” order Ships order Vendor Cycle Receives and enters order Manufactures or “picks” order Ships order Internal Receiving Cycle Receiving Incoming inspection Inventory control receives order, updates records, and notifies department Internal Receiving Cycle Receiving Incoming inspection Inventory control receives order, updates records, and notifies department The Typical Procurement Cycle

Cost Information  Holding or carrying costs  Ordering costs  Shortage costs

Holding or Carrying Costs  Cost to carry a unit in inventory for a length of time  Includes interest (opportunity cost), insurance, taxes, depreciation, obsolescence, deterioration  May be expressed as a percentage of unit price or as a dollar amount per unit

Ordering Costs  Cost of ordering and receiving inventory  Include determining how much is needed, preparing invoices, shipping costs, inspecting goods upon receipt for quantity and quality  Generally expressed as a fixed dollar amount, regardless of order size

Shortage Costs  Result when demand exceeds the inventory on hand  Include the opportunity cost of not making a sales, loss of customer goodwill, late charges, and in the case of internal customers, the cost of lost production or downtime  Difficult to measure, thus may have be subjectively estimated

Independent Demand MPS & Forecast A B(4) C(2) D(2)E(1) D(3) F(2) Dependent Demand MRP Independent demand is uncertain Dependent demand is certain Independent vs. Dependent Demand

JIT/Lean Production  Repetitive production system in which processing and movement of materials and goods occur just as they are needed, usually in small batches  JIT is characteristic of lean production systems  A JIT system operates with very little “fat”

JIT Goals  Eliminate disruptions to the system  Make the system flexible  Reduce setup and lead times  Minimize inventory in the system  Eliminate waste in the system

Sources of Waste  Waste from overproduction  Waste of waiting time  Transportation waste  Inventory waste  Processing waste  Waste of motion  Waste from product defects

JIT Dimensions 1.Set-up time reduction 2.Small-lot production 3.Small-lot transportation 4.Multi-process handling through automation 5.Zero-defect quality control 6.Equipment maintenance (TPM)

JIT Dimensions 7.Leveling and mixing of production 8.Withdrawal by subsequent processes (pull) 9.In-house modification and production of equipment 10.JIT supply arrangements 11.Employee involvement in continuous improvement

JIT Building Blocks  Product design  Process design  Personnel/organizational elements  Manufacturing planning and control

Product Design  Incorporate standard parts when possible  Modular design  Highly capable production systems

Process Design  Small lot sizes  Setup time reduction  Manufacturing cells  Limited work in process  Quality improvement  Production flexibility  Little inventory storage

Reduces inventory Less storage space Less rework Problems are more apparent Increases product flexibility Easier to balance operations Benefits of Small Lot Sizes

Production Flexibility  Reduce downtime for an operation by reducing changeover time  Use preventive maintenance to reduce the chance of random breakdowns  Cross-train workers to help clear bottlenecks  Reserve capacity for important customers

Personnel/Organizational Elements  Workers regarded as assets  Cross-trained workers  Continuous improvement  Cost accounting  Leadership/project management

Manufacturing Planning and Control  Level loading  Pull systems  Visual systems  Close vendor relationships  Reduced transaction processing  Preventive maintenance

Pull/Push Systems  Pull system: System for moving work (material) where a workstation pulls output from the preceding station only as it is needed  Push system: System for moving work where output is pushed to the next station as it is completed (e.g. MRP)

Kanban Production Control System  A visible signal is used to notify the supplier (or supplying department) of the need for more material  This results in a “pull” system  Supply batches are usually very small requires tight production/delivery schedules and frequent setups  Any inventory shortage, quality problem or process failure has immediate impact