Upon completion of this lesson, the successful participant will be able to: Minimum cost concepts, Economic Order Quantity (EOQ) analysis methods, Just‐in‐time (JIT) purchasing quantities based on EOQ, setup time reduction, push and pull inventory scheduling and EOQ.
Chapter 9 – Unit 1 Minimum Cost Analysis IET 350 Engineering Economics Learning Objectives – Chapter 9 Upon completion of this chapter you should understand: Minimum cost concepts Economic Order Quantity (EOQ) analysis methods Just‐in‐time (JIT) purchasing quantities based on EOQ Setup time reduction Push and pull inventory scheduling and EOQ Learning Objectives – Unit 1 Upon completion of this unit you should understand: Minimum cost concepts Economic Order Quantity (EOQ) analysis methods Just‐in‐time (JIT) purchasing quantities based on EOQ Setup time reduction Push and pull inventory scheduling and EOQ Minimum Cost Analysis Basis for understanding and applying techniques such as: Economic purchase quantity analysis Economic production quantity analysis Just‐in‐time purchasing Just‐in‐time scheduling Inventory reduction Capacity maximization Cost minimization as related to quality, maintenance and design Minimum Cost Analysis Cost analysis problems frequently include opposing costs. Changes to a variable may cause some costs to increase while other costs decrease Example J increasing production quantities reduce cost Example J increasing production quantities reduce cost associated with setup but increase costs associated with holding and storing inventory Objective of minimum cost analysis is to find the point at which total costs are minimized Minimum Cost Analysis Breakeven, isocost and make/buy analysis techniques apply to situations where cost increase relative to a key variable (output quantity) Minimum cost analysis techniques apply to situations where y q pp y some costs increase and some costs decrease relative to a key variable (typically output quantity). Concept of minimum cost occurs frequently when designing and manufacturing products “It is not enough to design a technically good product; it must be economical as well.” Minimum Cost and Manufacturing Minimum cost analysis is typically used in the manufacturing process in the following areas: Amount and type of quality control Amount of raw material and/or components in each Amount of raw material and/or components in each purchase order. Scheduling delivery frequency of materials from vendors Determination of the equipment setup and scheduling of production Determination of the production lot size Response and delivery times to customers End Unit 1 Material Go to Unit 2 Economic Order Quantity Chapter 9 – Unit 2 Economic Order Quantity IET 350 Engineering Economics Learning Objectives – Unit 2 Upon completion of this chapter you should understand: Minimum cost concepts Economic Order Quantity (EOQ) analysis methods Just‐in‐time (JIT) purchasing quantities based on EOQ Setup time reduction Push and pull inventory scheduling and EOQ 10 Inventory and Minimum Cost Technique for minimizing inventory costs is known as Economic Order Quantity (EOQ) analysis Economic Order Quantity analysis is applied to: Production lot (batch) quantity determination Production lot (batch) quantity determination Purchase quantities for raw materials or components used in the product from outside suppliers Purchase quantities for supplies required for the organization’s operation 11 Inventory and Minimum Cost Just‐in‐time (JIT) is an economic order quantity concept of having inventory and supplies available just before they are required rather than holding large quantities in inventory Just‐in‐time is a philosophy that requires a fundamental shift in how manufacturing organizations operate Just‐in‐time also requires a fundamental change in many manufacturing methods to allow quick and inexpensive changeover of equipment to produce different parts Large inventories are sometimes known as just‐in‐case g j Known and predictable quality is mandatory 12 Inventory EOQ Determination of inventory levels is a critical decision for manufacturing organizations: Inventory represents significant costs and investment of financial resources Lack of inventory leads to customer dissatisfaction and potential loss of sales Inventory must be ordered, scheduled and monitored which requires personnel resources Levels of in‐process inventory significantly affects the operation of the production area 13 Inventory EOQ Determination of EOQ requires minimizing opposing costs. Increasing order quantities and the resulting inventory: Ordering/setup costs are lower since fewer orders per time period are required p q Holding (storage) cost of inventory increases due to higher levels including the requirement of more space Funds used to purchase the inventory have a cost (ROI) Inventory is readily available for immediate sale Loss due to scrapping inventory due to obsolescence 14 Inventory EOQ Determination of EOQ requires minimizing opposing costs. Decreasing order quantities and the resulting inventory: Ordering/setup costs are higher since more orders per p q time period are required Holding (storage) cost of inventory decreases due to lower levels including the requirement for less space Funds used to purchase the inventory have a cost (ROI) Potential for lost sales due to lack of inventory Less chance of loss of inventory due to obsolescence 15 Inventory EOQ – Factors Order Cost J costs associated with obtaining quotations and placing the order for materials, supplies or components Setup Cost J costs associated with the setup or changeover of production equipment for each production batch (lot) p q p p ( ) Holding (Storage) Cost J costs associated with: Value of warehouse space Cost of the investment (ROI) Other costs such as insurance, spoilage, damage, materials handling and related storage costs 16 Inventory EOQ – Factors Total Inventory Cost = Order Cost + Storage Cost Example problem from Bowman text page 351 17 Inventory EOQ – Factors Annual Storage or Holding Cost J uses average inventory/year: ⎛Q⎞ Holding Cost = ⎜ ⎟ (H)(PV ) ⎝2⎠ where: Q = Units/order (EOQ) H = Holding costs/year (%) PV = Part Value ($/unit) 18 Inventory EOQ – Factors Annual Setup Cost: ⎛ AU ⎞ Setup Cost = ⎜ ⎟ ( SU) ⎝ Q ⎠ where: Q = Units/order (EOQ) AU = Annual Usage (units/year) SU = Setup Cost ($/setup) 19 Inventory EOQ – Factors EOQ occurs when Annual Storage Cost = Annual Setup Cost : ⎛Q⎞ ⎛ AU ⎞ ⎜ ⎟ (H)(PV ) = ⎜ ⎟ ( SU) ⎝2⎠ ⎝ Q ⎠ solving for Q EOQ = Q = ( AU)( SU) (H)(PV ) 20 Inventory EOQ – Factors EOQ = Q = ( AU)( SU) (H)(PV ) This EOQ equation yields an exact mathematical solution This EOQ equation yields an exact mathematical solution Frequently it is advantageous to modify the actual quantity ordered to better reflect schedule or customer requirements Often firms maintain a safety stock to account for unexpected orders or delays in delivery. However, safety stock adds cost 21 Inventory EOQ – Factors EOQ = Q = ( AU)(PO ) (H)(PV ) This EOQ equation yields an exact mathematical solution for This EOQ equation yields an exact mathematical solution for purchased raw materials, components or supplies The Setup Cost per order (SU) is replaced with the Purchase Cost per order (PO) Like EOQ for manufactured parts, EOQ for ordered items is adjusted within reason to account for specific situations 22 Example Problem 9.1 Example Problem 9.1 Solution 23 End Unit 2 Material Go to Unit 3 Just‐In‐Time Purchasing 24 Chapter 9 – Unit 3 Just‐In‐Time Purchasing IET 350 Engineering Economics Learning Objectives – Unit 3 Upon completion of this unit you should understand: Minimum cost concepts Economic Order Quantity (EOQ) analysis methods Just‐in‐time (JIT) purchasing quantities based on EOQ Setup time reduction Push and pull inventory scheduling and EOQ 26 Just‐In‐Time Purchasing Successful just‐in‐time ordering is based on EOQ analysis Philosophy J if the cost of executing the purchase order (PO) is reduced, the order frequency (f) increases and the quantity per order (Q) decreases per order (Q) decreases Result J reduced stored inventory and shorter response time to the customer Reduced inventory requires less space allowing for conversion to productive purposes Objective J extend J‐I‐T philosophy to all purchased materials and supplies 27 Just‐In‐Time Purchasing J‐I‐T purchasing implementation: Work with vendors to establish long‐range ordering plans under a single purchase order with more frequent q p y deliveries and smaller quantities per delivery Utilize single vendors and establish long‐term relationships. Long‐term commitments generally result in: Investment by vendor yielding lower costs to the vendor and customer Higher‐quality products with less variation. Quality assurance responsibilities are transferred to the vendor 28 Just‐In‐Time Purchasing As suppliers and customers become “partners,” costs decrease, quality increases, and schedules become more synchronized. The results of this effort are better profits for both the supplier and customer as well as higher customer satisfaction J‐I‐T purchasing requires the vendor (supplier) to make similar changes in their production system: Producing large quantities, storing inventory and shipping small frequent quantities will increase costs to the vendor resulting in higher costs to the customer 29 Quantity Discounts and EOQ Suppliers frequently offer quantity discounts for minimum order quantities or order dollar value Buyers must consider the effect on total cost if the EOQ is q y ordered or if the quantity needed for the discount is ordered Total cost is determined by totaling for the EOQ and for each discount quantity: Storage cost Ordering (acquisition) cost Material Cost 30 10 Example Problem 9.2 Example Problem 9.2 Solution 31 EOQ Concerns and Limitations Lumpy demand J usage and demand are not linear or constant. Minimum order quantity J suppliers may require minimum order quantities which are more than the EOQ q Q Transportation costs J should be factored into the ordering cost. More frequent smaller orders may result in increased total shipping costs Unit loads J there may be a standard quantity such as a pallet load which is different than EOQ 32 Just‐In‐Time History First examples of J‐I‐T can be found in the grocery industry in the United States Dairy and bakery companies began providing home y small, frequent deliveries , q delivery in the late 1800s J when the item was needed Grocery stores in the 1950s were receiving non‐ perishable items on a two week delivery schedule J small delivery quantities minimizing inventory on‐hand Japanese auto industry adapted inventory techniques used by the U.S. grocery industry in the 1970s 33 11 End Unit 3 Material Go to Unit 4 Setup Time and Inventory Scheduling 34 Chapter 9 – Unit 4 Setup Time and Inventory Scheduling IET 350 Engineering Economics Learning Objectives – Unit 4 Upon completion of this unit you should understand: Minimum cost concepts Economic Order Quantity (EOQ) analysis methods Just‐in‐time (JIT) purchasing quantities based on EOQ Setup time reduction Push and pull inventory scheduling and EOQ 36 12 Setup Time Reduction Key element of J‐I‐T in the production environment is minimum setup or changeover times If setup time can be reduced, setup costs are decreased g Q resulting in lower EOQ Figure 9‐2 Revised RL 12‐40 Setup Costs 37 Push and Pull Inventory and EOQ Pull inventory system: Supplier waits for customer order to begin assembling the final product Replenishment components are requested from prior Replenishment components are requested from prior department in the manufacturing sequence J pulled from the prior step Sequence repeats backward through the manufacturing process until raw material inventory is reached Order to replenish the materials and components issued to replenish the inventory J pulled from the supplier. 38 Push and Pull Inventory and EOQ Push inventory system: Supplier forecasts the customer needs Product is produced in advance of customer’s needs Product is pushed through the manufacturing sequence and placed in finished goods inventory until needed Push inventory system typically used when changeover times are high EOQ minimum cost analysis can be used to implement the preferable pull system 39 13 Conclusions on J‐I‐T Benefits of J‐I‐T purchasing, EOQ and quick changeover: Reduced inventory levels Increased productivity Increased inventory turnover Reduced costs Increased ROI Reduced customer delivery times Increase the organization’s overall financial results 40 Conclusions on J‐I‐T Figure 9‐3 Inventory Improvement Cycle 41 Minimum Cost Applications Maintenance costs J implementation of preventive maintenance policies that balance opposing costs of inspection and preventive replacement with costs associated with equipment downtime 42 14 Minimum Cost Applications Electrical conductor sizing J balance opposing costs of reducing resistance by increasing conductor diameter with additional cost of larger conductor 43 Minimum Cost Applications Fluid flow and pipe sizing J balance opposing costs of increasing pipe diameter to reduce flow resistance with additional cost of larger pipe 44 Minimum Cost Applications Heat transfer and insulation thickness J balance opposing costs of increasing insulation thickness to reduce heat loss with additional cost of thicker insulation 45 15 Minimum Cost Applications Structural design J balance opposing costs of increasing column spacing reduce number of columns with additional cost of heavier column cross‐section 46 End Chapter 9 Material Student Study Guide Ö Chapter 9 Homework Assignment Ö Problem Set 9 47 16 ... Objective of minimum cost analysis is to find the point at which total costs are minimized Minimum Cost Analysis Breakeven, isocost and make/buy analysis techniques apply to situations where cost increase relative to a key variable ... Cost minimization as related to quality, maintenance and design Minimum Cost Analysis Cost analysis problems frequently include opposing costs. Changes to a variable may cause some costs to increase ... (output quantity) Minimum cost analysis techniques apply to situations where y q pp y some costs increase and some costs decrease relative to a key variable (typically output quantity). Concept of minimum cost occurs frequently when designing