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Chapter 12

GMS401- Chapter 12- Operations Planning.docx

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Ryerson University
Global Management Studies
GMS 401
Sam Lampropoulos

GMS401- Chapter 12- Operations Planning Introduction  Inventory- idle material or product, usually in a warehouse or storeroom  Inventory management- planning and controlling the inventories  Importance of inventory one widely used measure of business performance is return on investments, which is profit after taxes divided by total assets o Inventories can may represent a huge part of total assets reduction in inventories can increase ROI Functions on inventory 1. To wait while being transported  Raw materials and part from suppliers, and finished goods from manufacturers heading to markets need to be transported 2. To protect against stock-outs  Delayed deliveries and unexpected increases in demand increase the risk of stock-outs or shortages  Rick of shortage can be reduced by safety stock- stocks in excess of average demand to compensate for variabilites in demand and delivery lead time 3. To take advantage of economic lot size and quantity discount  Minimize purchasing, receiving, material handling, and accounts payable, an organization often buys in quantities to exceed their immediate requirements  Inventory storage enables an organization to buy or produce in economic lot sizes o Consecutive orders occurring after some interval of time order/ replenishment cycle 4. To smooth seasonal demand or production to decouple operations  Manufactures that experience seasonal patterns in demand o Build up inventories during off-season periods to meet high requirements during peek seasons  Seasonal inventories 5. Decouple operations  Used inventories as buffers between successive operations to maintain continuity of production that would otherwise be disrupted by events such as breakdowns of equipment and accidents that cause portion of the operation to shut down temporarily 6. To hedge against price increases  A buyer or manager will suspect that a products price will be increasing they buy larger then usually quantities to avoid price increase  Anticipation inventory Importance and objectives of inventory  Under stocking missed deliveries, lost sales, dissatisfied customers, production stoppage  Over stocking ties up funds that might be more productive elsewhere and also ties up storage price  2 main concerns o Level of customer service (availability) not under stock o Inventory costs: the cost of ordering and holding inventory not overstock  Objective achieve satisfactory levels of customer service while keeping inventory cost within reasonable bounds  Inventory turnover- ratio annual cost of goods to average inventory investment o Higher the ratio the better o Used to compare companies of different size in the same industry Requirements for Effective Inventory Management  Inventory managers required to perform o Safely storing and using inventories o Tracking inventories and using inventory control models o Forecasting demands and lead times o Estimating inventory costs o Performing A-B-C classification Safely storing and using inventories  Warehouse management system- computer software that controls the movement and storage f materials within a warehouse, and processes the associated transaction 1 GMS401- Chapter 12- Operations Planning Tracking inventories and using inventory control models  Periodic counting- counting of items in inventory made at periodic intervals o Advantage- orders form the same supplier can be issued at the same time economies in processing and shipping o Disadvantage- stock-out between reviews, time and cost of physical count  Perpetual tracking- keeps track of removal from and additions to inventory continuously, thus providing the current inventory level of each item o Fixed Order Quantity/Reorder Point Model- an order of a fixed size is placed when the amount on hand drops below a minimum quantity called the reorder point  Adv- shortages can be avoided, order quantity is fixed  Dis- added cost of continual record keeping o Two-Bin System- two containers of inventory; reorder when the first is empty  Adv- no need to record each withdrawal from inventory or keep track on hand  Dis- recorder card may not be turned in o Bar Code- a number assigned to an item or location, made of a group of vertical bars of different thickness that are readable by a scanner,  Universal Product Code (UPC)  Radio Frequency Identification (RFID)- technology that uses a RFID tag attached to the item that emits radio waves to identify items Forecasting demands and lead times  Purchasing lead time- time interval between ordering and receiving the order  Point of Sale (POS) system- software for electronically recording actual sales at the time and location of sale Estimating inventory costs  Holding (carrying) costs- cost to carry an item in inventory o Stated in either way—as a % of unit cost or $ amount per unit  Ordering costs- costs determining order quantity, preparing purchase orders, and fixed cost portion of receiving, inspection, and material handling o Expressed as fixed dollar amount per order, regardless of size  Setup costs- Time spent preparing equipment for the job by adjusting machine, changing tools, etc  Shortage costs- costs when demand exceeds supply; often unrealized profit per unit Performing A-B-C classification  A-B-C classification- grouping inventory items into 3 classes according to some measure of importance, and allocating inventory control efforts accordingly  A= very important  15-20% of the type items in inventory but 70- 80% of annual dollar value (ADV)  B= moderately important  C= least important  50-60% of the SKUs but only about 5-10% of the ADV  Related to 80-20 rule and Pareto analysis discussion  Cycle counting- regular actual count of the items in inventory on a cyclic schedule o Reduce discrepancies between inventory records and the actual quantities of inventory on hand o Investigate the causes of inaccuracy and fix them  Cycle counting management o How much accuracy is needed? o When kind of counting cycle should be used? o Who should do it? Fixed Order Quantity/Reorder Point Model (FOQRP)  Economic order quantity(EOQ)- order size that minimizes total inventory control cost o Basic economic order quantity o Economic production quantity o EOQ with quantity discounts o EOQ with planned shortages 2 GMS401- Chapter 12- Operations Planning Basic economic order quantity  Identity the order size for an item that will minimize the sum of the annual costs of holding and ordering inventory  Assumptions of the basic EOQ model o Only one product is involved o Annual demand requirements known o Demand is even throughout the year o Lead time does not vary o Each order is received in a single delivery o There are no quantity discounts o Shortage is not allowed  Inventory cycles with EOQ 1. You receive an order 2. Quantity decrease by demand rate 3. When quantity reaches reorder point quantity, place another order 4. Order received after lead time (LT) expires, when 0 on hand the cycle repeats  Annual holding cost= (Q/2)(H) o Q= order quantity, H= holding cost per unit per year  Annual ordering costs=(D/Q)(S) o D= demand units per year, S=ordering cost per order  Total annual inventory cost of holding and ordering inventory when Q units are ordered each time o TC= annual holding cost + annual ordering costs=(Q/2)(H)+(D/Q)(S) o Total cost curve is a U-shape  Expression for the optimal order quantity 0 o EOQ=Q =02DS/H  Length of an order cycle (in years)=0Q /D  Robust model o The EOQ model is robust o It works even if all parameters and assumptions are not met o The total cost curve is relatively flat near the EOQ (especially to the right) o Economic production quantity  Equivalent of EOQ in production  Used to determine the optimal batch or lot size in a batch process  Production capacity for a part > usage or demand rate for a part  Assumptions are similar to EOQ—instead of orders being received in a single delivery, units are received incrementally  Total annual inventory cont
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