Test 3 Flashcards
Types of Inventory
- raw materials and purchased parts
- work in progress
- finished goods
- maintenance and repairs
- goods in transit to warehouse/customers (pipeline inventory)
Functions of Inventory
- meet anticipated demand
- permit operations (work in progress)
- smooth production requirements (seasonal demand)
- decouple operations (in case of breakdown)
- protect against stock outs (delayed deliveries/ increase in demand)
- take advantage of order cycles (economy of scale)
Goal of Inventory Management
- satisfactory levels of customer service
2. minimize inventory costs
Customer Satisfaction
- number and quantity of back orders
- complaints
Inventory Turnover (Equation)
(average COGS) / (average inventory investment)
over a give time period
Management and Inventory
- establish a system for tracking items in inventory
- make decisions about when to order and how much to order
Effective Inventory Management Requires:
- classification of inventory items
- system to keep track of inventory
- reliable forecast of demand
- knowledgeable lead time
- reasonable estimates of costs
ABC Classification System
-A items (very important)
-10 to 20 percent of the number of items in inventory
about 60 to 70 percent of the annual dollar value
-B items (moderately important)
-C items (least important)
-50 to 60 percent of the number of items in inventory
-only about 10 to 15 percent of the annual dollar value
Periodic Inventory Counting System
physical count of items in inventory made at periodic intervals
- many items ordered at one time
- lack of control between checks
- must keep extra stock
Perpetual Inventory Counting
System that keeps track of removals from inventory continuously, monitoring current levels of each item
- added cost of record keeping
- also has periodic physical count
Point of Sale (POS) Inventory Counting
a system that that electronically records actual sales
Radio Frequency Identification
RFID
Economic Order Quantity (EOQ) Model
- used to find a fixed order quantity that will minimize total (annual) inventory costs
- continuous monitoring system
EOQ Model Assumptions
- Only one product is involved
- Annual demand requirements are known
- Demand is even throughout the year
- Lead time does not vary
- Each order is received in a single delivery
- There are no quantity discounts
Purchase Cost
amount paid to buy the inventory
Holding/Carrying Costs
Cost to carry an item in inventory for a length of time, usually a year
rent + equipment + materials + labor to operate the space + insurance + security + interest +other direct expenses
Ordering Costs
Costs of ordering and receiving inventory
Shortage Cost
Costs resulting when demand exceeds the supply of inventory; unrealized profit per unit
Cshortage = Cs = Revenue per unit – Cost per unit
Lead Time
Time interval between ordering and receiving the order
Determinants of Re-Order Point
- rate of demand
- lead time
- extent of demand and/or lead time variability
- degree of stock-out risk acceptable to management
Single Period Model
Model for ordering of perishables and other items with limited useful lives
Optimal Service Level
order quantity that will minimize the long-run excess and shortage costs
Goal of Single Period Model
to identify the optimal service level
Service Level
probability that demand will not exceed the stocking level
Stock Out Risk
1 - Service Level
Excess Cost
Different between purchase cost and salvage value of items left over at the end of the period
Cexcess = Ce = Cost per unit – Salvage value per unit
Aggregate Planning Characteristics
- Intermediate Capacity Planning (2-18 months)
- good for variation in demand (seasonal, etc)
- big picture approach (groups together similar products)
Goal of Aggregate Planning
Achieve a production plan that equates demand and capacity over the entire planning horizon while minimizing cost
Rolling Horizon
- Most organizations use rolling 3, 6, 9 and 12 month forecasts
- forecasts are updated periodically
Aggregate Planning Strategies
- Proactive: Alter demand to match supply (capacity)
- Reactive: Alter supply (capacity) to match demand
- Mixed
Demand Options (Aggregate Planning Strategies)
- Pricing and Promotions
- Back Orders
- New Demand
- Yield/Revenue Management
Pricing and Promotions
Demand Option
- shift demand from peak to off-peak periods
- Price elasticity is important
Back Orders (Delayed Order Filing)
Demand Option
- Orders are taken in one period and deliveries promised for a later period
- Possible loss of sales, increased record keeping, lowered customer service level
New Demand
Demand Option
Offer different products/services during off-peak periods
Yield/Revenue Management
Demand Option
- Maximizing revenue by using a variable pricing strategy.
- Prices are set relative to capacity availability
Supply Options (Aggregate Planning Strategies)
- Hire/Fire Workers
- Inventories
- Overtime
- Part Time Workers
- Subcontracting
- Level Capacity
- Chase Demand
Level Capacity Stratgey
Supply Option
- Maintaining a steady rate of regular-time output;
- Variations in demand are met by using Inventories
Chase Demand Strategy
Supply Option
-Matching capacity to demand; the planned output for a period is set at the expected demand for that period
- Advantages
- Investment in inventory is low
- Labor utilization in high
- Disadvantages
- The cost of adjusting output rates and/or workforce levels
Dependent Demand
Demand for component parts that are used in the production of finished goods
Material requirements planning
- Planning and scheduling technique used for batch production of assembled items
- translates Master production schedule requirements to time-phased requirements
Goal of MRP
Scheduling of ordering, fabrication, assembly for timely completion while keeping low inventory levels
MRP Inputs
Master Schedule
Bill of materials
Inventory records
What does the Master schedule state?
Which end items are produced
When these items are needed
In what quantities
Bill of Materials (BOM)
A hierarchical listing of all the assemblies, parts, raw materials needed to produce on unit
Product Structure tree
a visual depiction of the requirements in the BOM, listed by levels
Cumulative Lead Time
The sum of lead times of all phases required from ordering parts to final assembly
What is the relation between the master schedule and cumulative lead time ?
The master schedule should be at least equivalent to the cumulative lead time.
MRP Processing
Takes the end item requirements and splits them into time-phased requirements based on the master schedule.
Inventory Records
Includes information of an item by time periods (Time buckets)
Gross requirements
Total expected demand ignoring supply
Schedule receipts
Open orders scheduled to arrive
Projected on hand
Expected inventory on hand
Net requirements
Actual amount needed
Planned-order receipts
quantity expected to received
Planned-order releases
Planned amount to order
Primary MRP Outputs
Order receipts
Order releases
Changes
Order receipts
amount and time of future orders
Order releases
Authorizing the execution of planned orders
Secondary MRP Outputs
Performance-control reports
Planning reports
Exception reports
Performance-control reports
Evaluation of system operation
Planning reports
Data useful for assessing future material requirements
Exception reports
Data on any major discrepancies encountered
MRP Benefits
Slide 12-24
Enterprise Resource Planning (ERP)
Captures and makes data available in real-time
