1. Chapter 4 1 Inventory Control Models

2. Learning Objectives Students will be able to: 1.Understand the importance of inventory control and ABC analysis. 2.Use the economic order quantity (EOQ) to determine how much to order. 3.Compute the reorder point (ROP) in determining when to order more inventory. 4.Solve inventory problems that allow quantity discounts or non- instantaneous receipt. 5.Understand the use of safety stock. 6.Describe the use of material requirements planning in solving dependent-demand inventory problems. 7.Discuss just-in-time inventory concepts to reduce inventory levels and costs. 8.Discuss enterprise resource planning systems. 2

3. Chapter Outline 6.1Introduction. 6.2Importance of Inventory Control. 6.3Inventory Decisions. 6.4Economic Order Quantity (EOQ): Determining How Much to Order. 6.5Reorder Point: Determining When to Order. 6.6EOQ without the Instantaneous Receipt Assumption. 3 6.7 Quantity Discount Models. 6.8 Use of Safety Stock. 6.9 Single-Period Inventory Models. 6.10 ABC Analysis. 6.11 Dependent Demand: The Case for Material Requirements Planning. 6.12 Just-in-Time Inventory Control. 6.13 Enterprise Resource Planning.

4. Inventory as an Important Asset 4 Inventory can be the most expensive and the most important asset for an organization. Other Assets 60% Inventory 40% 40% Inventory as a percentage of total assets 1. INTRODUCTION

5. Inventory Planning and Control 5 (Fig. 6.1) Inventory Planning and Control Controlling Inventory Levels Forecasting Parts/Product Demand Planning on What Inventory to Stock and How to Acquire It Feedback Measurements to Revise Plans and Forecasts

6. The Inventory Process 6 SuppliersCustomers Finished Goods Raw Materials Work in Process Fabrication and Assembly Inventory Storage Inventory Processing

7. 2. Importance of Inventory Control Five Functions of Inventory: 1.The decoupling function (inventory can act as a buffer). 2.Storing resources. 3.Responding to irregular supply and demand. 4.Taking advantage of quantity discounts. 5.Avoiding stockouts and shortages, and then maintain goodwill. 7

8. Five uses of inventory: 8 1. Decouple manufacturing processes. Inventory is used as a buffer between stages in a manufacturing process. This reduces delays and improves efficiency. 2. Storing resources. Seasonal products may be stored to satisfy off-season demand. Materials can be stored as raw materials, work-in-process, or finished goods. Labor can be stored as a component of partially completed subassemblies. 3. Compensate for irregular supply and demand. Demand and supply may not be constant over time. Inventory can be used to buffer the variability.

9. Five uses of inventory: 9 4. Take advantage of quantity discounts. Lower prices may be available for larger orders. Extra costs associated with holding more inventory must be balanced against lower purchase price. 5. Avoid stockouts and shortages. Stockouts may result in lost sales. Dissatisfied customers may choose to buy from another supplier.

10. 3. Inventory Decisions Two fundamental decisions in controlling inventory: 1.How much to order, 2.When to order. Overall goal is to minimize total inventory cost. 10

11. Inventory Costs  Cost of the items “purchase cost or material cost ),  Cost of ordering (set-up or placing an order), “ordering (setup) cost ”,  Cost of carrying, or holding inventory, “holding cost or carrying cost ”,  Cost of stockouts, “stockout cost or shortage cost”. 11

12. Ordering (Set-up) Costs: Developing and sending purchase orders, Processing and inspecting incoming inventory, Inventory inquiries, Utilities, phone bills, etc., for the purchasing department, Salaries/wages for purchasing department employees, Supplies (e.g., forms and paper) for the purchasing department. 12

13. Carrying Costs: Cost of capital, Taxes, Insurance, Spoilage (damage), Theft, Obsolescence, Salaries/wages for warehouse employees, Utilities/building costs for the warehouse, Supplies (e.g., forms, paper) for the warehouse. 13

14. Inventory Cost Factors 14 Ordering costs are generally independent of order quantity. Many involve personnel time. The amount of work is the same no matter the size of the order. Carrying costs generally varies with the amount of inventory, or the order size. The labor, space, and other costs increase as the order size increases. The actual cost of items purchased can vary if there are quantity discounts available.

15. EOQ - Basic Assumptions: 1.Demand is known and constant. 2.Lead time is known and constant. 3.Receipt of inventory is instantaneous. 4.Purchase cost is constant (Quantity discounts are not possible). 5.The only variable costs are: ordering cost, and holding cost. 6.Orders are placed so that stockouts or shortages are avoided completely. 15 4. Economic Order Quantity (EOQ): Determining How Much to Order Determining How Much to Order

16. Inventory Usage Over Time 16 Fig. 6.2: Inventory Usage Over Time Receipt of inventory is instantaneous

17. Inventory Costs in the EOQ Situation Average inventory level = (6.1) 17 Q = number of pieces to order. EOQ = Q * = optimal number of pieces to order, D = annual demand in units for the inventory items, C o = ordering cost of each order, C h = holding or carrying cost per unit per year. Variables:

18. Average inventory level 18 INVENTORY LEVEL DAYBEGINNINGENDINGAVERAGE April 1 (order received) 1089 April 2867 April 3645 April 4423 April 5201 Maximum level April 1 = 10 units Total of daily averages = 9 + 7 + 5 + 3 + 1 = 25 Number of days = 5 Average inventory level = 25/5 = 5 units = 10/2

19. Total Cost as a Function of Order Quantity 19 Fig. 6.3 Minimum Total Cost Optimal Order Quantity Curve of Total Cost of Carrying and Ordering Carrying Cost Curve Ordering Cost Curve Cost Order Quantity Total Cost as a Function of Order Quantity

20. Finding the EOQ Develop an expression for the ordering cost. Develop an expression for the carrying cost. Set the ordering cost equal to the carrying cost. Q*Solve this equation for the optimal order quantity, Q*. 20

21. 21 Annual ordering cost = (number of orders placed per year) × (ordering cost per order) annual demand = × (ordering cost per order) number of units in each order Annual holding or carrying cost = = (average inventory) × (carrying cost per unit per year) order quantity = × (carrying cost per unit per year) 2

22. Setting the Equations Equal to Solve for Q* 22 h C 2 Q o C Q D  Q 2 h C 2 o C D  Annual ordering cost = Annual holding cost: Q*Q*  h C 2 o CD EOQ =

23. 23 Economic Order Quantity (EOQ) Model o C Q D Annual ordering cost = (6-2) Annual holding cost h C 2 Q  (6-3) Q*Q*  h C 2 o CD EOQ = (6-4) Total inventory cost = (6-5) Average inventory level = (6.1) Economical Order Quantity

24. 24 Sumco Pump Company Example Sumco, a company that sells pump housings to other manufacturers, would like to reduce its inventory cost by determining the optimal number of pump housings to obtain per order. The annual demand is 1,000 units, the ordering cost is $10 per order, and the average carrying cost per unit per year is $0.50. Using these figures, if the EOQ assumptions are met, we can calculate the optimal number of units per order:

25. 25 $0.50 C h Sumco, a company that sells pump housings to other manufacturers, would like to reduce its inventory cost by determining the optimal number of pump (Q*) housings to obtain per order. The annual demand is 1,000 units (D), the ordering cost is $10 per order (C o ), and the average carrying cost per unit per year is $0.50 (C h ). Sumco Pump Company Example

26. 26 the optimal number of units per order: Q*Q*  h C 2 o CD EOQ = Total inventory cost = The number of orders per year = (D/Q) = 1,000 / 200 5 The average inventory = Q/2 = 200/ 2 = 100

27. 27 Lab Exercise # 3 1. Solve Sumco Pump Company Example using Excel and QM for Windows. (page ……). To be Continued.

28. 28 h C 2 o CD = =Q* =Q*/2 =D/Q* =Average Inventory*C h =Number of Orders*Setup (order) cost =Unit price*Demand =Holding costs+Setup costs+Unit costs Total Solution Using Excel

29. 29 Total

30. 30

31. 31 Solution Using QM for Windows

32. 32

33. 33

34. 34

35. 35 Enter the Input Parameters, then Click Solve

36. 36

37. 37

38. Purchase Cost of Inventory Items  Typically, carrying cost, C h, is stated in:  $ cost per unit per year.  Sometimes, it is expresses as percentage of the unit cost.  Let I = The annual inventory holding cost as a percent of unit cost, then:  C h = IC 38 Let: C = the purchase cost per unit. The average dollar level = (6-6)

39. EOQ 39 Per Unit Carrying Cost: Percentage Carrying Cost: * Q  h C 2DC o Q *  IC 2DC o Denominator Change (6-7)

40. Sensitivity Analysis with the EOQ Model Determining the effects of changes in input values on the EOQ is called sensitivity analysis. From the equation for Q * : the EOQ changes by the square root of a change in any of the inputs D, C ○, C h ). 40 * Q  h C 2DC o

41. 41 Sumco Pump Company Example (Revisited) Consider the Sumco Pump Company example. What will happen to the EOQ if we increased C ○ from $10 to $40. Q*Q*  h C 2 o CD EOQ =

42. Inputs and Outputs of the EOQ Model 42 Input Values Output Values Annual Demand (D) Ordering Cost (C o ) Carrying Cost (C h ) Lead Time (L) Demand Per Day (d) Economic Order Quantity (EOQ) Reorder Point (ROP) # of Orders (D/Q) Avg. Inventory (Q/2) Cycle Time (Q/D*360) EOQ Models

43. 5. Reorder Point (ROP): Determining When to Order 43 ROP = (Demand per day) x (Lead time for a new order, in days) ROP = d x L Inventory Level (Units) Q * ROP (Units) Slope = Units/Day = d Lead Time (Days) = L Time (Days) ……….(6.8)

44. 6. EOQ without the Instantaneous Receipt Assumption 44 Inventory Level There is No Production During This Part of the Cycle Maximum Inventory Level Time Production Portion of Cycle Inventory Control and the Production Process Inventory Control and the Production Process (Figure 6.5) t Production Run Model:

45. Annual Holding (Carrying) Cost for Production Run Model 45 Let: Q = number of pieces per production run, or (or per order). t = length of production run in days, or (length of time for receiving the inventory order). C s = Setup cost, C h = Holding (or carrying cost) per unit per year. p = daily production rate, or ( daily receiving rate ). d = daily demand rate.

46. 46 Annual holding cost = (average annual inventory) × (holding cost) Annual holding cost = (6-10) Average annual inventory = one-half of the maximum inventory Average annual inventory = ……(6.9) The maximum inventory = = ( total production during the production run) – (total used during the production run) = (pt ) – (dt ) = t (p – d) = (p – d ), The maximum inventory = Q = number of pieces p = daily production rate t = length of production run in days d = daily demand rate C h carrying cost per unit per year

47. 47 Annual Setup Cost, or Annual Ordering Cost Both of these are independent of the size of the production run (size of the order). This cost = the number of production runs (number of orders) times the setup cost (ordering cost). – Annual Setup Cost = – Annual Ordering Cost = s C Q D o C Q D (6-11) (6-12)

48. Determining the Optimal Production Quantity 48 C s C o. If the case involves the receipt of inventory over a period of time, use the same model but replace the setup cost C s with the ordering cost C o. Costs are minimized when the setup cost (ordering cost) equals the holding cost. s C Q D =  p d 1 C 2 D C Q h s * _ (6-13)

49. Production Run Model 49 Annual holding cost = Annual Setup Cost = s C Q D Optimal Production Quantity  p d 1 C 2 D C Q h s * _

50. 50 Brown Manufacturing Example Brown Manufacturing produces commercial refrigeration units in batches. The firm’s estimated demand for the year is 10,000 units. It costs about $100 to set up the manufacturing process, and the carrying cost is about 50 cents per unit per year. When the production process has been set up, 80 refrigeration units can be manufactured daily. The demand during the production period has traditionally been 60 units each day. Brown operates its refrigeration unit production area 167 days per year. How many refrigeration units should Brown Manufacturing produce in each batch? How long should the production part of the cycle shown in Figure 6.5 last?

51. 51 Brown Manufacturing Example Brown Manufacturing produces commercial refrigeration units in batches. The firm’s estimated demand for the year is 10,000 units. It costs about $100 to set up the manufacturing process, and the carrying cost is about 50 cents per unit per year. When the production process has been set up, 80 refrigeration units can be manufactured daily. The demand during the production period has traditionally been 60 units each day. Brown operates its refrigeration unit production area 167 days per year. How many refrigeration units should Brown Manufacturing produce in each batch? How long should the production part of the cycle shown in Figure 6.5 last?

52. 52 Brown Manufacturing Example Brown Manufacturing produces commercial refrigeration units in batches. The firm’s estimated demand for the year is 10,000 units. It costs about $100 to set up the manufacturing process, and the carrying cost is about 50 cents per unit per year. When the production process has been set up, 80 refrigeration units can be manufactured daily. The demand during the production period has traditionally been 60 units each day. Brown operates its refrigeration unit production area 167 days per year. How many refrigeration units should Brown Manufacturing produce in each batch? How long should the production part of the cycle shown in Figure 6.5 last? Annual demand (D) = 10,000 units. Setup cost (C s ) = $100. Carrying cost (C h ) = $0.50 per unit per year. Production rate (p) = 80 units daily. Demand rate (d) = 60 units daily. Refrigeration operational days = 167 days per year. -Optimal Production Quantity Q* ? -t = Q * /p ? Given Data:

53. Questions 53 1.How many refrigeration units should Brown produce in each batch? i.e., What is Q * ? 2.How long should the production cycle last ? i.e., What is t = Q * /p ? Brown Manufacturing Example

54. 1.What is Q * ? 54  4,000 units    p d 1 C 2 D C Q h s * _        1 (0.5) 2(10,000)(100) Q * _ 60 80

55. 2.How long should the production cycle lasts ? What is t (Q/p)? 55 Q *  4,000 units. p = 80 units per day. t = Q * /p = 4,000/80 = 50 days. Production runs will last 50 days and produce 4,000 units.

56. Lab Exercise # 3 (Cont’d.) 2. a) Solve the Brown Manufacturing Example using Excel QM and QM for Windows. b) Draw a curve (in scale) representing the inventory control and the production process (as shown in Figure 6.5). 56 To be Continued.

57. 57

58. 58 =SQRT((2*B7*B8)/(B9*(1-B11/B10)))  p d 1 C 2 D C Q h s * _ =B15*(1-(B11/B10)) = =B16/2 = ½ Maximum inventory =B7/B15 = D/Q* =B17*B9 = Average inventory * Holding cost =B18*B8 = Number of Setups * Setup cost =B20+B21 = Total Holding cost + Total Setup cost

59. 59

60. 60

61. 61

62. 62

63. 63

64. 64 Enter data and Click Solve

65. 65

66. 66

67. 7. Quantity Discount Models Total inventory cost = Purchase cost + Ordering cost + Holding cost TCDC TC = DC + (D/Q)C o + (Q/2)C h..... (6-14) Where:  D = annual demand in units.  C = cost per unit.  C o = ordering cost for each order.  C h = holding cost per unit per year. Let I = holding cost as a percentage of the unit cost (C). C h = IC, IC is convenient to be used in place of C h in decision-making. 67

68. 68 Total Cost Curve for each of the Quantity Discount Model EOQ = Q* Figure 6.6 The lowest cost quantity

69. Quantity Discount Models Quantity Discount Models 1. For each discount price (C), Compute EOQ : 2. If EOQ < Minimum for discount, adjust the quantity to Q = Minimum for discount. 3. For each EOQ, compute total cost: TC = DC + D/Q(C o ) + Q/2(C h ) 4. Choose the lowest cost quantity from all levels. 69 Q *  IC 2DC o Q*Q*  h C 2 o CD EOQ =

70. Brass Department Store Example Brass Department Store stocks toy race cars. Recently, the store was given a quantity discount schedule for the cars; this quantity discount schedule is shown in Table 6.3. Thus, the normal cost for the toy race cars is $5. For orders between 1,000 and 1,999 units, the unit cost is $4.80, and for orders of 2,000 or more units, the unit cost is $4.75. Furthermore, the ordering cost is $49 per order, the annual demand is 5,000 race cars, and the inventory carrying charge as a percentage of cost, I, is 20% or 0.2. What order quantity will minimize the total inventory cost? 70

71. 71 Brass Department Store Example Material cost: Total material cost is affected by the Discount (%). Unit cost = first $5.00, then $4.80, and finally $4.75 Table 6.3 Quantity Discount Schedule

72. The ordering cost = $49 per order. The annual demand = 5000 race cars. The holding cost as a percentage of purchase cost (I) = 20% or 0.2. What order quantity will minimize the total inventory cost? 72 Brass Department Store Example (Cont’d)

73. Solution Steps: 1.The first step is to compute EOQ for every discount: EOQ 1 = = 700 cars/order EOQ 2 = = 714 cars/order EOQ 3 = = 718 cars/order 73 EOQ = Q *  ICIC 2DC o

74. 2. The second step is to adjust those quantities that are below the allowable discount range: EOQ 1 = 700 is between 0 and 999, it does not have to be adjusted. EOQ 2 = 714 is below the allowable range of 1000 to 1999, and therefore, it must be adjusted to 1000 units. The same is true for EOQ 3 = 718; it must be adjusted to 2000 units. So, Q 1 = 700, Q 2 = 1000 (adjusted), Q 3 = 2000 (adjusted). 74

75. 3. The third step is to compute a total cost for each of the order quantities: 75 TCD/Q (C o ) Q / 2 (C h ) TC = DC + D/Q (C o ) + Q / 2 (C h ) D=5000, C o = $49, C h = IC =0.2C TotalCostAnnualHoldingCost Annual Ordering Cost Annual Material CostDC Order Quantity (Q) Unit Price ( C ) Discount Number 2570035035025000700$51 24725480245240001000$4.82 24822950122237502000$4.753 4. The fourth step is to select that order quantity with the lowest total cost: Q* = 1000 units with total cost = $24,725. Table 6.4

76. Lab Exercise # 3 Lab Exercise # 3 (Cont’d) 3. Solve the Brass Department Store using Excel QM and QM for Windows. 76

77. 77 Syntax IF(logical_test,[value_if_true],[value_if_false])

78. 78

79. 79

80. 80

81. 81

82. 82

83. 83

84. 84

85. 8. Use of Safety Stock 85 Safety stock is extra stock on hand to avoid stockouts. Stockouts occur when there are uncertainties with: Demand, Lead time. ROP is adjusted to implement safety stock policy: ROP = d × L + SS ….(6-15) d = average daily demand, L = average lead time, SS = safety stock.

86. Use of Safety Stock Fig. 6.7 86 Inventory on Hand Stockout Time Inventory on Hand Stockout is avoided Time Safety Stock, SS 0 Units

87. Safety Stock with Unknown Stockout Costs  When stockout costs are not quantifiable or not applicable: Use a service level to determine safety stock level. Service level is the percent of time an item is not out of stock. Service Level = 1 – P(Stockout) Or: P(Stockout) = 1 – Service Level 87  Set service level; use normal distribution for Demand Lead time.

88. The Hinsdale Company carries a variety of electronic inventory items, and these are typically identified by SKU. One particular item, SKU A3378, has a demand that is normally distributed during the lead time, with a mean of 350 units and a standard deviation of 10. Hinsdale wants to follow a policy that results in stockouts occurring only 5% of the time on any order. How much safety stock should be maintained and what is the reorder point? Figure 6.8 helps visualize this example. 88 Hinsdale Company Example:

89. 89 The Hinsdale Company carries a variety of electronic inventory items, and these are typically identified by SKU. One particular item, SKU A3378, has a demand that is normally distributed during the lead time, with a mean of 350 units and a standard deviation of 10. Hinsdale wants to follow a policy that results in stockouts occurring only 5% of the time on any order. How much safety stock should be maintained and what is the reorder point? Figure 6.8 helps visualize this example. Hinsdale Company Example: Lead time demand ~N(350, 10) P (Stockout) = 5%

90. Hinsdale Company Example: 1.Lead time demand ~N(350, 10)  Where: Average (  = 350, Standard deviation (  = 10. 2.Desired Policy: P (Stockout) = 5% Therefore, service level = 95% Visualization of Desired Inventory Policy: 90 Figure 6.8 μ = Mean demand = 350 σ = Standard deviation = 10 X = Mean demand + Safety stock

91. Hinsdale Company example: X = Mean demand  + Safety Stock (SS) Z = X –  = SS = Z  91 X-   SS = Z σ Z is obtained from the Normal distribution tables. SS = X – μ

92. Hinsdale Company example: Find Z using a Normal table, like in Appendix A: Z = 1.65 for a 5% right tail ( Search for an area of 0.95 inside the table). SS = Zσ = 1.65 (10) = 16.5 units, or 17 units. 92 ROP = Average demand during lead time + SS ROP = μ +SS = 350 + 17 = 367 units.

93. 93 0.95 Z = 1.65

94. 94 Service Level versus Holding Costs Hinsdale Company Example: If the carrying cost C h = $2 per unit per year. The carrying cost will vary for service levels that range from 90% 91%, 92%,…, 99.99%. Table 6.5 : Service Level (%)Z value from Normal Curve Table Safety Stock (Units) Holding Cost of the Safety Stock 901.2812.825.6 911.3413.426.8 921.4114.128.2 931.4814.829.6 941.5515.531 951.6516.533 961.7517.535 971.8818.837.6 982.0520.541 992.3323.346.6 99.993.7537.274.4

95. Service Level versus Carrying Costs 95 The following curve depicts the tradeoff between carrying costs of safety stocks and service level for the previous example. Such dramatic tradeoffs exist for all similar problems

96. Service Level versus Annual Carrying Costs 96 Figure 6.9 Holding cost of safety Stock ($)

97. Total Annual Holding Cost 97 Total annual holding cost = holding cost of regular inventory + Holding cost of safety stock THC = Q/2 C h + (SS) C h …. (6.20) Where: THC = total annual holding cost, Q = order quantity, C h = holding cost per unit per year, SS = safety stock.

98. 10. ABC Analysis Group A Items – High $ value Group B Items – Moderate $ value Group C Items – Low $ value 98 Inventory Group Dollar Usage (%) Inventory Items (%) Are Quantitative Control Techniques Used? ABCABC 70 20 10 20 70 Yes In some cases No Summary of ABC Analysis Table 6.8

99. ABC Inventory Analysis 99 100 90 80 70 60 50 40 30 20 10 0 Percent of Inventory Items Percent of Annual Dollar Usage 1 2 3 4 5 6 7 8 9 10 AItems BItems C Items C Items

100. ABC Inventory Policies  Greater expen  Greater expenditure on supplier development for A items than for B items or C items.  Tighter physical control  Tighter physical control on A items than on B items or on C items.  Greater expenditure on forecasting  Greater expenditure on forecasting A items than on B items or on C items. 100

101. 101

102. 102

103. 103

104. 104

105. 11. Dependent Demand: The Case for Material Requirements Planning (MRP)  Discussion thus far has concerned independent demands:  i.e., demand of one item not dependent on another. 105 e.g., demand of lawn mower wheels are dependent on the demand of lawn mowers. Interrelated inventory items means that the demand of one item is dependent on the demand of another.

106. Dependent Demand Inventory: MRP independent demand  For independent demand inventory, major questions are:  How much to order  When to order ABC Analysis helps decide how much time to spend on each item. dependent demand  For dependent demand inventory, MRP (Material Requirements Planning) can be employed very effectively to answer the same questions. 106

107. Benefits of MRP  Increased customer service and satisfaction.  Reduced inventory costs.  Better inventory planning and scheduling.  Higher total sales.  Faster response to market changes and shifts.  Reduced inventory levels without reduced customer service. Although most MRP systems are computerized, the analysis is straightforward and similar from one computerized system to the next. 107

108. MRP: Typical Procedures 1.Develop a bill of materials (BOM) The BOM identifies: The components, Component descriptions, Amount required to produce 1 unit of final product. 2.Develop a Material Structure Tree: The tree has several levels depending on the depth of subcomponents required. Parents and components are identified: Items above any level are parents, Items below any level are components. The tree shows how many units are needed at each level of production: 108

109. Material Structure Tree: An Example A Assume demand for product A is 50 units A Each unit of A requires: B, 1.2 units of B, which in turn requires: D, 1.2 units of D, E. 2.3 units of E. C 2.3 units of C, which in turn requires: E, 1.1 unit of E, F. 2.2 units of F. 109

110. 110 Material Structure Tree: An Example (continued) An Example (continued) This structure tree has 3 levels: 0, 1, and 2.0, 1, and 2. parents There are 3 parents: A, B, CA, B, C components There are 5 components: B, C, D, E, FB, C, D, E, F BCand B and C are parents and components Material Structure Tree is on next slide  Numbers in parentheses next to the levels indicate the amounts needed for 1 unit of final product of A.  For example, B(2) indicates that it takes 2 units of B to make 1 unit of A.

111. 111 Material Structure Tree An Example continued Figure 6.12 After developing the tree, the number of units of each item needed to satisfy demand can be calculated. This is shown on the next slide. How many of each item are needed for 50 units of A?

112. 112 Material Structure Tree An Example (continued) Component Calculations: Part B Part B: 100. 2×# of A = 2×50 = 100. Part C Part C: 150. 3×# of A = 3×50 = 150. Part D Part D: 200. 2×# of B = 2×100 = 200. Part E Part E: 3×# of B + 1×# of C = 450. 3×100 + 1×150 = 450. Part F Part F: 300. 2×# of C = 2×150 = 300.

113. Material Structure Tree An Example (continued) directly from the material structure tree  The numbers in this table could also have been determined directly from the material structure tree by multiplying the numbers along the branches times the demand for A, which is 50 units for this problem. For example, the number of units of D needed is simply 2 × 2 × 50 = 200 units. 113

114. Gross and Net Material Requirements Plan 1.Once the materials structure tree is done, construct a gross material requirements plan. 2.This is a time schedule that shows when an item must be ordered: 1.when there is no inventory on hand, or 2.when the production of an item must be started in order to satisfy the demand for the finished product at a particular date. Let’s assume that all of the items are produced or manufactured by the same company. 114

115. It takes one week to make A, two weeks to make B, one week to make C, one week to make D, two weeks to make E, and three weeks to make F. If you want 50 units of A at week 6, construct the gross material requirement plan? 115Example

116. 116 Figure 6.13 Week Lead Time 123456 A Required Date50 1 Week Order Release50 B Required Date100 2 Weeks Order Release100 C Required Date150 1 Week Order Release150 D Required Date200 1 Week Order Release200 E Required Date300150 2 Weeks Order Release300150 F Required Date3003 Weeks Order Release300 AB(2)D(2)E(3) C C(3)E(1)F(2) Level : 0 1 2 Material Structure Tree for Item A 50 100 150 200300

117. Net Material Requirements Plan A net material requirements plan can be constructed from: the gross materials requirements plan, and the inventory on-hand information. For each item, this plan includes: gross requirements, on-hand inventory, net requirements, order receipt, and order release. 117

118. Material on hand information: ItemOn hand inventory A10 B15 C20 D10 E10 F5 118

119. Figure 6.14 119 Week Lead Time Item123456 AGross 501 On-Hand 1010 Net40 Order Receipt40 Order Release40 BGross80 A 2 On-Hand 1515 Net65 Order Receipt65 Order Release65 CGross120 A 1 On-Hand 2010 Net100 Order Receipt100 Order Release100 DGross130 B 1 On-Hand 1010 Net120 Order Receipt120 Order Release120 EGross195 B 100 C 2 On-Hand 10100 Net185100 Order Receipt185100 Order Release185100 FGross200 C 3 On-Hand 55 Net195 Order Receipt195 Order Release195

120. Two or More End Products 120 A second end product is introduced (AA). The lead time for AA is one week. The material structure tree for AA is as follows:

121. The gross requirement for AA is 10 units in week 6 and there are no units on hand. This new product can be added to the MRP process. The addition of AA will only change the MRP schedules for the parts contained in AA. MRP can also schedule spare parts and components. These have to be included as gross requirements. 121

122. Net Material Requirements Plan, Including AA 1 - 122

123. 12. Just-in-Time (JIT) Inventory Control One objective to achieve greater efficiency in the production process is to have less in-process inventory on handOne objective to achieve greater efficiency in the production process is to have less in-process inventory on hand. JIT inventory achieves this objective: inventory arrives just-in-time to be used during the production process to produce subparts, assemblies, or finished goods. kanbanOne technique of implementing JIT is a manual procedure called kanban. (Kanban in Japanese means “card” ). With a dual-card kanban system, there is:With a dual-card kanban system, there is: ConveyanceC-kanbana Conveyance kanban, or C-kanban, and ProductionP-kanbana Production kanban, or P-kanban. 123

124. 4 Steps of Kanban 124 The kanban system is very simple. These are the steps: 1.The user takes a container of parts or inventory along with its C-kanban to his or her work area. When the container is empty, the user returns the empty container along with the C-kanban to the producer area. C-Kanban And Container 1

125. 4 Steps of Kanban (continued) 125 2.At the producer area, there is a full container of parts along with a P-kanban attached. The user detaches the P-kanban from the full container of parts. Then the user takes the full container of parts along with the original C-kanban back to his or her area for immediate use. Container C-Kanban & Container 2 1 P-Kanban &

126. 4 Steps of Kanban (continued) 126 3.The detached P-kanban goes back to the producer area along with the empty container. The P-kanban is a signal that new parts are to be manufactured and placed into the container. When the container is filled, the P-kanban is attached to the container. P-Kanban & C-Kanban And Container 3

127. 4 Steps of kanban (continued) 4.This process repeats itself during the typical workday. The dual-card kanban system is shown below: 127

128. 128 C C C P P C 1 2 3

129. 13. ENTERPRISE RESOURCE PLANNING (ERP)  Material Requirements Planning (MRP) evolved to include not only the materials required in production, but also the labor hours, material cost, and other resources related to production.  In this approach the term MRP II is often used, and the word resource replaces the word requirements.  As this concept evolved and sophisticated software was developed, these systems became known as enterprise resource planning (ERP) systems. 129

130. ENTERPRISE RESOURCE PLANNING (continued)  Objective of an ERP System: to reduce costs by integrating all of the operations of a firm. This starts with the supplier of needed materials, flows through the organization, includes invoicing the customer of the final product.  Once data enters database, it can be quickly and easily accessed by anyone.  This benefits: the functions related to planning and managing inventory, and also other business processes such as: accounting, finance, and human resources. 130

131. ENTERPRISE RESOURCE PLANNING (continued)  The benefits of an ERP system are reduced transaction costs, and increased speed and accuracy of information.  There are drawbacks The software is expensive to buy and costly to customize. The implementation of an ERP system may require a company to change its normal operations. Employees are often resistant to change. Training employees on the use of the new software can be expensive. 131

132. ENTERPRISE RESOURCE PLANNING (continued)  Many ERP systems are available.  The most common ones are from the firms: SAP, Oracle, People Soft, Baan, and JD Edwards.  Even small systems can cost hundreds of thousands of dollars.  The larger systems can cost hundreds of millions of dollars. 132