Inventory Management CORE MRP II Why Have Inventory

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Chapter 11

• Inventory Management

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CORE MRP II
MANUFACTURING RESOURCE PLANNING
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(No Transcript)
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Why Have Inventory?

• Anticipation of demand surge
• Cycle stock to minimize setups/orders
• Buffering against uncertainty
• Pipeline inventory of goods in transit

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Lot-Sizing

• Cycle stock inventories are determined by two
  interrelated decisions
• When to order/produce
• How much to order/produce
• Lot-sizing models attempt to provide answers
  which minimize the total cost over some period of
  time

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Reactive vs. Proactive Systems

• Two basic types of inventory systems 
• Reactive systems
• Require little detailed knowledge of future
  demand
• Never look beyond the next purchase/production
  order
• Proactive systems
• Require detailed knowledge of demand
• Plan purchase/production orders far into the
  future

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Reactive Inventory Systems

• Order Q more units when inventory drops below ROP
  
• Q -- Order quantity (lot size)
• ROP Reorder point
• LT -- Lead time (1 Period)
• T -- Reorder interval

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Reactive Inventory Systems

• How should Q and ROP be determined?
• ROP expected demand during lead time safety
  stock

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Finding ROP

• D -- Average demand per period (40)
• If safety stock is zero, then
• ROP (D)(LT) ____________________

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Finding Q

• EOQ -- The best or most "economic" order quantity
  that minimizes the total cost per period
• Need to determine how Q affects holding and setup
  costs per period

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Economic Order Quantity

• The total cost per period function TCQ can be
  written as a function of Q
• TCQ total holding cost total setup cost
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• TCQ (avg. inventory)Ch (setups/period)Cs
• TCQ ( ) Ch ( ) Cs

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Economic Order Quantity
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Cost Minimization Goal
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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.
• The total cost curve reaches its minimum where
  the carrying and ordering costs are equal.

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Economic Order Quantity

• Solution

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Economic Order Quantity
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Proactive Inventory Systems

• If we have a detailed forecast for the part or
  product . .
• A lot-sizing decisions can be planned in advance
• A proactive, rather than reactive approach

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Lot For Lot

• Simplest lot-sizing rule
• Make as much as you need each period 
• Maximizes total setup cost
• Minimizes total holding cost
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Economic Order Quantity

• EOQ can also be modified for use in a proactive
  system
• Some EOQ assumptions are violated
• Use average demand for EOQ formula

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Periodic Order Quantity

• POQ modifies the EOQ for discrete demand
• Assumes a single best reorder interval (number of
  periods covered by a single lot)

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Operations Strategy

• Too much inventory
• Tends to hide problems
• Easier to live with problems than to eliminate
  them
• Costly to maintain
• Wise strategy
• Reduce lot sizes
• Reduce safety stock