1. 12 Inventory Management PowerPoint presentation to accompany
Heizer and Render
Operations Management, 10e
Principles of Operations Management, 8e
PowerPoint slides by Jeff Heyl
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2. Inventory Management
The objective of inventory management is to strike a balance between inventory investment and customer service
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3. Types of Inventory Raw material Work-in-process
Purchased but not processed
Work-in-process
Undergone some change but not completed
A function of cycle time for a product
Maintenance/repair/operating (MRO)
Necessary to keep machinery and processes productive
Finished goods
Completed product awaiting shipment
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4. The Material Flow Cycle
Cycle time
95% 5%
Input Wait for Wait to Move Wait in queue Setup Run Output
inspection be moved time for operator time time
Figure 12.1
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5. Independent Versus Dependent Demand
Independent demand - the demand for item is independent of the demand for any other item in inventory
Dependent demand - the demand for item is dependent upon the demand for some other item in the inventory
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6. Holding, Ordering, and Setup Costs
Holding costs - the costs of holding or “carrying” inventory over time
Ordering costs - the costs of placing an order and receiving goods
Setup costs - cost to prepare a machine or process for manufacturing an order
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7. Inventory Models for Independent Demand
Need to determine when and how much to order
Basic economic order quantity
Production order quantity
Quantity discount model
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8. Basic EOQ Model Important assumptions
Demand is known, constant, and independent
Lead time is known and constant
Receipt of inventory is instantaneous and complete
Quantity discounts are not possible
Only variable costs are setup and holding
Stockouts can be completely avoided
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9. An EOQ Example Q* = 2DS H Q* = 2(1,000)(10) 0.50 = 40,000 = 200 units
Determine optimal number of needles to order
D = 1,000 units
S = $10 per order
H = $.50 per unit per year
Q* =
2DS H
Q* =
2(1,000)(10)
0.50
= 40,000 = 200 units
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10. Expected number of orders
An EOQ Example
Determine optimal number of needles to order
D = 1,000 units Q* = 200 units
S = $10 per order
H = $.50 per unit per year
= N = =
Expected number of orders
Demand
Order quantity D Q*
N = = 5 orders per year
1,000
200
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11. Expected time between orders Number of working days per year
An EOQ Example
Determine optimal number of needles to order
D = 1,000 units Q* = 200 units
S = $10 per order N = 5 orders per year
H = $.50 per unit per year
= T =
Expected time between orders
Number of working days per year N
T = = 50 days between orders
250 5
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12. An EOQ Example Determine optimal number of needles to order
D = 1,000 units Q* = 200 units
S = $10 per order N = 5 orders per year
H = $.50 per unit per year T = 50 days
Total annual cost = Setup cost + Holding cost
TC = S H D Q 2
TC = ($10) ($.50)
1,000
200 2
TC = (5)($10) + (100)($.50) = $50 + $50 = $100
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13. Lead time for a new order in days Number of working days in a year
Reorder Points
EOQ answers the “how much” question
The reorder point (ROP) tells “when” to order
ROP =
Lead time for a new order in days
Demand per day
= d x L
d = D
Number of working days in a year
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14. Number of working days in a year
Reorder Point Example
Demand = 8,000 iPods per year
250 working day year
Lead time for orders is 3 working days
d = D
Number of working days in a year
= 8,000/250 = 32 units
ROP = d x L
= 32 units per day x 3 days = 96 units
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15. Exercise
The Warren Fisher Computer Corporation purchases 8,000 transistors each year as component in minicomputers. The cost of carrying one transistor in inventory is RM3. Ordering cost RM30. Calculate the:
Optimal order quantity
Expected no of order each year
Expected time between order (no of working day = 200 days)
Total cost
Reorder point (lead time is 3 days)
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16. Production Order Quantity Model
Used when inventory builds up over a period of time after an order is placed
Used when units are produced and sold simultaneously
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17. What’s the Difference? EPQ EOQ
The company will produce its own quantity or the parts are going to be shipped to the company while they are being produced, therefore the orders are available or received in an incrementally manner while the products are being produced.
EOQ
While the EOQ model assumes the order quantity arrives complete and immediately after ordering, meaning that the parts are produced by another company and are ready to be shipped when the order is placed.
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18. Production Order Quantity Model
Inventory level
Time
Part of inventory cycle during which production (and usage) is taking place
Demand part of cycle with no production
Maximum inventory t
Figure 12.6
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19. Production Order Quantity Example
D = 1,000 units p = 8 units per day
S = $10 d = 4 units per day
H = $0.50 per unit per year
Q* =
2DS
H[1 - (d/p)]
= or 283 hubcaps
Q* = = ,000
2(1,000)(10)
0.50[1 - (4/8)]
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20. Production Order Quantity Model
Note:
d = 4 = = D
Number of days the plant is in operation
1,000
250
When annual data are used the equation becomes
Q* =
2DS
annual demand rate
annual production rate
H 1 –
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21. Exercise for Production Order Quantity Model
Carpet Store has its own manufacturing facility in which it produces Super Shag carpet.
The cost of setting up the production process to make Super Shag carpet is RM150. The carrying cost is RM0.75 per yard and D=10,000 yards per year. The operation day=311days and it produces 150 yards of the carpet per day. Calculate:
Optimal order size
Total cost
Production run length
Number of production run
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22. Quantity Discount Models
Reduced prices are often available when larger quantities are purchased
Trade-off is between reduced product cost and increased holding cost
Total cost = Setup cost + Holding cost + Product cost
TC = S H + PD D Q 2
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23. Quantity Discount Example
Wohl’s Discount Store stocks toy race cars. Recently, the store has been given a quantity discount schedule for these cars. This quantity schedule was shown in the following table. Ordering cost is RM49.00 and annual demand is 5,000 race cars. Inventory carrying cost is 20% from price per unit.
Determine the quantity that will minimize the total inventory cost
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24. Quantity Discount Models
A typical quantity discount schedule
Discount Number
Discount Quantity
Discount (%)
Discount Price (P) 1
0 to 999
no discount
$5.00 2
1,000 to 1,999 4
$4.80 3
2,000 and over 5
$4.75
Table 12.2
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25. Quantity Discount Models
Steps in analyzing a quantity discount
For each discount, calculate Q*
If Q* for a discount doesn’t qualify, choose the smallest possible order size to get the discount
Compute the total cost for each Q* or adjusted value from Step 2
Select the Q* that gives the lowest total cost
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26. Quantity Discount Example
2DS IP
Calculate Q* for every discount
Q1* = = 700 cars/order
2(5,000)(49)
(.2)(5.00)
Q2* = = 714 cars/order
2(5,000)(49)
(.2)(4.80)
Q3* = = 718 cars/order
2(5,000)(49)
(.2)(4.75)
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27. Quantity Discount Example
2DS IP
Calculate Q* for every discount
Q1* = = 700 cars/order
2(5,000)(49)
(.2)(5.00)
Q2* = = 714 cars/order
2(5,000)(49)
(.2)(4.80)
1,000 — adjusted
Q3* = = 718 cars/order
2(5,000)(49)
(.2)(4.75)
2,000 — adjusted
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28. Quantity Discount Example
Discount Number
Unit Price
Order Quantity
Annual Product Cost
Annual Ordering Cost
Annual Holding Cost
Total 1
$5.00
700
$25,000
$350
$25,700 2
$4.80
1,000
$24,000
$245
$480
$24,725 3
$4.75
2,000
$23.750
$122.50
$950
$24,822.50
Table 12.3
Choose the price and quantity that gives the lowest total cost
Buy 1,000 units at $4.80 per unit
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29. Exercise
Whole Nature Foods sells a gluten-free product for which the annual demand is 5,000 boxes. At the moment, it is paying RM6.40 for each box; carrying cost is 25% of the unit costl ordering cost are RM25. A new supplier has offered to sell the same item for RM6.00 if Whole Nature Foods buys at least 3,000 boxes per order. Should the company change their supplier?
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30. Material Requirement Planning
MRP
Material Requirement Planning
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31. Wheeled Coach Largest manufacturer of ambulances in the world
International competitor
12 major ambulance designs
18,000 different inventory items
6,000 manufactured parts
12,000 purchased parts
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32. Dependent Demand
For any product for which a schedule can be established, dependent demand techniques should be used
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33. Dependent Demand Benefits of MRP Better response to customer orders
Faster response to market changes
Improved utilization of facilities and labor
Reduced inventory levels
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34. Dependent Demand
The demand for one item is related to the demand for another item
Given a quantity for the end item, the demand for all parts and components can be calculated
In general, used whenever a schedule can be established for an item
MRP is the common technique
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35. Dependent Demand
Effective use of dependent demand inventory models requires the following
Master production schedule
Specifications or bill of material
Inventory availability
Purchase orders outstanding
Lead times
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36. Master Production Schedule (MPS)
Specifies what is to be made and when
Must be in accordance with the aggregate production plan
Inputs from financial plans, customer demand, engineering, supplier performance
As the process moves from planning to execution, each step must be tested for feasibility
The MPS is the result of the production planning process
Aggregate planning – determining quantity and timing of production.
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37. Bills of Material
List of components, ingredients, and materials needed to make product
Provides product structure
Items above given level are called parents
Items below given level are called children
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38. Packing box and installation kit of wire, bolts, and screws
BOM Example
Product structure for “Awesome” (A) A
Level
B(2) Std. 12” Speaker kit
C(3)
Std. 12” Speaker kit w/ amp-booster 1
E(2)
F(2)
Packing box and installation kit of wire, bolts, and screws
Std. 12” Speaker booster assembly 2
D(2)
12” Speaker
G(1)
Amp-booster 3
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39. Packing box and installation kit of wire, bolts, and screws
BOM Example
Product structure for “Awesome” (A) A
Level
B(2) Std. 12” Speaker kit
C(3)
Std. 12” Speaker kit w/ amp-booster 1
Part B: 2 x number of As = (2)(50) = 100
Part C: 3 x number of As = (3)(50) = 150
Part D: 2 x number of Bs
+ 2 x number of Fs = (2)(100) + (2)(300) = 800
Part E: 2 x number of Bs
+ 2 x number of Cs = (2)(100) + (2)(150) = 500
Part F: 2 x number of Cs = (2)(150) = 300
Part G: 1 x number of Fs = (1)(300) = 300
E(2)
F(2)
Packing box and installation kit of wire, bolts, and screws
Std. 12” Speaker booster assembly 2
D(2)
12” Speaker
G(1)
Amp-booster 3
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40. Accurate Records
Accurate inventory records are absolutely required for MRP (or any dependent demand system) to operate correctly
Generally MRP systems require more than 99% accuracy
Outstanding purchase orders must accurately reflect quantities and scheduled receipts
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41. Lead Times The time required to purchase, produce, or assemble an item
For production – the sum of the order, wait, move, setup, store, and run times
For purchased items – the time between the recognition of a need and the availability of the item for production
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42. Time-Phased Product Structure
Must have D and E completed here so production can begin on B
Start production of D
| | | | | | | |
Time in weeks
2 weeks
1 week D E
1 week
2 weeks to produce B C E
1 week A F
2 weeks
3 weeks
2 weeks D G
1 week
Figure 14.4
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43. MRP Structure Figure 14.5 Data Files Output Reports BOM Master
Purchasing data
BOM
Lead times
(Item master file)
Inventory data
Output Reports
MRP by period report
MRP by date report
Planned order report
Purchase advice
Exception reports
Order early or late or not needed
Order quantity too small or too large
Master
production schedule
Material requirement planning programs (computer and software)
Figure 14.5
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44. Determining Gross Requirements
Starts with a production schedule for the end item – 50 units of Item A in week 8
Using the lead time for the item, determine the week in which the order should be released – a 1 week lead time means the order for 50 units should be released in week 7
This step is often called “lead time offset” or “time phasing”
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45. Determining Gross Requirements
From the BOM, every Item A requires 2 Item Bs – 100 Item Bs are required in week 7 to satisfy the order release for Item A
The lead time for the Item B is 2 weeks – release an order for 100 units of Item B in week 5
The timing and quantity for component requirements are determined by the order release of the parent(s)
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46. Determining Gross Requirements
The process continues through the entire BOM one level at a time – often called “explosion”
By processing the BOM by level, items with multiple parents are only processed once, saving time and resources and reducing confusion
Low-level coding ensures that each item appears at only one level in the BOM
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47. Gross Requirements Plan
Week
Lead Time
Required date Order release date week
Required date Order release date weeks
Required date Order release date week
Required date Order release date weeks
Required date Order release date weeks
Required date Order release date week
Required date Order release date weeks
Table 14.3
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48. Net Requirements Plan
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49. Net Requirements Plan
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50. Determining Net Requirements
Starts with a production schedule for the end item – 50 units of Item A in week 8
Because there are 10 Item As on hand, only 40 are actually required – (net requirement) = (gross requirement - on- hand inventory)
The planned order receipt for Item A in week 8 is 40 units – 40 =
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51. Determining Net Requirements
Following the lead time offset procedure, the planned order release for Item A is now 40 units in week 7
The gross requirement for Item B is now 80 units in week 7
There are 15 units of Item B on hand, so the net requirement is 65 units in week 7
A planned order receipt of 65 units in week 7 generates a planned order release of 65 units in week 5
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52. Determining Net Requirements
A planned order receipt of 65 units in week 7 generates a planned order release of 65 units in week 5
The on-hand inventory record for Item B is updated to reflect the use of the 15 items in inventory and shows no on-hand inventory in week 8
This is referred to as the Gross-to-Net calculation and is the third basic function of the MRP process
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