PRODUCTIONS/OPERATIONS MANAGEMENT

1
Lecture
4
Inventory Management Chapter 11
2
Dependent and Independent Demand
Inventory a stock or store of goods
3
Types of Inventories

• Raw materials purchased parts
• Partially completed goods called work in
  progress
• Finished-goods inventories
• (manufacturing firms) or merchandise (retail
  stores)
• Replacement parts, tools, supplies
• Goods-in-transit to warehouses or customers

4
Functions of Inventory

• To meet anticipated demand
• To smooth production requirements
• To decouple operations
• To protect against stock-outs
• To take advantage of order cycles
• To help hedge against price increases
• To permit operations
• To take advantage of quantity discounts

5
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

6
Effective Inventory Management

• 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

7
Inventory Counting Systems

• Periodic System
• Physical count of items made at periodic
  intervals
• Perpetual Inventory System System that keeps
  track of removals from inventory continuously,
  thus monitoring current levels of each item

8
Inventory Counting Systems (Contd)

• Two-Bin System - Two containers of inventory
  reorder when the first is empty
• Universal Bar Code - Bar code printed on a label
  that hasinformation about the item to which it
  is attached

9
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
• Shortage costs costs when demand exceeds supply

10
ABC Classification System
Figure 11.1

• Classifying inventory according to some measure
  of importance and allocating control efforts
  accordingly.
• A - very important
• B - mod. important
• C - least important

11
Economic Order Quantity Models

• Economic order quantity (EOQ) model
• Economic production model (EPQ)
• Quantity discount model

12
The Inventory Cycle
Figure 11.2
Profile of Inventory Level Over Time
Q
Usage rate
Quantity on hand
Reorder point
Time
Place order
Receive order
Receive order
Place order
Receive order
Lead time
13
Total Cost
14
Cost Minimization Goal
Figure 11.4C
The Total-Cost Curve is U-Shaped
Annual Cost
Ordering Costs
Order Quantity (Q)
QO
(optimal order quantity)
15
Deriving the EOQ Minimum Total Cost

• The total cost curve reaches its minimum where
  the carrying and ordering costs are equal.

Number of orders per year D/Q0 Length of order
cycle Q0/D
16
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

17
When to Reorder with EOQ Ordering

• Reorder Point - When the quantity on hand of an
  item drops to this amount, the item is reordered
• Safety Stock - Stock that is held in excess of
  expected demand due to variable demand rate
  and/or lead time.
• Service Level - Probability that demand will not
  exceed supply during lead time.

18
Determinants of the Reorder Point

• The rate of demand
• The lead time
• Demand and/or lead time variability
• Stockout risk (safety stock)

19
Safety Stock
Figure 11.12
Safety stock reduces risk of stockout during lead
time
20
Economic Production Quantity (EPQ)

• Production done in batches or lots
• Capacity to produce a part exceeds the parts
  usage or demand rate
• Assumptions of EPQ are similar to EOQ except
  orders are received incrementally during
  production

21
EOQ with Incremental Inventory Replenishment
22
Economic Run Size
Formula (11-5) in page 498 of Chapter 11
23
Economic Production Quantity Assumptions

• Only one item is involved
• Annual demand is known
• Usage rate is constant
• Usage occurs continually
• Production occurs periodically
• Production rate is constant
• Lead time does not vary
• No quantity discounts

24
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

25
The Balance Sheet Dell Computer Co.
26
Income Statement Dell Computer Co.
27
Debt Ratio

• What It Measures The extent to which a form uses
  debt financing
• How You Compute The ratio of total debt to total
  assets

28
Inventory Turnover Ratio

• What It Measures How effectively a firm is
  managing its inventories.
• How You Compute This ratio is computed by
  dividing sales by inventories

• Inventory turnover ratio

29
Operations Scheduling Chapter 15
30
Scheduling

• Establishing the timing of the use of equipment,
  facilities and human activities in an
  organization
• Effective scheduling can yield
• Cost savings
• Increases in productivity

31
High-Volume Systems

• Flow system High-volume system with Standardized
  equipment and activities
• Flow-shop scheduling Scheduling for high-volume
  flow system

32
High-Volume Success Factors

• Process and product design
• Preventive maintenance
• Rapid repair when breakdown occurs
• Optimal product mixes
• Minimization of quality problems
• Reliability and timing of supplies

33
Scheduling Low-Volume Systems

• Loading - assignment of jobs to process centers
• Sequencing - determining the order in which jobs
  will be processed
• Job-shop scheduling
• Scheduling for low-volume systems with many
  variations in requirements

34
Gantt Load Chart
Figure 15.2

• Gantt chart - used as a visual aid for loading
  and scheduling

35
More Gantt Charts
36
Sequencing

• Sequencing Determine the order in which jobs at
  a work center will be processed.
• Workstation An area where one person works,
  usually with special equipment, on a specialized
  job.
• Priority rules Simple heuristics used to select
  the order in which jobs will be processed.
• FCFS - first come, first served
• SPT - shortest processing time
• Minimizes mean flow time
• EDD - earliest due date

37
Performance Measures
Table 15.2

• Job flow time
• Length of time a job is at a particular
  workstation
• Includes actual processing time, waiting time,
  transportation time etc.
• Lateness flow time due date
• Tardiness max lateness, 0
• Makespan
• Total time needed to complete a group of jobs
• Length of time between start of first job and
  completion of last job