detailed scheduling and planning session 1 inventory management: order planning

Detailed Scheduling and Planning

Session 1Inventory Management:

Order Planning

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Detailed Scheduling and Planning, ver. 1

Purpose of Inventory Strategy

Service Level Dependent Demand Independent Demand Demand Variability Seasonality Lead Time Fluctuation Company Policy

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Definition of Inventory

Those stocks or items used to support production (raw materials and work-in-process items), supporting activities (maintenance, repair, and operating supplies), and customer service (finished goods and spare parts). Demand for inventory may be dependent or independent. Inventory functions are anticipation, hedge, cycle (lot size), fluctuation (safety, buffer, or reserve), transportation (pipeline), and service parts. Source: APICS Dictionary, 9th ed., 1998

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Types of Inventory

Raw Materials (RAW) Work in Process (WIP) Finished Goods (FG) Maintenance, Repair, and Operating

Supplies (MRO)

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Classifications of Inventory

Excess Surplus Inactive Obsolete Consignment Vendor Managed

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Types of Order Review Methodologies

Material Requirements Planning (MRP) Time-Phased Order Point Reorder Point Periodic Review Visual Review Kanban

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Order Review Methods

Order Review Independent Dependent MROMethod Demand Demand

MRP

ReorderPoint

PeriodicReview

VisualReview

Kanban

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What They Answer

What is the net demand? What is the available balance? What quantity will need to be ordered? When will the orders need to be released? When will the orders need to be received?

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MRP Technique

0

1

2

3

4

5

Product A

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43

5 6

7 8

9

Bill Of Material Level

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MRP

MRP (Material Requirement Planning) is a computerized information system which was developed specifically to aid companies manage demand inventory and schedule replenishment orders.

Determine # of parts, components, materials, time schedule when ordered or produced.

Accommodate ordering strategies for parts with both dependent and independent profiles

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Two types of demand

(1) product demand The first is known customers who have placed specific

orders, such as those generated by sales personnel, or from interdepartmental transactions.

The second source is forecast demand which is from the known customers and the forecast demand.

(2) demand for repair parts and supplies The demand when customers order specific parts and

components either as spares, or for service and repair.

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Dependent Demand

Lumpy dependent demand resulting from continuous demandEven though customer demand is continuous and uniform, the production demand is “lumpy” and it occurs sporadically, usually in relatively large quantities.

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3 main inputs to MRP

3 key inputs to the MRPI. Master production schedules (MPS) II. A bill of materials database (BOM)III. An inventory record database

An MRP system translates the MPS and other sources of demand, such as independent demand for replacement parts and maintenance items, into the requirements for all subassemblies, components, and raw materials.

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Low-level coding

If all identical parts occur at the same level for each end product, the total number of parts and materials needed for a product can be computed easilyIf not, all items must be placed at the same level, it becomes a simple matter for summarizing the number of each item required.

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ROP = DDLT + SS

ROP = Reorder pointDDLT = Forecast demand during the lead-timeSS = Safety stock

Calculation Rule

For each item, when the available inventory quantity drops toor below the reorder point, place a replenishment order.

Source: Adapted from CPIM Inventory Management Certification Review Course (APICS, 1998).

Reorder Point Formula

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Continuous Demand

QuantityDemanded

Quantityin

Inventory

Time

TimeSource: CPIM Inventory Management Certification Review Course (APICS, 1998).

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Reorder Point Sawtooth Graph

BC

B C

AA

Lead TimeLead Time

Quantityin

Inventory

ReorderPoint


Time

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Effects of Uncertainty on Demand

A B C

Quantityin

Inventory

ReorderPoint

Time


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Complete Reorder Point Model

Safety Stock

Quantityin

Inventory

Time


ReorderPoint

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The Logic of TPOP Illustrated

Order Quantity: 600 FixedSafety Stock: 80 FixedAllocated Qty: 0Lead-Time: 2 WeeksLow Level Code: 4

Technique

Source: Adapted from CPIM Material and Capacity Requirements Planning Certification Review Course (APICS, 1998).

Part X

1 2 3 4 5 6 7 9

Sales forecast 100 100 120 120 100 100 100 125

Interplant orders 50 140 10

Special engineering needs

Charity donations 30 30

Special promotion 80

Safety stock increase 10

Anticipation buildup 5 5

Dependent demand 40 30 10 20 50 40 20 0Gross requirements 170 190 130 280 180 160 205 125

8

100

10125

Periods

20

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TPOP Equation

TPOP = DDLTDependent + DDLTIndependent + SS

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TPOP Exercise

Source: CPIM Inventory Management Certification Review Course (APICS, 1998).

Gross Requirements

Scheduled Receipts

Projected Available

Net Requirements

Planned Order Receipts

Planned Order Releases

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PERIODS

370X

170 190 130 280 180 160 205 125600

8


Technique

125

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540 = (20 + 50) + (260 + 130) + 80

540 = 70 + 390 + 80

Period 3 Calculation

For periods 4 and 5:

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Period 7 Calculation


330 = (10) + (115 + 125) + 80

330 = 10 + 240 + 80

For periods 8 and 9:

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TPOP Solution With and Without MRP Grid


2 weeks

Gross RequirementsScheduled ReceiptsProjected AvailableNet RequirementsPlanned Order ReceiptsPlanned Order Releases

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PERIODS

2808

370 200600610

170

200

190 180

620

160

460

205

255

125

130

125

600

130

48075

600

60

600600

330

125125

80

(1) The TPOP is not considered in periods between order release and order receipt since therequirement for a scheduled or planned order receipt has already been satisfied.

DDLT

+ SS

540

280180

80

445

160205

80

410

205125

80

490

130280

80

= TPOP

Is Projected Available TPOP (1) no yes (1) no no yes (1)


Technique

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Periodic Review

Independent demand model Order is placed every n time units (as

required) Order quantity is variable

order on InventoryO

hand on Inventory=X

quantity Order=Q

O-X-M=Q

=

where

( )

stock Safety=SS

periodreview during Demand=DDR

time lead during Demand=DDL

level inventory Maximum=M

SS+R+LDD=M

where

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Visual Review

Reordering is based on actually looking at the inventory on hand

Min/Max is a commonly used technique

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Kanban

Kanban is a signal for replenishment The quantity for replacement is determined

from the rate-based MRP as a fixed-order quantity, order point method

Upstream station does not start producing parts until it receives a signal

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Order Quantity Modifiers

Acceptable Order Quantity Range

Lower Constraint(Inclusive)

Upper Constraint(Inclusive)

Modifier Acceptable From a ModifierPerspective, But Not From the

Upper Constraint Perspective

Source: Bernard, Paul. Integrated Inventory Management, p. 291 (John Wiley & Sons, Inc. 1999).

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Order Quantity Constraints

Minimum quantity can be used to meet a supplier minimum Maximum quantity can be set to recognize storage or

transportation limits Minimum dollar can be used to order at least a supplier- or

purchasing-established minimum purchase order charge Maximum dollar can be used to limit inventory investment

levels Minimum days’ supply can be used to prevent multiple orders

for the same period Maximum day’s supply is used to support inventory turns and

targets, and to recognize shelf-life constraints

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Order Quantity Modifiers

A price break quantity can be ensured on an individual order basis by setting one of the price break quantities as the supplier minimum

Rounding quantities can be used to meet container multiples Minimum demand quantity recognizes that certain items are

subject to large issue Order quantity multiplier accounts for scrap or yield conditions

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Costs Associated with Order Quantity Decisions

The cost to carry inventory– Storage facility cost– Counting, transporting, and handling– Risk of obsolescence– Insurance and taxes– Risk of loss– Opportunity costs

The cost of placing orders

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Opportunity Costs

A company’s cost of capital Typically the largest portion of the carrying

costs Represents the rate of return the company

could earn from investment opportunities

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Cost of Placing Orders

Differs between orders placed to outside suppliers and orders placed in a factory for production

Usually expressed as the cost to place a single order in absolute dollars

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Order Quantity Cost Comparison

OrderCost

CarryingCost

TotalCost

O R D E R Q U A N T I T Y

C

O

S

T


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EOQ Equation

A = Annual Usage S = Cost per Order

C = Cost of Item i = Annual Cost to Carry

iCSA2

EOQ××

=

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Carrying, Order, and Total Costs

Carrying Cost

Order Cost

Source: Adapted from Inventory Management Certification Review Course (APICS, 1998).

Total Cost Carrying Cost

+ Order Cost

= Total Cost

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EOQ Exercise Solution

Total Cost(a)

(b)

(c)

(d)

100.0%=1549)/1549 - (3098

3098=.25×.50

10×60,000×2

%605.000,000,110000,152

CQAS2

i 2 =×××

=×

=

15.4%=1549)/1549 - (1788

1788=.25×.50

10×20,000×2

29.1%=1549)/1549 - (2000

2000=.15×.50

10×15,000×2

6.6%=1549)/1549 - (1651

1651=.22×.50

10×15,000×2

154925.50.

10000,152CiAS2

EOQ =×

××==

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Detailed Scheduling and Planning, ver. 11-35a

Visual

EOQ—Change in Carrying Cost

(b) (25%-22%) / 25% is a 12% reduction in carrying

cost to achieve a 6.6% increase in order quantity

(25%-15%) / 25% is a 40% reduction in carrying cost to achieve a 29.1% increase in order quantity

The order quantity increases in geometric proportion to reductions in carrying cost

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Detailed Scheduling and Planning, ver. 11-36

Visual

EOQ with Increased Annual Usage

(c) (1,788-1,549) / 1549 is a 15.4% increase in order

quantity based on a 33% (20,000-15,000) / 15,000 increase in annual usage

(3,098-1,549) / 1,549 is a 100% increase in order quantity based on a 300% (60,000-15,000) / 15,000 increase in annual usage

The order quantity increases in geometric proportion to increases in annual usage

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Visual

EOQ—Order Quantity 1,000 Units

(d) 60% is too high for a carrying cost.

Something in the area of 24% is more reasonable.

A high carrying cost cannot be used as an excuse for reducing the order quantity.

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Visual

Fixed-Order Quantity

Use of a fixed-order quantity is usually dictated by some condition related to shipping, handling, or line replenishment

Regardless of demand variability, suppliers receive consistent orders with consistent order quantities, but at a variable frequency

It may be determined very informally, or it might be based on some form of calculation, such as EOQ

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Fixed-Order Quantity Grid


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Gross Requirements

Scheduled Receipts

Projected Available

Net Requirements



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PERIODS

150

130 160 120 260 130 120 185 125

8

Order Quantity: 500 FixedSafety Stock: 80 FixedAllocated Qty: 0Lead-Time: 2 PeriodsLow Level Code: 0

Technique

115

37060

8010

SS*

200 570 450 265240 460

500 500500

40+80SS*

500 500

*SS=Safety Stock Replenishment

525

500

Visual


Period Order Quantity

Lot size is equal to the net requirements for a given number of periods

The number of planning periods included within the “ordering” period can be determined based on the EOQ equation

With fairly steady demand, the order quantity for the “ordering” period generally balances ordering and carrying cost

The intent is to eliminate remnants

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Period Order Quantity Example

For a purchased item:

52 Planning periods/year (weeks)

520 Annual demand

$50.00 Setup and ordering cost

$12.30 Unit cost

0.25 Carrying cost

The “ordering” period includes 13 weekly planning periods.

13=POQ520

130×52=POQ

5201230(0.25)2(520)50

×52=POQ

AUC2AS

×P=POQ

AEOQ×P

=A/EOQ

P=POQ

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Understanding terms

Average lot size inventory = order quantity/2 = Q/2

Number of orders per period = total demand/order quantity = D/Q

Time between order (TBO) = The average elapsed time between receiving replenishment orders of Q units for a particular lot size

= Q/D * 12 months/year = Q/D * 52 weeks/year = Q/D * 365 days/year

Example 5.1: The annual demand for an SKU is 10,075 units, and it is ordered in quantities of 650 units. Calculate the average inventory and the number of orders place per week, per month, and per year.

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Total relevant cost

(1) Annual holding cost = (Average cycle inventory)*(Unit cost)*(Carrying cost) = Q/2 * v * r

Where v = unit cost, Q = order quantity, and r = carrying charge as portion of unit cost (such as 0.25)

(2) Annual ordering or setup cost = (Number of orders/year)*(Ordering or setup cost) = D/Q * A

Where D = demand per year (big number), and = ordering/setup cost

(3) Total relevant cost = Annual holding cost (1) + Annual ordering or setup cost (2) = Q/2 * v * r + D/Q * A

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Economic order quantity

EOQ = the lot size that minimizes total relevant cost

TRC(EOQ) = Total relevant cost at EOQ

TBO(EOQ) = Time between orders (the average elapsed time between receiving orders of Q units for a particular lot size)

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Period Order Quantity


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Gross Requirements

Scheduled Receipts

Projected Available

Net Requirements



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PERIODS

?

130 160 120 260 130 120 185

8

Order Quantity: 650 EOQSafety Stock: 0 FixedAllocated Qty: 0Lead-Time: 6 PeriodsLow Level Code: 2

Technique

115

370 80 330 200 80 ?240 590

630630

4=4.26152.5650

=iodUsageAveragePer

EOQ=POQ =

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Visual

Lot for Lot

The sum of requirements for a period.With MRP replanning nightly, the periods can be as short as one day

Visual


Session 1 Review

Identify types of inventory and how they are assessed from their different requirements and impacts on the planning process

Describe order review methodologies and apply them to different types of inventory and inventory strategies

Identify lot sizing techniques, including the effects of order quantity constraints, and modifiers

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detailed scheduling and planning session 1 inventory management: order planning

Documents

detailed scheduling

demand inventory

order planning slide

types of demand

continuous demand

customer demand

production demand

product demand