OMIS 430 Exam 3 Woosley

Inventory

a stock or store of goods

Independent Demand Items

items that are ready to be sold or used

- Necessary for operations.

- Contribute to customer satisfaction.

- usually: 30% of current assets and 90% of working capital invested in inventory

Why is inventory important?

- Raw materials and purchased parts.

- WIP

- Finished goods

- Tools and Supplies

- MRO

- Goods-in-transit

Types of Inventory

1. to meet anticipated customer demand.

2. to smooth production requirements.

3. to decouple operations.

4. to protect against stockouts.

5. to take advantage of order cycles.

6. to hedge against price increases.

7. to permit operations.

8. to take advantage of quantity discounts

What are the functions of inventory?

1. achieve satisfactory levels of customer service while keeping inventory costs within reasonable bounds.

2. level of customer service: having right goods in right quantity in right place at right time.

3. costs of ordering and carrying inventories

Objectives of Inventory Control

1. establish a system for tracking items in inventory.

2. make decisions about when to order and how much to order.

What are the 2 basic functions of inventory management?

1. a system to keep track of inventory.

2. reliable forecast of demand.

3. knowledge of lead time and lead time variability.

4. reasonable estimates of: holding, ordering, and shortage costs.

5. a classification system for inventory items.

What does effective inventory management require?

Periodic System

physical count of items in inventory made at periodic intervals

Perpetual Inventory System

- system that keeps track of removals from inventory continuously, thus monitoring current levels of each item

- order placed when inventory drops to a predetermined minimum level

Two-Bin System

two containers of inventory; reorder when the first is empty

Lead Time

time interval between ordering and receiving the order

Purchase Cost

the amount paid to buy the inventory

Holding Costs

cost to carry an item in inventory for a length of time, usually a year

Ordering Costs

costs of ordering and receiving inventory

Setup Costs

the costs involved in preparing equipment for a job

Shortage Costs

costs resulting when demand exceeds the supply of inventory; often unrealized profit per unit

A-B-C approach

classifying inventory according to some measure of importance, and allocating control efforts accordingly

A items

- very important.

- 10 to 20 percent of the number of items in inventory and 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 but only

about 10 to 15 percent of the

annual dollar value.

Cycle Counting

a physical count of items in inventory

- how much accuracy is needed?

- when should cycle counting be performed?

- who should do it?

Cycle Counting Management

Single-Period Inventory Model

- model for ordering perishables and other items with limited useful lives.

- one time purchasing decision.

- seeks to balance the costs of inventory overstock and under stock.

Multi-Period Inventory Models

- fixed order quantity models: event triggered; running out of stock.

- fixed order interval models: time triggered.

Fixed Order Quantity System

1. Economic Order Quantity, EOQ, and Q-model.

2. Event triggered

3. Relies on continuous review

4. Order is placed when remaining inventory drops to a predetermined order point, R.

5. This is a perpetual system, which requires the constant updating of inventory records.

6. Favors more expensive items because average inventory is lower.

7. More appropriate for important items because of closer monitoring, which results in quicker response to potential stockouts.

8. Requires more effort to maintain due to logging of every addition and withdrawal to inventory.

Fixed Order Interval System

1. Periodic system, periodic review system, and P-model.

2. Time triggered

3. Inventory is checked (counted) only at review period, T.

4. Larger average inventory to protect against stockouts during the review period.

EOQ

identify the optimal order quantity by minimizing the sum of annual costs that vary with order size and frequency

EOQ Model

identify the optimal order quantity by minimizing the sum of annual coasts that vary with order size and frequency

Basic EOQ Model

used to find a fixed order quantity that will minimize total annual inventory costs

Single Period Model

Applications:

- overbooking of airline flights

- ordering of fashion items

- any type of one-time order

1. Only one product is involved

2. Annual demand requirements are known

3. Demand is even throughout the year

4. Lead time does not vary

5. Each order is received in a single delivery

6. There are no quantity discounts

Assumptions of the basic EOQ

EPQ

- batch most widely used in production

- certain instances, the capacity to produce a part exceeds its usage

1. Only one item is involved

2. Annual demand requirements are known

3. Usage rate is constant

4. Usage occurs continually, but production occurs periodically

5. The production rate is constant

6. Lead time does not vary

7. There are no quantity discounts

Assumptions of the EPQ Model

Quantity Discount Model

price reduction for larger orders offered to customers to induce them to but in large quantities

1. The rate of demand

2. The lead time

3. The extent of demand and/or lead time variability

4. The degree of stockout risk acceptable to management

Determinants of the reorder point

Service level

the probability that demand will not exceed supply during lead time

1. The average demand rate and average lead time

2. Demand and lead time variability

3. The desired service level

The amount of safety stock that is appropriate for a given situation depends upon:

Fixed-Order-Interval Model (FOI)

orders are placed at fixed time intervals

- Supplier's policy may encourage its use

- Grouping orders from the same supplier can produce savings in shipping costs

- Some circumstances do not lend themselves to continuously monitoring inventory position

Reasons for using FOI Model

- Tight control of inventory items

- Items from same supplier may yield savings in: ordering, packing, and shipping costs

- May be practical when inventories cannot be closely monitored

FOI Advantages

- Requires a larger safety stock

- Increases carrying cost

- Costs of periodic reviews

FOI Disadvantages

Operations Strategy

improving inventory processes can offer significant cost reduction and customer satisfaction benefits

Aggregate Planning

- intermediate-range capacity planning that typically covers a time horizon of 3 to 18 months

- useful for organizations that experience seasonal or other variations in demand

Goal of AP

achieve a production plan that will effectively utilize the organization's resources to satisfy demand

specify the optimal combination of: production rate, workforce level, and inventory on hand

What is the main purpose of the Aggregate Operations Plan?

Sales and Operations Planning

- Intermediate-range planning decisions to balance supply and demand, integrating financial and operations

- Since the plan affects functions throughout the organization, it is typically prepared with inputs from sales, finance, and operations

Long-Rage Plans

- long-term capacity

- location

- layout

- product design

- work system design

Intermediate Plans

- employment

- output

- finished goods inventories

- subcontracting

- backorders

Short-Range Plans

- production lot size

- order quantities

- machine loading

- job assignments

- job sequencing

- work schedules

1. maintain a certain amount of excess capacity to handle increases in demand

2. maintain a degree of flexibility in dealing with change: temp workers, overtime

3. wait as long as possible before committing to a certain level of supply capacity

Strategies to counter variation:

- Resources: workforce/production, facilities/equipment

- Demand Forecast

-Policies: workforce changes, subcontracts, overtime, inventory changes, back orders

- Costs: back orders, hiring/firing, overtime, inventory changes

Aggregate Planning Inputs

-total cost of plan

- projected levels of: inventory, output, employment, subcontracts, back orders

Aggregate Planning Outputs

Proactive

AP Strategy: alter demand to match capacity

Reactive

AP Strategy: alter capacity to match demand

Level Capacity Strategy

maintaining a steady rate of regular-time output while meeting variations in demand by a combination of options: inventories, overtime, part-time workers, subcontracts, and back orders

(maintain workforce)

Chase Demand Strategy

- matching capacity to demand; the planned output for a period is set at the expected demand for that period

- not good for industries that require highly skilled labor or labor competition is fierce

- cost effective during high unemployment or when low-skilled labor is ok

Chase Approach

Advantages: investment in inventory is low, labor utilization is high

Disadvantage: cost of adjusting output rates and/or workforce levels

Level Approach

Advantages: stable output rates and workforce

Disadvantages: greater inventory costs, increased overtime and idle time, resource utilizations vary over time

Yield Management

an approach to maximizing revenue by using a strategy of variable pricing, prices are set relative to capacity availability

Dependent Demand

demand for items that are subassemblies or component parts to be used in the production of finished goods

Dependent Demand

What type of demand does MRP deal with?

Lumpy Demand

large quantities are used at specific points in time with little or no usage at other times

MRP

a computer-based information system that translates master schedule requirements for end items into time-phased requirements for subassemblies, components, and raw materials

Master Schedule

- one of three primary inputs in MRP

- states which end items are to be produced, when these are needed, and in what quantities

- should cover a period that's at least equivalent to the cumulative lead time

Cumulative Lead Time

the sum of the lead times that sequential phases of a process require, from ordering of parts or raw materials to completion of final assembly

Bill of Materials

a listing of all of the assemblies, subassemblies, parts, and raw materials needed to produce one unit of a product

Product Structure Tree

a visual depiction of the requirements in a bill of materials, where all components are listed by levels

Low-Level Coding

restructuring the bill of material so that multiple occurrences of a component all coincide with the lowest level at which the component occurs

Inventory Records

includes information on the status of each item by time period, called time buckets

MRP Processing

takes the end item requirements specified by the master schedule and "explodes" them into time-phased requirements for assemblies, parts, and raw materials offset by lead times

Gross Requirements

total expected demand

Scheduled Recipets

open orders scheduled to arrive

Projected on hand

Expected inventory on hand at the beginning of each time period

Net Requirments

- Actual amount needed in each time period

- GR-SR-Inv

Planned-Order Recipets

Quantity expected to received at the beginning of the period offset by lead time

Planner-Order Releases

Planned amount to order in each time period

Pegging

process of identifying the parent items that have generated a given set of material requirements for an item

Lot-for-Lot Ordering

- The order or run size is set equal to the demand for that period

- Minimizes investment in inventory

- It results in variable order quantities

- A new setup is required for each run

Economic Order Quantity

- Can lead to minimum costs if usage of item is fairly uniform

- This may be the case for some lower-level items that are common to different 'parents'

- Less appropriate for 'lumpy demand' items because inventory remnants often result

Fixed Period Ordering

Provides coverage for some predetermined number of periods

Safety Time

Scheduling orders for arrival or completions sufficiently ahead of their need that the probability of shortage is eliminated or significantly reduced

Backflushing

Exploding an end item's BOM to determine the quantities of the components that were used to make the item

System Nervousness

how a system might react to changes

Time Fences

Series of time intervals during which order changes are allowed or restricted:

- The nearest fence is most restrictive

- The farthest fence is least restrictive