Integrated Producrtion System

What is Inventory?

Integrated Production System I

Ø Inventory any idle goods or materials that are held for future use. ØStock of materials ØStored capacity

Ø Examples

Material and Inventory Management Chapter 12 ١

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Why an organization carries inventories:

Types of Inventory ØRaw material ØComponents ØWork-in-process ØFinished goods ØMaintenance/repair/operating supply

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Ø It is rarely possible to forecast sales levels and production time accurately. Thus fluctuation inventories, most often called safety stock, are maintained in order to minimize the effect of such variation. Ø Many items have high seasonal demand; it might be impossible to produce enough quantity during a short selling season because of limit production capacity Ø To take advantage of economies of scales in production and purchasing such as quantity discounts, truck load discounts. Ø to maintain constant operation of manufacturing phase raw material and parts are required. Ø smooth running of machines spare parts for ٤ machines are needed.

Inventory Costs

Disadvantages of Inventory

ØOrdering costs - associated with costs of placing order and receiving goods e.g. Supplies; Forms; support; Etc.

• Higher costs – Item cost (if purchased) – Ordering (or setup) cost

processing;

Clerical

ØSetup costs - cost to prepare a machine or process for manufacturing an order e.g.

• Costs of forms, clerks’ wages etc.

Clean-up costs; Re-tooling costs; Adjustment costs; Etc.

– Holding (or carrying) cost • Capital, Building lease, insurance, taxes etc.

ØHolding costs - associated with holding or “carrying” inventory over time e.g.

• Difficult to control • Hides production problems

Obsolescence; Insurance; Extra-staffing; Interest; Pilferage; Damage; Warehousing; Etc. ٥

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Order

ØItem cost ØShortage costs

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Classifying of Inventory Problems

The Material Flow Cycle Characteristics

Attributes

Number of items

One or many

Nature of demand

Number of periods Lead time

Independent pr dependant; deterministic or stochastic; static or dynamic time One or many Deterministic or stochastic

Stock-outs

Backorders or lost sales ٧

Three Primary Decisions That Must Be Made Regard To Inventory:

The Material Flow Cycle Input

Other

Wait Time

Move Time

Queue Time

Setup Time

Run Time

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ØHow to monitor Inventory?

Output

Cycle Time

ØHow Much Should Be Ordered?

1 Run time: Job is at machine and being worked on 2 Setup time: Job is at the work station, and the work station is being "setup." 3 Queue time: Job is where it should be, but is not being processed because other work precedes it. 4 Move time: The time a job spends in transit 5 Wait time: When one process is finished, but the job is waiting to be moved to the next work area. 6 Other: "Just-in-case" inventory.

ØWhen Should Orders be Placed?

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ABC Analysis

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Classifying Items as ABC

• Divides on-hand inventory into 3 classes

Class A B C

% Annual $ Usage

– A class, B class, C class

100

• Basis is usually annual $ volume

80

– $ volume = Annual demand x Unit cost

60

• Policies based on ABC analysis

% Items 15 30 55

A

40

– Develop class A suppliers more – Give tighter physical control of A items – Forecast A items more carefully

% $ Vol 80 15 5

B

20

C

0 0

50

100

% of Inventory Items ١١

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Advantages of Cycle Counting

Cycle Counting

• Eliminates shutdown and interruption of production necessary for annual physical inventories • Eliminates annual inventory adjustments • Provides trained personnel to audit the accuracy of inventory • Allows the cause of errors to be identified and remedial action to be taken • Maintains accurate inventory records

• Physically counting a sample of total inventory on a regular basis • Used often with ABC classification – A items counted most often (e.g., daily)

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Techniques for Controlling Service Inventory Include:

Inventory Models

• Good personnel selection, training, and discipline • Tight control of incoming shipments • Effective control of all goods leaving the facility

• Fixed order-quantity models – Economic order quantity – Production order quantity – Quantity discount

Help Helpanswer answerthe the inventory inventoryplanning planning questions! questions!

• Probabilistic models • Fixed order-period models © 1984-1994 T/Maker Co.

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• • • • • •

Inventory Usage Over Time

Known and constant demand Known and constant lead time Instantaneous receipt of material No quantity discounts Only order (setup) cost and holding cost No stockouts

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Order quantity = Q (maximum inventory level)

Inventory Level

EOQ Assumptions

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Minimum inventory 0

Usage Rate

Average Inventory (Q*/2)

Time ١٨

EOQ Model How Much to Order?

Why Holding Costs Increase

Annual Cost

• More units must be stored if more are ordered

rve t Cu l Cos rve Tota t Cu Cos g in Hold

Minimum total cost

Purchase Order Description Qty. Microwave 1

Order (Setup) Cost Curve Optimal Order Quantity (Q*)

Order quantity

Purchase Order Description Qty. Microwave 1000

Order quantity

Order quantity

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Why Order Costs Decrease

Deriving an EOQ

Cost is spread over more units

1. Develop an expression for setup or ordering costs 2. Develop an expression for holding cost 3. Set setup cost equal to holding cost 4. Solve the resulting equation for the best order quantity

Example: You need 1000 microwave ovens 1 Order (Postage $ 0.33)

1000 Orders (Postage $330)

Purchase Order Description Qty.

PurchaseOrder Order Purchase Purchase OrderQty. Description Purchase Order Description Qty. Qty. Description Microwave Qty. 11 Description Microwave Microwave Microwave 11

Microwave

1000

Order quantity ٢١

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EOQ Model When To Order

EOQ Model Equations Optimal Order Quantity

Inventory Level Average Inventory (Q*/2)

Optimal Order Quantity (Q*)

Expected Number of Orders Expected Time Between Orders

Reorder Point (ROP)

d =

Lead Time

ROP = d × L

Time ٢٣

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D Working Days

/ Year

2 ×D ×S H D =N = Q*

= Q* =

=T =

Working Days

/ Year

N

D = Demand per year S = Setup (order) cost per order H = Holding (carrying) cost d = Demand per day L = Lead time in days ٢٤

The Reorder Point (ROP) Curve

• Answers how much to order and when to order • Allows partial receipt of material

Q* Slope = units/day = d Inventory level (units)

Production Order Quantity Model

– Other EOQ assumptions apply

ROP (Units)

• Suited for production environment – Material produced, used immediately – Provides production lot size

• Lower holding cost than EOQ model

Time (days) Lead time = L ٢٥

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EOQ POQ Model When To Order

Inventory Level Usage only takes place

Average Inventory

Optimal Order Quantity (Q*)

Inventory Level

Maximum inventory level

Both production and usage take place

EOQ POQ Model When To Order

Reorder Point (ROP)

Time

Time

Lead Time

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Reasons for Variability in Production Most variability is caused by waste or by poor management. Specific causes include: qemployees, machines, and suppliers produce units that do not conform to standards, are late or are not the proper quantity qinaccurate engineering drawings or specifications qproduction personnel try to produce before drawings or specifications are complete qcustomer demands are unknown

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POQ Model Inventory Levels Inventory Level Level Production portion of cycle

Demand portion of cycle with no supply

Supply Begins ٢٩

Supply Ends

Time

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POQ Model Inventory Levels

POQ Model Equations

Inventory Level Inventory level with no demand

Production Portion of Cycle

Q*

= Q* = p

Optimal Order Quantity Max. Inventory Q·(1Q·(1- d/p) Maximum inventory level =

Setup Cost Supply Begins

Supply Ends

Demand portion of cycle with no supply

Time Holding Cost

D Q

= Q*

(

1 -

H* d p

2*D*S d 1p

( )

)

* S

= 0.5 * H * Q

( ) 1-

d

p

D = Demand per year S = Setup cost H = Holding cost d = Demand per day p = Production per day

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Quantity Discount Model

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Quantity Discount Schedule

• Answers how much to order & when to order • Allows quantity discounts – Reduced price when item is purchased in larger quantities – Other EOQ assumptions apply

• Trade-off is between lower price & increased holding cost ٣٣

Quantity Discount – How Much to Order

Discou nt Numb er

Discount Quantity

Discount (%)

Discount Price (P)

1

0 to 999

No discount

$5.00

2

1,000 to 1,999

4

$4.80

3

2,000 and over

5

$4.75 ٣٤

Probabilistic Models • Answer how much & when to order • Allow demand to vary – Follows normal distribution – Other EOQ assumptions apply

• Consider service level & safety stock – Service level = 1 - Probability of stockout – Higher service level means more safety stock • More safety stock means higher ROP ٣٥

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Probabilistic Models When to Order? Frequency

Inventory Level

Service Level

Fixed Period Model P(Stockout)

Optimal Order Quantity

SS

– Inventory brought up to target amount – Amount ordered varies

X

ROP

Reorder Point (ROP)

• No continuous inventory count – Possibility of stockout between intervals

Safety Stock (SS) Place order

Receive order

Lead Time

• Answers how much to order • Orders placed at fixed intervals

• Useful when vendors visit routinely

Time ٣٧

Inventory Level in a Fixed Period System

– Example: P&G representative calls every 2 weeks

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Fixed Period Model When to Order?

Various amounts (Qi) are ordered at regular time intervals (p) based on the quantity necessary to bring inventory up to target maximum

Inventory Level

Target maximum

On--Hand Inventory On

Target maximum

Q1

Q4

Q2 Q3 p

p

p Period

Time ٣٩

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Period

Period

Time ٤٠