Industrial Management

LOGO

JJ619

CHAPTER 3INVENTORY CONTROL MANAGEMENT

JJ619

CHAPTER 3INVENTORY CONTROL MANAGEMENT

PREPAREDE BY:MD NAJIP BIN TALIBIN

Course Learning Outcomes

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2

4

.Upon completion of this course, students should be able to:

apply the basic concept of industrial management system in Industry. Identify the suitable concept industrial management system in related industry by group

Contents

Inventory control and management concept. 1

Inventory cost. 2

Inventory models for independent demand.3

44 Master scheduling.

45 Material Requirement Planning (MRP)

Inventory Control & Management Concept

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What Is Inventory?

Inventory is an idle resource which is usable and has value.

Stock of items kept to meet future demandPurpose of inventory management:

how many units to order when to order


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12-5

Objective of Inventory

To meet anticipated demand (make-to-stock)

In-Transit inventory: goods being transported

To take advantage of order cycles or to take advantage of quantity discounts (cycle stock)


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Objective of Inventory

To protect against stock-outs (safety stocks).

To smooth production requirements (seasonal inventories).

To decouple production and distribution (WIP buffers).

To help hedge against price increases (speculative inventories).


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General Types of Inventory

Official Inventory Unofficial Inventory


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Types of Inventory

Raw materialsComponents - Purchased parts and suppliesWork-in-process (partially completed) products

(WIP)Items being transported (Finished Goods)Tools and equipment


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Types of Inventory


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Inventory Control Systems

Continuous system (fixed-order quantity)• constant amount ordered when inventory

declines to predetermined level.

Periodic system (fixed-time-period)• order placed for variable amount after fixed

passage of time.


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Inventory Costs

Carrying or Holding cost- This broad category includes the costs for

storage facilities, handling, insurance, breakage, taxes and the opportunity cost of capital.

Ordering cost- Refer to the managerial and clerical costs to

prepare the purchase or production order.

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4

1 Inventory Costs

Shortage cost- Temporary or permanent loss of sales when

demand cannot be met.

Setup Cost- To make each different product involves

obtaining the necessary materials, arranging specific equipment setups, filling out the required paper, charging time & material and moving out the previous stock of material.

Inventory Cost

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Most Important Inventory Costs

Holding Costs

Denoted H; includes the variable expenses incurred by the plant related to the volume of inventory held e.g. 15-25%

Ordering Cost

Denoted S; fixed, constant money amount incurred for each order placed

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3Inventory Model For IndependentDemand

Independent demand items are finished products or parts that are shipped as end items to customers.

Forecasting plays a critical roleDue to uncertainty- extra units must be

carried in inventory.

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Dependent demand items are raw materials, component parts, or subassemblies that are used to produce a finished product.

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Economic Order Quantity (EOQ or Q System)

Economic Production Quantity (EPQ)

Quantity Discount Model

Three Mathematical Models for Determining Order Quantity

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Economic Order Quantity (EOQ or Q System) An optimizing method used for determining order

quantity and reorder points Part of continuous review system which tracks on-

hand inventory each time a withdrawal is made

Economic Production Quantity (EPQ) A model that allows for incremental product delivery

Quantity Discount Model Modifies the EOQ process to consider cases where

quantity discounts are available

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© Wiley 2007

Economic Order Quantity EOQ Assumptions:

Demand is known & constant - no safety stock is required

Lead time is known & constant No quantity discounts are

available Ordering (or setup) costs are

constant All demand is satisfied (no

shortages) The order quantity arrives in a

single shipment

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Total annual cost= annual ordering cost + annual holding costs

H

2DSQ and H;

2

QS

Q

DTCQ


Continuous (Q) Review System Example: A computer company has annual demand of 10,000. They want to determine EOQ for circuit boards which have an annual holding cost (H) of RM6 per unit, and an ordering cost (S) of RM75. They want to calculate TC and the reorder point (R) if the purchasing lead time is 5 days.

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EOQ (Q)

Reorder Point (R)

Total Inventory Cost (TC)

units 500RM6

RM75*10,000*2

H

2DSQ

units 200days 5*days 250

10,000Time Lead x DemandDaily R

RM3000RM1500RM1500RM62

500RM75

500

10,000TC

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© Wiley 2007

Economic Production Quantity (EPQ) Same assumptions as the EOQ except: inventory

arrives in increments & is drawn down as it arrives

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© Wiley 2007

EPQ Equations

Total cost:

Maximum inventory: d=avg. daily demand rate p=daily production rate

Calculating EPQ

H

2

IS

Q

DTC MAX

EPQ

p

d1QIMAX

p

d1H

2DSEPQ

EPQ Problem: HP Ltd. Produces its premium plant food in 50# bags. Demand is 100,000 kg per week and they operate 50 weeks. each year and HP can produce 250,000kg. per week. The setup cost is RM200 and the annual holding cost rate is RM55 per bag. Calculate the EPQ. Determine the maximum inventory level. Calculate the total cost of using the EPQ policy.

H

2

IS

Q

DTC MAX

EPQ

p

d1H

2DSEPQ

p

d1QIMAX

Inventory Model For IndependentDemand

pd1H

2DSEPQ BagsEPQ 850,77

250000000,100

155.

)200)(000,100)(50(2

p

d1QIMAX

H

2

IS

Q

DTC MAX

EPQ

bagsMAXI 710,46000,250

000,1001850,77

690,2555.2

710,46200

850,77

000,000,5RMTC


Quantity Discount Model

Same as the EOQ model, except: Unit price depends upon the quantity ordered

The total cost equation becomes:

H

2

QS

Q

DTCQD CD


Quantity Discount Procedure

Calculate the EOQ at the lowest priceDetermine whether the EOQ is feasible at

that price Will the vendor sell that quantity at that price?

If yes, stop – if no, continueCheck the feasibility of EOQ at the next

higher price

Continue to the next slide ...

© Wiley 2007

QD Procedure (continued)

Continue until you identify a feasible EOQCalculate the total costs (including total item

cost) for the feasible EOQ modelCalculate the total costs of buying at the

minimum quantity required for each of the cheaper unit prices

Compare the total cost of each option & choose the lowest cost alternative

Any other issues to consider?

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4 Master Scheduling

Master Scheduling is a business process designed to balance demand and supply at the detailed, mix level.

Master Scheduling is primarily a decision-making process, performed by an individual called the Master Scheduler. As such, it is people-centered; the computer’s role is to support the people in their decision-making activities.

4 Master Scheduling

The output from this process is the Master Production Schedule, which is the anticipated build schedule for specific products (or parts of products) and customer orders.

4 Master Scheduling

The Master Schedule is:

• time-phased,• extends for a number of weeks into the future,• is typically expressed in weekly time increments or smaller.

4 Master Scheduling

Master Production Schedule

Provides basis for: Making good use of manufacturing resources. Making customer delivery promises. Resolving tradeoffs between sales and

manufacturing. Attaining strategic objectives in the sales and

operations plan.

4 Master Scheduling

What is “Master Production Scheduling?”

Start with Aggregate plan (Aggregate Sales & Ops Plan) Output level designed to meet targets

DisaggregatesConverts into specific schedule for each item

Role of the MPS

Aggregate plan: Specifies the resources available (e.g.: regular

workforce, overtime, subcontracting, allowable inventory levels & shortages)

Master production schedule: Specifies the number & when to produce each

end item (the anticipated build schedule) Disaggregates the aggregate plan

4 Master Scheduling

4 Master Scheduling

S&OP vs MPS

“The role of the sales and operations plan is to balance supply and demand volume, while the MPS specifies the mix and volume of the output”

MPS shows when products will be available in future

Planned production, not forecast

4 Master Scheduling

4 Master Scheduling

Planning Links to MPS

4 Master Scheduling

Basic information which are needed to preparethe Master Production Schedule (MPS).

a) When the product is completed and can be sent to the customer.b) How long is the final assemble.c) How long is the process to make sub assembly. d) How long is the component takes time to be completed.

4 Master Scheduling

Basic information which are needed to preparethe Master Production Schedule (MPS).

e) List the number of all quantity material to produce a product.f) List the completed production processes.g) Standard time for each operation.h) Total order quantity from the customer or internal order as in the stock.

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Objectives of MPS

Maintain the desired customer service levelUtilize resources efficientlyMaintain desired inventory levels

4 Master Scheduling

Zubair Sdn Bhd will produce a new product for 1,000 units. The product has four stages of operation which is shown as below:

Operation Operation Time (hour/unit)

Production Time (hour)

1 2 6002 4 4003 4 4004 6 600

4 Master Scheduling

• Calculate the monthly capacity and the duration of the production.• Draw Master Production Schedule (MPS).• Analyze the data.

LOGOMaterial Requirements Planning (MRP)

Material Requirements Planning (MRP)

Presented by:

MD NAJIP BIN TALIBIN

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Dependent Demand

For any product for which a schedule can be established, dependent

demand techniques should be used

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5Material Requirement Planning (MRP)

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Dependent Demand The demand for one item is related

to the demand for another item Given a quantity for the end item,

the demand for all parts and components can be calculated

In general, used whenever a schedule can be established for an item

MRP is the common technique


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1. Master production schedule

2. Specifications or bill of material

3. Inventory availability

4. Purchase orders outstanding

5. Lead times

Effective use of dependent demand inventory models requires the following


Material Requirement Planning (MRP)

Define fundamental of Material Requirement Planning (MRP).

Materials requirements planning (MRP) is the logic for determining the number of parts, components, and materials needed to produce a product.

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Material Requirement Planning (MRP)

MRP provides time scheduling information specifying when each of the materials, parts, and components should be ordered or produced.

MRP is a Computer-based information system that schedules and orders dependent-demand inventory components.

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Benefits of MRP

1. Better response to customer orders

2. Faster response to market changes

3. Improved utilization of facilities and labour.

4. Reduced inventory levels

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The Planning Process

Figure 14.1

Is capacity plan being

met?

Is execution

meeting the plan?

Change master

production schedule?

Change capacity?

Change requirements?

No

Execute material plans

Execute capacity plans

Yes

Realistic?

Capacity requirements plan

Material requirements plan

Master production schedule

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Aggregate Production Plan

Months January February

Aggregate Production Plan 1,500 1,200(Shows the totalquantity of amplifiers)

Weeks 1 2 3 4 5 6 7 8

Master Production Schedule(Shows the specific type andquantity of amplifier to beproduced

240-watt amplifier 100 100 100 100

150-watt amplifier 500 500 450 450

75-watt amplifier 300 100

Figure 14.2

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Bills of Material

List of components, ingredients, and materials needed to make product

Provides product structure Items above given level are called

parents Items below given level are called

children


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BOM Example

B(2) Std. 12” Speaker kit C(3)

Std. 12” Speaker kit w/ amp-booster1

E(2)E(2) F(2)

Packing box and installation kit of wire,

bolts, and screws

Std. 12” Speaker booster assembly

2

D(2)

12” Speaker

D(2)

12” Speaker

G(1)

Amp-booster

3

Product structure for “Awesome” (A)

A

Level

0

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BOM Example

B(2) Std. 12” Speaker kit C(3)

Std. 12” Speaker kit w/ amp-booster1

E(2)E(2) F(2)

Packing box and installation kit of wire,

bolts, and screws

Std. 12” Speaker booster assembly

2

D(2)

12” Speaker

D(2)

12” Speaker

G(1)

Amp-booster

3

Product structure for “Awesome” (A)

A

Level

0

Part B: 2 x number of As = (2)(50) = 100Part C: 3 x number of As = (3)(50) = 150Part D: 2 x number of Bs

+ 2 x number of Fs = (2)(100) + (2)(300) = 800Part E: 2 x number of Bs

+ 2 x number of Cs = (2)(100) + (2)(150) = 500Part F: 2 x number of Cs = (2)(150) = 300Part G: 1 x number of Fs = (1)(300) = 300

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MRP Structure

Figure 14.5

Output Reports

MRP by period report

MRP by date report

Planned order report

Purchase advice

Exception reports

Order early or late or not needed

Order quantity too small or too large

Data Files

Purchasing data

BOM

Lead times

(Item master file)

Inventory data

Masterproduction schedule

Material requirement

planning programs

(computer and software)

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Determining Gross Requirements

Starts with a production schedule for the end item – 50 units of Item A in week 8

Using the lead time for the item, determine the week in which the order should be released – a 1 week lead time means the order for 50 units should be released in week 7

This step is often called “lead time offset” or “time phasing”

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From the BOM, every Item A requires 2 Item Bs – 100 Item Bs are required in week 7 to satisfy the order release for Item A

The lead time for the Item B is 2 weeks – release an order for 100 units of Item B in week 5

The timing and quantity for component requirements are determined by the order release of the parent(s)

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The process continues through the entire BOM one level at a time – often called “explosion”

By processing the BOM by level, items with multiple parents are only processed once, saving time and resources and reducing confusion

Low-level coding ensures that each item appears at only one level in the BOM

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Gross Requirements Plan

Table 14.3

Week

1 2 3 4 5 6 7 8 Lead Time

A. Required date 50Order release date 50 1 week

B. Required date 100Order release date 100 2 weeks

C. Required date 150Order release date 150 1 week

E. Required date 200 300Order release date 200 300 2 weeks

F. Required date 300Order release date 300 3 weeks

G. Required date 600 200Order release date 600 200 1 week

G. Required date 300Order release date 300 2 weeks

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Net Requirements Plan

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Determining Net Requirements

Starts with a production schedule for the end item – 50 units of Item A in week 8

Because there are 10 Item As on hand, only 40 are actually required – (net requirement) = (gross requirement - on- hand inventory)

The planned order receipt for Item A in week 8 is 40 units – 40 = 50 - 10

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Following the lead time offset procedure, the planned order release for Item A is now 40 units in week 7

The gross requirement for Item B is now 80 units in week 7

There are 15 units of Item B on hand, so the net requirement is 65 units in week 7

A planned order receipt of 65 units in week 7 generates a planned order release of 65 units in week 5

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A planned order receipt of 65 units in week 7 generates a planned order release of 65 units in week 5

The on-hand inventory record for Item B is updated to reflect the use of the 15 items in inventory and shows no on-hand inventory in week 8

This is referred to as the Gross-to-Net calculation and is the third basic function of the MRP process

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S

B C

12 138 9 10 11

20 3040

Lead time = 6 for SMaster schedule for S

Gross Requirements Schedule

Figure 14.6

1 2 3

10 10

Master schedulefor B

sold directly

Periods

Therefore, these are the gross requirements for B

Gross requirements: B 10 40 50 2040+10 15+30=50 =45

1 2 3 4 5 6 7 8Periods

A

B C

Lead time = 4 for AMaster schedule for A

5 6 7 8 9 10 11

40 1550

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The logic of net requirements

Available inventory

Net requirementsOn hand

Scheduled receipts+– =

Total requirements

Gross requirements Allocations+

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MRP Planning Sheet

Figure 14.7

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Safety Stock

BOMs, inventory records, purchase and production quantities may not be perfect

Consideration of safety stock may be prudentShould be minimized and ultimately

eliminatedTypically built into projected on-hand

inventory

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MRP Management

MRP is a dynamic system Facilitates replanning when changes occur

Regenerating Net change

System nervousness can result from too many changes

Time fences put limits on replanning Pegging links each item to its parent

allowing effective analysis of changes

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MRP and JIT

MRP is a planning system that does not do detailed scheduling

MRP requires fixed lead times which might actually vary with batch size

JIT excels at rapidly moving small batches of material through the system

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Lot-Sizing Techniques

Lot-for-lot techniques order just what is required for production based on net requirements May not always be feasible If setup costs are high, lot-for-lot can

be expensive

Economic order quantity (EOQ) EOQ expects a known constant

demand and MRP systems often deal with unknown and variable demand

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Lot-Sizing Techniques

Part Period Balancing (PPB) looks at future orders to determine most economic lot size

The Wagner-Whitin algorithm is a complex dynamic programming technique Assumes a finite time horizon Effective, but computationally

burdensome

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Lot-for-Lot Example

1 2 3 4 5 6 7 8 9 10

Gross requirements 35 30 40 0 10 40 30 0 30 55

Scheduled receipts

Projected on hand 35 35 0 0 0 0 0 0 0 0 0

Net requirements 0 30 40 0 10 40 30 0 30 55

Planned order receipts 30 40 10 40 30 30 55

Planned order releases 30 40 10 40 30 30 55

Holding cost = $1/week; Setup cost = $100; Lead time = 1 week

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Lot-for-Lot Example

1 2 3 4 5 6 7 8 9 10


Scheduled receipts



Planned order receipts 30 40 10 40 30 30 55

Planned order releases 30 40 10 40 30 30 55


No on-hand inventory is carried through the systemTotal holding cost = $0

There are seven setups for this item in this planTotal ordering cost = 7 x $100 = $700

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EOQ Lot Size Example

1 2 3 4 5 6 7 8 9 10


Scheduled receipts



Planned order receipts 73 73 73 73

Planned order releases 73 73 73 73


Average weekly gross requirements = 27; EOQ = 73 units

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EOQ Lot Size Example

1 2 3 4 5 6 7 8 9 10


Scheduled receipts



Planned order receipts 73 73 73 73

Planned order releases 73 73 73 73

Holding cost = $1/week; Setup cost = $100; Lead time = 1 weekAverage weekly gross requirements = 27; EOQ = 73 units

Annual demand = 1,404Total cost = setup cost + holding costTotal cost = (1,404/73) x $100 + (73/2) x ($1 x 52 weeks)Total cost = $3,798Cost for 10 weeks = $3,798 x (10 weeks/52 weeks) = $730

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PPB Example

1 2 3 4 5 6 7 8 9 10


Scheduled receipts

Projected on hand 35

Net requirements

Planned order receipts

Planned order releases

Holding cost = $1/week; Setup cost = $100; Lead time = 1 weekEPP = 100 units

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PPB Example

1 2 3 4 5 6 7 8 9 10


Scheduled receipts

Projected on hand 35

Net requirements

Planned order receipts

Planned order releases

Holding cost = $1/week; Setup cost = $100;EPP = 100 units

2 30 02, 3 70 40 = 40 x 12, 3, 4 70 402, 3, 4, 5 80 70 = 40 x 1 + 10 x 3 100 70 1702, 3, 4, 5, 6 120 230 = 40 x 1 + 10 x 3

+ 40 x 4

+ =

Combine periods 2 - 5 as this results in the Part Period closest to the EPP

Combine periods 6 - 9 as this results in the Part Period closest to the EPP

6 40 06, 7 70 30 = 30 x 16, 7, 8 70 30 = 30 x 1 + 0 x 26, 7, 8, 9 100 120 = 30 x 1 + 30 x 3 100 120 220+ =

10 55 0 100 0 100Total cost 300 190 490

+ =+ =

Trial Lot SizePeriods (cumulative net Costs

Combined requirements) Part Periods Setup Holding Total

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PPB Example

1 2 3 4 5 6 7 8 9 10


Scheduled receipts



Planned order receipts 80 100 55

Planned order releases 80 100 55

Holding cost = $1/week; Setup cost = $100; Lead time = 1 weekEPP = 100 units

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Lot-Sizing Summary

For these three examples

Lot-for-lot $700EOQ $730PPB $490

Wagner-Whitin would have yielded a

plan with a total cost of $455

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Lot-Sizing Summary

In theory, lot sizes should be recomputed whenever there is a lot size or order quantity change

In practice, this results in system nervousness and instability

Lot-for-lot should be used when low-cost JIT can be achieved

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Lot-Sizing Summary

Lot sizes can be modified to allow for scrap, process constraints, and purchase lots

Use lot-sizing with care as it can cause considerable distortion of requirements at lower levels of the BOM

When setup costs are significant and demand is reasonably smooth, PPB, Wagner-Whitin, or EOQ should give reasonable results

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Extensions of MRP

MRP II Closed-Loop MRP

MRP system provides input to the capacity plan, MPS, and production planning process

Capacity Planning MRP system generates a load report which details capacity

requirements This is used to drive the capacity planning process Changes pass back through the MRP system for

rescheduling

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MRP in Services

Some services or service items are directly linked to demand for other services

These can be treated as dependent demand services or items Restaurants Hospitals Hotels

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