An – Najah National University Faculty of Engineering

Industrial Engineering Department

Production planning & inventory management at Arab Eastern Company for health diaper

Project Group Members:

Nour Abu SharkhTahani YousufMohammad QubbajTamara Dwaikat

Supervised by:Dr. Yahya Saleh

AGENDA

introduction About the company Literature Review Problem Statement Methodology ABC Classification Demand Forecasting Inventory Costs Inventory Management Models Model Formation Results and discussion Conclusion Recommendation

INTRODUCTION

Planning is a success key to any business throughout its existence.

Every successful business regularly reviews its business plans to ensure meeting customer demand. It is sensible to review current performance on a regular basis and identify the most likely strategies for growth and improvement.

CONT…

Inventory management is primarily concerned about specifying the size and placement of stocked goods.

Inventory management is required at different locations within a facility or within multiple locations of a supply chain network to protect the regular and planned course of production against the random disturbance of running out of materials or goods.

CONT… Inventory types can be grouped into three classifications:-

1- Raw materials - materials and components scheduled for use in making a product.

2- Work in process (WIP) - materials and components that have begun their transformation to finished goods.

3- Finished goods - goods ready for sale to customers.

ABOUT THE COMPANY Lucky Baby Company for health diapers was established

in 1990 for the purpose of manufacturing products of diapers and marketing of health products.

1990The company has installed the first productive line of diapers and earning experience and the ability to compete.

At the beginning of the year 1999 the company got the international quality system certification ISO 9002.

CONT… At the end of 2012 it has successfully run the new

production line that works with the latest international technology in the manufacture of diapers.

At the beginning of 2013 the company began to supply the Palestinian market known varieties such as Lucky Baby Primo, stretch, and Super Chic Shack of the production of this machine.

LITERATURE REVIEWsearch year Author

Studied theoretical inventory policies: the so-called (S - 1, S) model with an underlying Poisson demand distribution. It’s well studied and suitable for slow-moving items, this type of policy requires continuous review of the inventory system.

1966 Feeney and Sherbrooke

Advocated to the potentials and benefits material requirement planning (MRP).

1975 Orlicky

Said that advance demand information is a substitute for supply lead-times and can reduce safety stock levels and costs significantly when used effectively.

1995 Hariharan and Zipkin

CONT…Identified that postponement is an important characteristic of modern and competitive supply chains.

1999 Van Hoek

states that inventory management approaches are a “function of product, operational and demand related variables such as delivery time, coefficient of variation of sales and inventory turnover.

2004 Wanke and Zinn

Said The amount of safety stock is a function of five factors: average and standard deviation of lead time, average and standard deviation of demand, and the desired service level.

2009 Alex J. Ruiz-Torresa and Farzad Mahmoodi

PROBLEM STATEMENT In this project we present a case study in inventory

management and production planning of diapers at lucky baby company.

In this project we tackle a serious problem in production planning department being encountered by (Arab _Eastern Company) Lucky Baby Company. More specifically we have problems an inefficient production planning process, which negatively effect on customer need, sales, production quantity and scheduling, productivity, high and low inventory levels with associated cost.

OBJECTIVES 1- Help the company to develop production planning

system which enables the company to:

Design a program to forecast the future demand. Estimate the required amount of raw material needed to

cover the expected demand. Determine the number of products that should be stored

in the company’s warehouses.

CONT…

2-Help the company to make cost reduction by reducing the holding , ordering cost.

3-Increase the market share of the company as a consequence of increasing the customer confidence.

METHODOLOGY

Determine and classify the diapers by using ABC analysis.

Forecasting the demand by analyzing the historical sales data available.

Collecting Relevant Cost Data ( Holding Cost , Ordering Cost).

Building Inventory Models for each raw material in inventory.

Evaluate the previous conditions and compare them empirically with the new results based on our inventory models.

ABC

Classification

Diapers

Primo Chic Shack Stretch

XL

MAXI

S.MINI

MINI

MIDI

XL

MAXI

MIDI

MINI

XL

MAXI

MIDI

MINI

S.MINI

ABC INVENTORY CLASSIFICATION

Is away to categorize/group products .

This method helps managers focus on the few significant items that account for the bulk of investment in inventory. Which leads to facilitate instant decision-making

It is also called (80/20 Rule).

The classification can be as under:

A items : these are the 20% of the items that tie up 80% of the total inventory money.

B items : these are the 30% of the items the tie up 15% of the total inventory money.

C items : these are 50% of the items that tie up 5% of the total inventory money.

Class A deserve the most attention, with less attention justified for class B and class C items.

CONT…

product name Rank

Annual Demand

Unit price $

usage value $

percentage of

Annual sales %

CumulativeProduct %

cumulative annual sales

%Category

Max.Str 1 150592 27 4065984 22.69 7.14 22.69 A

Xl.Str 2 71027 39 2770053 15.46 14.29 38.15 A

Max.Sh 3 107342 24 2576208 14.38 21.43 52.53 A

Mid.Str 4 84525 27 2282175 12.74 28.57 65.27 A

Mid.Sh 5 59993 24 1439832 8.04 35.71 73.30 B

Xl.Sh 6 56499 24 1355976 7.57 42.86 80.87 B

Min.Str 7 27356 27 738612 4.12 50.00 84.99 B

Max.P 8 15749 40 629960 3.52 57.14 88.51 B

S.Min.Str 9 51192 10 511920 2.86 64.29 91.37 B

Min.Sh 10 21746 23 500158 2.79 71.43 94.16 B

Mid.P 11 9270 40 370800 2.07 78.57 96.23 C

Xl.P 12 8694 40 347760 1.94 85.71 98.17 C

Min.p 13 4843 40 193720 1.08 92.86 99.25 C

S.Min.P 14 11203 12 134436 0.75 100.00 100.00 C

CONT…

CONT…

DEMAND FORECASTING Demand forecasting is often the first critical step in any planning

activity especially inventory planning.

The purpose of demand forecasting is for companies to determine the required quantity of parts that need to be ordered.

Forecasts can be made for various timeframes Short-term Mid-term Long-term

We have 3 years data of demand divided in 36 months, for 14 items

FORECASTING METHODS

Naïve Approach

Moving Averages Simple moving average

Exponential Smoothing

CRITERIA FOR CHOOSING TIME SERIES METHODS

Mean absolute deviation (MAD)

Mean absolute percent error (MAPE)

Excel sheet

product ABC Chosen Type of Forecasting

Max. Str A5 Simple Moving Average

XL. Str A5 Simple Moving Average

Max. Sh A5 Simple Moving Average

Mid. Str A5 Simple Moving Average

Mid.Sh B5 Simple Moving Average

Xl. Sh B3 Simple Moving Average

Min. Str BExponential Smoothing α=0.1

Max. Pre B5 Simple Moving Average

S. Min. Str B3 Simple Moving Average

Min. Sh B5 Simple Moving Average

Mid. Pre C5 Simple Moving Average

Xl. Pre C3 Simple Moving Average

Min. Pre C3 Simple Moving Average

S. Min. pre C3 Simple Moving Average

Item Classes Best Forecasting Method Accuracy

Measures

Forecasting Method

Accuracy

Percentage of the

total

Items

A items

4 items

simple moving average

exponential smoothing

MAD

MAPE

A: 4 items

A”: 0 items

E : 0 items

E”: 0 items

N: 0 items

A: 100%

A”: 0%

E : 0%

E”: 0%

N: 0%

B items

6 items

Simple moving avarage

Exponential Smoothing

MAD

MAPE

A: 3 items

A”: 2 items

E : 1 item

E”: 0 items

N: 0 items

A: 50%

A”: 33.33%

E : 16.66%

E”: 0%

N: 0%

C items

4 items

simple moving average MAD

MAPE

A: 1 item

A”: 3 items

E : 0 item

E”: 0 item

N: 0 item

A: 25%

A”: 75%

E : 0%

E”: 0%

N: 0%

CONT…

Where;

A : 5 simple moving average method. A” :3 simple moving average method. E : Exponential Smoothing Method α=0.1 E” : Exponential Smoothing Method α=0.2 N : Naïve Method.

Inventory

cost

INVENTORY COSTS

inventory is an important role in the organization and requires careful management in terms of cost and performance.

Too much inventory will incur storage charges, burden

cash flow, and run a risk of obsolescence.

Too little inventory may result in a loss of sales and opportunities. Thus it’s necessary to measure the performance of the inventory control process.

CONT…

Calculating cost of holding inventory and ordering cost.

Inventory cost is generally regarded by the company in terms of annual cost.

Lucky baby storage includes both raw material and

finished goods that remains unsold.

CALCULATE THE INVENTORY HOLDING COST

Item no.

Item name The amount in inventory

Unit unit price

Total value(NIS)

weight Hi

1بلب قطن 250352.4226 Kg 4 1001409.69 0.0081 0.0325

2بودره 78424.99238 Kg 12 941099.91 0.0076 0.0916

3ابيض صمغ 18951.34 Kg 30 568540.2 0.0046 0.1384

Inv HC = unit price for R.M * weight

where;

Wi =

Wi: the weight of each R.M in the inventory Excel sheet

Inventory

management

models

INVENTORY MANAGEMENT MODELS

Good management of inventory is required to manage the supply of product and satisfy the customer’s needs. The inventory management is to meet the customer’s demands and requirements at a minimum cost to the supplier.

We discusses the inventory review process in order to build an inventory management system. The system should determine how much stock to order and when it should be ordered.

CONT…

There are two basic types of inventory system that we used:

I. Continuous review II. Periodic review

In our project we will be using the continuous review system for all raw materials to insure that we find the most optimal feasible solution.

MODEL FORMATION

Finding The Optimal ordering quantity : The EOQ formula was used to determine the optimal Q to be ordered.

Where:

Q = order quantity

EOQ = optimal order quantity

D = annual demand quantity

S = ordering cost

H = annual holding cost per unit

CONT… Assumptions using this formula:

1. Demand is known, constant, and independent.

2. Lead time is known and constant.

3. Quantity discounts are not possible.

This table shows how to calculate EOQ

Raw material

Annual Demand

ordering cost(S)

holding cost(H)

cost/kg or EOQ Q current

قطن 6457142.4 15 0.0325 4

38602 10000بودره 3874285.2 9.9 0.0916 12

8354 6000ابيض صمغ 322857.12 9.9 0.1384 30

1241 500احمر صمغ 161428.56 9.9 0.0257 30

2036 850تثبيت صمغ

القطن 322857.12 9.9 0.0097 30

4687 2000

Excel sheet

CONT…

Continuous Review System

1-Reorder point = Average demand during lead time + Safety Stock.

2-Choosing an Appropriate Service -Level Policy (z) :95 percent service level

3-Finding the Safety Stock assuming the demand is normally distributed

(Safety stock is the stock which is used when there are delayed deliveries to the organizations).

Where:

σt= standard deviation of monthly demand.

L = Lead time.

MODEL FORMATION

Reorder point SS Z dL σL L(month) SD

Avg demand(d)

raw materials

33613 7206 1.65 26407 4366.95 1.8 3285.49 14947قطن

12927 3360 1.65 9566 2035.95 1.1 1971.30 8968 بودره

1194 297 1.65 897 179.95 1.2 164.27 747 ابيض صمغ

598 149 1.65 448 89.98 1.2 82.14 374 احمر صمغ

TOTAL COST

Calculating the total costs for the new ordering quantity and current one for the systems.

Total Cost = Annual holding cost + Setup Cost + Safety stock holding cost.

Where

C = Total cost per year.

Q = Lot size, in units for the new and current quantity.

H = cost of holding one unit is inventory for a year.

D = Annual demand, in units per year.

S = ordering cost.

CONT…

Raw material EOQ

Q/2 * H

D/Q * S SS new

Total costnew

Q current

Q/2 * H D/Q * S

SS current

Total cost

current savings

قطن 38602 2509 2509 7206 5955 10000 650.0 9685.71 40000 15536 9581

بودره 8354 4591 4591 3360 12876 6000 3297.6 6392.57 14000 25079 12203

صمغ ابيض 1241 2576 2576 297 6385 500 1038.0 6392.57 2000 15735 9350

صمغ احمر 2036 785 785 149 1685 850 327.7 1880.17 800 2825 1140

Excel sheet

The results clearly show that the chosen continuous review system model has marked improvement over the existing method; the inventory cost savings are 155264 NIS.

Current model New inventory model (Continuous Review

System)

Total Parts(raw materials)

19 19

Inventory cost per year, NIS

276,260 120,996

Results &Analysis

The company in this study lacks of expertise in the area of inventory management. This has resulted in severe shortcomings in the business process of their company.

By implementing an inventory management system, Lucky baby Company in this study will be able to save a lot of money.

Conclusions

Applying the inventory model successfully depends on the effective implementation of every stage of the framework of inventory management which includes

• ABC analysis• demand forecasting• implementation development of an inventory model.

Inaccurate data going into a perfect model will give inaccurate results.

Recommendation

Any Questions?