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Detailed Scheduling and Planning

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Presentation on theme: "Detailed Scheduling and Planning"— Presentation transcript:

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

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

3 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 Detailed Scheduling and Planning, ver. 1

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

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

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

7 Order Review Methods Order Review Independent Dependent MRO
Method Demand Demand MRP Reorder Point Periodic Review Visual Kanban Detailed Scheduling and Planning, ver. 1

8 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? Detailed Scheduling and Planning, ver. 1

9 MRP Technique Product A 1 1 2 2 3 4 3 5 6 4 7 8 5 9
Bill Of Material Level Product A 1 1 2 2 3 4 3 5 6 4 7 8 5 9 Detailed Scheduling and Planning, ver. 1

10 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 Detailed Scheduling and Planning, ver. 1

11 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. Detailed Scheduling and Planning, ver. 1

12 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. Detailed Scheduling and Planning, ver. 1

13 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. Detailed Scheduling and Planning, ver. 1

14 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. Detailed Scheduling and Planning, ver. 1

15 Reorder Point Formula 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). Detailed Scheduling and Planning, ver. 1

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

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

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

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

20 The Logic of TPOP Illustrated
Technique Order Quantity: 600 Fixed Safety Stock: 80 Fixed Allocated Qty: 0 Lead-Time: 2 Weeks Low Level Code: 4 Part X Periods 1 2 3 4 5 6 7 8 9 Sales forecast 100 100 120 120 100 100 100 100 125 Interplant orders 50 140 10 Special engineering needs 20 Charity donations 30 30 Special promotion 80 Safety stock increase 10 Anticipation buildup 5 5 Dependent demand 40 30 10 20 50 40 20 10 Gross requirements 170 190 130 280 180 160 205 125 125 Source: Adapted from CPIM Material and Capacity Requirements Planning Certification Review Course (APICS, 1998). Detailed Scheduling and Planning, ver. 1

21 TPOP Equation Detailed Scheduling and Planning, ver. 1

22 TPOP Exercise PERIODS Gross Requirements Scheduled Receipts
Technique Order Quantity: 600 Fixed Safety Stock: 80 Fixed Allocated Qty: 0 Lead-Time: 2 Weeks Low Level Code: 3 PERIODS Gross Requirements Scheduled Receipts Projected Available Net Requirements Planned Order Receipts Planned Order Releases 1 2 3 4 5 6 7 8 9 170 190 130 280 180 160 205 125 125 600 370 X Source: CPIM Inventory Management Certification Review Course (APICS, 1998). Detailed Scheduling and Planning, ver. 1

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

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

25 TPOP Solution With and Without MRP Grid
2 weeks Gross Requirements Scheduled Receipts Projected Available Net Requirements Planned Order Receipts Planned Order Releases 1 2 4 3 9 7 6 5 PERIODS 280 8 370 200 600 610 170 190 180 620 160 460 205 255 125 130 480 75 60 330 80 (1) The TPOP is not considered in periods between order release and order receipt since the requirement for a scheduled or planned order receipt has already been satisfied. DDLT + SS 540 445 410 490 = TPOP Is Projected Available TPOP no yes Order Quantity: 600 Fixed Safety Stock: 80 Fixed Allocated Qty: 0 Lead-Time: 2 Weeks Low Level Code: 3 Technique Source: CPIM Inventory Management Certification Review Course (APICS, 1998). Detailed Scheduling and Planning, ver. 1

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

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

28 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 Detailed Scheduling and Planning, ver. 1

29 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). Detailed Scheduling and Planning, ver. 1

30 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 day’s supply is used to support inventory turns and targets, and to recognize shelf-life constraints Detailed Scheduling and Planning, ver. 1

31 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 Detailed Scheduling and Planning, ver. 1

32 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 Detailed Scheduling and Planning, ver. 1

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

34 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 Detailed Scheduling and Planning, ver. 1

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

36 2 A × S EOQ = × C i EOQ Equation A = Annual Usage S = Cost per Order
C = Cost of Item i = Annual Cost to Carry Detailed Scheduling and Planning, ver. 1

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

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

39 EOQ—Change 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 Detailed Scheduling and Planning, ver. 1 1-35a Visual

40 EOQ with Increased Annual Usage
(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 Detailed Scheduling and Planning, ver. 1 1-36 Visual

41 EOQ—Order Quantity 1,000 Units
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. Detailed Scheduling and Planning, ver. 1 1-37 Visual

42 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 Detailed Scheduling and Planning, ver. 1 1-38 Visual

43 Fixed-Order Quantity Grid
Technique Order Quantity: 500 Fixed Safety Stock: 80 Fixed Allocated Qty: 0 Lead-Time: 2 Periods Low Level Code: 0 PERIODS Gross Requirements Scheduled Receipts Projected Available Net Requirements Planned Order Receipts Planned Order Releases 1 2 3 4 5 6 7 8 9 130 160 120 260 130 120 185 115 125 370 240 80 460 200 570 450 265 150 525 40+80 SS* 10 SS* 60 500 500 500 500 500 500 *SS=Safety Stock Replenishment Source: CPIM Inventory Management Certification Review Course (APICS, 1998). Detailed Scheduling and Planning, ver. 1 1-39 Visual

44 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 Detailed Scheduling and Planning, ver. 1 1-40

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

46 Understanding terms Average lot size inventory = order quantity/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. Detailed Scheduling and Planning, ver. 1

47 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 Detailed Scheduling and Planning, ver. 1

48 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) Detailed Scheduling and Planning, ver. 1

49 Period Order Quantity PERIODS Gross Requirements Scheduled Receipts
Technique Order Quantity: 650 EOQ Safety Stock: 0 Fixed Allocated Qty: 0 Lead-Time: 6 Periods Low Level Code: 2 PERIODS Gross Requirements Scheduled Receipts Projected Available Net Requirements Planned Order Receipts Planned Order Releases 1 2 3 4 5 6 7 8 130 160 120 260 130 120 185 115 370 240 80 590 330 200 80 ? ? 630 630 Source: CPIM Inventory Management Certification Review Course (APICS, 1998). Detailed Scheduling and Planning, ver. 1 1-41a Visual

50 Lot for Lot The sum of requirements for a period. With MRP replanning nightly, the periods can be as short as one day Detailed Scheduling and Planning, ver. 1 1-42 Visual

51 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 Detailed Scheduling and Planning, ver. 1 1-43


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