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Fundamentals of Operations Management BUS 3 – 140 Inventory Management Oct 16, 2007. Master Scheduling. The Master Schedule “disaggregates ” the Aggregate Plan. Figure 13.4. Figure 13.5. Aggregate Planning. Aggregate Plan. Jan. Feb. Mar. Lawn Mowers. 200. 300. 400. Disaggregation.

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the master schedule disaggregates the aggregate plan
The Master Schedule “disaggregates ” the Aggregate Plan

Figure 13.4

Figure 13.5

Aggregate

Planning

Aggregate Plan

Jan

Feb

Mar

Lawn Mowers

200

300

400

Disaggregation

Master Schedule

Jan

Feb

Mar

Push Mowers

100

100

100

Power Mowers

75

150

200

Riding Mowers

25

50

100

Total

200

300

400

Master

Schedule

* From Stevenson, Operations Management, Ninth Edition, McGraw Hill Irwin

the master scheduling process figure 13 6
The Master Scheduling Process (Figure 13.6)

Outputs

Inputs

  • Beginning Inventory
  • Forecast
  • Orders
  • Projected Inventory
  • Master Production Schedule
  • Uncommitted Inventory

PROCESS

* From Stevenson, Operations Management, Ninth Edition, McGraw Hill Irwin

additional key points in master scheduling
Additional Key Points in Master Scheduling
  • Rough Cut Capacity Planning
  • Time Horizons
  • Time Fences
  • “Available to Promise”

The most valuable part of the job is knowing when

to say, “Yes” and when to say, “No”

time fences
Time Fences

“frozen”(firm orfixed)

“liquid”(open)

“slushy”somewhatfirm

Only Executive Exception would authorize a Change

Only Executive Exception would NOT authorize a Change

Changes are likely to be accepted, but require Research and / or Business Case

time fences can be dynamic
Time Fences can be Dynamic

Typical Technology Manufacturer

Dell Computer

Cargo Airplanes for the US Dept. of Defense

Restaurant

Burger King

  • Generally varies by Lead Time to obtain Materials and Capital equipment
  • Goal is to minimize the Red and Yellow and keep FLEXIBILITY and RESPONSIVENESS to a maximum
planning horizon

Assembly

Subassembly

Fabrication

Procurement

6

7

1

2

3

4

5

8

9

10

Planning Horizon

Figure 14.4

Time Period (weeks)

sales operations planning s op
Sales & Operations Planning (S&OP)

Purpose

  • Senior Management Alignment on Revenue and Supply plans
  • Greater accountability of individual plans
  • Consensus on managing gaps

Output

  • Judged Revenue Plan
  • Master Build Schedule
  • Contingency plans
  • Documented agreements and planned outcomes
key s op inputs by function
Key S&OP Inputs, by Function
  • Unconstrained Forecast
  • Execution to Plan
  • Capacity
  • Materials Plan
  • Time to Volume
  • Buffer Targets

Sales

Operations

BU’s

Finance

  • Prelim. Revenue Plan
  • GM Revenue objectives
  • Profitability scenarios
  • Prelim. Budgets
  • Prelim. FGI Targets
  • Return on Invested Capital
  • Market Trends & TAM
  • Share expectations
  • Customer TAM expectations
  • Roadmaps and Transitions
s op output is a consensus plan
S&OP Output is a Consensus Plan
  • Constrained Revenue plan
  • Accountability for Forecast Accuracy
    • Standard, system-generated, accuracy metrics
    • Defined ownership by Sales and Marketing
    • Joint ownership of FGI between Sales and Operations
  • MPS tied to single plan of record and business rules
  • Published Lead Times
  • Integrated Revenue plan
  • Credible EPS guidance
  • Exception Loops between meetings
reasons for carrying inventory
Reasons for Carrying Inventory
  • Revenue
    • Have what Customers want, when they want it
    • Compensate for non-linear demand that doesn’t match your capacity
    • Buffer for upside demand
    • Buffer for when competitors cannot deliver
    • Buffer against unexpected internal supply problems

Carrying Buffer inventory is necessary, but continuous, relentless

efforts to minimize variability, and thus eliminate the need for

the Buffers is greatly preferred

reasons for carrying inventory15
Reasons for Carrying Inventory
  • Cost and Efficiency
    • Minimize shortages, to avoid delays and idle time
    • Optimize plant, people, and equipment utilization
    • Obtain volume discounts for favorable unit pricing
    • Hedge against future price increases

Optimizing utilization and unit pricing are valuable only when

the goods made or purchased will SOLD to a paying Customer

in a reasonable time

The cost of a STOCKOUT is hard to quantify,

but is to be AVOIDED at all times

inventory turns
Inventory Turns

Inventory turnover is the ratio ofaverage cost of goods sold toaverage inventory investment.

types of inventory
Types of Inventory

Maintenance,

Repair, &

Operating

Supplies (MRO)

Raw

Materials

Resale

Items

Work

In Process

(WIP)

Finished

Goods

(FGI)

Manufacturing

All

Independent Demand

Chocolate

Cake

Finished Goods

Cake

Icing

Subassembly (WIP)

Raw Material

Dependent Demand

Water

Egg

Mix

MRO

Raw

costs of inventory
Costs of Inventory
  • Carrying Costs
    • Capital (Interest and Opportunity Costs)
    • Warehouses and Stock rooms
    • Personnel
    • Insurance
    • Damage and Loss
    • Theft
    • Insurance
    • Taxes
  • Other Costs
    • Ordering Costs
    • Setup Costs
    • Stockout Costs
      • Lost Sales
      • Idle labor and equipment
      • Expedite fees
prerequisites for inventory mgmt
A system to keep track of inventory

A reliable forecast of demand

Knowledge of Lead Times

Reasonable estimates of

Holding costs

Ordering costs

Shortage costs

A classification system

Prerequisites for Inventory Mgmt
lead time
Lead Time

Production

Transit

Receipt

Planning

Ordering

Materials

Set up

Production

Packaging

Will be addressed directly in Later Chapters

cycle counting
A physical count of items in inventory

Cycle counting management

How much accuracy is needed?

When should cycle counting be performed?

Who should do it?

Cycle Counting
triggers for cycle counting
Triggers for Cycle Counting
  • Out-Of-Stock report
  • Zero balance
  • Discrepancy
  • ABC report
abc classification the 80 20 rule applied
ABC Classification – the 80/20 Rule Applied

* From Leenders, Johnson, Flynn, and Fearon, Purchasing and Supply Management, Thirteenth Edition, McGraw Hill Irwin

abc classification is not based on unit cost
ABC Classification is not based on unit cost

Unit Cost

Annual Volume

Annual Spend

A

High

High

High

A

High

Medium

High

A

Medium

High

High

A

Low

Very High

High

B

High

Low

Medium

B

Medium

Medium

Medium

B

Low

High

Medium

C

Medium

Low

Low

C

Low

Medium

Low

C

Low

Low

Low

C Items can still stop a production line

and cause Customer Shipments to be missed!

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

Assumptions of EOQ Model
lot sizing the economic order quantity eoq
Lot Sizing: The Economic Order Quantity (EOQ)

CTmin

total cost

Annual Cost ($)

carrying costs

ordering costs

EOQ

Quantity Ordered

A conceptual model that balances Carrying Costs and Ordering Costs.

Somewhat limited, but often useful for C Items

* From Leenders, Johnson, Flynn, and Fearon, Purchasing and Supply Management, Thirteenth Edition, McGraw Hill Irwin

lot sizing order quantities
Lot Sizing: Order Quantities
  • Fixed Quantity
  • Same quantity whenever material is needed
  • Fixed Period
  • Calculates requirements for n periods. Example = 4 periods
  • E O Q
  • Calculated to balance Inventory & Ordering Costs
  • Supplier Multiple
  • Similar to Fixed
  • Lot-For-Lot
  • Maps exactly to Requirements
example of how inventory is consumed and reordered
Example of how Inventory is Consumed and Reordered

INVENTORY

cycle

stock

ROP

ROP = L × d

TIME

lead time (L)

* From Leenders, Johnson, Flynn, and Fearon, Purchasing and Supply Management, Thirteenth Edition, McGraw Hill Irwin

mrp overview

MRP Inputs

MRP Processing

MRP Outputs

Changes

Order releases

Master

schedule

Planned-order

schedules

Primary

reports

Exception reports

Bill of

materials

Planning reports

MRP computer

programs

Secondary

reports

Performance-

control

reports

Inventory

records

Inventory

transaction

MRP Overview

Figure 14.2

* From Stevenson, Operations Management, Ninth Edition, McGraw Hill Irwin

benefits of mrp
Low levels of in-process inventories

Ability to track material requirements

Ability to evaluate capacity requirements

Means of allocating production time

Ability to easily determine inventory usage by backflushing

Backflushing: Exploding an end item’s bill of materials to determine the quantities of the components that were used to make the item.

Benefits of MRP
requirements of mrp
Computer and necessary software

Accurate and up-to-date

Master schedules

Bills of materials

Inventory records

Lead Times

Other

Requirements of MRP
highest level mrp logic
Highest Level MRP Logic

Business Terms:

Product

Planning

Demand

Planning

Master

Production

Scheduling

Material

Planning

Production

Delivery

& Service

Life Terms:

Will have

Italian Food

Dinner on

Saturday

Menu

Recipes &

Ingredients

Cooking

Eating!

mrp logic is constantly balancing supply demand
MRP Logic is Constantly Balancing Supply & Demand

What you NEED (Demand)

What you HAVE (Supply)

  • Final Assemblies
    • Sales Orders
    • Forecast
  • Components and Subassemblies:
    • Higher level Starts
    • Higher level Work Order Shortages
  • Stockroom Inventory
  • WIP Stores Inventory
  • Open Work Orders
  • Open Purchase Orders

What you NEED TO GET and WHEN you need to get it (MRP output)

  • Planned Purchase Orders
  • Planned Work Orders
  • Rescheduled Work Orders
  • Rescheduled Purchase Orders
mrp nets inventory balance on hand just like a checkbook

Item/Descr.

Where Used

QPA

OH

LT

Past Due

31-Jan

7-Feb

14-Feb

21-Feb

28-Feb

SJSU141

MB1234

1

0

1

Gross Requirement

0

50

50

70

100

40

Mother Board

On Order

0

70

100

10

0

0

Projected Available

0

20

70

10

-90

-130

Planned Order Complete

0

0

0

0

90

40

Planned Order Starts

0

0

0

90

40

0

Cum Planned Order

0

0

0

0

90

130

MRP “Nets” Inventory Balance On Hand just like a Checkbook

is Equivalent to:

mrp netting logic illustration

Item/Descr.

Where Used

QPA

OH

LT

Past Due

31-Jan

7-Feb

14-Feb

21-Feb

28-Feb

SJSU141

MB1234

1

0

1

Gross Requirement

0

50

50

70

100

40

Mother Board

On Order

0

70

100

10

0

0

Projected Available

0

20

70

10

-90

-130

Planned Order Complete

0

0

0

0

90

40

Planned Order Starts

0

0

0

90

40

0

Cum Planned Order

0

0

0

0

90

130

MRP Netting Logic Illustration

Lead Time

Quantity

Per Assembly

Quantity

On Hand

mrp is extremely dependent on accurate data
MRP is EXTREMELY DEPENDENT on ACCURATE DATA

The system MUST see ALL inventory in ALL of these categories

at ALL times

In WIP

Open

Work

Orders

Open

Purchase

Orders

In

Receiving

In the

Stockroom

In a higher

Assemblies

In

Finished

Goods

Shipped

In a WIP

Location

EVERY time inventory is moved, a TRANSACTION must be executed

mrp in services
Food catering service

End item => catered food

Dependent demand => ingredients for each recipe, i.e. bill of materials

Hotel renovation

Activities and materials “exploded” into component parts for cost estimation and scheduling

MRP in Services
mrp ii
Expanded MRP with emphasis placed on integration

Financial planning

Marketing

Engineering

Purchasing

Manufacturing

MRP II
erp overview

Master

production schedule

Market

Demand

Finance

Manufacturing

Marketing

Production

plan

MRP

Adjust master schedule

Rough-cut

capacity planning

Capacity

planning

Adjust

production plan

No

Yes

Requirements

schedules

No

Yes

Problems?

Problems?

ERP Overview

Figure 14.14

* From Stevenson, Operations Management, Ninth Edition, McGraw Hill Irwin

slide44
Enterprise resource planning (ERP):

Next step in an evolution that began with MPR and evolved into MRPII

Integration of financial, manufacturing, and human resources on a single computer system.

ERP