Inventory

1
Inventory Master Production Schedule

• ISQA 459
• Mellie Pullman

2
Lead Times

• The time required to purchase, produce, or
  assemble an item
• For purchased items the time between the
  recognition of a need and the availability of the
  item for production
• For production the sum of the order, wait,
  move, setup, store, and run times

3
Time-Phased Product Structure
4
Set-up Order Costs

• Set-up Cost to prepare a machine or process for
  an order
• Order cost of supplies, forms, order processing
  time, support.
• Often combined together as S set up and ordering
  cost

5
Holding Cost

• Cost of Holding Inventory over time.

6
Lot-Sizing TechniquesL4L

• Lot-for-lot techniques order just what is
  required for production based on net requirements
• May not always be feasible
• If setup costs are high, costs may be high as well

7
Lot-for-Lot Example
Holding cost 1/week Setup cost 100
8
Lot-for-Lot Example
No on-hand inventory is carried through the
system Total holding cost 0 There are seven
setups for this item in this plan Total setup
cost 7 x 100 700
Holding cost 1/week Setup cost 100
9
Lot-Sizing Techniques

• Economic order quantity (EOQ)
• EOQ expects a known constant demand and MRP
  systems often deal with unknown and variable
  demand

10
Basic EOQ Model
Important assumptions

• Demand is known, constant, and independent
• Lead time is known and constant
• Receipt of inventory is instantaneous and
  complete
• Quantity discounts are not possible
• Only variable costs are setup and holding
• Stockouts can be completely avoided

11
Inventory Usage Over Time
Order quantity Q (maximum inventory level)
12
Minimizing Costs
Objective is to minimize total costs
13
An EOQ Example
Determine optimal number of items to order D 27
units per week S 100 per order H 1.00 per
unit per week
14
EOQ Lot Size Example
Holding cost 1/week Setup cost 100 52
weeks Average weekly gross requirements 27
EOQ 73 units
15
EOQ Lot Size Example
Annual demand 1,404 Total cost setup cost
holding cost Total cost (1,404/73) x 100
(73/2) x (1 x 52 weeks) Total cost 3,798 Cost
for 10 weeks 3,798 x (10 weeks/52 weeks) 730
Holding cost 1/week Setup cost
100 Average weekly gross requirements 27
EOQ 73 units
16
Lot-Sizing TechniquesPPB

• Part Period Balancing (PPB) looks at future
  orders to determine most economic lot size
• Looking at total cost of placing orders
  carrying inventory
• Part period how long are you holding additional
  units for and at what cost?
• Keep adding subsequent weeks orders to initial
  order until the inventory holding cost is as
  close as possible to order cost (balances)

17
PPB Example (Assume we hold inventory for ½ of
initial period)
Holding cost 1/week Setup cost 100
18
PPB Example
19
Lot-Sizing Summary
For these three examples
20
Lot-Sizing Summary

• In theory, all lot sizes should be recomputed
  whenever there is a lot size or order quantity
  change
• In practice, this results in system nervousness
  and instability
• Lot-for-lot should be used when economical
• Lot sizes can be modified to allow for scrap,
  process constraints, and purchase lots

21
Lot-Sizing Summary

• Use lot-sizing with care as it can cause
  considerable distortion of requirements at lower
  levels of the BOM
• When setup costs are significant and demand is
  reasonably smooth, PPB or EOQ should give
  reasonable results

22
Resource Requirements Profile
Figure 14.9
23
Smoothing Tactics

• Overlapping
• Sends part of the work to following operations
  before the entire lot is complete
• Reduces lead time
• Operations splitting
• Sends the lot to two different machines for the
  same operation
• Shorter throughput time but increased setup costs
• Lot splitting
• Breaking up the order into smaller lots and
  running part ahead of schedule