In this chapter, the following content will be discussed: What is inventory, cost of inventory, benefits of inventory, multi period model, optimal quantity to order, safety stock, periodic review system, single period inventory model.
LECTURE 31 LSM733-PRODUCTION OPERATIONS MANAGEMENT By: OSMAN BIN SAIF CHAPTER : Inventory Management Functions of Inventory To decouple or separate various parts of the production process To decouple the firm from fluctuations in demand and provide a stock of goods that will provide a selection for customers To take advantage of quantity discounts To hedge against inflation Types of Inventory ỵ Raw material ỵ þ Work-in-process þ þ þ Undergone some change but not completed A function of cycle time for a product Maintenance/repair/operating (MRO) ỵ ỵ Purchased but not processed Necessary to keep machinery and processes productive Finished goods ỵ Completed product awaiting shipment Inventory Management ỵ ỵ How inventory items can be classified How accurate inventory records can be maintained ABC Analysis ỵ Divides inventory into three classes based on annual dollar volume ỵ ỵ ỵ ỵ Class A - high annual dollar volume Class B - medium annual dollar volume Class C - low annual dollar volume Used to establish policies that focus on the few critical parts and not the many trivial ones ABC Analysis Item Stock Number #10286 Percent of Number of Items Stocked 20% Annual Volume (units) 1,000 x Unit Cost $ 90.00 = Annual Dollar Volume $ 90,000 Percent of Annual Dollar Volume Class 38.8% A 72% #11526 500 154.00 77,000 33.2% A #12760 1,550 17.00 26,350 11.3% B 350 42.86 15,001 6.4% 1,000 12.50 12,500 5.4% #10867 #10500 30% 23% B B ABC Analysis Item Stock Number Percent of Number of Items Stocked Annual Volume (units) x Unit Cost = Annual Dollar Volume Percent of Annual Dollar Volume Class #12572 600 $ 14.17 $ 8,502 3.7% C #14075 2,000 60 1,200 5% C 100 8.50 850 4% #01307 1,200 42 504 2% C #10572 250 60 150 1% C $232,057 100.0% #01036 50% 8,550 5% C Holding, Ordering, and Setup Costs þ þ þ 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 Holding Costs Category Housing costs (building rent or depreciation, operating costs, taxes, insurance) Cost (and range) as a Percent of Inventory Value 6% (3 - 10%) Material handling costs (equipment lease or depreciation, power, operating cost) 3% (1 - 3.5%) Labor cost 3% (3 - 5%) Investment costs (borrowing costs, taxes, and insurance on inventory) Pilferage, space, and obsolescence Overall carrying cost 11% (6 - 24%) 3% (2 - 5%) 26% 10 Table 12.1 Aggregate Planning Options Option Advantages Disadvantages Some Comments Changing inventory levels Changes in Inventory human holding cost resources are may increase gradual or Shortages may none; no abrupt result in lost production sales changes Applies mainly to production, not service, operations Varying workforce size by hiring or layoffs Avoids the costs Hiring, layoff, of other and training alternatives costs may be significant Used where size of labor pool is large 38 Table 13.1 Aggregate Planning Options Option Advantages Disadvantages Some Comments Varying production rates through overtime or idle time Matches seasonal fluctuations without hiring/ training costs Overtime premiums; tired workers; may not meet demand Allows flexibility within the aggregate plan Subcontracting Permits flexibility and smoothing of the firm’s output Loss of quality control; reduced profits; loss of future business Applies mainly in production settings 39 Table 13.1 Aggregate Planning Options Option Advantages Disadvantages Some Comments High turnover/ training costs; quality suffers; scheduling difficult Good for unskilled jobs in areas with large temporary labor pools Using parttime workers Is less costly and more flexible than full-time workers Influencing demand Tries to use Uncertainty in excess demand Hard capacity to match Discounts draw demand to new customers supply exactly Creates marketing ideas Overbooking used in some businesses 40 Table 13.1 Aggregate Planning Options Option Advantages Disadvantages Some Comments Back ordering during highdemand periods May avoid overtime Keeps capacity constant Customer must be willing to wait, but goodwill is lost Many companies back order Counterseasonal product and service mixing Fully utilizes resources; allows stable workforce May require skills or equipment outside the firm’s areas of expertise Risky finding products or services with opposite demand patterns 41 Table 13.1 Graphical Methods ỵ ỵ ỵ ỵ Popular technique scenarios þ Constant workforce þ Subcontracting þ Hiring and Firing Easy to understand and use Trial-and-error approaches that not guarantee an optimal solution Require only limited computations 42 CHAPTER : MATERIAL REQUIREMENT PLANNING 43 Master Production Schedule (MPS) ỵ ỵ þ þ þ 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 44 Master Production Schedule (MPS) ỵ þ þ þ þ MPS is established in terms of specific products Schedule must be followed for a reasonable length of time The MPS is quite often fixed or frozen in the near term part of the plan The MPS is a rolling schedule The MPS is a statement of what is to be produced, not a forecast of demand 45 The Planning Process Production Capacity Inventory Marketing Customer demand Procurement Supplier performance Management Return on investment Capital Finance Cash flow Human resources Manpower planning Aggregate production plan Master production schedule Engineering Design completion Change production plan? 46 Figure 14.1 The Planning Process Master production schedule Change requirements? Change master production schedule? Material requirements plan Change capacity? Capacity requirements plan No Realistic? Yes Is capacity plan being met? Is execution meeting the plan? Execute capacity plans Execute material plans 47 Figure 14.1 Bills of Material ỵ ỵ List of components, ingredients, and materials needed to make product Provides product structure þ þ Items above given level are called parents Items below given level are called children 48 Gross Requirements Plan Week Required date Order release date 50 Required date Order release date 150 Required date Order release date 200 Required date Order release date 300 200 600 300 600 50 200 Lead Time week weeks 150 week 300 weeks 300 300 Required date Order release date 100 100 Required date Order release date Required date Order release date weeks 200 week 300 weeks 49 Table 14.3 Net Requirements Plan 50 Net Requirements Plan 51 THANK YOU ... demand p = Daily production rate d = Daily demand/usage rate Setup cost = (D/Q)S Holding cost = (D/Q)S = Q2 = Q* = p HQ[1 - (d/p)] HQ[1 - (d/p)] 2DS H[1 - (d/p)] 2DS H[1 - (d/p)] 17 Production Order... another 33 Fixed-Period (P) Example jackets are back ordered It is time to place an order No jackets are in stock Target value = 50 Order amount (Q) = Target (T) - On-hand inventory - Earlier orders... Manpower planning Aggregate production plan Master production schedule Engineering Design completion Change production plan? 46 Figure 14.1 The Planning Process Master production schedule Change