2LEARNING OBJECTIVES LEARNING GOALS After studying this chapter, you should be able to:
3Click the button to skip Questions to Think About LEARNING OBJECTIVESDescribe the traditional inventory management model.Discuss JIT inventory management.Explain the theory of constraints (TOC) & tell how it can be used to management inventory.Click the button to skip Questions to Think About
4QUESTIONS TO THINK ABOUT: Swasey Trenchers Why do firms carry inventory? What are inventory costs?
5QUESTIONS TO THINK ABOUT: Swasey Trenchers What can be done to minimize inventory costs? How does JIT reduce inventories?
6QUESTIONS TO THINK ABOUT: Swasey Trenchers What are the weaknesses of JIT? How does using the theory of constraints reduce inventories?
7QUESTIONS TO THINK ABOUT: Swasey Trenchers Why is effective management of inventory so important?
8LEARNING OBJECTIVE1Describe the traditional inventory management model.
9LO 1INVENTORY MANAGEMENTManaging inventory for competitive advantage includes:Quality product engineeringPricesOvertimeExcess capacityAbility to respond to customersLead timesOverall profitability
10INVENTORY COSTS Costs to acquire Carrying costs Stockout costs LO 1INVENTORY COSTSCosts to acquireOrdering costsSetup costsCarrying costsStockout costs
11HOLDING INVENTORY Traditional reasons for holding inventory are: LO 1HOLDING INVENTORYTraditional reasons for holding inventory are:Balancing acquisition & carrying costsDealing with uncertainty in demand (stockout costs)Creating buffers for needed parts, etc.Producing extra inventory because of unreliable production processesTaking advantage of discountsHedging against future price increases
12LO 1EOQ: DefinitionIs a model that calculates the best quantity to order or produce. (Economic Order Quantity)
13What are 2 basic questions addressed by EOQ? LO 1What are 2 basic questions addressed by EOQ?How much should be ordered (produced)?When should the order be placed (setup done)?
14TOTAL COST: Background LO 1TOTAL COST: BackgroundThe total cost (TC) formula includes the following:P = $25 per order [cost of placing & receiving order (setup & production)]D = 10,000 [known demand]Q = 1,000 [order size (or production lot size)]C = $2 per unit [carrying cost of 1 unit for 1 year]
15FORMULA: Total Cost Total cost (TC) equation 14.1: LO 1FORMULA: Total CostTotal cost looks at all inventory costs.Total cost (TC) equation 14.1:= Ordering cost + Carrying cost= PD/Q + CQ/2PD/Q = [(10,000/1,000) x $25] = $ 250CQ/2 = [(1,000/2) x $2] = $1,000TC = $1,250
16How can the total cost be reduced? LO 1How can the total cost be reduced?The EOQ model will compute the cheapest batch order size.
17FORMULA: EOQ EOQ equation 14.2: = √ 2 x Order costs ÷ Unit cost LO 1FORMULA: EOQEOQ is a calculation intended to lower total inventory costs.EOQ equation 14.2:= √ 2 x Order costs ÷ Unit cost= √ 2PD/C= √ 2 x $25 x 10,000 / $2= √ 250,000= 500
18What do you do with the order quantity calculated by the EOQ model? LO 1What do you do with the order quantity calculated by the EOQ model?Enter the order quantity into the TC equation in 14.1.
19FORMULA: EOQ Cost Total cost (TC) equation 14.1: LO 1FORMULA: EOQ CostEOQ Total cost calculates TC using the EOQ batch size in units to cut total cost by $250.Total cost (TC) equation 14.1:= Ordering cost + Carrying cost= PD/Q + CQ/2PD/Q = [(10,000/500) x $25] = $ 500CQ/2 = [(500/2) x $2] = $ 500TC = $1,000
20REORDER POINT: Background LO 1REORDER POINT: BackgroundWhen using the EOQ model, identify the reorder point (ROP) reduces the probability of a stockout. To identify the reorder point, you need to know:Rate of usageLead time required for order to be placed & received
21FORMULA: Reorder Point (ROP) LO 1FORMULA: Reorder Point (ROP)ROP identifies the proper time to place an order to avoid stockout.Reorder Point (ROP) equation 14.3:= Rate of usage x Lead time= 50 parts per day x 4 days= 200 parts
22REORDER POINT EXHIBIT 14-2 LO 1REORDER POINTGiven an optimal order quantity of 500 units, reordering should occur when 200 units remain.EXHIBIT 14-2
23SAFETY STOCK: Definition LO 1SAFETY STOCK: DefinitionIs extra inventory carried as insurance against fluctuations in demand.
24FORMULA: Safety Stock Safety stock: LO 1FORMULA: Safety StockSafety stock provides a buffer to reorder point.Safety stock:= Lead time x (maximum – average usage)= 4 days x (60 – 50)= 40 parts
25FORMULA: ROP + Safety Stock LO 1FORMULA: ROP + Safety StockSafety stock adds a buffer to reorder point.Reorder Point (ROP) equation 14.4:= Rate of usage x Lead time + Safety stock= 50 parts per day x 4 days + 40= 240 parts
26MANUFACTURING: Background LO 1MANUFACTURING: BackgroundWhat are the EOQ and ROP for manufacturing based on information the controller provided the manager.Ave. demand for blades320 per dayMaximum demand for blades340 per dayAnnual demand for blades80,000Unit carrying cost$5Setup cost$12,500Lead time20 days
27EOQ & ROP: Manufacturing LO 1EOQ & ROP: ManufacturingThe model shows that blades will be ordered in batches of 20,000 when there are 6,800 blades remaining.EXHIBIT 14-3
29JUST-IN-TIME (JIT): Definition LO 2JUST-IN-TIME (JIT): DefinitionIs a demand-pull manufacturing system that requires goods to be pulled through the system by present demand.
30How does JIT differ from traditional inventory management? LO 2How does JIT differ from traditional inventory management?A JIT system arranges with suppliers to deliver parts & materials just in time for production rather than on a specified predetermined schedule.
33JIT: Inventory Management Features LO 2JIT: Inventory Management FeaturesJIT manages inventory throughDevising basic features that differ from traditional inventory systemsControlling setup & carrying costsManaging due-date performanceAvoiding shutdown & achieving process reliability
34What kinds of changes does JIT address? LO 2What kinds of changes does JIT address?Basic inventory features of JIT address how manufacturing facilities can be designed to promote employee empowerment & product quality.
35BASIC FEATURES OF JIT Changing plant layout to manufacturing cells LO 2BASIC FEATURES OF JITChanging plant layout to manufacturing cellsGrouping to empower employeesEmphasizing quality through total quality control (TQC)Tracing rather than allocating overheadMaintaining low inventory levels
36PLANT LAYOUT PATTERN: Panel A LO 2PLANT LAYOUT PATTERN: Panel AThe traditional layout pushes multiple products through departments that specialize in one activity.EXHIBIT 14-4
37PLANT LAYOUT PATTERN: Panel B LO 2PLANT LAYOUT PATTERN: Panel BThe JIT layout divides workplace into cells that complete manufacture of 1 product each.EXHIBIT 14-4
38JIT SETUP & CARRYING COSTS LO 2JIT SETUP & CARRYING COSTSJIT uses new strategies to reduce & control setup and carrying costs of inventoryLong-term contracts with close relationship to suppliersContinuous replenishment of inventoryEDI using computers to manage inventory ordersJIT II has supplier on-site full time
39How does JIT measure supplier response? LO 2How does JIT measure supplier response?JIT uses due date performance to measure a supplier’s ability to respond to inventory needs.
40AVOIDING SHUTDOWNS: JIT LO 2AVOIDING SHUTDOWNS: JITShutdowns are caused by:Machine failureDefective material or sub-assemblyUnavailability of material or sub-assemblyJIT responseTotal preventive maintenanceTotal quality control (TQC)Using the Kanban system
41How does JIT select suppliers? LO 2How does JIT select suppliers?JIT selects suppliers based on performance in terms of price, quality, ability to deliver.
42LO 2LIMITATIONS OF JITTime is required to build sound relations with suppliersWorkers experience stress in changing over to JITProduction may be interrupted because of absence of inventory supply bufferMay place current sales at risk to achieve assurance of future sales
43LEARNING OBJECTIVEExplain the theory of constraints (TOC) & tell how it can be used to management inventory.3
44CONSTRAINT: Definition LO 3CONSTRAINT: DefinitionIs the limitation of resources or product demand.
45LO 3THEORY OF CONSTRAINTSTheory of constraints (TOC) focuses on 3 measures of organizational performance:Throughput: rate of generating money through salesInventory: money spent turning materials into throughputOperating expenses: money spent turning inventory into throughput
46How does throughput work? LO 3How does throughput work?Increasing throughput minimizes inventory & decreases operating expenses.
47LO 3BASIC CONCEPTS: TOCTOC suggests that constraints (and thereby inventory) are best managed throughHaving better, higher quality productsHaving lower pricesBeing responsiveOn-time deliveryShorter lead time
48TOC STEPS Identify constraints Exploit binding constraints Subordinate everything to decision made in #2 aboveElevate binding constraintsRepeat process
49BINDING CONSTRAINTS: Definition LO 3BINDING CONSTRAINTS: DefinitionAre those constraints whose available resources are fully utilized.
50DRUM-BUFFER-ROPE (DBR) SYSTEM LO 3DRUM-BUFFER-ROPE (DBR) SYSTEMAdditional inventory is placed before the binding constraint to give a time buffer.EXHIBIT 14-11