1. Inventory System
Inventory system: the set of policies and controls that monitor levels of inventory and determines:
what levels should be maintained
when stock should be replenished
how large orders should be

2. Fixed-Order Quantity Models: Model Assumptions (Part 1)
Demand for the product is constant and continuous throughout the period and known.
Lead time (time from ordering to receipt) is constant.
Price per unit of product is constant.

3. Fixed-Order Quantity Models: Model Assumptions (Part 2)
Inventory holding cost is based on average inventory.
Ordering or setup costs are constant.
All demands for the product will be satisfied. (No back orders are allowed.)

4. Basic Fixed-Order Quantity Model and Reorder Point Behavior
Exhibit 15.3
R = Reorder point
Q = Economic order quantity
L = Lead time L Q R
Time
Number
of units
on hand

5. Cost Minimization Goal
By adding the item, holding, and ordering costs together, we determine the total cost curve, which in turn is used to find the Qopt inventory order point that minimizes total costs.
Total Cost C O S T
Holding
Costs
Annual Cost of
Items (DC)
Ordering Costs
QOPT
Order Quantity (Q)

6. Basic Fixed-Order Quantity (EOQ) Model Formula
Annual
Purchase
Cost
Annual
Ordering
Cost
Annual
Holding
Cost
Total Annual Cost = + +
Average
Inventory
Annual
Holding Cost
Per Unit *
Annual
Demand
Cost Per
Unit *
# of
Orders
Per Year *
Ordering
Cost
Per Order D C *
D/Q + S *
Q/2 + H *

7. EOQ Example (1) Solution
In summary, you place an optimal order of 89 units when the inventory position (IP = OH + SR – BO) is 20 units.
112.36
111.25

8. Fixed-Order Quantity Model with Safety Stock
Order arrives OH
Inventory
ROP
Stockout risk
Base
inventory
level
Safety
Stock (Is)

9. Fixed-Order Quantity Model with Safety Stock Formula
R = Average demand during lead time + Safety stock 18

10. Determining the Value of sL
The standard deviation of a sequence of random events equals the square root of the sum of the variances. 20

11. Price-Break Example Problem Data (Part 1)
A company has a chance to reduce their inventory costs by placing larger quantity orders using the price-break order quantity schedule below. What should their optimal order quantity be if this company purchases this single inventory item with an ordering cost of $4, a carrying cost rate of 20% of the inventory cost of the item, and an annual demand of 10,000 units?
Order Quantity(units) Price/unit($)
0 to 999 $30.00
1,000 to 1,
1,500 or more

12. Total cost curves if any quantity could be ordered at each price
EOQ = 115
C = 29.75
EOQ = 116
C = 29.50
EOQ = 116

13. Price-Break Example Solution (Part 2)
Annual Demand (D)= 10,000 units
Cost to place an order (S)= $4
Carrying cost % of total cost (i)= 20%
Cost per unit (C) = $30.00, $29.75, $29.50
Beginning with the lowest unit cost, determine if the computed Qopt values are feasible or not.
Interval from 1500 & more, the Qopt value is not feasible.
Interval from , the Qopt value is not feasible.
Interval from 0 to 999, the Qopt value is feasible.

14. Total cost curves if any quantity could be ordered at each price
EOQ = 115
C = 29.75
EOQ = 116
C = 29.50
EOQ = 116

15. Actual total cost curve
Q = 115
Q = 1000
Q = 1500

16. Price-Break Example Solution (Part 4)
Next, we plug the feasible Qopt values into the total cost annual cost function to determine the total cost for each order quantity.

17. Price-Break Example Solution (Part 5)
TC(115)= (10000*$30.00)+(10000/115)*4+(115/2)*(0.2*$30.00) = $300,693
TC(1000)= (10,000*$29.75) + (10,000/1000)*4 + (1000/2)*(0.2*$29.75) = $300,515
TC(1500) = (10,000*$29.50) + (10,000/1500)*4 + (1500/2)*(0.2*$29.50) = $299,452
Finally, we select the least costly Qopt, which is this problem occurs for an order quantity of In summary, our optimal order quantity is 1500 units.

18. ABC Classification System
Items kept in inventory are not of equal importance in terms of:
dollars invested
profit potential
sales or usage volume
stock-out penalties 60
% of
$ Value A 30 B C
% of
Use 30 60
So, identify inventory items based on percentage of total dollar value, where “A” items are roughly top 80 %, “B” items as next 15 %, and the lower 5% are the “C” items.

19. Just-In-Time (JIT) Defined
JIT: an integrated set of activities designed to achieve high-volume production using minimal inventories (RM, WIP, FG).
JIT involves:
the elimination of waste in production effort.
the timing of production resources (e.g., parts arrive at the next workstation “just in time”).

20. Minimizing Waste: Kanban Production Control Systems
Exhibit 10.6
Minimizing Waste: Kanban Production Control Systems
Withdrawal kanban
Storage Part A
Storage Part A
Machine Center
Assembly Line
Production kanban
Material Flow
Card (signal) Flow

21. JIT Requirements:
Stabilize Schedule: Level schedule, underutilize capacity, establish freeze windows
Kanban-Pull: Demand pull, backflush, reduce lot sizes
Work with Vendors: Reduce lead times, frequent deliveries, project usage requirements, quality expectations

22. Characteristics of JIT Vendor Partnerships
Few, nearby suppliers
Long-term contract agreements
Steady supply rate
Frequent deliveries in small lots
Buyer helps suppliers meet quality
Suppliers use process control charts
Buyer schedules inbound freight

23. Respect for People Level payrolls Cooperative employee unions
Subcontractor networks
Bottom-round management style
Quality circles (Small group involvement activities)

24. Goldratt’s Rules of Production Scheduling (Continued)
Bottlenecks govern both throughput and inventory in the system.
Transfer batch may not and many times should not be equal to the process batch.
A process batch should be variable both along its route and in time.
Priorities can be set only by examining the system’s constraints. Lead time is a derivative of the schedule. 5

25. Goldratt’s Theory of Constraints (TOC)
Identify the system constraints.
Decide how to exploit the system constraints.
Subordinate everything else to that decision.
Elevate the system constraints.
If, in the previous steps, the constraints have been broken, go back to Step 1, but do not let inertia become the system constraint. 5

26. Goldratt’s Goal of the Firm
The goal of a firm is to make money. 4

27. Capacity Related Terminology
Capacity is the available time for production.
Bottleneck is what happens if capacity is less than demand placed on resource.
Nonbottleneck is what happens when capacity is greater than demand placed on resource.
Capacity-constrained resource (CCR) is a resource where the capacity is close to demand placed on the resource. 10

28. Capacity Example Situation 1
There is some idle production in this set up. How much? X Y
Market
Case A
25% in Y 11

29. Capacity Example Situation 2
Is there is going to be a build up of unnecessary production in Y? Y X
Market
Case B
Yes, 25% in Y. 12

30. Capacity Example Situation 3
Assembly
Market
Case C
Is there going to be a build up in unnecessary production in Y?
Yes, 25% in Y. 13

31. Capacity Example Situation 4
Yes, 25% in Y.
If we run both X and Y for the same time, will we produce any unneeded production? X Y
Market
Case D 14

32. Time Components of Production Cycle
Setup time is the time that a part spends waiting for a resource to be set up to work on this same part.
Process time is the time that the part is being processed.
Queue time is the time that a part waits for a resource while the resource is busy with something else. 15

33. Time Components of Production Cycle (Continued)
Wait time is the time that a part waits not for a resource but for another part so that they can be assembled together.
Idle time is the unused time. It represents the cycle time less the sum of the setup time, processing time, queue time, and wait time. 16

34. Saving Time Bottleneck Nonbottleneck
What are the consequences of saving time at each process?
Bottleneck
Nonbottleneck
Rule: Bottlenecks govern both throughput and inventory in the system.
Rule: An hour lost at a bottleneck is an hour lost for the entire system.
Rule: An hour saved at a nonbottleneck is a mirage. 17

35. Drum, Buffer, Rope A B C D E F Bottleneck (Drum) Market Inventory
Exhibit 17.9 A B C D E F
Bottleneck (Drum)
Inventory
buffer
(time buffer)
Communication
(rope)
Market 18

36. Quality Implications of synchronous manufacturing
More tolerant than JIT systems
Excess capacity throughout system.
Except for the bottleneck
Quality control needed before bottleneck. 19

37. Batch Sizes
What is the batch size?
One?
Infinity? 20

38. Bottlenecks and CCRs: Flow-Control Situations
A bottleneck
(1) with no setup required when changing from one product to another.
(2) with setup times required to change from one product to another.
A capacity constrained resource (CCR)
(3) with no setup required to change from one product to another.
(4) with setup time required when changing from one product to another. 21

39. Inventory Cost Measurement: Dollar Days
Dollar Days is a measurement of the value of inventory and the time it stays within an area.
Dollar Days = (value of inventory)(number of days within a department)
Example 22

40. Benefits from Dollar Day Measurement
Marketing
Discourages holding large amounts of finished goods inventory.
Purchasing
Discourages placing large purchase orders that on the surface appear to take advantage of quantity discounts.
Manufacturing
Discourage large work in process and producing earlier than needed. 23

41. Comparing Synchronous Manufacturing to MRP
MRP uses backward scheduling.
Synchronous manufacturing uses forward scheduling. 24

42. Comparing Synchronous Manufacturing to JIT
JIT is limited to repetitive manufacturing
JIT requires a stable production level
JIT does not allow very much flexibility in the products produced 25

43. Comparing Synchronous Manufacturing to JIT (Continued)
JIT still requires work in process when used with kanban so that there is "something to pull."
Vendors need to be located nearby because the system depends on smaller, more frequent deliveries. 26

44. Relationship with Other Functional Areas
Accounting’s influence
Marketing and production 27