Materials Management

BUS 3 – 141

Ensuring Continuous Supply and Optimizing Inventory Levels

Feb 11, 2008

Page 2 2

Agenda

– Questions from Last Week

– Forming Teams

– “Ensuring Continuous Supply

– Optimizing Inventory Levels

– Continued MRP overview

Page 3 3

Case: Connecticut Circuit Manufacturers p 173 Due Feb 181. FACTS OF THE CASE

Quantitative data (Revenue, Inventory, Costs, Employees, Divisions, etc….)

Approx. 20% of Total Effort / Grade

2. BUSINESS ISSUES IDENTIFIED Customers, Suppliers, Internal Measurement Systems, Organization, Competitors, Supply Shortages, Price Increases, Cash Flow, etc…)

Approx. 20% of Total Effort / Grade

3. CONCLUSIONS What has been going well? What needs improvement?

Approx. 25% of Total Effort / Grade

4. RECOMMENDATIONS What improvements should be made? What (if any?) activities should be stopped? How can the improvements be implemented?

Approx. 35% of Total Effort / Grade Be concise. Use a format equivalent to what you would use in writing a persuasive email to your boss. Try to limit your report to no more than one page, single-spaced. Longer will be accepted, but is not required.

Page 4 4

Reasons for Carrying Inventory

– Revenue Have what Customers want, when they want it Compensate for non-linear demand that doesn’t match your

capacity Buffer for upside demand Buffer for when competitors cannot deliver Buffer against unexpected internal supply problems

Carrying Buffer inventory is necessary, but continuous, relentlessefforts to minimize variability, and thus eliminate the need for

the Buffers is greatly preferred

Page 5 5

Reasons for Carrying Inventory

– Cost Minimize shortages, to avoid delays and idle time Optimize plant, people, and equipment utilization Obtain volume discounts for favorable unit pricing Hedge against future price increases

Optimizing utilization and unit pricing are valuable only whenthe goods made or purchased will SOLD to a paying Customer

in a reasonable time

The cost of a STOCKOUT is hard to quantify,but is to be AVOIDED at all times

Page 6 6

Types of Inventory

RawMaterials

WorkIn Process

(WIP)

FinishedGoods(FGI)

Maintenance,Repair, & Operating

Supplies (MRO)

ResaleItems

Manufacturing All

Egg Mix Water

Cake Icing

ChocolateCake

Finished Goods

Subassembly (WIP) Raw Material

Raw

MRO

Page 7 7

ABC Classification – the 80/20 Rule Applied

* From Leenders, Johnson, Flynn, and Fearon, Purchasing and Supply Management, Thirteenth Edition, McGraw Hill Irwin

Page 8 8

ABC Classification is not based on unit cost

Unit Cost Annual Volume Annual SpendA High High HighA High Medium HighA Medium High HighA Low Very High HighB High Low MediumB Medium Medium MediumB Low High MediumC Medium Low LowC Low Medium LowC Low Low Low

C Items can still stop a production lineand cause Customer Shipments to be missed!

Page 9 9

Costs of Inventory

– Carrying Costs Capital (Interest and Opportunity Costs) Warehouses and Stock rooms Personnel Insurance Damage and Loss Theft Insurance Taxes

– Other Costs Ordering Costs Setup Costs Stockout Costs

• Lost Sales• Idle labor and equipment• Expedite fees

Page 10 10

Lead Time

PlanningOrderingMaterials

Set upProduction

Production TransitPackaging Receipt

Will be addressed directly in Later Chapters

Page 11 11

Lot Sizing: The Economic Order Quantity (EOQ)

Annual C

ost

($)

Quantity Ordered

ordering costs

carrying costs

EOQ

total cost

CTmin

A conceptual model that balances Carrying Costs and Ordering Costs.Somewhat limited, but often useful for C Items

* From Leenders, Johnson, Flynn, and Fearon, Purchasing and Supply Management, Thirteenth Edition, McGraw Hill Irwin

Page 12 12

Lot Sizing: Order Quantities

Fixed Quantity P/D 1 2 3 4 5 6 7 8 9 10 11 12 13Requirement 872 500 400 500 400 500 400 400 400 400 400 500 500Planned Order 1,000 1,000 1,000 1,000 1,000 1,000 1,000Projected Available 128 628 228 728 328 828 428 1,028 628 228 828 328 828

P/D 1 2 3 4 5 6 7 8 9 10 11 12 13Requirement 872 500 400 500 400 500 500 400 400 400 400 500 500Planned Order 2,272 1,800 1,700 500Projected Available 1,400 900 500 0 1,400 900 400 0 1,300 900 500 0 0

P/D 1 2 3 4 5 6 7 8 9 10 11 12 13Requirement 872 500 400 500 400 500 400 400 400 400 400 500 500Planned Order 872 700 700 700 700 700 700 700 700Projected Available 0 200 500 0 300 500 100 400 0 300 600 100 300

P/D 1 2 3 4 5 6 7 8 9 10 11 12 13Requirement 872 500 400 500 400 500 400 400 400 400 400 500 500Planned Order 1,000 500 500 500 500 500 500 500 500 500 500 500Projected Available 128 128 228 228 328 328 428 28 128 228 328 328 328

P/D 1 2 3 4 5 6 7 8 9 10 11 12 13Requirement 872 500 400 500 400 500 400 400 400 400 400 500 500Planned Order 872 500 400 500 400 500 400 400 400 400 400 500 500Projected Available 0 0 0 0 0 0 0 0 0 0 0 0 0

TIME PERIODSame quantity whenever material is needed

Fixed PeriodCalculates requirements for n periods. Example = 4 periods

E O QCalculated to balance Inventory & Ordering Costs

Supplier Multiple

Similar to Fixed

Lot-For-Lot

Maps exactly to Requirements

Page 13 13

Example of how Inventory is Consumed and Reordered

lead time (L)

ROP

cyclestock

INVENTORY

TIMEROP = L × d

* From Leenders, Johnson, Flynn, and Fearon, Purchasing and Supply Management, Thirteenth Edition, McGraw Hill Irwin

Page 14 14

Forecasting

– Estimate of future events

• Weather• Future Sales• Stock Prices• Other

– Several Methods

• Quantitative• History and Patterns• Leading Indicators (Housing Starts & Furniture)

• Qualitative• Judgment• Consensus

Forecasts WILL be wrong – the goal is to predict as closely as possible

Page 15 15

A Forecast serves many Purposes

RegionProduct

LineChannel Features Product Customer

Scheduling Factory VolumesMaterials Planning Balancing Factory CapacityAssessing Direct Cost @ MixesAnalyzing Absorption implications

Revenue Planning Revenue Scenarios Allocation CriteriaCommissions & Quotas

Estimating TAM and SharePricing TargetsPrograms & PromotionsMargins @ MixesMessage to Analysts

Business Need / Benefit

WHAT is done and WHY?

Page 16 16

Forecast accuracy varies over time

0 +1 +2 +3 +4 ………………………………………… +n

Exp

ecte

d E

rro

rs

Over

Under

Time in Future (Weeks)

The further into the future, the harderto predict details with accuracy

Page 17 17

Relationship of Lead Time, Forecast, Inventory, and Cost

Need toForecast

InventoryLevels inPipeline

Cost toManage

Risk ofExcess

Long Lead Time

Short Lead Time

High High Higher Higher

Low Low Lower Lower

Page 18 18

Just-In-Time (JIT)

Will be addressed directly in Later Chapters

Material Requirements Planning Introduction and Overview

Page 20 20

Highest Level MRP Logic

ProductPlanning

DemandPlanning

MaterialPlanning

MasterProductionScheduling

ProductionDelivery

& Service

Will haveItalian Food

Dinner onSaturday

Recipes &Ingredients

Menu Cooking Eating!

Business Terms:

Life Terms:

Page 21 21

MRP Logic is Constantly Balancing Supply & Demand

What you NEED (Demand)

• Final Assemblies– Sales Orders– Forecast

• Components and Subassemblies:– Higher level Starts– Higher level Work Order Shortages

What you HAVE (Supply)

• Stockroom Inventory• WIP Stores Inventory• Open Work Orders• Open Purchase Orders

What you NEED TO GET and WHEN you need to get it (MRP output)

• Planned Purchase Orders• Planned Work Orders• Rescheduled Work Orders• Rescheduled Purchase Orders

Page 22 22

MRP “Nets” Inventory Balance On Hand just like a Checkbook

Item/Descr. Where Used QPA OH LT Past Due 31-Jan 7-Feb 14-Feb 21-Feb 28-FebSJSU141 MB1234 1 0 1 Gross Requirement 0 50 50 70 100 40Mother Board On Order 0 70 100 10 0 0

Projected Available 0 20 70 10 -90 -130Planned Order Complete 0 0 0 0 90 40Planned Order Starts 0 0 0 90 40 0Cum Planned Order 0 0 0 0 90 130

is Equivalent to:

DATE TRANSACTION SUBTRACT ADD BALANCE31-Jan-07 BEGINNING BALANCE 031-Jan-07 RECEIVE WORK ORDER 70 702-Feb-07 SHIP TO CUSTOMER 50 207-Feb-07 RECEIVE WORK ORDER 100 1209-Feb-07 SHIP TO CUSTOMER 50 70

14-Feb-07 RECEIVE WORK ORDER 10 8016-Feb-07 SHIP TO CUSTOMER 70 1023-Feb-07 SHIP TO CUSTOMER 100 (90)2-Mar-07 SHIP TO CUSTOMER 40 (130)

Page 23 23

MRP Netting Logic Illustration

MV2002 SJSU141 1 80 2 Gross Requirement 0 0 0 90 40 0Processor On Order 0 0 0 0 0 0

Projected Available 80 80 80 -10 -50 -50Planned Order Complete 0 0 0 10 40 0Planned Order Starts 0 10 40 0 0 0Cum Planned Order 0 10 50 50 50 50

MV2004 SJSU141 2 80 3 Gross Requirement 0 0 0 180 80 0Power Supply On Order 0 0 150 0 0 0

Projected Available 80 80 230 50 -30 -30Planned Order Complete 0 0 0 0 30 0Planned Order Starts 0 30 0 0 0 0Cum Planned Order 0 30 30 30 30 30

Quantity Per

Assembly Quantity On Hand

Lead Time

Item/Descr. Where Used QPA OH LT Past Due 31-Jan 7-Feb 14-Feb 21-Feb 28-FebSJSU141 MB1234 1 0 1 Gross Requirement 0 50 50 70 100 40Mother Board On Order 0 70 100 10 0 0

Projected Available 0 20 70 10 -90 -130Planned Order Complete 0 0 0 0 90 40Planned Order Starts 0 0 0 90 40 0Cum Planned Order 0 0 0 0 90 130

Page 24 24

MRP is EXTREMELY DEPENDENT on ACCURATE DATA

OpenPurchase

Orders

InReceiving

OpenWork

Orders In a higherAssemblies

In theStockroom

InFinishedGoods

Shipped

In a WIPLocation

In WIP

EVERY time inventory is moved, a TRANSACTION must be executed

The system MUST see ALL inventory in ALL of these categoriesat ALL times