Foundations of Control & Inventory management

1. Foundations of Control& Inventory management PART V: Controlling

2. What Is Control? • Control • The process of monitoring activities to ensure that they are being accomplished as planned and of correcting any significant deviations • An effective control system ensures that activities are completed in ways that lead to the attainment of the organization’s goals.

3. Characteristics of Three Approaches to Control Systems • Market • Uses external market mechanisms, such as price competition and relative market share. • Bureaucratic • Emphasizes organizational authority of administrative and hierarchical mechanisms to ensure appropriate employee behaviors and to meet performance standards. • Clan • Regulates employee behavior by the shared values, norms, traditions, rituals, beliefs, and other aspects of the organization’s culture.

4. The Control Process Exhibit 13.2

5. Steps in the Control Process • Measuring actual performance • Personal observation, statistical reports, oral reports, and written reports • Management by walking around (MBWA) • A phrase used to describe when a manager is out in the work area interacting with employees

6. Steps in the Control Process (cont’d) • Comparing actual performance against a standard • Comparison to objective measures: budgets, standards, goals • Range of variation • The acceptable parameters of variance between actual performance and the standard

7. Defining an Acceptable Range of Variation Exhibit 13.3

8. Steps in the Control Process (cont’d) • Taking managerial action to correct deviations or inadequate standards • Immediate corrective action • Correcting a problem at once to get performance back on track • Basic corrective action • Determining how and why performance has deviated and then correcting the source of deviation • Revising the standard • Adjusting the performance standard to reflect current and predicted future performance capabilities

9. South Atlantic’s Distributors’ Sales Performance for July (hundreds of cases) BRAND STANDARD ACTUAL OVER (UNDER) Heineken 1,075 913 (162) Molson 630 634 4 Beck’s 800 912 112 Moosehead 620 622 2 Labatt’s 540 672 132 Corona 160 140 (20) Amstel Light 225 220 (5) Dos Equis 80 65 (15) Tecate 170 286 116 Total cases 4,300 4,464 164

10. Types Of Control • Feedforward control • Control that prevents anticipated problems • Concurrent control • Control that takes place while an activity is in progress • Feedback control • Control that takes place after an action • Provides evidence of planning effectiveness • Provides motivational information to employees

11. Types of Control Exhibit 13.5

12. Are usually set in terms of: Quantity Quality Time Costs Or combination all of them Control standards

13. Accuracy Timeliness Economy Flexibility Understandability Reasonable criteria Strategic placement Emphasis on the exception Multiple criteria Corrective action The Qualities Of An Effective Control System

14. What Contingency Factors Affect the Design of A Control System? • Size of the organization • The job/function’s position in the organization’s hierarchy • Degree of organizational decentralization • Type of organizational culture • Importance of the activity to the organization’s success

15. Contingency Factors in the Design of Control Systems Control Recommendations ContingencyVariable Exhibit 13.6

16. Inventory control & management

17. Independent Demand Dependent Demand A C(2) B(4) D(2) E(1) D(3) F(2) Independent demand is uncertain. Dependent demand is certain. Inventory Inventory: a stock or store of goods

18. Inventory • Independent demand – finished goods, items that are ready to be sold • E.g. a computer • Dependent demand – components of finished products • E.g. parts that make up the computer

19. Types of Inventories • Raw materials & purchased parts • Partially completed goods called work in progress • Finished-goods inventories • (manufacturingfirms) or merchandise (retail stores)

20. Types of Inventories (Cont’d) • Replacement parts, tools, & supplies • Goods-in-transit to warehouses or customers

21. Functions of Inventory • To meet anticipated demand • To smooth production requirements • To decouple operations • To protect against stock-outs

22. Functions of Inventory (Cont’d) • To take advantage of order cycles • To help hedge against price increases • To take advantage of quantity discounts

23. Objective of Inventory Control • To achieve satisfactory levels of customer service while keeping inventory costs within reasonable bounds • Level of customer service • Costs of ordering and carrying inventory

24. Key Inventory Terms • Lead time: time interval between ordering and receiving the order • Holding (carrying) costs: cost to carry an item in inventory for a length of time, usually a year • Ordering costs: costs of ordering and receiving inventory • Purchasing costs:costs from quantity and unit price

25. High A Annual $ value of items B C Low Low High Percentage of Items ABC Classification System Classifying inventory according to some measure of importance and allocating control efforts accordingly. A-very important B- mod. important C- least important

26. Inventory Models • Economic order quantity (EOQ) model • The order size that minimizes total annual cost • Production order quantity model • Quantity discount model

27. Economic Order Quantity model(EOQ) * Assumptions of EOQ Model • Only one product is involved • Annual demand requirements known • Demand is even throughout the year • Lead time does not vary • Each order is received in a single delivery • There are no quantity discounts

28. Profile of Inventory Level Over Time Q Usage rate Quantity on hand Reorder point Time Place order Receive order Receive order Receive order Place order Lead time The Inventory Cycle

29. Q D S H + 2 Q Total Cost Annual carrying cost Annual ordering cost Total cost = + TC = H: holding cost per unit per year S: ordering cost per time D: annual demand

30. Cost Minimization Goal The Total-Cost Curve is U-Shaped Annual Cost Ordering Costs Order Quantity (Q) QO (optimal order quantity)

31. Deriving the EOQ Using calculus, we take the derivative of the total cost function and set the derivative (slope) equal to zero and solve for Q.

32. Q D S H = 2 Q Minimum Total Cost The total cost curve reaches its minimum where the carrying and ordering costs are equal.

33. Annual carrying cost Annual ordering cost Purchasing cost + TC = + Q D PD S H TC = + + 2 Q Total Costs with Purchasing Cost

34. When to Reorder with EOQ Ordering • Reorder Point - When the quantity on hand of an item drops to this amount, the item is reordered • ROP = d x L d: daily demand, d = D/number of production days per year

35. Determinants of the Reorder Point • The rate of demand • The lead time • Demand and/or lead time variability • Stockout risk (safety stock)

36. EOQ Example Given the information below, what are the EOQ and reorder point? Annual Demand = 1,000 units Days per year considered in average daily demand = 365 Cost to place an order = $10 Holding cost per unit per year = $2.50 Lead time = 7 days Cost per unit = $15

37. EOQ Example - Solution In summary, you place an optimal order of 90 units. In the course of using the units to meet demand, when you only have 20 units left, place the next order of 90 units.

38. Discount quantity model (price-break model) Based on the same assumptions as the EOQ model, the price-break model has a similar Qopt formula: i = percentage of unit cost attributed to carrying inventory C = cost per unit Since “C” changes for each price-break, the formula above will have to be used with each price-break cost value

39. Price-Break Example Problem Data (Part 1) A company has a chance to reduce their inventory ordering 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 e-mail ordering cost of $4, a carrying cost rate of 2% of the inventory cost of the item, and an annual demand of 10,000 units? Order Quantity(units)Price/unit($) 0 to 2,499 $1.20 2,500 to 3,999 1.00 4,000 or more .98

40. Price-Break Example Solution (Part 2) First, plug data into formula for each price-break value of “C” Annual Demand (D)= 10,000 units Cost to place an order (S)= $4 Carrying cost % of total cost (i)= 2% Cost per unit (C) = $1.20, $1.00, $0.98 Next, determine if the computed Qopt values are feasible or not Interval from 0 to 2499, the Qopt value is feasible Interval from 2500-3999, the Qopt value is not feasible Interval from 4000 & more, the Qopt value is not feasible

41. Price-Break Example Solution (Part 3) Since the feasible solution occurred in the first price-break, it means that all the other true Qopt values occur at the beginnings of each price-break interval. Why? Because the total annual cost function is a “u” shaped function Total annual costs So the candidates for the price-breaks are 1826, 2500, and 4000 units 0 1826 2500 4000 Order Quantity

42. Price-Break Example Solution (Part 4) Next, we plug the true Qopt values into the total cost annual cost function to determine the total cost under each price-break TC(0-2499)=(10000*1.20)+(10000/1826)*4+(1826/2)(0.02*1.20) = $12,043.82 TC(2500-3999)= $10,041 TC(4000&more)= $9,949.20 Finally, we select the least costly Qopt, which is this problem occurs in the 4000 & more interval. In summary, our optimal order quantity is 4000 units