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7/27/2019 Ch 13 Quantitative Models for Materials Planning
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Quantitative Models
for Materials PlanningChapter 13
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Planning Materials Requirements
Planning importance
Begins with the design of a product
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Planning Materials Requirements
To plan manufacturing requirements, everystock item must be analyzed periodically to:
Forecast demand for the next period Determine acquisition lead time
Plan usage during the lead time
Establish quantity on hand
Determine reserve or safety stock requirements
Place units on order
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Planning Materials Requirements
Accurate future requirements for eachstock item or product play a central role in
materials control. Materials planning deals with two
fundamental factors:
The quantity
The time to purchase
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Planning Materials Requirements
Determination of how much and when tobuy involves two conflicting kinds of cost:
The cost of carrying inventory The cost of inadequate carrying
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Cost of Carrying inventory
Investment cost
Property rent/storage cost
Insurance Handling cost
Deterioration and shrinkage of stocks
Obsolescence
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Cost of Inadequate carrying
Extra purchasing, handling andtransportation cost
Higher price due to small order quantity Frequent stockouts resulting in disruptions
production schedule
Additional clerical costs
Inflation-oriented increases in prices
Lost sales and loss of GOODWILL
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Economic Order Quantity
EOQ Amount of inventory to be ordered
at one time for purposes of minimizingannual inventory cost.
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Economic Order Quantity
The quantity to be ordered at a given timemust be determined by balancing two
factors: The cost of carrying (possessing) materials
The cost of ordering (acquiring) materials
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Formula
EOQ= 2* annual required units*cost per order Cost per unit of material*carrying cost percentage
OR
EOQ= 2*RU*CO CU*CC
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Formula
The formula is based on the following relationships:
RU/EOQ= No.of orders placed annually
RU*CO/EOQ= Annual ordering cost
EOQ/2= Avg. no of units in inventory at any point
in time
CU*CC*EOQ/2= Annual carrying cost
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Example
Estimated requirement for the next year:2400units
Cost of the item per unit: $1.50 Ordering cost: $20
Inventory carrying cost: 10%
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Solution
EOQ= 2*2400*$20
$1.50*10%
EOQ= 800 units
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Economic Order Quantity
It is also possible to express EOQ in dollarsrather than in units.
EOQ= 2*AB I
A= annual requirement in dollars
B= ordering cost(per order) Inventory carrying costs.
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Example
Estimated requirement for the next year:2400units
Cost of the item per unit: $1.50 Ordering cost: $20
Inventory carrying cost: 10%
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Solution
A= 2,400*$1.50= $3,600
B= $20
I= 10% per year
EOQ= 2*3,600*$20
0.10
EOQ= $1,200 total cost.
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Economic Order Quantity
Cost of carrying inventory can becalculated and expressed numerically
Cost of not carrying inventory is difficult tobe calculated; yet they must be considered
upon ordering quantities.
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Graph
Total
annual costto order andcarry
Annualcarryingcost
Annual
orderingcost
Low point
Economicorder quantity
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Quantity Price Discounts
Purchasing in large quantities
Earns discounts and reduces per unit freight cost
But it increases investment in inventories
Therefore larger quantities should be
purchased only if the earned discount ismore than the cost of additional investment
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Inventory Turnover
Ratio between COGS and averageinventory investment
Number of times per period that inventoryis physically replaced
The higher it is the better