Chapter 4 - Supply Chain Operations

7/27/2019 Chapter 4 - Supply Chain Operations

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1. Plan: This refers to all the operations needed to planand organize the operations in the other threecategories

2. Source:Operations included to acquire the inputs tocreate goods and services to meet planned or actualdemand.

3. Make: transforming goods and services to a finishedstate to meet demand.

4. Deliver:managing orders, transportation, and

distribution to provide the goods and services.


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Role of Forecasting

in a Supply Chain The basis for all strategic and planning decisions in a supply

chain

Used for both push and pull processes

Examples:

Production: scheduling, inventory, aggregate planning

Marketing: sales force allocation, promotions, newproduction introduction

Finance: plant/equipment investment, budgetaryplanning

Personnel: workforce planning, hiring, layoffs

All of these decisions are interrelated


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All forecasts deal with four major variables that combine todetermine what market conditions will be like. These

variables are:

1. Demand : refers to the overall market demand for agroup of relatedproducts or services in aparticular time.Impact of Market growth rate on demand?Demand patterns-- Seasonal demand


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2. Supply : Supply is determined by the number ofproducers of a product and by the lead timesthat areassociated with a productSupply chain forecasts must cover a time period that

encompasses the combined lead times of all thecomponents that go into the creation of a final product

3. Product Characteristics: include the features of a product

that influence customer demand for the product

4. Competitive Environment: refers to the actions of acompany and its competitors


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Chase Strategy Production rate is synchronized with demand by varying

machine capacity or hiring and laying off workers as thedemand rate varies

However, in practice, it is often difficult to vary capacityand workforce on short notice

Expensive if cost of varying capacity is high

Negative effect on workforce morale

Results in low levels of inventory Should be used when inventory holding costs are high

and costs of changing capacity are low

Works well for make-to-order firms


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Level Strategy Maintain stable machine capacity and workforce levels with a

constant output rate

Shortages and surpluses result in fluctuations in inventorylevels over time

Inventories that are built up in anticipation of future demandor backlogs are carried over from high to low demand periods

Better for worker morale

Large inventories and backlogs may accumulate

Should be used when inventory holding and backlog costs arerelatively low

Works well for make-to-stockmanufacturing firms


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Time Flexibility Strategy Can be used if there is excess machine capacity

Workforce is kept stable, but the number of hoursworked is varied over time to synchronize production anddemand

Can use overtime or a flexible work schedule

Requires flexible workforce, but avoids morale problemsof the chase strategy

Low levels of inventory, lower utilization

Should be used when inventory holding costs are highand capacity is relatively inexpensive


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The Extremes

Level

Strategy

Chase

Strategy

Production

equals

demand

Production rate

is constant


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Time-phased plan specifyinghow manyand whenthe firm plans to build each end item

Aggregate Plan(product groups)

MPS(specific items)


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What is Master Production

Scheduling?

Start with Aggregate plan

Disaggregates Converts into specific schedule for each end

item


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Furniture Mfg Co Ltd.

Produces 3-types of woodenchairs

Ladder-back chair

Kitchen chair

Desk chair


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Master Production Schedule

200

Ladder-back chair

Kitchen chair

Desk chair

1 2

April May

670

3 4 5 6 7 8

200

150

120

200

150

200

120

Aggregateproduction planfor chair family

670


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Master Production Scheduling


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1 2 3 4 5 6 7 8 9 10 11 12Forecast 10 10 10 10 10 10 10 10 10 10 10 10

Available (End) 5 5 5 5 5 5 5 5 5 5 5 5

MPS 10 10 10 10 10 10 10 10 10 10 10 10

On hand (start) 5 5 5 5 5 5 5 5 5 5 5 5

level production plan

Kitchen Chairs MPS


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1 2 3 4 5 6 7 8 9 10 11 12Forecast 5 5 5 5 5 5 15 15 15 15 15 15

Available (End) 25 30 35 40 45 50 45 40 35 30 25 25

MPS 10 10 10 10 10 10 10 10 10 10 10 10

On hand (start) 20 25 30 35 40 45 50 45 40 35 30 25

Different sales forecast Same total: 120 units, starts lower, goes higher

Level production plan

Kitchen Chairs MPS


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1 2 3 4 5 6 7 8 9 10 11 12Forecast 5 5 5 5 5 5 15 15 15 15 15 15

Available (End) 0 0 0 0 0 0 0 0 0 0 0 0

MPS 5 5 5 5 5 5 15 15 15 15 15 15

On hand (start) 0 0 0 0 0 0 0 0 0 0 0 0

Same demand as Fig 2Production adjusts to meet demandChase production strategy

Kitchen Chairs MPS


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1 2 3 4 5 6 7 8 9 10 11 12Forecast 5 5 5 5 5 5 15 15 15 15 15 5

Available (End) 15 10 5 30 25 20 5 20 5 20 5 15

MPS 0 0 0 30 0 0 0 30 0 30 0 0

On hand (start) 20 15 10 5 30 25 20 5 20 5 20 5

Lot size of 30 units

Produce if projected balance falls below 5 unitsExtra on-hand inventory is cycle stock5 unit trigger is safety stock

Kitchen Chairs MPS


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Materials Requirement Planning

MRP-A computer-based materials management system. Thematerials requirement plan calculates the exact quantities, needdates, & planned order releases for components & raw materialsrequired to manufacture the final products listed on MPS.

MRP requires:

The independent demand information. Parent-component relationships from the bill of

materials.

Inventory status of the final product & all of thecomponents.

Planned order releases (output of the MRP system)


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What operations Manager should know in the MRP

model?

Effective use of MRP requires that the operations managerknow :

1. Master Production Schedule (what is to be made and when)

2. Specifications or bill-of-material (how to make the product)

3. Inventory availability (what is in stock)

4. Purchase orders outstanding (what is on order), and

5. Lead times (how long it takes to make or get various

components)


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Bill of Materials

List of components & quantities needed

to make product

Provides product structure (tree)

Parents: Items above given levelChildren: Items below given level


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Bill of Materials

Seat cushion

Seat-frame

boards

Front

legs ALadder-back

chair

Back

legs

Leg supports

Back slats


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Bill of Materials

Back slats Seat cushion

Seat-frame

boards

Leg supports

FrontlegsBacklegs A

Ladder-back

chairJ (4)Seat-frame

boards

C (1)

Seat

subassembly

D (2)

Front

legs

B (1)

Ladder-back

subassembly

E (4)

Leg

supports

ALadder-back

chair

I (1)

Seat

cushion

H (1)

Seat

frame

G (4)

Back

slats

F (2)

Back

legs


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Dependent vs. Independent Demand

Demand for chairs

A finished product

Demand for front legs (Independent)

A component or subassembly

Dependson the demand for chairs (parent)


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Materials WithIndependent Demand

Materials WithDependent Demand

DemandSource

Company Customers Parent Items

MaterialType

Finished Goods WIP & Raw Materials

Method ofEstimatingDemand

Forecast & BookedCustomer Orders

Calculated

Planning

Method

EOQ & POQ MRP

R i f Eff i U f D d


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Requirements for Effective Use of Dependent

Demand Inventory Models-MRP

master production schedule

specifications or bills-of-material

inventory availability

purchase orders outstanding

lead times

You might add to this list that the operations manager must know

that inventory records, bill-of-materials, etc., are accurate.


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Lead-Time Elements

Queue

time waiting before operation begins

Setup

time getting ready for operation Run

time performing operation

Wait

time waiting after operation ends Move

time physically moving between operations


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Cooperstown Cars, Inc.

Produces toy cars

Body

Wheel Assembly (2)

Axles (2)

Wheels (4)

Toy Car

WheelAssembly(2)

Body

Axle (1) Wheels (2)

Bill of Materials for Toy Car


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- Each componenthas a known

lead time

Toy Car

LT = 1

WheelAssembly(2)

LT = 1

Body

LT = 2

Axle (1)

LT = 2

Wheels (2)

LT = 1

Bill of Materials for Toy Car


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Demand for Toy Car in June 8 is 100

Schedule production for: Toy car assembly

Wheel assembly

Body

Axle Wheels


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1 2 3 4 5 6 7

Wheel assembly Gross requirements 160

Scheduled receiptsProjected on-hand |10 10 10 10 10 10 10 10

Planned order receipts 150

Planned order releases 150

Wheels Gross requirements 300

Scheduled receiptsProjected on-hand | 30 30 30 30 30 30 30

Planned order receipts 270

Planned order releases 270

Net Requirements Plan

DAY+A9


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MRP Matrix


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Materials Requirement Planning- Cont.

Terms used in Materials Requirement Planning

1. Parent: Item generating the demand for lower-level components.2. Components: parts demanded by a parent.

3. Gross requirement:A time-phased requirement prior to netting outon-hand inventory & the lead-time consideration.

4. Net requirement: The unsatisfied item requirement for a specific timeperiod. Gross requirement for that period minus the current on-handinventory.

5. Scheduled receipt: A committed order awaiting delivery for a specific

period.6. Projected on-hand inventory: Projected closing inventory at the end

of the period. Beginning inventory minus the gross requirement, plusthe scheduled receipt & planned receipt & planned receipt fromplanned order releases.

7. Planned order release: Specific order to be released to the shop or to the supplier.


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Materials Requirement Planning- Cont.

Terms used in Materials Requirement Planning- Cont.

8. Time bucket: Time period used on the MRP. Days or weeks.9. Explosion:The process of converting a parent items planned

order releases into component gross requirements.

10. Planning factor: Number of components needed to produce a

unit of the parent item.11. Pegging: Relates gross requirements for a part to the planned

order releases the reverse of the explosion process.

12. Low-level coding: assigns the lowest level on the bill of

materials to all common components to avoid duplicate MRPcomputations.

13. Lot size:The order size for MRP logic

14. Safety Stock: Protects against uncertainties in demand supply,quality, & lead time.


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Planning

ReportsPerformance

Reports

Changes to

Planned Orders

Planned Order

Schedule

Orders /

Forecast of

Service

Parts

Master

Production

Schedule

Bills of

Material File

MRP System

Inputs MRP Computer Program Outputs

Inventory

Status File

Inventory

TransactionsData

Exception

Reports

Primary

Outputs

Secondary

Outputs

ELEMENTS OF MRP


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BENEFITS AND COSTS OF MRP

Potential Benefits:

Lower inventories. The ability to plan ahead and the flexibilityto reschedule rather than maintain large safety stocks allowssignificant reduction in inventory levels.

Improved customer service. Late orders and stock-outs is

reduced. Reduced overtime and idle timethe result of smoother and

better planned production.

Improved response to market demands.

Ability to modify the master schedule and respond tounanticipated changes in demand.

Reduced subcontracting and purchasing cost.

The largest cost of any MRP system is the cost of installing

the MRP system (computer system)


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Capacity Requirement

Planning


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Capacity Requirements

Planning (CRP) Capacity requirements planning is a computerized tool

that is used to determine the available and requiredcapacity to help alleviate bottlenecks and to helpidentify potential problems before they occur

Creates a load profile Identifies under-loads and over-loads Inputs

Planned order releases Routing file Open orders file


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Defining Capacity

Capacity is the amount of work that can be done in aperiod of time

Capacity = Available time x Utilization x Efficiency

Actual Hours ChargedUtilization =

Scheduled Available Hours


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CRP

MRP plannedorder

releases

Routingfile

Capacityrequirements

planning

Openorders

file

Load profile foreach machine center


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What is a load?

Load refers to the standard hours of workassigned to a facility.

A load is identified as the standard hours of work assigned to afacility. The load needs to be determined to calculate a loadpercent.


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What Is Load Percent?

Load percent is the ratio of load to capacity.

LoadLoad percent = x 100

Capacity Russell and Taylor

When you know the load and capacity, you can find the load percent bydividing the load by the capacity and multiplying by 100. A load percentof 100 or less can be accomplished by the work center. If the loadpercent is greater than 100, adjustments would need to be made.

Load % Example


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Load % Example

A local road construction company needs to develop engineeringspecifications prior to doing any pre-surfacing preparation. The

company has been awarded the bid on four projects. They have oneengineer. It takes 4 hours per mile to develop the engineeringspecifications. The first project is 30 miles long and must be startedby March 15th to complete on schedule. The second project is 20miles long and must be started by April 1st. The third project is 5

miles long and must be started by May 1st. The fourth project is 15miles long and must be started by May 23rd. It is now February 15th.

The engineer works a 40 hours week and is very experienced so heoperates at 100% efficiency. Assume one project can not be starteduntil the previous project is completed. Does the engineer haveenough time to accomplish the specifications on time?

This is an example of how CRP would be used in a road construction company todetermine if it is cost effective to bid on four projects. By using CRP a company cancalculate the load percent and therefore will be able to plan the amount of work they canproduce.


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Engineering Calculations (Capacity)

Numbers of hours = 40

Shifts = 1

Efficiency = 100%

Utilization = 80%

Capacity = 40 x 1 x 0.8 x 1.00 = 32 hours

Project 1 capacity = 4 (weeks) x 32 = 128




Engineering Calculations (Load)


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Engineering Calculations (Load)

Project 1 = 30 x 4 hours per mile = 120 hours

(start by February 15thmust be completed by March 15th)

Project 2 = 20 x 4 hours per mile = 80 hours

(start March 16thmust be completed by April 1st)

Project 3 = 5 x 4 hours per mile = 20 hours (start April 2ndmust be completed by May 1st)

Project 4 = 15 x 4 hours per mile = 60 hours (start by May 2ndmust be completed by May 23rd)

To calculate the load we take the miles of the project times the hours it

takes per mile. Project 1 is 30 miles long and it takes 4 hours per mile so the load is calculated at 120 hours.

Project 2 is 20 miles long times the 4 hours per mile so the load for project 2 is 80 hours.




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Road Construction Bidding

In analyzing the engineering calculations, the company must decide if it

cost effective to accept the bid on project 2. Based on the currentcapacity, the engineer is not able to complete the engineeringspecifications as needed. If the company accepts the bid, one of thefollowing adjustments will need to be made:

Add extra shift (weekend or evening)

Schedule overtime

Add personnel temporarily

There are several adjustments the company could calculate to determine if is cost effective to

bid on project 2. The adjustments include adding extra shifts, which would require havingthe engineer work overtime by working evenings or weekends. Another alternative wouldbe adding a temporary engineer to assist the current staff. All of the costs on theseadjustments will be calculated by the company prior to submitting a bid on the project or if abid is submitted the additional costs involved with these adjustments will be added onto thebid when submitted. By using Capacity Requirements Planning the company will take allcosts into consideration when submitting a bid. Without a method of calculating the costs,the company could submit the bid only to find that the actual cost of the project is more

than the bid submitted and they will lose money on the project.


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Load Sources

Open Orders

MRP - Planned Order Releases

Other Sources

Rework

Quality problems


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Routing Data

Operation identification code

Operation description

Planned work center

Standard setup time

Standard run time per unit

Tooling requirements


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Initial Load Profile

Hoursofcapacity

1 2 3 4 5 6

Time (Weeks)

Normalcapacity

120

110

100

90

80

70

60

50

40

30

2010

0


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Reducing Over-load Conditions

1. Eliminating unnecessary requirements2. Rerouting jobs to alternative machines, workers, or

work centers3. Splitting lots between two or more machines4. Increasing normal capacity5. Subcontracting6. Increasing efficiency of the operation7. Pushing work back to later time periods8. Revising master schedule


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Test Exercise of Load %

A local hospital prides themselves in top quality patient care.They have 5 registered nurses on each of the 3 shifts and eachnurse cares for 5 patients. Each patient requires 1.5 hours ofRNs time. For week one they have projected the patient load to

be 200 patients, week two the patient load will be 225 patients,week three the patient load will be 180 patients and week fourthe patient load will be 195 patients. The staff consists of about30% student graduate RNs; therefore the efficiency is 70%.

Each nurse works 36 hours per week. Unitization factor to beconsidered is 80 %. Does the hospital have sufficient staff toprovide care for the patients?


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Calculations

Registered Nurse Calculations (Capacity) Number of hours = 36 Shifts = 5 x 3 = 15 Utilization = 4/5 = 80% Efficiency = 70% Capacity = 36 x 15 x 0.80 x 0.70 = 302.40 hours

Week 1 = 200 x 1.5 = 300 Week 2 = 225 x 1.5 = 337.5 Week 3 = 180 x 1.5 = 270 Week 4 = 195 x 1.5 = 292.5

Week 1 = 300 / 302.4 = 99% = Can be accomplished Week 2 = 337.5 / 302.4 = 111.6% = Can not be accomplished Week 3 = 270 / 302.4 = 89% = Can be accomplished Week 4 = 292.5 / 302.4 = 97% = Can be accomplished


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Inventory Definition

A stock of items held to meet

future demand

INVENTORY MANAGEMENT


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Types of Inventory

Inputs Raw Materials

Purchased parts

Maintenance andRepair Materials

Outputs Finished Goods

Scrap and WasteProcess

In Process Partially Completed

Products and

Subassemblies

(in warehouses, or

in transit)

(often on the

factory floor)


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Types of Inventory

Work in

process

Work in

process

Work in

process

Finished

goods

RawMaterials

Vendors Customer


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Water Tank Analogy for Inventory

Supply Rate

Inventory Level

Demand Rate

Inventory Level

Buffers Demand

Rate from Supply

Rate

Independent and Dependent Demand


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Independent and Dependent DemandInventory

Independent demand items demanded by external customers (Kitchen

Tables)

Dependent demand items used to produce final products (table top, legs,

hardware, paint, etc.)

Demand determined once we know the type andnumber of final products

Independent and Dependent Demand


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Independent and Dependent DemandInventory Management

Independent demand Uncertain / forecasted

Continuous Review / Periodic Review

Dependent demand Requirements / planned

Materials Requirements Planning / Just in Time

R T H ld I t


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Reasons To Hold Inventory

Meet variations in customer demand: Meet unexpected demand Smooth seasonal or cyclical demand

Pricing related: Temporary price discounts

Hedge against price increases

Take advantage of quantity discounts

Transit Time

R T NOT H ld I t


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Reasons To NOT Hold Inventory

Carrying cost Financially calculable

Takes up valuable factory space Especially for in-process inventory

I C S


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Inventory Cost Structures

Ordering costThe costs of placing and receiving an order.

Examples: Clerical costs, documents etc

Carrying (or holding) cost: Cost of capital

Cost of storage

Cost of obsolescence, deterioration, and loss

Stock out cost

Cost Of acquisition: , shipping costs , labor cost, taxes,duties paid etc

I t M t S t


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Inventory Management Systems

Functions of Inventory Management

Track inventory

How much to order

When to order

Prioritization

Inventory Management Approach EOQ

Continuous / Periodic


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ABC Prioritization

Classification of items as A, B, or C often

based on $ volume.

Purpose: set priorities for management

attention.


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Annual Usage of Items by Dollar Value

Item

Annual Usage in

Units Unit Cost Dollar Usage

Percentage ofTotal Dollar

Usage

1 5,000 1.50$ 7,500$ 2.9%

2 1,500 8.00 12,000 4.7%

3 10,000 10.50 105,000 41.2%4 6,000 2.00 12,000 4.7%

5 7,500 0.50 3,750 1.5%

6 6,000 13.60 81,600 32.0%

7 5,000 0.75 3,750 1.5%

8 4,500 1.25 5,625 2.2%9 7,000 2.50 17,500 6.9%

10 3,000 2.00 6,000 2.4%

Total 254,725$ 100.0%


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ABC Chart For Previous Slide

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

3 6 9 2 4 1 10 8 5 7

Item No.

Perce

ntUsage

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

Cumulative%

Usage

Percentage of Total Dollar Usage Cumulative Percentage

A B C


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ABC Prioritization

A items: 20% of SKUs, 80% of dollars

B items: 30 % of SKUs, 15% of dollars

C items: 50 % of SKUs, 5% of dollars

Three classes is arbitrary; could be any number.

Percents are approximate.

Danger: dollar use may not reflect importance ofany given SKU!


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Economic Order Quantity

Given the cost structure of a company, there isan order quantity that is the most cost effectiveamount to purchase at a time. This is called the

economic order quantity (EOQ)


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EOQ Lot Size Choice

There is a trade-off between lot size andinventory level.

Frequent orders (small lot size): higher ordering

cost and lower holding cost. Fewer orders (large lot size): lower ordering cost

and higher holding cost.


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EOQ

EOQ = (square root of 2UO / hC)

where:

U = annual usage rate

O = ordering cost

C = cost per unit

h = holding cost per year as a percentage of unitcost

Economic Order Quantity (EOQ)


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Economic Order Quantity (EOQ)

Model

Annual Demand rate U is constant, recurring, andknown

Amount in inventory is known at all times

Ordering cost O per order is fixed Lead time L is constant and known.

Unit cost C is constant (no quantity discounts)

Annual carrying cost / Holding Cost His known No stockouts allowed.

Material is ordered or produced in a lot or batch and

the lot is received all at once

Answer to Inventory Management Questions


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for EOQ Model

For instance, lets say that Item Z has an annual

usage rate (U) of 240,000 / year a fixed cost perorder (O) of $5.00, a unit cost (C) of $7.00, and

an annual holding cost (h) of 30 percent per unit.If we do the math, it works out as:

EOQ = 1069.044 and rounded to the nearestwhole unit, it is 1070


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Re-order Point Example

Demand = 240,000 units/year

Lead time = L = 10 days

When inventory falls to R, we order so as not to runout before the new order comes in.

R = ?


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Re-order Point Example

Demand = 240,000 units/year

Daily demand = 240,000 / 365 = 657.553 units/day

Lead time = L = 10 days

R = D*L = (657.553)(10) = 6575.34 units or 6576 Units

(usually can neglect issues of working days vs weekends,

etc.)

Dont forget to convert to consistent time units!


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EOQ Question

Why Re-order Point quantity is larger thanEOQ lot size?

Documents

Chapter 4 - Supply Chain Operations