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Detailed Scheduling and Planning Session 1 Inventory Management: Order Planning.

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Presentation on theme: "Detailed Scheduling and Planning Session 1 Inventory Management: Order Planning."— Presentation transcript:

1 Detailed Scheduling and Planning Session 1 Inventory Management: Order Planning

2 Visual 1-2 Detailed Scheduling and Planning, ver. 1 Purpose of Inventory Strategy Service Level Dependent Demand Independent Demand Demand Variability Seasonality Lead Time Fluctuation Company Policy

3 Visual 1-3 Detailed Scheduling and Planning, ver. 1 Definition of Inventory Those stocks or items used to support production (raw materials and work-in-process items), supporting activities (maintenance, repair, and operating supplies), and customer service (finished goods and spare parts). Demand for inventory may be dependent or independent. Inventory functions are anticipation, hedge, cycle (lot size), fluctuation (safety, buffer, or reserve), transportation (pipeline), and service parts. Source: APICS Dictionary, 9th ed., 1998

4 Visual 1-4 Detailed Scheduling and Planning, ver. 1 Types of Inventory Raw Materials (RAW) Work in Process (WIP) Finished Goods (FG) Maintenance, Repair, and Operating Supplies (MRO)

5 Visual 1-5 Detailed Scheduling and Planning, ver. 1 Classifications of Inventory Excess Surplus Inactive Obsolete Consignment Vendor Managed

6 Visual 1-6 Detailed Scheduling and Planning, ver. 1 Types of Order Review Methodologies Material Requirements Planning (MRP) Time-Phased Order Point Reorder Point Periodic Review Visual Review Kanban

7 Visual 1-7 Detailed Scheduling and Planning, ver. 1 Order Review Methods Order ReviewIndependentDependentMRO MethodDemandDemand MRP Reorder Point Periodic Review Visual Review Kanban

8 Visual 1-8 Detailed Scheduling and Planning, ver. 1 What They Answer What is the net demand? What is the available balance? What quantity will need to be ordered? When will the orders need to be released? When will the orders need to be received?

9 Visual 1-9 Detailed Scheduling and Planning, ver. 1 MRP Technique Product A Bill Of Material Level

10 Visual 1-10 Detailed Scheduling and Planning, ver. 1 MRP MRP (Material Requirement Planning) is a computerized information system which was developed specifically to aid companies manage demand inventory and schedule replenishment orders. Determine # of parts, components, materials, time schedule when ordered or produced. Accommodate ordering strategies for parts with both dependent and independent profiles

11 Visual 1-11 Detailed Scheduling and Planning, ver. 1 Two types of demand (1) product demand The first is known customers who have placed specific orders, such as those generated by sales personnel, or from interdepartmental transactions. The second source is forecast demand which is from the known customers and the forecast demand. (2) demand for repair parts and supplies The demand when customers order specific parts and components either as spares, or for service and repair.

12 Visual 1-12 Detailed Scheduling and Planning, ver. 1 Dependent Demand Lumpy dependent demand resulting from continuous demand Even though customer demand is continuous and uniform, the production demand is lumpy and it occurs sporadically, usually in relatively large quantities.

13 Visual 1-13 Detailed Scheduling and Planning, ver. 1 3 main inputs to MRP 3 key inputs to the MRP I. Master production schedules (MPS) II. A bill of materials database (BOM) III. An inventory record database An MRP system translates the MPS and other sources of demand, such as independent demand for replacement parts and maintenance items, into the requirements for all subassemblies, components, and raw materials.

14 Visual 1-14 Detailed Scheduling and Planning, ver. 1 Low-level coding If all identical parts occur at the same level for each end product, the total number of parts and materials needed for a product can be computed easily If not, all items must be placed at the same level, it becomes a simple matter for summarizing the number of each item required.

15 Visual 1-15 Detailed Scheduling and Planning, ver. 1 ROP = DDLT + SS ROP=Reorder point DDLT=Forecast demand during the lead-time SS=Safety stock Calculation Rule For each item, when the available inventory quantity drops to or below the reorder point, place a replenishment order. Source: Adapted from CPIM Inventory Management Certification Review Course (APICS, 1998). Reorder Point Formula

16 Visual 1-16 Detailed Scheduling and Planning, ver. 1 Continuous Demand Quantity Demanded Quantity in Inventory Time Source: CPIM Inventory Management Certification Review Course (APICS, 1998).

17 Visual 1-17 Detailed Scheduling and Planning, ver. 1 Reorder Point Sawtooth Graph B C B C A A Lead Time Quantity in Inventory Reorder Point Source: Adapted from CPIM Inventory Management Certification Review Course (APICS, 1998). Time

18 Visual 1-18 Detailed Scheduling and Planning, ver. 1 Effects of Uncertainty on Demand AB C Quantity in Inventory Reorder Point Time Source: Adapted from CPIM Inventory Management Certification Review Course (APICS, 1998).

19 Visual 1-19 Detailed Scheduling and Planning, ver. 1 Complete Reorder Point Model Safety Stock Quantity in Inventory Time Source: Adapted from CPIM Inventory Management Certification Review Course (APICS, 1998). Reorder Point

20 Visual 1-20 Detailed Scheduling and Planning, ver. 1 The Logic of TPOP Illustrated Order Quantity:600Fixed Safety Stock:80Fixed Allocated Qty:0 Lead-Time:2Weeks Low Level Code:4 Technique Source: Adapted from CPIM Material and Capacity Requirements Planning Certification Review Course (APICS, 1998). Part X Sales forecast Interplant orders Special engineering needs Charity donations30 Special promotion80 Safety stock increase10 Anticipation buildup55 Dependent demand Gross requirements Periods 20

21 Visual 1-21 Detailed Scheduling and Planning, ver. 1 TPOP Equation

22 Visual 1-22 Detailed Scheduling and Planning, ver. 1 TPOP Exercise Source: CPIM Inventory Management Certification Review Course (APICS, 1998). Gross Requirements Scheduled Receipts Projected Available Net Requirements Planned Order Receipts Planned Order Releases PERIODS 370 X Order Quantity:600Fixed Safety Stock:80Fixed Allocated Qty:0 Lead-Time:2Weeks Low Level Code:3 Technique 125

23 Visual 1-23 Detailed Scheduling and Planning, ver. 1 Period 3 Calculation For periods 4 and 5:

24 Visual 1-24 Detailed Scheduling and Planning, ver. 1 Period 7 Calculation For periods 8 and 9:

25 Visual 1-25 Detailed Scheduling and Planning, ver. 1 TPOP Solution With and Without MRP Grid Source: CPIM Inventory Management Certification Review Course (APICS, 1998).

26 Visual 1-26 Detailed Scheduling and Planning, ver. 1 Periodic Review Independent demand model Order is placed every n time units (as required) Order quantity is variable

27 Visual 1-27 Detailed Scheduling and Planning, ver. 1 Visual Review Reordering is based on actually looking at the inventory on hand Min/Max is a commonly used technique

28 Visual 1-28 Detailed Scheduling and Planning, ver. 1 Kanban Kanban is a signal for replenishment The quantity for replacement is determined from the rate-based MRP as a fixed-order quantity, order point method Upstream station does not start producing parts until it receives a signal

29 Visual 1-29 Detailed Scheduling and Planning, ver. 1 Order Quantity Modifiers Acceptable Order Quantity Range Lower Constraint (Inclusive) Upper Constraint (Inclusive) Modifier Acceptable From a Modifier Perspective, But Not From the Upper Constraint Perspective Source: Bernard, Paul. Integrated Inventory Management, p. 291 (John Wiley & Sons, Inc. 1999).

30 Visual 1-30 Detailed Scheduling and Planning, ver. 1 Order Quantity Constraints Minimum quantity can be used to meet a supplier minimum Maximum quantity can be set to recognize storage or transportation limits Minimum dollar can be used to order at least a supplier- or purchasing-established minimum purchase order charge Maximum dollar can be used to limit inventory investment levels Minimum days supply can be used to prevent multiple orders for the same period Maximum days supply is used to support inventory turns and targets, and to recognize shelf-life constraints

31 Visual 1-31 Detailed Scheduling and Planning, ver. 1 Order Quantity Modifiers A price break quantity can be ensured on an individual order basis by setting one of the price break quantities as the supplier minimum Rounding quantities can be used to meet container multiples Minimum demand quantity recognizes that certain items are subject to large issue Order quantity multiplier accounts for scrap or yield conditions

32 Visual 1-32 Detailed Scheduling and Planning, ver. 1 Costs Associated with Order Quantity Decisions The cost to carry inventory –Storage facility cost –Counting, transporting, and handling –Risk of obsolescence –Insurance and taxes –Risk of loss –Opportunity costs The cost of placing orders

33 Visual 1-33 Detailed Scheduling and Planning, ver. 1 Opportunity Costs A companys cost of capital Typically the largest portion of the carrying costs Represents the rate of return the company could earn from investment opportunities

34 Visual 1-34 Detailed Scheduling and Planning, ver. 1 Cost of Placing Orders Differs between orders placed to outside suppliers and orders placed in a factory for production Usually expressed as the cost to place a single order in absolute dollars

35 Visual 1-35 Detailed Scheduling and Planning, ver. 1 Order Quantity Cost Comparison Order Cost Carrying Cost Total Cost O R D E R Q U A N T I T Y COSTCOST Source: CPIM Inventory Management Certification Review Course (APICS, 1998).

36 Visual 1-36 Detailed Scheduling and Planning, ver. 1 EOQ Equation A = Annual UsageS = Cost per Order C = Cost of Item i = Annual Cost to Carry iC SA2 EOQ × × =

37 Visual 1-37 Detailed Scheduling and Planning, ver. 1 Carrying, Order, and Total Costs Carrying Cost Order Cost Source: Adapted from Inventory Management Certification Review Course (APICS, 1998). Total Cost Carrying Cost + Order Cost = Total Cost

38 Visual 1-38 Detailed Scheduling and Planning, ver. 1 EOQ Exercise Solution Total Cost (a) (b) (c) (d)

39 Visual 1-39 Detailed Scheduling and Planning, ver a Visual EOQChange in Carrying Cost (b) (25%-22%) / 25% is a 12% reduction in carrying cost to achieve a 6.6% increase in order quantity (25%-15%) / 25% is a 40% reduction in carrying cost to achieve a 29.1% increase in order quantity The order quantity increases in geometric proportion to reductions in carrying cost

40 Visual 1-40 Detailed Scheduling and Planning, ver Visual EOQ with Increased Annual Usage (c) (1,788-1,549) / 1549 is a 15.4% increase in order quantity based on a 33% (20,000-15,000) / 15,000 increase in annual usage (3,098-1,549) / 1,549 is a 100% increase in order quantity based on a 300% (60,000-15,000) / 15,000 increase in annual usage The order quantity increases in geometric proportion to increases in annual usage

41 Visual 1-41 Detailed Scheduling and Planning, ver Visual EOQOrder Quantity 1,000 Units (d) 60% is too high for a carrying cost. Something in the area of 24% is more reasonable. A high carrying cost cannot be used as an excuse for reducing the order quantity.

42 Visual 1-42 Detailed Scheduling and Planning, ver Visual Fixed-Order Quantity Use of a fixed-order quantity is usually dictated by some condition related to shipping, handling, or line replenishment Regardless of demand variability, suppliers receive consistent orders with consistent order quantities, but at a variable frequency It may be determined very informally, or it might be based on some form of calculation, such as EOQ

43 Visual 1-43 Detailed Scheduling and Planning, ver. 1 Fixed-Order Quantity Grid Source: CPIM Inventory Management Certification Review Course (APICS, 1998) Visual Gross Requirements Scheduled Receipts Projected Available Net Requirements Planned Order Receipts Planned Order Releases PERIODS Order Quantity:500Fixed Safety Stock:80Fixed Allocated Qty:0 Lead-Time:2Periods Low Level Code:0 Technique SS* SS* 500 *SS=Safety Stock Replenishment

44 Visual Detailed Scheduling and Planning, ver. 1 Period Order Quantity Lot size is equal to the net requirements for a given number of periods The number of planning periods included within the ordering period can be determined based on the EOQ equation With fairly steady demand, the order quantity for the ordering period generally balances ordering and carrying cost The intent is to eliminate remnants 1-40

45 Visual Detailed Scheduling and Planning, ver. 1 Period Order Quantity Example For a purchased item: 52Planning periods/year (weeks) 520Annual demand $50.00Setup and ordering cost $12.30Unit cost 0.25Carrying cost The ordering period includes 13 weekly planning periods. 1-41

46 Visual 1-46 Detailed Scheduling and Planning, ver. 1 Understanding terms Average lot size inventory = order quantity/2 = Q/2 Number of orders per period = total demand/order quantity = D/Q Time between order (TBO) = The average elapsed time between receiving replenishment orders of Q units for a particular lot size = Q/D * 12 months/year = Q/D * 52 weeks/year = Q/D * 365 days/year Example 5.1: The annual demand for an SKU is 10,075 units, and it is ordered in quantities of 650 units. Calculate the average inventory and the number of orders place per week, per month, and per year.

47 Visual 1-47 Detailed Scheduling and Planning, ver. 1 Total relevant cost (1) Annual holding cost = (Average cycle inventory)*(Unit cost)*(Carrying cost) = Q/2 * v * r Where v = unit cost, Q = order quantity, and r = carrying charge as portion of unit cost (such as 0.25) (2) Annual ordering or setup cost = (Number of orders/year)*(Ordering or setup cost) = D/Q * A Where D = demand per year (big number), and = ordering/setup cost (3) Total relevant cost = Annual holding cost (1) + Annual ordering or setup cost (2) = Q/2 * v * r + D/Q * A

48 Visual 1-48 Detailed Scheduling and Planning, ver. 1 Economic order quantity EOQ = the lot size that minimizes total relevant cost TRC(EOQ) = Total relevant cost at EOQ TBO(EOQ) = Time between orders (the average elapsed time between receiving orders of Q units for a particular lot size)

49 Visual 1-49 Detailed Scheduling and Planning, ver. 1 Period Order Quantity Source: CPIM Inventory Management Certification Review Course (APICS, 1998). 1-41a Visual Gross Requirements Scheduled Receipts Projected Available Net Requirements Planned Order Receipts Planned Order Releases PERIODS ? Order Quantity:650EOQ Safety Stock:0Fixed Allocated Qty:0 Lead-Time:6Periods Low Level Code:2 Technique ?

50 Visual 1-50 Detailed Scheduling and Planning, ver Visual Lot for Lot The sum of requirements for a period. With MRP replanning nightly, the periods can be as short as one day

51 Visual Detailed Scheduling and Planning, ver. 1 Session 1 Review Identify types of inventory and how they are assessed from their different requirements and impacts on the planning process Describe order review methodologies and apply them to different types of inventory and inventory strategies Identify lot sizing techniques, including the effects of order quantity constraints, and modifiers 1-43


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