Manufacturing Planning and Control

1. Manufacturing Planning and Control MPC 6th Edition Chapter 11

2. Order Point Inventory Control Methods Order point methods are used to determine appropriate order quantities and timing for individual independent-demand product items that are characterized by random customer demand. Performed well, these inventory management functions can provide appropriate levels of customer service without excess levels of inventory and/or cost.

3. Agenda–Order Point Inventory Control Methods

4. Basic Concepts • Inventory supports both independent- and dependent-demand items • Independent-demand inventories–primarily influenced by factors outside of company decisions (e.g. random variation) • Demand forecasts estimate the average usage rate and pattern of variation • Dependent-demand inventories–influenced mainly by internal factors within the firm’s control

6. Inventory Management Issues • Routine inventory decisions–how much to order and when to order • Inventory control decision rules can simplify these decisions

7. Inventory Management Issues • Determining Inventory System Performance • Inventory turnover (annual sales divided by average inventory investment) • Fill rate (percentage of units available when requested by customers) • Allows comparison of different systems and evaluation of system changes

8. Inventory Management Issues • Implementing Changes in Managing Inventory–making the appropriate changes at the right time is critical • More formalized change management system is required as the scope of the business increases

9. Inventory-Related Costs Incremental costs–does the cost represent an actual expenditure or lost profit? Does the cost actually vary with the decision being made?

10. Economic Order Quantity (EOQ) Model • Describes the relationship between cost of ordering, cost of carrying inventory, and the order quantity Total Costs Inventory Holding Costs Ordering Costs

11. Determining the EOQ–Graphical Method TAC curve shows clear minimum value at Q=25 A = 1,250 Cp = 6.25 CH = 25 TAC=(1,250/Q)6.25+(Q/2)25

12. Determining the EOQ–Deriving the EOQ Formula Derivative of TAC with respect to Q Set derivative equal to zero and solve for Q Economic time between orders (TBO)

13. Order Timing Decisions • Q,R rule • When stock reaches predetermined inventory level (R), a fixed quantity (Q) is ordered • Order point is influenced by demand rate, replenishment lead time, uncertainty of demand rate and replenishment lead time, and acceptable level of customer service • Safety stock is the difference between average demand during lead time and the reorder point

14. Safety Stock in a Q,R system Order quantity (Q) Reorder point Safety stock R Inventory level S Time Lead time

15. Determining the Safety Stock in a Q,R system • Stockout probability–specify an acceptable risk of stocking out during any given replenishment cycle • Carry stock sufficient to satisfy expected demand with this probability • Customer service level–define an acceptable level of customer service (percent of demand met from inventory)

16. Stockout Probability With a lead time of one day, 95% of cycles will experience demand for 7 or fewer units Safety stock of 7 units will provide 5% chance of stockout during a one day lead time Sum of demand probability is 0.05 (5%)

17. Customer Service Level A reorder point of 5 units has a 35% chance of stockout, with an average of 0.56 units short each cycle Sum = 0.35

18. Safety Stock with Continuous Distributions Expected number of stockouts per cycle Reorder point Probability of at least one stockout during cycle

19. Probability of Stocking Out Probability of demand between 3.5 and 6.5 units is 0.6827. Probability of stockout when safety stock is 1 unit is 0.3173 (1 – 0.6827) Safety stock = Zσd Reorder point = mean demand during replenishment lead time + Zσd Z = appropriate value from standard normal table σd = standard deviation of demand during replenishment lead time

20. Customer Service Criterion Calculate E(Z) using the desired service level (SL) and reorder quantity (Q) Find the calculated E(Z) in the chart to determine the Z value Safety stock = Zσd

21. Time Period Correction Factor • Variations in demand and lead time complicate the calculations When standard deviation of demand is measured over a different time period than the lead time, correction is required When both demand and lead time vary, additional adjustments are required

22. Forecast Error Distribution • Safety stock can be based on forecast error rather than historical demand variation • Standard deviation = 1.25 MAD • MAD – mean absolution deviation

23. Multi-Item Management • Management attention should be focused on the most important items • ABC analysis segments the inventoried items according to annual cost volume usage(unit cost x annual usage) • A items are the most important • This small percentage of items usually makes up a majority of annual cost volume usage • B and C items are progressively less critical

24. Principles • The difference between dependent and independent demand must serve as the first basis for determining appropriate inventory management procedures. • Organizational criteria must be clearly established before we set safety stock levels and measure performance. • A sound basic independent demand system must be in place before attempting to implement advanced techniques.

25. Principles • Savings in inventory-related costs can be achieved by a joint determination of the order point and order quantity parameters. • All criteria should be taken into account in classifying inventory items for management priorities. • The functions of inventory are useful principles to apply in determining whether or not inventory reductions can be made.

26. Quiz – Chapter 11 • Order point methods are generally used for _____________ demand items. • Cycle stock is are a result of manufacturing lot sizes? (True/False) • Stock produced for upcoming promotional events would be considered _______________ stock. • The two main decisions when managing independent demand items are _______________ and ______________. • A measurement that relates inventory levels to product sales volume is ___________ _____________. • The three types of costs associated with holding inventory are ____________, ______________, and ____________.