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Chapter 6 Quantity & Delivery By: Paul Batchelor, Paige Frank, Matthew Johnson, Priscilla Mak, Missy McCormick.

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Presentation on theme: "Chapter 6 Quantity & Delivery By: Paul Batchelor, Paige Frank, Matthew Johnson, Priscilla Mak, Missy McCormick."— Presentation transcript:

1 Chapter 6 Quantity & Delivery By: Paul Batchelor, Paige Frank, Matthew Johnson, Priscilla Mak, Missy McCormick

2 Why Do We Care? Continuous improvement and organizational goals drive management attitudes to quality, quantity and delivery Ch 5 – Quality Ch 6 – Quantity and Delivery Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand Models Service Levels MRP Game Case 6-3

3 Classification of Purchases Direct/Indirect Purchases Types of Requirements –i.e. raw materials, resale items, packaging, etc. Frequency of Purchase Stock Items –i.e. whether or not purchases are for stock replenishment Physical/Chemical Nature Transport Type Monetary Value – ABC Classification PURCHASES ABC Forecasting Inventory Carrying Costs Inventory JIT Demand Models Service Levels MRP Game Case 6-3

4 ABC Classification Concentrates efforts in the areas of highest payoff Reduces paperwork and managerial effort, but maintains a high service coverage Steps: 1.Calculate purchase value (unit price x number of units) 2.Classify the purchase value of each item into groups of high annual purchase value (A), medium value (B), low value (C) 3.Concentrate time and effort on A & B items versus on C items Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand Models Service Levels MRP Game Case 6-3

5 Forecasting Forecasts of usage, supply, market conditions, technology, price, etc., are always necessary to make good decisions Sales forecasts drive the need for raw materials, parts and subassemblies Purchases ABC FORECASTI NG Inventory Carrying Costs Inventory JIT Demand Models Service Levels MRP Game Case 6-3

6 Review of Forecasting Techniques Qualitative Forecasting –Gathering opinions from a number of people –Delphi Technique Quantitative Forecasting –Using past data to predict the future –Causal Models –Time Series Forecasting Purchases ABC FORECASTI NG Inventory Carrying Costs Inventory JIT Demand Models Service Levels MRP Game Case 6-3

7 Inventory Inventory policy has a great influence on purchase quantity decision Need to know: –How much to order –When to order –How much to carry Purchases ABC Forecasting INVENTORY Carrying Costs Inventory JIT Demand Models Service Levels MRP Game Case 6-3

8 Inventory Costs Main types of inventory costs –Carrying Costs –Holding Costs –Possession Costs Other costs –Ordering or Purchase Costs –Setup Costs –Stockout Costs –Price Variation Costs Purchases ABC Forecasting INVENTORY Carrying Costs Inventory JIT Demand Models Service Levels MRP Game Case 6-3

9 Article: “Poor Inventory Control” Areas of investigation: –Bills of Material (BOM) –Receiving Policies –Do You Know Each Part’s ATP? –Engineering Changes –Scrap Reporting –Lead Times –Reorder Triggers –Warehouse Locator System Purchases ABC Forecasting INVENTORY Carrying Costs Inventory JIT Demand Models Service Levels MRP Game Case 6-3

10 Basic Elements of Carrying Costs 1) Capital Costs 2) Inventory Service Costs 3) Storage Space Costs 4) Inventory Risk Costs After carrying costs have been estimated, annual carrying costs can be calculated Purchases ABC Forecasting Inventory CARRYING COSTS Inventory JIT Demand Models Service Levels MRP Game Case 6-3

11 Inventory Carrying Costs (CC per year) = (avg. inventory value) x (inventory CC as a % of inventory value) Avg. inv. value = (avg. inv. in units) x (material unit cost) Purchases ABC Forecasting Inventory CARRYING COSTS Inventory JIT Demand Models Service Levels MRP Game Case 6-3

12 Inventory Carrying Costs CC = Q/2 x C x I Where: CC = carrying cost per year Q = order quantity for the material C = delivered unit cost of the material I = inventory carrying cost for the material, as a % of inventory value Purchases ABC Forecasting Inventory CARRYING COSTS Inventory JIT Demand Models Service Levels MRP Game Case 6-3

13 Forms of Inventory 1) Raw Materials and Purchased Parts 2) Work In Process 3) Finished Goods 4) MRO Items 5) Resale Items Purchases ABC Forecasting Inventory Carrying Costs INVENTORY JIT Demand Models Service Levels MRP Game Case 6-3

14 Functions of Inventory Roles of Inventory: –Transit or Pipeline Inventories –Cycle Inventories –Buffer/Safety Stocks –Anticipation Inventories –Decoupling Inventories WHY?? Purchases ABC Forecasting Inventory Carrying Costs INVENTORY JIT Demand Models Service Levels MRP Game Case 6-3

15 Inventory Systems Inventory has costs associated with storage Systems developed to decrease stocks: –Just-in-time (JIT) –Kanban –Materials Resource Planning (MRP) Purchases ABC Forecasting Inventory Carrying Costs INVENTORY JIT Demand Models Service Levels MRP Game Case 6-3

16 Just-in-Time (J.I.T.) What is it? Goals Integration with process and production function –Layout –Automation –standardization Quality is the key! –3 principles Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand Models Service Levels MRP Game Case 6-3

17 J.I.T. Continued Kanban systems What will J.I.T. accomplish? Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand Models Service Levels MRP Game Case 6-3

18 Dependent vs. Independent Demand Independent –Fixed-Quantity Model –Fixed-Period Model Dependent –MRP Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT DEMAND Models Service Levels MRP Game Case 6-3

19 Fixed-Quantity Model Reorder when inventory drops to a reorder point Consider safety stock Calculations –Optimal Order Quantity (EOQ) –Reorder Point Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand MODELS Service Levels MRP Game Case 6-3

20 Fixed-Period Model Reorder only at review time Count inventory at the fixed interval period Inventory level should prevent stockouts Calculation: –Optimal Order Period Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand MODELS Service Levels MRP Game Case 6-3

21 Formula Variables  S = Order cost R = Annual demand K = Carrying cost percentage C = Purchase cost L = Lead time Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand MODELS Service Levels MRP Game Case 6-3

22 Example: Fixed-Quantity Model See pg of text – Refer to handout Given: R = 900 units K = 25 percent L = 10 working days C = $45 / unit S = $50 / order Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand MODELS Service Levels MRP Game Case 6-3

23 Calculation EOQ Q opt = √ (2RS / KC) Q opt = √ (2 * 900 * 50) / (25% * 45) Q opt = 89 units Reorder point P = LR/250  Assume 250 working days P = (10 * 900) / 250 = 36 units Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand MODELS Service Levels MRP Game Case 6-3

24 T opt =  (2S)/(RKC) Solution: –R = 900 units –C = $45 / unit –K = 25 percent –S = $50 / order Example: Fixed-Period Model T opt =  (2S)/(RKC) T opt =  ( 2)(50) (900)(0.25)(45) T opt = 0.1 = 0.1*250 working days = 25 reorder times per year Note: 250/25 = 10 working days Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand MODELS Service Levels MRP Game Case 6-3

25 Example: Fixed-Period Model Reordering every 10 working days minimizes total costs –Carrying costs –Order costs Order must meet demand for 20 days: –Review period (10 working days) –Lead time (10 working days) Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand MODELS Service Levels MRP Game Case 6-3

26 Safety Stock and Service Levels Service Coverage –Percentage of requests that are immediately served Stockout Costs –Loss of business due to running out of inventory Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand Models SERVICE LEVELS MRP Game Case 6-3

27 Safety Stock and Service Levels Critical Fractile = C u /(C u + C o ) Where –C u = the cost of understocking –C o = the cost of overstocking Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand Models SERVICE LEVELS MRP Game Case 6-3

28 Safety Stock and Service Levels Critical Fractile: –Difficult to determine –95% or 19:1 –Understocking is generally more costly than overstocking Exception: “bait and switch” Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand Models SERVICE LEVELS MRP Game Case 6-3

29 MRP Used for dependent demand Goals of MRP: –Minimize inventory –Maintain high service coverage –Coordinate delivery schedules and manufacturing and purchasing activities Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand Models Service Levels MRP Game Case 6-3

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32 Case 6-3: Abbey Paquette Abbey Paquette, Purchasing Agent for Pentz International, has been instructed by the new President to reduce annual inventory carry costs from two and a half million to zero by year end. Upon further investigation, the firm’s database was filled with outdated, inaccurate information. Much of the inventory still on the system was not actually in stock. Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand Models Service Levels MRP Game CASE 6-3

33 Problems Immediate Problem: –How to cut inventory carrying costs? Basic Problems: –Lack of internal and external information systems –Poor inventory controls –Poor communication with employees Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand Models Service Levels MRP Game CASE 6-3

34 Analysis No system to classify inventory No knowledge of required inventory No forecasting May have resulted in unnecessary spending & stockout costs Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand Models Service Levels MRP Game CASE 6-3

35 Analysis No analysis/system to measure carrying costs –Goal: minimize total annual costs –Timing considerations –Obsolescence Tradeoff between different costs: –Inventory carrying costs vs. ordering costs –Inventory carrying costs vs. stockout costs –Inventory carrying costs vs. safety stock costs Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand Models Service Levels MRP Game CASE 6-3

36 Analysis Minimal supplier relationships –Inconsistent data Top management does not understand purchasing function Overabundance of small tasks minimizes time for strategy –Low level of automation Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand Models Service Levels MRP Game CASE 6-3

37 Analysis Current system of inventory tracking and control is not very useful or accurate Employees are not following the system and have not been properly trained on how to use the system The quality of the entire process is reduced without the problem being fixed Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand Models Service Levels MRP Game CASE 6-3

38 Alternatives 1.Immediate reduction of inventory Goal: Zero inventory Refrain from reordering, until it is absolutely necessary Utilize J.I.T. 2.Gradual reduction of inventory Goal: Some inventory Continue to reorder, but in smaller quantities May require improved supplier relationships Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand Models Service Levels MRP Game CASE 6-3

39 Class Discussion Split into 2 groups and prepare to defend why the following should be chosen: Alternative #1 – Group A Alternative #2 – Group B

40 Our Solution … Gradual Reduction of Inventory (Alternative #1)

41 Implementation: Short Term Time frame: August to end of December Comprehensive Analysis –ABC classification –Supplier relations –EOQ Analysis Research information systems –MRP –EDI-INT –Barcode scanning Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand Models Service Levels MRP Game CASE 6-3

42 Choosing information systems. –Consult other employees Meet with Isaac Chisholm –Explain issues with Zero inventory –Present the plan of action Implementation: Short Term Time frame: August to end of December Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand Models Service Levels MRP Game CASE 6-3

43 Implementation: Medium Term Time frame: January to the end of December Get employee buy-in Implement new Information Systems –Barcode inventory management system –Internet-based EDI system Hire a consultant Train employee to do cycle counting Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand Models Service Levels MRP Game CASE 6-3

44 Implementation: Long Term Time frame: January and on Continue working with suppliers and employees to achieve a stockless inventory purchasing system –Use checks and balances –Generate feedback from employees Analyze the average carrying cost to determine the plan’s success Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand Models Service Levels MRP Game CASE 6-3

45 QUESTIONS? THANK YOU!


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