1. Materials Management BUS 3 – 141 Ensuring Continuous Supply and Optimizing Inventory Levels February, 2011

2. Page 2 2 Agenda –Questions from Last Week –Teams to be established by next week –“Ensuring Continuous Supply” –Optimizing Inventory Levels –MRP overview

3. Page 3 3 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

4. Page 4 4 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

5. Page 5 5 ABC Classification – the 80/20 Rule Applied * From Leenders, Johnson, Flynn, and Fearon, Purchasing and Supply Management, Thirteenth Edition, McGraw Hill Irwin

6. Page 6 6 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!

7. Page 7 7 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

8. Page 8 8 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

9. Page 9 9 Lead Time Planning Ordering Materials Set up Production Transit Packaging Receipt Will be addressed directly in Later Chapters

10. Page 10 10 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

11. Page 11 11 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

12. Page 12 12 A Forecast serves many Purposes Region Product Line ChannelFeaturesProductCustomer Scheduling Factory Volumes Materials Planning Balancing Factory Capacity Assessing Direct Cost @ Mixes Analyzing Absorption implications Revenue Planning Revenue Scenarios Allocation Criteria Commissions & Quotas Estimating TAM and Share Pricing Targets Programs & Promotions Margins @ Mixes Message to Analysts Business Need / Benefit WHAT is done and WHY?

13. Page 13 13 Forecast accuracy varies over time 0+1+2+3+4………………………………………… +n Expected Errors Over Under Time in Future (Weeks) The further into the future, the harder to predict details with accuracy

14. Page 14 14 Just-In-Time (JIT) Will be addressed directly in Later Chapters

15. Material Requirements Planning Introduction and Overview

16. Page 16 16 Highest Level MRP Logic Product Planning Demand Planning Material Planning Master Production Scheduling Production Delivery & Service

17. Page 17 17 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

18. Page 18 18 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

19. Page 19 19 MRP “Nets” Inventory Balance On Hand just like a Checkbook is Equivalent to:

20. Page 20 20 MRP Netting Logic Illustration Quantity Per Assembly Quantity On Hand Lead Time

21. Page 21 21 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

22. Page 22 22 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