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Inventory Costs
• Holding (carrying) cost – cost to carry an item in inventory for a length of time, usually a year. (e.g., insurance, depreciation, breakage, warehousing costs, etc.)
• Ordering cost – costs of ordering and receiving inventory.(e.g., time and labor spend on ordering and receiving, shipping, inspection upon arrival, moving, etc.
• Shortage costs – costs resulting when demand exceeds the supply of inventory. (Safety stock – extra inventory carried to reduce the probability of a stockout due to demand and/or lead time variability.)
• Small order size: low holding costs & high ordering costs
• Large order size: high holding costs & low ordering costs
EOQ (Economic Order Quantity) definition:
• EOQ is used to identify a fixed order size that will minimize the sum of the annual costs of holding inventory and ordering inventory.
EOQ model assumptions:
1. Only one product is involved.
2. No constraints are placed (such as truck capacity or materials handling limitations) on the size of each lot.
3. The only two relevant costs are the inventory holding cost and the fixed cost per lot for ordering or setup.
4. Annual demand requirements are known.
5. Demand is spread evenly throughout the year so that the demand rate is reasonably constant (e.g., always 10 units per day).
6. Lead time is known and constant.
7. Each order is received in a single delivery.
8. There are no quantity discounts.
9. Decisions for one item can be made independently of decisions for other items. In other words, no advantage is gained in combining several orders going to the same supplier.
3 Basic Elements of Lean Systems:
• Demand driven
• Focuses on waste reduction
• Dedicated to excellence and continuous improvement
8 Types of Waste
1. Overproduction
2. Inappropriate processing / Processing waste (unnecessary production steps or using unnecessary equipment)
3. Waiting time
4. Unnecessary transporting
5. Motion (unnecessary movement – bending, lifting, walking)
6. Inventory
7. Product defects
8. Underutilization of employees / Inefficient work methods
Push vs. Pull Systems
• PULL Method:
o Customer demand activates the production of a good or service.
o A workstation pulls output from the preceding station as it is needed.
o Output of the final operation is pulled by customer demand.
o Work moves on in response to demand from the next stage in the process.
o Work moves just in time for the next operation.
• PUSH Method:
o Uses forecasts of demand and produces the item before the customer orders it.
o When work is finished at a workstation, the output is pushed to the next station.
o Work moves on as it is complete, without regard to the next station’s readiness.
o Work may pile up at workstations that fall behind schedule.
Aggregate Planning:
• Intermediate-range capacity planning, usually covering 2 to 12 months.
• Making intermediate-range decisions to balance supply (capacity) and demand, integrating financial and operational planning.
Aggregate Planning Strategies
Proactive Strategies – Demand Options:
• Pricing
• Promotion
• Back Orders
• New Demand
Reactive Strategies – Supply Options:
• Employment Related Options (chase strategy, level strategy, mixed strategy)
• Inventories
• Subcontracting
BOM Key Terminologies
• Component: an item that goes through one or more operations to be transformed into or become part of one or more parents.
• Parent: any product that is manufactured from one or more components.
• End item: The final product sold to a customer.
• Intermediate item: An item that has at least one parent and at least one component.
• Subassembly: An intermediate item that is assembled from more than one component.
• Purchased item: An item that has one or more parents but no components because it comes from a supplier.
Inventory Records
• Gross Requirements: The total demand derived from all parent production plans.
• Scheduled Receipts: Orders that have been placed but not yet completed.
• Projected on-hand inventory: An estimate of the amount of inventory available each week after gross requirements have been satisfied.
• Planned receipts: Orders that are not yet released to the shop or the supplier.
• Planned order release: An indication of when an order for a specific quantity of an item is to be issued.
Supply Chain Key Terminologies
• Outsourcing: Paying suppliers and distributors to perform processes and provide needed services and materials.
• Vertical Integration: Purchasing the needed processes. A firm chooses vertical integration when it has the skills, volume, and resources to hit the competitive priorities better than outsiders can.
o Backward Integration: A firm’s movement upstream toward the sources of raw materials, parts, and services through acquisitions.
o Forward Integration: Acquiring more channels of distribution, such as distribution centers and retail stores.
• Offshoring: a supply chain strategy that involves moving processes to another country.
• Next-shoring: a supply chain strategy that involves locating processes in close proximity to customer demand or product R&D.
final
Inventory Costs
• Holding (carrying) cost – cost to carry an item in inventory for a length of time, usually a year. (e.g., insurance, depreciation, breakage, warehousing costs, etc.)
• Ordering cost – costs of ordering and receiving inventory.(e.g., time and labor spend on ordering and receiving, shipping, inspection upon arrival, moving, etc.
• Shortage costs – costs resulting when demand exceeds the supply of inventory. (Safety stock – extra inventory carried to reduce the probability of a stockout due to demand and/or lead time variability.)
• Small order size: low holding costs & high ordering costs
• Large order size: high holding costs & low ordering costs
EOQ (Economic Order Quantity) definition:
• EOQ is used to identify a fixed order size that will minimize the sum of the annual costs of holding inventory and ordering inventory.
EOQ model assumptions:
1. Only one product is involved.
2. No constraints are placed (such as truck capacity or materials handling limitations) on the size of each lot.
3. The only two relevant costs are the inventory holding cost and the fixed cost per lot for ordering or setup.
4. Annual demand requirements are known.
5. Demand is spread evenly throughout the year so that the demand rate is reasonably constant (e.g., always 10 units per day).
6. Lead time is known and constant.
7. Each order is received in a single delivery.
8. There are no quantity discounts.
9. Decisions for one item can be made independently of decisions for other items. In other words, no advantage is gained in combining several orders going to the same supplier.
3 Basic Elements of Lean Systems:
• Demand driven
• Focuses on waste reduction
• Dedicated to excellence and continuous improvement
8 Types of Waste
1. Overproduction
2. Inappropriate processing / Processing waste (unnecessary production steps or using unnecessary equipment)
3. Waiting time
4. Unnecessary transporting
5. Motion (unnecessary movement – bending, lifting, walking)
6. Inventory
7. Product defects
8. Underutilization of employees / Inefficient work methods
Push vs. Pull Systems
• PULL Method:
o Customer demand activates the production of a good or service.
o A workstation pulls output from the preceding station as it is needed.
o Output of the final operation is pulled by customer demand.
o Work moves on in response to demand from the next stage in the process.
o Work moves just in time for the next operation.
• PUSH Method:
o Uses forecasts of demand and produces the item before the customer orders it.
o When work is finished at a workstation, the output is pushed to the next station.
o Work moves on as it is complete, without regard to the next station’s readiness.
o Work may pile up at workstations that fall behind schedule.
Aggregate Planning:
• Intermediate-range capacity planning, usually covering 2 to 12 months.
• Making intermediate-range decisions to balance supply (capacity) and demand, integrating financial and operational planning.
Aggregate Planning Strategies
Proactive Strategies – Demand Options:
• Pricing
• Promotion
• Back Orders
• New Demand
Reactive Strategies – Supply Options:
• Employment Related Options (chase strategy, level strategy, mixed strategy)
• Inventories
• Subcontracting
BOM Key Terminologies
• Component: an item that goes through one or more operations to be transformed into or become part of one or more parents.
• Parent: any product that is manufactured from one or more components.
• End item: The final product sold to a customer.
• Intermediate item: An item that has at least one parent and at least one component.
• Subassembly: An intermediate item that is assembled from more than one component.
• Purchased item: An item that has one or more parents but no components because it comes from a supplier.
Inventory Records
• Gross Requirements: The total demand derived from all parent production plans.
• Scheduled Receipts: Orders that have been placed but not yet completed.
• Projected on-hand inventory: An estimate of the amount of inventory available each week after gross requirements have been satisfied.
• Planned receipts: Orders that are not yet released to the shop or the supplier.
• Planned order release: An indication of when an order for a specific quantity of an item is to be issued.
Supply Chain Key Terminologies
• Outsourcing: Paying suppliers and distributors to perform processes and provide needed services and materials.
• Vertical Integration: Purchasing the needed processes. A firm chooses vertical integration when it has the skills, volume, and resources to hit the competitive priorities better than outsiders can.
o Backward Integration: A firm’s movement upstream toward the sources of raw materials, parts, and services through acquisitions.
o Forward Integration: Acquiring more channels of distribution, such as distribution centers and retail stores.
• Offshoring: a supply chain strategy that involves moving processes to another country.
• Next-shoring: a supply chain strategy that involves locating processes in close proximity to customer demand or product R&D.
