Competency 6

Question 1

Types of inventory:

Answer 1

raw materials
components
work-in-process: items in process throughout the plant
finished goods
distribution inventory

Question 2

3 inventory management objectives:

Answer 2

o customer service
o cost-efficient operations
o minimum inventory investments: Measured by any of the following:
• Inventory turnover
• Weeks of supply
• Days of supply

Question 3

functions of inventory are:

Answer 3

Anticipation inventory: Items built in anticipation of future demand. Allows company to maintain a level production strategy.
Fluctuation inventory: Protects against unexpected demand variations. Assures customer service levels.
Lot-size inventory: Results from the actual quantity purchased. Allows for lower unit costs.
Transportation inventory: Items in movement between locations. Inventory moves from manufacturer to distribution facilities.
Speculative inventory: Extra inventory built up or purchased to protect against some future events. Allows for continuous supply.
MRO inventory: Includes maintenance supplies, spare parts, lubricants, cleaning agents, and daily operating supplies. Facilitates day-to-day operations.

Question 4

Differences between inventory management for manufacturing, retail vs services

Answer 4

1. Manufacturing has tangible inventory while services do not.
2. Services need good inventory control
   - Select, train, and discipline personnel.
   - Have tight control over incoming shipments.
   - Have tight control over items leaving the facility.

Question 5

Relevant inventory costs

Answer 5

Item cost: Price paid per item plus any other direct costs associated with getting the item to the plant
Holding cost: capital, storage, and risk costs
Ordering cost: fixed, constant dollar amount incurred for each order placed
Shortage costs: Loss of customer goodwill, back-order handling, and lost sales

Question 6

Methods used to verify inventory

Answer 6

• Continuous review system: Updates inventory balances after each inventory transaction.
• Periodic review system: Requires regular periodic reviews of the on-hand quantity to determine the size of the replenishment order. (daily, weekly, monthly) (to satisfy audit documents)
• Two-bin system: One bin with enough stock to satisfy demand during replenishment time is kept in the storeroom; the other bin is placed on the manufacturing floor.
• Lead time: Time from order placement to order receipt.

Question 7

Period counting

Answer 7

A physical inventory is taken periodically, annually.

count, verify, collect tickets, reconcile

Question 8

cycle counting

Answer 8

daily counting of pre-specified items provides the following advantages:
• timely detection and correction of inaccurate records
• elimination of lost production time due to unexpected stockouts
• structured approach using employees trained in cycle counting

Question 9

Types of Aggregate Plan strategies:

Answer 9

Level aggregate plan: maintains a constant workforce and produces the same amount of product in each time period of the plan.
- Advantage: workforce stability
- Disadvantage: build up inventory or/and possible bad customer service due to extensive use of backorders.
(think of a straight line)
Chase aggregate plan: produces exactly what is needed to satisfy demand during each period.
- Advantage: that it minimizes finished goods holding costs.
- Disadvantage: constantly changing capacity needs and the need for enough equipment to meet peak demand.
(think continually chasing to meet demands)
Hybrid aggregate plan: a combination of level and chase while developing the aggregate plan.
- Need to evaluate companies current situation and limit the options to choose from. Could be more costly if not limited.

Question 10

Strategic business plan

Answer 10

A statement of long-range strategy and revenue, cost, and profit objectives

Question 11

Significance of the Marketing plan in aggregate plan:

Answer 11

the market share needed to achieve the objectives of the strategic business plan.

Question 12

Sales and operations planning

Answer 12

The process that brings together all the functional business plans
(marketing, operations, engineering, and finance) into one integrated plan

Question 13

Marketing plan

Answer 13

Identifies the markets to be served, desired levels of customer service, product competitive advantage, profit margins, and the market share needed to achieve the objectives of the strategic business plan

Question 14

Financial plan

Answer 14

Identifies the sources and uses of funds; projects cash flows, profits, return on investment; and provides budgets in support of the strategic business plan

Question 15

Engineering plan

Answer 15

Identifies new products or modifications to existing products that
are needed to support the marketing plan

Question 16

Master production schedule

Answer 16

The anticipated production schedule for the company expressed in specific configurations, quantities, and dates

Question 17

Aggregate planning option: demand based

Answer 17

Reactive
• Finished goods inventory used to absorb fluctuations and develop a stable work environment
• Back orders used when fluctuations result in unfilled orders; can be costly
o Proactive
• Attempts to shift demand patterns to minimize fluctuations by offering incentives—e.g., early-bird dinner prices at a restaurant

Question 18

Aggregate planning options: Capacity-based

Answer 18

Output capacity changed to meet demand
o Various methods used:
• Overtime — cost of labor per unit increases; short term only
• Undertime — more people than required for demand or build- up of inventory; short term only
• Subcontracting — provides extra capacity; medium to long term
• Hiring and firing — expensive; long term
• Part-timers and temps

Question 19

aggregate options: demand based vs capacity based

Answer 19

demand based - what inventory you have on hand

capacity based - what resources, people needed

Question 20

Evaluating Current Situation: Magnitude of the change & Duration of the change

Answer 20

• Point of departure
  • Current % of normal capacity
  • Options are different depending on the present situation
• Magnitude of change
  • Larger changes need more dramatic measures
• Duration of change
  • Is the length of time a brief seasonal change?
  • Is a permanent change in capacity needed?

Question 21

Aggregate Plan Strategies: Level

Answer 21

o Maintains a constant workforce
o Sets capacity to accommodate average demand
o Often used for make-to-stock products like appliances
o Disadvantage — builds inventory and/or uses back orders o Uses demand-based options

Question 22

Aggregate Plan Strategies: Chase

Answer 22

o Produces exactly what is needed each period
o Sets labor/equipment capacity to satisfy period demands
o The production rate changes in response to demand fluctuations
o Good for make-to-order products
o Disadvantage—constantly changing short-term capacity o Uses capacity-based options

Question 23

Aggregate Plan Strategies: Hybrid

Answer 23

o Uses a combination of options
o Options should be limited to facilitate execution
o May use a level workforce with overtime and temps to meet demand
o May allow inventory buildup and some back-ordering o May use short-term sourcing
o Can use demand-based and/or capacity-based options

Question 24

Steps in developing the aggregate plan

Answer 24

Step 1: Choose strategy: level, chase, or hybrid
Step 2: Determine aggregate production rate
Step 3: Calculate the size of the workforce
Step 4: Test the plan as follows:
o Calculate inventory, expected hiring/firing, overtime needs
o Calculate total cost of plan
Step 5: Evaluate performance: cost, service, human resources, and operations

Question 25

Aggregate Planning Across the Organization

Answer 25

Aggregate planning, MPS, and rough-cut capacity affect functional areas throughout the organization.
o Accounting is affected because the aggregate plan details the resources needed by operations.
o Marketing is involved, as the aggregate plan supports the marketing plan.
o Information systems maintains the databases that support demand forecasts and other such information.
o Other: Purchasing calculates long-term needs and discounts; manufacturing knows more about workforce and amount of inventory to be held.

Question 26

Enterprise Resource Planning (ERP)

Answer 26

Large, sophisticated software systems used for identifying and planning the enterprise-wide resources needed to coordinate all activities involved in producing and delivering products.
o Modules share information across all business functions.
o Can share customer sales data with the supply chain to help with
global replenishment.
o All modules are fully integrated and use a common database.

Question 27

Benefits of ERP Systems

Answer 27

ERP presents a holistic view of the business functions from a single information and IT architecture
• Increases organizational information flow
• Increases ability to incorporate better management control,
speedier decision making, and cost reductions
• Allows replacement of disparate systems; e.g., ExxonMobil replaced 300 different systems
• A study of ERP implementations reports that benefits typically start 8 months after implementation with median annual savings of $1.6 million

Question 28

Costs of ERP

Answer 28

Costs for larger ERP systems range from hundreds of thousands to
several million dollars.
• Outside consultants are usually involved in selection, configuration, and implementation.
o Consultantcostscanrunupto3timesthecostofthesystemitself.
• Additional costs for people, new computer hardware, and the development of a new, integrated database.

Question 29

Material Planning Systems

Answer 29

MRP systems translate a master schedule of final products into time-phased net requirements for subassemblies, assemblies, and parts.

Question 30

Overview of MRP

Answer 30

• MRP uses the concept of backward scheduling to determine how much and when to order and replenish.
• The CRP module checks to make sure the scheduled workload profile is feasible.
• The MPS module contains the authorized schedule.
• The BOM module contains the product structure for each unique
product.
• MRP output includes schedules for all internal activities and parts as well as orders for all supply chain items.

Question 31

Objectives of Material Requirements Planning (MRP)

Answer 31

Determines the quantity and timing of material requirements
o MRP determines what to order (checksBOM) ,how much to order (lot size rules), when to place the order (need date minus lead time), and when to schedule delivery (on date needed).
• Maintain priorities
o In a changing environment, MRP reorganizes priorities to keep plans current and viable.

Question 32

Types of Demand

Answer 32

Independent demand
o Does not depend on the demand for other products.
o Needs to be forecasted.

Dependent demand
Is the demand for component parts based on the number of end items being produced and is managed by the MRP system?

Question 33

Role of CRP

Answer 33

CRP checks to see if available capacity is sufficient to complete the orders scheduled in a particular work center during a specific time period.
- CRP calculates the workloads at critical work centers by using the planned orders generated by the MRP system. These planned orders are multiplied by the standard times to calculate individual work center loads.