RM ProductivityRM Productivity
Raw materials productivityOutput (value or unit or value added)
Value of Raw material used
How to Increase?
=
Efforts to reduce the cost of input materials.
Material productivity Material productivity
Reduce scrap or waste so that a higher Reduce scrap or waste so that a higher percentage of the raw materials is utilised.percentage of the raw materials is utilised.
Use of non corrosive materials or coatings to Use of non corrosive materials or coatings to increase product life. (e.g. Bridges, highways increase product life. (e.g. Bridges, highways & tools etc.)& tools etc.)
Reduce inventories to get higher returns per Reduce inventories to get higher returns per unit of inventory item.unit of inventory item.
Cost of Input MaterialsCost of Input Materials
Reduce the actual quantity of materials used Reduce the actual quantity of materials used per unit of the finished product.per unit of the finished product. Improve product design.Improve product design. Improve manufacturing processes to:Improve manufacturing processes to:
Enhance product qualityEnhance product quality Reduce material waste.Reduce material waste.
Improve Supplier’s processesImprove Supplier’s processes Reduce inventory costs.Reduce inventory costs.
The Functions of InventoryThe Functions of Inventory
To provide a stock of goods that will To provide a stock of goods that will provide a “selection” for customersprovide a “selection” for customers
To take advantage of quantity discountsTo take advantage of quantity discounts To hedge against inflation and upward price To hedge against inflation and upward price
changes.changes. Protect against shortagesProtect against shortages WIP decouples production stagesWIP decouples production stages
The Functions of InventoryThe Functions of Inventory
Independence of operationsIndependence of operations Decouple production & distributionDecouple production & distribution
permits constant production quantitiespermits constant production quantities Variation in demandVariation in demand Flexibility in schedulingFlexibility in scheduling Supply (lead-time) variabilitySupply (lead-time) variability Economic purchase order sizeEconomic purchase order size
Disadvantages of InventoryDisadvantages of Inventory
Higher costsHigher costs Item cost (cost of the item)Item cost (cost of the item) Ordering (or setup) costOrdering (or setup) cost
cost of forms, clerk’s wages, EDI systemcost of forms, clerk’s wages, EDI system Holding (or carrying) costHolding (or carrying) cost
Building lease, insurance, money tied upBuilding lease, insurance, money tied up
Difficult to controlDifficult to control Hides production problemsHides production problems
Types of InventoryTypes of Inventory
Raw materialRaw material Work-in-progressWork-in-progress Maintenance/repair/operating supplyMaintenance/repair/operating supply Finished goodsFinished goods DefectivesDefectives ReturnsReturns
Performance and WIP LevelPerformance and WIP Level
Less WIP means products go through system fasterLess WIP means products go through system faster reducing the WIP makes you more sensitive to reducing the WIP makes you more sensitive to
problems, helps you find problems fasterproblems, helps you find problems faster Stream and Rocks analogy:Stream and Rocks analogy:
Inventory (WIP) is like water in a streamInventory (WIP) is like water in a stream It hides the rocksIt hides the rocks Rocks force you to keep a lot of water (WIP) in the streamRocks force you to keep a lot of water (WIP) in the stream
Lowering Inventory Reduces Lowering Inventory Reduces WasteWaste
Reducing WIP makesproblem very visible
STOP
Lowering Inventory Reduces Lowering Inventory Reduces WasteWaste
Reduce WIP again to findnew problems
The Material Flow CycleThe Material Flow Cycle
1 Run timeRun time: : Job is at machine and being worked onJob is at machine and being worked on2 Setup timeSetup time: Job is at the work station, and the work : Job is at the work station, and the work
station is being "setup."station is being "setup."3 Queue timeQueue time: Job is where it should be, but is not being : Job is where it should be, but is not being
processed because other work precedes it.processed because other work precedes it.4 Move timeMove time: The time a job spends in transit: The time a job spends in transit5 Wait timeWait time: When one process is finished, but the job is : When one process is finished, but the job is
waiting to be moved to the next work area.waiting to be moved to the next work area.6 OtherOther: : "Just-in-case" inventory."Just-in-case" inventory.
Other WaitTime
MoveTime
QueueTime
SetupTime
RunTimeInput
Cycle Time
Output
Inventory CostsInventory Costs
Holding costsHolding costs -- associated with holding associated with holding or “carrying” inventory over timeor “carrying” inventory over time
Ordering costsOrdering costs -- associated with costs associated with costs of placing order and receiving goodsof placing order and receiving goods
Setup costsSetup costs - - cost to prepare a machine cost to prepare a machine or process for manufacturing an orderor process for manufacturing an order
Holding (Carrying) CostsHolding (Carrying) Costs ObsolescenceObsolescence InsuranceInsurance Extra staffingExtra staffing InterestInterest PilferagePilferage DamageDamage WarehousingWarehousing Etc.Etc.
Inventory Holding CostsInventory Holding Costs
CategoryCategory % of Value% of Value
Housing (building) costHousing (building) cost 6%6%
Material handlingMaterial handling 3%3%
Labor costLabor cost 3%3%
Opportunity/investmentOpportunity/investment 11%11%
Pilferage/scrap/obsolescencePilferage/scrap/obsolescence 3%3%
Total Holding CostTotal Holding Cost 26%26%
Shrinkage CostsShrinkage Costs
How much is stolen?How much is stolen? 2% for discount, dept. stores, hardware, convenience, 2% for discount, dept. stores, hardware, convenience,
sporting goodssporting goods 3% for toys & hobbies3% for toys & hobbies 1.5% for all else1.5% for all else
Where does the missing stuff go?Where does the missing stuff go? Employees: Employees: 44.5%44.5% Shoplifters: Shoplifters: 32.7%32.7% Administrative / paperwork error: Administrative / paperwork error: 17.5%17.5% Vendor fraud:Vendor fraud: 5.1% 5.1%
ABC AnalysisABC Analysis
Divides on-hand inventory into 3 classesDivides on-hand inventory into 3 classes A class, B class, C classA class, B class, C class
Basis is usually annual $ volumeBasis is usually annual $ volume $ volume = Annual demand x Unit cost$ volume = Annual demand x Unit cost
Policies based on ABC analysisPolicies based on ABC analysis Develop class A suppliers moreDevelop class A suppliers more Give tighter physical control of A itemsGive tighter physical control of A items Forecast A items more carefullyForecast A items more carefully
Classifying Items as ABCClassifying Items as ABC
0
20
40
60
80
100
0 20 40 60 80 100 120
0
20
40
60
80
100
0 20 40 60 80 100 120
AA
BB CC
% Annual $ Usage% Annual $ Usage
% of Inventory Items% of Inventory Items
Ordering CostsOrdering Costs
SuppliesSupplies FormsForms Order processingOrder processing Clerical supportClerical support Etc.Etc.
Setup CostsSetup Costs
Clean-up costsClean-up costs Re-tooling costsRe-tooling costs Adjustment costsAdjustment costs EtcEtc
Inventory ModelsInventory Models
Fixed order-quantity modelsFixed order-quantity models Economic order quantityEconomic order quantity Production order quantityProduction order quantity Quantity discountQuantity discount
Probabilistic modelsProbabilistic models
Fixed order-period modelsFixed order-period models
EOQ AssumptionsEOQ Assumptions
Known and constant Known and constant demanddemand Known and constant Known and constant lead timelead time Instantaneous receiptInstantaneous receipt of material of material NoNo quantity quantity discountsdiscounts Only order (setup) cost and holding costOnly order (setup) cost and holding cost No No stockoutsstockouts
Inventory Usage Over TimeInventory Usage Over Time
Time
Inve
ntor
y Le
vel
AverageInventory
(Q*/2)
0Minimum inventory
Order quantity = Q (maximum inventory level)
Usage Rate
EOQ ModelEOQ ModelHow Much to Order?How Much to Order?
Order quantity
Annual Cost
Holding Cost CurveTotal Cost Curve
Order (Setup) Cost Curve
Optimal Order Quantity (Q*)
Minimum total cost
EOQ Model EquationsEOQ Model Equations
Optimal Order Quantity
Expected Number of Orders
Expected Time Between Orders Working Days / Year
Working Days / Year
= =× ×
= =
= =
=
= ×
Q*D SH
NDQ*
TN
dD
ROP d L
2
D = Demand per year
S = Setup (order) cost per order
H = Holding (carrying) cost
d = Demand per day
L = Lead time in days
Material productivityMaterial productivity
Raw materials productivityOutput (value or unit or value added)
Value of Raw material used =
Value of Raw Material used.
Value of Perfect Requirement
Value of waste
Improve Product Design
Inventory Costs
Improve Manufacturing Process
Improve Material Quality
Optimize Inventory carrying Costs
Optimize Inventory Ordering Costs
ABC Classification SolutionABC Classification Solution
Stock # Vol. Cost $ Vol. % ABC
206 26,000 $ 36 $936,000
105 200 600 120,000
019 2,000 55 110,000
144 20,000 4 80,000
207 7,000 10 70,000
Total 1,316,000
ABC Classification SolutionABC Classification Solution
Stock # Vol. Cost $ Vol. % ABC
206 26,000 $ 36 $936,000 71.1 A
105 200 600 120,000 9.1 A
019 2,000 55 110,000 8.4 B
144 20,000 4 80,000 6.1 B
207 7,000 10 70,000 5.3 C
Total 1,316,000 100.0
Deriving an EOQDeriving an EOQ
1.1. Develop an expression for setup or ordering Develop an expression for setup or ordering costscosts
2.2. Develop an expression for holding costDevelop an expression for holding cost
3.3. Set setup cost equal to holding costSet setup cost equal to holding cost
4.4. Solve the resulting equation for the best Solve the resulting equation for the best order quantityorder quantity
Why Holding Costs IncreaseWhy Holding Costs Increase
Purchase OrderDescription Qty.Microwave 1
Order quantity
Purchase OrderDescription Qty.Microwave 1000
Order quantity
More units must be stored if more are ordered
Why Order Costs DecreaseWhy Order Costs Decrease
Purchase OrderDescription Qty.Microwave 1
Purchase OrderDescription Qty.Microwave 1
Purchase OrderDescription Qty.Microwave 1
Purchase OrderDescription Qty.Microwave 1
1 Order (Postage $ 0.33) 1000 Orders (Postage $330)
Order quantity
Purchase OrderDescription Qty.Microwave 1000
EOQ Model EOQ Model (When To Order)(When To Order)
Reorder Point (ROP)
Time
Inventory LevelAverageInventory
(Q*/2)
Lead Time
Optimal Order
Quantity(Q*)
The Reorder Point (ROP) CurveThe Reorder Point (ROP) Curve
Q*
ROP (Units)
Slope = units/day = d
Lead time = LTime (days)
Inve
ntor
y le
vel (
units
)
Sample Problem 1Sample Problem 1 Assume you have a product with the following Assume you have a product with the following
parameters:parameters: Annual Demand = 360 unitsAnnual Demand = 360 units Holding cost = $1.00 per unitHolding cost = $1.00 per unit Order cost = $100 per orderOrder cost = $100 per order
What is the EOQ for this product? What is the EOQ for this product? AAssuming a ssuming a 300-day work year, how many orders should 300-day work year, how many orders should be processed per year? What is the expected be processed per year? What is the expected time between orders?time between orders?