Operations Management CustomerFocused Principles

1
Operations ManagementCustomer-Focused Principles

• Inventory Management
• Independent Demand

2
Overview

• Inventory Overview (Revisited)
• Inventory Modelling Concepts
• Quantity determination
• Timing decision
• Factors Affecting Inventory Levels
• Lot sizes (economies of scale)
• Variability (buffer stocks)
• Inventory Reduction

3
Inventory Review

• Represents Flow Stoppage
• Paradox!
• Cant live without inventory
• Dont want to live with inventory
• Solve problem (not symptom)
• Inventory is a result, not a control variable
• Address problem by cutting need for inventory
• Services customers in process

4
Inventory Overview

• Problem Definition
• 2 Decision Variables
• Quantity
• Timing
• Increases with
• Setup/changeover complexity (batch sizes)
• Demand variability (buffer stock)

5
Inventory Overview

• Cost Considerations
• Components
• Order processing
• Carrying
• Shortage
• Traditionally
• Emphasis on order processing and shortage costs
• Understatement of carrying costs
• Resulted in inventory, rather than flow, focus

6
Inventory ModellingQuantity

• Basic Assumptions
• Perpetual inventory system
• Place order when inventory level ROP
• Fixed order quantity
• Instantaneous replacement
• Exhibit S11-1
• Slight modification for manufacturing quantities
  (Exhibit S11-3)
• Constant, uniform demand
• No purchase/volume discounts or premiums

7
Exhibit S11-1
EOQ Order Cycles over Time
Inventory
Q
I
Q/2
II
0
Time
Order cycle
11-10
8
Exhibit S11-3
EOQ EMQ Replenishment Patterns
A. Basic EOQ -- Instantaneous replenishment
Qmax
Qmax
Q

Qavg
2
Time
B. EMQ -- Gradual Replenishment
P
Qmax
Q
Qmax

Qavg
2
Time
TQ/P
11-12
9
Inventory ModellingQuantity

• Notation
• Q Order quantity (i.e., lot size)
• D Expected demand rate
• C Variable cost per unit
• S Order processing cost per lot
• I Annual carrying cost rate
• OC Total order processing costs per year
• CC Total carrying costs per year
• TC Annual total of all relevant costs

10
Inventory ModellingQuantity

• Relevant Costs
• Order processing (setup) costs
• OC (D/Q) S
• Carrying costs
• CC (Q/2) IC
• So total annual relevant costs are
• TC OC CC
• (D/Q) S (Q/2) IC
• See graph (also Exhibit S11-2)

11
Exhibit S11-2
Graph of Annual Inventory Cost and Lot Sizes
Total annual cost
EOQ "zone"
Minimum cost
Annual cost
Annual carrying cost
Annual order-processing cost
EOQ
Lot sizes
11-11
12
Inventory ModellingQuantity

• So, Whats the Best Value of Q ?
• Recall
• TC (D/Q) S (Q/2) IC
• TC is minimized where Q EOQ
• Provides optimal tradeoff between ordering and
  carrying costs
• Examples
• Exhibit copy paper
• Gaming Company

13
Example - EOQ for Copy Paper
D 20 reams / week 1040 reams / year
C 2 / ream
I 30 / year
S 30 / order
2 DS
EOQ
IC
2(1040)(30)

.30(2)
322 reams
11-7
14
Inventory ModellingTiming

• Now, When Should the Order be Placed?
• Recall Exhibit S11-1
• More realistic view given in Exhibit 10-21
• Notation
• ROP Reorder point (i.e., the timing variable)
• LT Expected ead time
• SD Standard deviation of demand rate
• DLT Expected demand during lead time
• SS Safety (buffer) stock
• Z Standard normal score for service level

15
Exhibit 10-21
ROP Replenishment Cycles - Radiator Cap
Stock level
Average demand D
Order Quantity, Q
Order Quantity, Q
ROP
Dem. dur. lead time, DLT
Safety stock, SS
0
Backordered
Average LT
Avg LT
Actual LT
Order
Receipt
Actual LT
Order
Receipt
12
1
2
3
4
5
6
7
8
9
10
11
13
Time periods
10-13
16
Inventory ModelingTiming

• Then, simply
• ROP DLT SS
• Note
• Accommodates variation in demand rate
• Safety stock
• Arbitrarily estimated
• Estimated statistically (via normal distribution)

17
Example - ROP for Copy Paper
D 20 reams / week LT 3 weeks DLT 20 x 3
60 SS 50 reams
ROP DLT SS
60 50 110 reams
10-14
18
Example - Safety Stock for Copy Paper
D 20 reams / week SD 6 reams / week LT 3
weeks Desired service level 95
2
SS Z LT (SD)
1.65 3 (6) 17 reams
2
10-15
19
Inventory ModellingQuantity Timing

• Inventory Levels Affected By
• Order processing costs
• Carrying costs
• Lead times
• Variability in demand rates and lead times
• Above are the Reasons for Inventory
• Changes in these factors affect
• Lot sizes
• Inventory levels
• Hence, improve flows by addressing these

20
Exhibit 11-8
EOQ Sensitivity to Inventory Factors
A. Classical EOQ Graph
B. Higher I / Reduced S
Total annual cost
Total annual cost
Annual carrying cost
Annual carrying cost
Annual cost
Annual order-processing cost
Annual order-processing cost
Lot sizes
Lot sizes
EOQ
EOQ
11-9
21
Exhibit 11-1
Quick Changeover, Setup, and Readiness
Changeover avoidance 1. A dedicated,
single-purpose process Be-ready improvements -
Developed by teams of associates 2.
External (off-line) steps - while process is
active 3. Setup implements close, clean, in
top condition, ready 4. In the case of
costly equipment, trained crew and clockwork
precision
11-1
22
Exhibit 11-1
Quick Changeover, Setup, and Readiness
Modifications - Technical assistance on
improvement team 5. Eliminate/immobilize
unneeded devices and adjusters
6. Add positioners and locators 7.
Simplify/standardize equipment, fixtures,
fasteners, accessories 8. Employ
externally-loadable magazines and
work-element holders
11-2
23
Exhibit 11-4
Fasteners for Quick Installation
Insert bolt here
Tighten bolt here
slide
slide
DahmaHole
Cut-offthread
U-washer
11-3
24
Exhibit 11-5
Lot Size and Throughput Time
Station I
Station II
Station III
2 min. per piece
2 min. for the lot
2 min. per piece
Final Customer
1 min.
1 min.
1 min.
Lot Size 1
Lot Size 10
Lot Size 6 pieces
11-4