S Inventory Management - 60 Min 2. JIT - 30 Min 3. Case Discussion - 30 Min 4. “Final” Problems - 60 Min Agenda:

S12-2  Types of Inventory  Raw material  Work-in-progress  Maintenance/repair/operating supply  Finished goods What is Inventory? Functions of inventory?

S12-3 The Functions of Inventory  To protect against lost sales - stock-outs  To ”decouple” or separate various parts of the production process  To provide a stock of goods that will provide a “selection” for customers  To take advantage of quantity discounts  To hedge against inflation and upward price changes

S12-4  Divides on-hand inventory into 3 classes  A class, B class, C class  Basis is usually annual $ volume  $ volume = Annual demand x Unit cost  Policies based on ABC analysis  Develop class A suppliers more  Give tighter physical control of A items  Forecast A items more carefully ABC Analysis

S % of Inventory Items % Annual $ Usage A B C Class% $ Vol% Items A8015 B 30 C555 Classifying Items as ABC

S12-6 Inventory Costs  Holding costs  Holding costs - associated with holding or “carrying” inventory over time  Ordering costs  Ordering costs - associated with costs of placing order and receiving goods  Setup costs  Setup costs - cost to prepare a machine or process for manufacturing an order  Excess at EOL  Excess at EOL - mark down, scrap  Stock-out costs  Stock-out costs - a negative cost of inventory.

S12-7  Fixed order-quantity models  Economic order quantity  Production order quantity  Quantity discount  Probabilistic models  Fixed order-period models Inventory Models

S12-8 Order Quantity Annual Cost Holding Cost Curve Total Cost Curve Order (Setup) Cost Curve Optimal Order Quantity (Q*) EOQ Model How Much to Order?

S12-9 Optimal Order Quantity Expected Number of Orders Expected Time Between Orders Working Days/Year Working Days/Year == ×× == == = =× Q* DS H N D Q*Q* T N d D ROPdL 2 D = Demand per year S = Setup (order) cost per order H = Holding (carrying) cost d = Demand per day L = Lead time in days EOQ Model Equations

S12-10 EOQ Model When To Order Reorder Point (ROP) Time Inventory Level Average Inventory (Q*/2) Lead Time Optimal Order Quantity (Q*)

S12-11  Answers how much to order and when to order  Allows partial receipt of material  Other EOQ assumptions apply  Suited for production environment  Material produced, used immediately  Provides production lot size  Lower holding cost than EOQ model Production Order Quantity Model

S12-12 POQ Model Inventory Levels Inventory Leve l Time Supply Begins Supply Ends Production portion of cycle Demand portion of cycle with no supply

S12-13 POQ Model Inventory Levels Time Inventory Level Production Portion of Cycle Max. Inventory Q·(1- d/p) Q* Supply Begins Supply Ends Inventory level with no demand Demand portion of cycle with no supply

S12-14 D = Demand per year S = Setup cost H = Holding cost d = Demand per day p = Production per day POQ Model Equations Optimal Order Quantity Setup Cost Holding Cost == - = * = * = Q H* d p Q D Q S p * 1 ( 0.5 * H * Q - d p 1 ) - d p 1 () 2*D*S () Maximum inventory level

S12-15  Answers how much to order & when to order  Allows quantity discounts  Reduced price when item is purchased in larger quantities  Other EOQ assumptions apply  Trade-off is between lower price & increased holding cost Quantity Discount Model

S12-16 Quantity Discount Model Total cost = Setup cost + Holding cost + product cost TC = (D/Q)(S) + (QH)/2 + PD D = Annual Demand Q = Order Quantity S = Set or order cost H = Holding cost P = Price

S12-17 Quantity Discount Model TC = (D/Q)(S) + (QH)/2 + PD

S12-18  Answer how much & when to order  Considers Stock-out Costs  Allow demand to vary  Follows normal distribution  Other EOQ assumptions apply  Consider service level & safety stock  Service level = 1 - Probability of stockout  Higher service level means more safety stock  More safety stock means higher ROP Probabilistic Models

S12-19 Probabilistic Model Example 1. Stock out = 10(.2)($40)6 + 20(.1)($40)(6) = $ Stock out = 10(.1)($40)6 = $

S12-20  Answers how much to order  Orders placed at fixed intervals  Inventory brought up to target amount  Amount ordered varies  No continuous inventory count  Possibility of stockout between intervals  Useful when vendors visit routinely  Example: P&G representative calls every 2 weeks Fixed Period Model

S12-21 Time Inventory Level Target maximum PeriodPeriodPeriod Fixed Period Model When to Order?

S12-22 Waste is ‘anything other than the minimum amount of equipment, materials, parts, space, and worker’s time, which are absolutely essential to add value to the product.’ — Shoichiro Toyoda President, Toyota Introductory Quotation

S12-23  Management philosophy of continuous and forced problem solving  Supplies and components are ‘pulled’ through system to arrive where they are needed when they are needed.  JIT:  Attacks waste  Anything not adding value to the product ( From the customer’s perspective)  Exposes problems and bottlenecks caused by variability  Achieves streamlined production What is Just-in-Time?

S12-24  Overproduction  Waiting  Transportation  Inefficient processing  Inventory  Unnecessary motion  Product defects Types of Waste

S12-25 Push versus Pull  Push system: material is pushed into downstream workstations regardless of whether resources are available  Pull system: material is pulled to a workstation just as it is needed

S12-26 Results  Queue and delay reduction, speeds throughput, frees assets, and wins orders  Quality improvement, reduces waste and wins orders  Cost reductions, increases margin or reduces selling price  Variability reductions in the workplace, reduces waste and wins orders  Rework reduction, reduces waste and wins orders

S12-27  Incoming material and finished goods involve waste  Buyer and supplier form JIT partnerships  JIT partnerships eliminate  Unnecessary activities  In-plant inventory  In-transit inventory  Poor suppliers Suppliers

S12-28  Few  Nearby  Repeat business  Analysis to enable desirable suppliers to become or stay price competitive  Competitive bidding mostly limited to new purchases  Suppliers encouraged to extend JIT to their suppliers Characteristics of JIT Partnerships Suppliers

S12-29 Characteristics of JIT Partnerships Quantities  Steady output rate  Frequent deliveries in small-lot quantities  Long term contract agreements  Minimal paperwork  Delivery quantities fixed for whole contract term  Little or no permissible overage or underage  Suppliers package in exact quantities  Suppliers reduce their production lot sizes or store unreleased material

S12-30  Help suppliers to meet quality requirements  Close relationship between buyers’ and suppliers quality assurance people Characteristics of JIT Partnerships Quality

S12-31 Characteristics of JIT Partnerships Shipping  Scheduling of inbound freight  Gain control by use of company-owned or contract shipping and warehousing

S12-32 Goals of JIT partnerships ¬ Elimination of unnecessary activities · Elimination (reduction) of in-plant inventory ® Elimination (reduction) of in-transit inventory Í Elimination of poor suppliers

S12-33  JIT objective: Reduce movement of people and material  Movement is waste!  JIT requires  Work cells for product families  Moveable or changeable machines  Short distances  Little space for inventory  Delivery directly to work areas Layout

S12-34 Process LayoutWork Cell Saw Lathe Grinder Heat Treat Lathe Lathe Saw Heat Treat Grinder Grinder Press Press Saw Press Work Cell versus Process Layout

S12-35  Traditional: inventory exists in case problems arise  JIT objective: Eliminate inventory  JIT requires  Small lot sizes  Low setup time  Containers for fixed number of parts  JIT inventory: Minimum inventory to keep system running Inventory

S12-36 JIT Scheduling Tactics  Communicate the schedule to suppliers  Make level schedules  Freeze part of the schedule  Perform to schedule  Seek one-piece-make and one-piece-move  Eliminate waste  Produce in small lots  Use kanbans  Make each operation produce a perfect part

S12-37  Japanese word for card  Pronounced ‘kahn-bahn’ (not ‘can-ban’)  Authorizes production from downstream operations  ‘Pulls’ material through plant  May be a card, flag, verbal signal etc.  Used often with fixed-size containers  Add or remove containers to change production rate Kanban

S12-38  All activities involved in keeping equipment in working order  Done to prevent failure  JIT requires  Scheduled & daily PM  Operator performs PM  Knows machines  Responsible for product quality Preventive Maintenance (PM)

S12-39 Milling Painting Rivet Battens Insert Studs Mount Hinges Glue App. Final Assem. Tent Plywood Stock F/R Stock Rear & Front Assembly Flow B - 2,500 B - 1,500 B B - 1,500 B - 1,000