Purposes of Inventory

1
Purposes of Inventory

• 1. To maintain independence of operations.
• 2. To meet variation in product demand.
• 3. To allow flexibility in production scheduling.
• 4. To provide a safeguard for variation in raw
  material delivery time.
• 5. To take advantage of economic purchase-order
  size.

2
Basic Fixed-Order Quantity Model and Reorder
Point Behavior
Exhibit 13.3
3
Inventory Costs

• Holding (or carrying) costs.
• Costs for storage, handling, insurance, etc.
• Setup (or production change) costs.
• Costs for arranging specific equipment setups,
  etc.
• Ordering costs.
• Costs of someone placing an order, etc.
• Shortage costs.
• Costs of canceling an order, etc.

4
Cost Minimization Goal
By adding the item, holding, and ordering costs
together, we determine the total cost curve,
which in turn is used to find the Qopt inventory
order point that minimizes total costs.
C O S T
Holding Costs
Annual Cost of Items (DC)
Ordering Costs
QOPT
Order Quantity (Q)
5
Basic Fixed-Order Quantity (EOQ) Model Formula
TC Total annual cost D Demand C
Cost per unit Q Order quantity S
Cost of placing an order or setup cost R
Reorder point L Lead time H Annual
holding and storage cost per unit of
inventory
6
Fixed-Order Quantity Model with Safety Stock
Formula
R Average demand during lead time Safety
stock
7
Determining the Value of sL

• The standard deviation of a sequence of random
  events equals the square root of the sum of the
  variances.

8
ABC Classification System

• Items kept in inventory are not of equal
  importance in terms of
• dollars invested
• profit potential
• sales or usage volume
• stock-out penalties

60
of Value
A
30
B
0
C
30
of Use
60
So, identify inventory items based on percentage
of total dollar value, where A items are
roughly top 80 , B items as next 15 , and the
lower 5 are the C items.
9
Schedule Performance Measures

• Meeting due dates of customers or downstream
  operations.
• Minimizing the flow time (the time a job spends
  in the process).
• Minimizing work-in-process inventory.
• Minimizing idle time of machines or workers.

10
Principles of Work Center Scheduling

• 1. There is a direct equivalence between work
  flow and cash flow.
• 2. The effectiveness of any job shop should be
  measured by speed of flow through the shop.
• 3. Schedule jobs as a string, with process steps
  back-to-back.
• 4. A job once started should not be interrupted.

11
Principles of Job Shop Scheduling (Continued)

• 5. Speed of flow is most efficiently achieved by
  focusing on bottleneck work centers and jobs.
• 6. Reschedule every day.
• 7. Obtain feedback each day on jobs that are not
  completed at each work center.
• 8. Match work center input information to what
  the worker can actually do.

12
Principles of Job Shop Scheduling (Continued)

• 9. When seeking improvement in output, look for
  incompatibility between engineering design and
  process execution.
• 10. Certainty of standards, routings, and so
  forth is not possible in a job shop, but always
  work towards achieving it.

13
Just-In-Time (JIT)Defined

• JIT an integrated set of activities designed to
  achieve high-volume production using minimal
  inventories (RM, WIP, FG).
• JIT involves
• the elimination of waste in production effort.
• the timing of production resources (e.g., parts
  arrive at the next workstation just in time).

14
JIT Demand-Pull Logic
Customers
15
Minimizing Waste Inventory Hides Problems
16
Kanban

• Japanese word for card
• Pronounced kahn-bahn (not can-ban)
• Authorizes production from downstream operations
• Pulls material through plant
• May be a card, flag, verbal signal etc.
• Used often with fixed-size containers
• Add or remove containers to change production rate

17
Minimizing Waste Kanban Production Control
Systems
Exhibit 10.6
Withdrawal kanban
Storage Part A
Storage Part A
Machine Center
Assembly Line
Material Flow Card (signal) Flow
Production kanban
18
Characteristics of JIT VendorPartnerships

• Few, nearby suppliers
• Long-term contract agreements
• Steady supply rate
• Frequent deliveries in small lots
• Buyer helps suppliers meet quality
• Suppliers use process control charts
• Buyer schedules inbound freight

19
Respect for People

• Level payrolls
• Cooperative employee unions
• Subcontractor networks
• Bottom-round management style
• Quality circles (Small group involvement
  activities)

20
JIT Implementation Issues

• Level the Facility Load
• Eliminate Unnecessary Activities
• Reorganize Physical Configuration
• Introduce Demand-Pull Scheduling
• Develop Supplier Networks

21
Goldratts Rules of Production Scheduling

• Do not balance capacity balance the flow.
• The level utilization of a nonbottleneck resource
  is not determined by its own potential but by
  some other constraint in the system.
• Utilization and activation of a resource are not
  the same.
• An hour lost at a bottleneck is an hour lost for
  the entire system.
• An hour saved at a nonbottleneck is a mirage.

22
Goldratts Rules of Production Scheduling
(Continued)

• Bottlenecks govern both throughput and inventory
  in the system.
• Transfer batch may not and many times should not
  be equal to the process batch.
• A process batch should be variable both along its
  route and in time.
• Priorities can be set only by examining the
  systems constraints. Lead time is a derivative
  of the schedule.

23
Goldratts Theory of Constraints (TOC)

• Identify the system constraints.
• Decide how to exploit the system constraints.
• Subordinate everything else to that decision.
• Elevate the system constraints.
• If, in the previous steps, the constraints have
  been broken, go back to Step 1, but do not let
  inertia become the system constraint.

24
Saving Time
What are the consequences of saving time at each
process?
Rule Bottlenecks govern both throughput and
inventory in the system. Rule An hour lost at
a bottleneck is an hour lost for the entire
system. Rule An hour saved at a nonbottleneck
is a mirage.
25
Drum, Buffer, Rope
Exhibit 17.9
26
Quality Implications of synchronous manufacturing

• More tolerant than JIT systems
• Excess capacity throughout system.
• Except for the bottleneck
• Quality control needed before bottleneck.

27
Inventory Cost MeasurementDollar Days

• Dollar Days is a measurement of the value of
  inventory and the time it stays within an area.

28
Benefits from Dollar Day Measurement

• Marketing
• Discourages holding large amounts of finished
  goods inventory.
• Purchasing
• Discourages placing large purchase orders that on
  the surface appear to take advantage of quantity
  discounts.
• Manufacturing
• Discourage large work in process and producing
  earlier than needed.

29
Comparing Synchronous Manufacturing to MRP

• MRP uses backward scheduling.
• Synchronous manufacturing uses forward
  scheduling.

30
Comparing Synchronous Manufacturing to JIT

• JIT is limited to repetitive manufacturing
• JIT requires a stable production level
• JIT does not allow very much flexibility in the
  products produced

31
Comparing Synchronous Manufacturing to JIT
(Continued)

• JIT still requires work in process when used with
  kanban so that there is "something to pull."
• Vendors need to be located nearby because the
  system depends on smaller, more frequent
  deliveries.