S12-1

1
1. Inventory Management - 60 Min2. JIT - 30
Min3. Case Discussion - 30 Min4. Final
Problems - 60 Min
Agenda
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What is Inventory?

• Types of Inventory
• Raw material
• Work-in-progress
• Maintenance/repair/operating supply
• Finished goods

Functions of inventory?
3
The Functions of Inventory

• To protect against lost sales - stock-outs
• To decouple or separate various parts of the
  production process
• To provide a stock of goods that will provide a
  selection for customers
• To take advantage of quantity discounts
• To hedge against inflation and upward price
  changes

4
ABC Analysis

• Divides on-hand inventory into 3 classes
• A class, B class, C class
• Basis is usually annual volume
• volume Annual demand x Unit cost
• Policies based on ABC analysis
• Develop class A suppliers more
• Give tighter physical control of A items
• Forecast A items more carefully

5
Classifying Items as ABC
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Inventory Costs

• Holding costs - associated with holding or
  carrying inventory over time
• Ordering costs - associated with costs of placing
  order and receiving goods
• Setup costs - cost to prepare a machine or
  process for manufacturing an order
• Excess at EOL - mark down, scrap
• Stock-out costs - a negative cost of inventory.

7
Inventory Models

• Fixed order-quantity models
• Economic order quantity
• Production order quantity
• Quantity discount
• Probabilistic models
• Fixed order-period models

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EOQ ModelHow Much to Order?
Annual Cost
Total Cost Curve
Holding Cost Curve
Order (Setup) Cost Curve
Order Quantity
Optimal Order Quantity (Q)
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EOQ Model Equations
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EOQ ModelWhen To Order
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Production Order Quantity Model

• Answers how much to order and when to order
• Allows partial receipt of material
• Other EOQ assumptions apply
• Suited for production environment
• Material produced, used immediately
• Provides production lot size
• Lower holding cost than EOQ model

12
POQ Model Inventory Levels
13
POQ Model Inventory Levels
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POQ Model Equations
2DS



Q
Optimal Order Quantity
(
)
p
d
-
H
1
p
)
(

1
Maximum inventory level

Q
D Demand per year S Setup cost H Holding
cost d Demand per day p Production per day
D
S


Setup Cost
Q
(
)
d

-
1
Holding Cost
0.5 H Q
p
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Quantity Discount Model

• Answers how much to order when to order
• Allows quantity discounts
• Reduced price when item is purchased in larger
  quantities
• Other EOQ assumptions apply
• Trade-off is between lower price increased
  holding cost

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Quantity Discount Model
Total cost Setup cost Holding cost product
cost TC (D/Q)(S) (QH)/2 PD D Annual
Demand Q Order Quantity S Set or order
cost H Holding cost P Price
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Quantity Discount Model
TC (D/Q)(S) (QH)/2 PD
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Probabilistic Models

• Answer how much when to order
• Considers Stock-out Costs
• Allow demand to vary
• Follows normal distribution
• Other EOQ assumptions apply
• Consider service level safety stock
• Service level 1 - Probability of stockout
• Higher service level means more safety stock
• More safety stock means higher ROP

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Probabilistic Model Example
1.
2.
1. Stock out 10(.2)(40)6
20(.1)(40)(6) 960 2. Stock out
10(.1)(40)6 240
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Fixed Period Model

• Answers how much to order
• Orders placed at fixed intervals
• Inventory brought up to target amount
• Amount ordered varies
• No continuous inventory count
• Possibility of stockout between intervals
• Useful when vendors visit routinely
• Example PG representative calls every 2 weeks

21
Fixed Period ModelWhen to Order?
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Introductory Quotation

• Waste is anything other than the minimum amount
  of equipment, materials, parts, space, and
  workers time, which are absolutely essential to
  add value to the product.
• Shoichiro Toyoda President, Toyota

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What is Just-in-Time?

• Management philosophy of continuous and forced
  problem solving
• Supplies and components are pulled through
  system to arrive where they are needed when they
  are needed.
• JIT
• Attacks waste
• Anything not adding value to the product (From
  the customers perspective)
• Exposes problems and bottlenecks caused by
  variability
• Achieves streamlined production

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Types of Waste

• Overproduction
• Waiting
• Transportation
• Inefficient processing
• Inventory
• Unnecessary motion
• Product defects

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Push versus Pull

• Push system material is pushed into downstream
  workstations regardless of whether resources are
  available
• Pull system material is pulled to a workstation
  just as it is needed

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Results

• Queue and delay reduction, speeds throughput,
  frees assets, and wins orders
• Quality improvement, reduces waste and wins
  orders
• Cost reductions, increases margin or reduces
  selling price
• Variability reductions in the workplace, reduces
  waste and wins orders
• Rework reduction, reduces waste and wins orders

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Suppliers

• Incoming material and finished goods involve
  waste
• Buyer and supplier form JIT partnerships
• JIT partnerships eliminate
• Unnecessary activities
• In-plant inventory
• In-transit inventory
• Poor suppliers

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Characteristics of JIT Partnerships Suppliers

• Few
• Nearby
• Repeat business
• Analysis to enable desirable suppliers to become
  or stay price competitive
• Competitive bidding mostly limited to new
  purchases
• Suppliers encouraged to extend JIT to their
  suppliers

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Characteristics of JIT Partnerships Quantities

• Steady output rate
• Frequent deliveries in small-lot quantities
• Long term contract agreements
• Minimal paperwork
• Delivery quantities fixed for whole contract term
• Little or no permissible overage or underage
• Suppliers package in exact quantities
• Suppliers reduce their production lot sizes or
  store unreleased material

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Characteristics of JIT Partnerships Quality

• Help suppliers to meet quality requirements
• Close relationship between buyers and suppliers
  quality assurance people

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Characteristics of JIT Partnerships Shipping

• Scheduling of inbound freight
• Gain control by use of company-owned or contract
  shipping and warehousing

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Goals of JIT partnerships

• Elimination of unnecessary activities
• Elimination (reduction) of in-plant inventory
• Elimination (reduction) of in-transit inventory
• Elimination of poor suppliers

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Layout

• JIT objective Reduce movement of people and
  material
• Movement is waste!
• JIT requires
• Work cells for product families
• Moveable or changeable machines
• Short distances
• Little space for inventory
• Delivery directly to work areas

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Work Cell versus Process Layout
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Inventory

• Traditional inventory exists in case problems
  arise
• JIT objective Eliminate inventory
• JIT requires
• Small lot sizes
• Low setup time
• Containers for fixed number of parts
• JIT inventory Minimum inventory to keep system
  running

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JIT Scheduling Tactics

• Communicate the schedule to suppliers
• Make level schedules
• Freeze part of the schedule
• Perform to schedule
• Seek one-piece-make and one-piece-move
• Eliminate waste
• Produce in small lots
• Use kanbans
• Make each operation produce a perfect part

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Kanban

• Japanese word for card
• Pronounced kahn-bahn (not can-ban)
• Authorizes production from downstream operations
• Pulls material through plant
• May be a card, flag, verbal signal etc.
• Used often with fixed-size containers
• Add or remove containers to change production rate

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Preventive Maintenance (PM)

• All activities involved in keeping equipment in
  working order
• Done to prevent failure
• JIT requires
• Scheduled daily PM
• Operator performs PM
• Knows machines
• Responsible for product quality

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Rear Front Assembly Flow
Rivet Battens
Milling
B - 2,500
Plywood Stock
B - 1,500
Painting
Mount Hinges
B - 1,500
B - 500
F/R Stock
Insert Studs
Glue App.
Tent
B - 1,000
Final Assem.