Shri Vile Parle Kelvani Mandals Mithibai College of Arts,, Chauhan Institute of Science & Amrutben Jivanlal college

of Commerce and conomics Vile Parle !"est# Mumbai $%%%&'

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Shri Vile Parle Kelvani Mandals Mithibai College of Arts,, Chauhan Institute of Science & Amrutben Jivanlal college of Commerce and conomics Vile Parle !"est# Mumbai $%%%&'

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This is to certify that the undersigned have assessed and evaluated the project on Material (e<uirement Planning0 submitted by A=shita Shett>, student of M.Com. Part - I !emester I" for the academic year #$%&-%'. This project is original to the best of our (no)ledge and has been accepted for Internal *ssessment. +ame , !ignature of Internal -.aminer

+ame , !ignature of -.ternal -.aminer

P(I+CIPA, 3(6 3626 /A3AKA(I College !eal

Shri Vile Parle Kelvani Mandals Mithibai College of Arts,, Chauhan Institute of Science & Amrutben Jivanlal college of Commerce and conomics Vile Parle !"est# Mumbai $%%%&'

3 C,A(A*I)+ 24 *1 S*.3 +*
I/ *(shita !hetty/ student of M.Com. Part I"/ 0oll +o.1 '#/ hereby declare that the project titled ?Material (e<uirement Planning2 for the subject Strategic Management submitted by me for !emester I of the academic year #$%&-%'/ is based on actual )or( carried out by me under the guidance and supervision of P()86 +A( S1 S.K1A+I I further state that this )or( is original and not submitted any)here else for any e.amination.

Place1 Mumbai

3ate1 %&4$54#$%&

+ame , !ignature of !tudent1 *(shita !hetty

ACK+)", 3/ M +*

6irst and foremost I see( the blessings of my beloved * AC1 (S )ho (eep lot of e.pectations on me and sho)ering their infinite love for ever.

I )ould li(e to than( 7niversity of Mumbai for giving me this opportunity of ta(ing such a challenging project/ )hich has enhanced my (no)ledge about the Material (e<uirement Planning

I sho) my gratitude to the Princi@al, Vice Princi@al and Coordinator of Mithibai College )ho gave me a lot of moral support and under their guidance I )as successfully able to complete my project.

*nd )ith deep sense of gratitude I )ould li(e to than( Prof6 +aresh Su=hani for his immense help and co-operation.

A C.*IV S.MMA(4
Production control systems often sound dauntingly technical and complicated. 8o)ever/ the need for a system li(e M0P can be e.plained )ith a simple analogy !lac( et al. %559". Imagine that in ' )ee(s time you are hosting a party for around '$ guests. :ou have decided to provide beverages/ and soft drin(s plus sand)iches and savory snac(s. Putting all of this together on the night )ould involve some planning and production control. 6irst/ you )ould need some simple estimates of your guests; preferences for hot or cold beverages/ co(e/pepsi/ fruit juice etc. <efore shopping for these items/ you )ould ta(e into account )hat you already had in stoc( in the house. *gain/ shopping for the food at the party )ould involve identifying from your food recipes )hat ingredients )ere re=uired to ma(e up the various dishes subtracting )hat you already have from your shopping list". Then as )ell as specifying the =uantity of your needs for materials and ingredients against li(ely demand/ you also need to thin( about the se=uencing of the coo(ing and preparation. :ou can;t do everything on the night/ so you might choose for e.ample to do some of the coo(ing a )ee( before and then free>e the results. This might mean shopping for some ingredients first/ leaving others until later. In short/ to organi>e a party/ you need to plan and control your ac=uisition of materials and your process of production. :ou need to ma(e decisions about the =uantity and timing of the purchasing and production of different ingredients/ based on forecasts of the numbers coming to the party and your recipes for ma(ing the finished products. *lthough a production process is much more comple. than organi>ing a party/ production control systems li(e M0P are designed to address similar problems. It brea(s activities into a front end/ an engine/ and a bac( end. The front end produces the master production schedule MP!" the e=uivalent of food and drin( at the party". The MP! plans the production of the goods offered to customers over a given planning hori>on. The bac( end handles factory scheduling and manages materials from suppliers this e=uates )ith bringing home the shopping and planning coo(ing and preparation". Material re=uirements planning M0P" is the core of the engine. It ta(es a period-by-period set of MP! re=uirements and in the )ay our food recipes produce shopping lists" generates a related set of component and ra) materials re=uirements. M0P is the detailed plan for the components re=uired to enable the MP! to be fulfilled. *s )ell as the MP!/ M0P has t)o other inputs. * bill of material <?M" sho)s/ for each part number/ the associated component part numbers. Thus for a dining room table/ the <?M )ould sho) that a top assembly and four legs )ere re=uired. The <?M for the top assembly )ould sho) that t)o end panels/ a sub frame/ and t)o leaf inserts )ere re=uired. The <?M for the legs )ould sho) that solid timber stoc( and associated hard)are (its scre)s and castors" )ere re=uired. Inventory status data the third input into M0P" )ould indicate ho) many legs or leaf inserts/ etc./ )ere on hand/ ho) many of those )ere already committed for production/ and ho)

many hard)are (its had been ordered. This )ould then allo) the re=uirements for further table production to be )or(ed out. M0P data thus ma(e it possible to generate a time-phased re=uirement record for any part number. This data can also drive the detailed capacity planning modules. This is a massive computational tas(/ only made possible by the use of modern computers.

( S A(C1 M *1)3),)/4

)bBectives of the research5 To study material re=uirement planning Secondar> 3ata5 The secondary data has been collected from various reference boo(s and )ebsites/ )hich have been mentioned in the bibliography at the end of the project ,imitations of the (esearch5 Problems of selection of right information available from various sources. Sco@e of the (esearch5 The main objective of the project is to understand in depth about material re=uirement planning.

I+3 A

Sr6 +o6 : 7 ; $ & ' E

PA(*IC.,A(S Introduction Conce@t Case Stud> : Case Stud> 7 +eC & 2log Articles Conclusions & (ecommendation 2ibliogra@h>

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I+*()3.C*I)+

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Material re=uirement planning also (no)n as material re=uirement planning M0P" is a production planning and inventory control system used to manage manufacturing processes. Most M0P systems are soft)are-based/ )hile it is possible to conduct M0P by hand as )ell. !pecifically/ it is a procedure for planning and controlling the ra) material/ purchased parts/ and )or( in progress @IP" inventories re=uired in manufacturing a product. M0P is designed to ans)er three =uestions1 what is needed/ how much is needed/ and when is it needed. M0P calculates and maintains an optimum manufacturing plan based on master production schedules/ sales forecasts/ inventory status/ open orders and bills of material. If properly implemented/ it )ill reduce cash flo) and increase profitability. M0P )ill provide you )ith the ability to be pro-active rather than re-active in the management of your inventory levels and material flo).

76 3 8I+I*I)+ &

AP,A+A*I)+

Material re=uirements planning M0P" is a type of planning focused on the management of processes in manufacturing industries. M0P loo(s at the availability of materials for production and other related metrics.2 M0P is formal computeri>ed approach to inventory planning/ manufacturing scheduling/ supplier scheduling/ and overall corporate planning. The material re=uirements planning M0P" system provides the user )ith information about timing )hen to order" and =uantity ho) much to order"/ generates ne) orders/ and reschedules e.isting orders as necessary to meet the changing re=uirements of customers and manufacturing. The system is driven by change and constantly recalculates material re=uirements based on actual forecast orders. It ma(es
1

adjustments for possible problems prior to their occurrence/ as opposed to traditional control systems/ )hich loo(ed at more historical demand and reacted to e.isting problems. The logic of the material re=uirements planning system is based on the principle of dependent demand/ a term describing the direct relationship bet)een demand for one item and demand for a higher-level assembly part or component. 6or e.ample/ the demand for the number of )heel assemblies on a bicycle is directly related to the number of bicycles planned for productionA further/ the demand for tires is directly dependent on the demand for )heel assemblies. In most manufacturing businesses/ the bul( of the ra) material and in-process inventories are subject to dependent demand. 3ependent demand =uantities are calculated/ )hile independent demand items are forecast. Independent demand is unrelated to a higher-level item/ )hich the company manufactures/ or stoc(s. Benerally/ independent demand items are carried in finished goods inventory and subject to uncertain end customer demand. !pare parts or replacement re=uirements for a drill press are an e.ample of an independent demand item. ?ne of the aspects of material re=uirements planning is inventory control. This type of internal inventory handling is just one of a set of methodologies/ tools and resources that corporate e.ecutives and other leaders use in order to balance the availability of resources )ith the necessity to maintain lean inventories and avoid overstoc(ing. !marter purchases and more oversight of materials handling in the supply chain in general can lead to increased profits for a business and more efficient processes that re=uire less additional management and labor. <y use of the computer/ material re=uirements planning is able to manipulate massive amounts of data to (eep schedules up to date and priorities in order. The technological advances in computing and processing po)er/ the benefits of on-line capabilities/ and reduction in computing cost ma(e computeri>ed manufacturing planning and control systems such as material re=uirements planning po)erful tools in operating modern manufacturing systems productively.

;6 1IS*)(4
Material re=uirements planning M0P" soft)are dates bac( to the %59$;s. This timeline notes important dates in the evolution of M0P systems. ,A* :D&%F S 5
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Mayt ag devel ops a syste m for storin g d asse mbly mode l sched ule a limite

2 )( + their and gni>ed time-series as an Inventory authority in operations management and provides certification Control !ociety several months in for soft)are professionals. *PIC!". The advance. 8o)ever/ society is run as a the bill of materials non-profit <?M" has to and be helps promote maintained and
A(, 4

the inventoried on tape. comi are the first These ng steps to)ard maintaining electronic copies of inventory <?Ms. and

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on a C9$ tapedrum. @ith this syste m/ Mayt ag can proje ct

)ave 0ecogni>in of the need g soft for an )are. educational In and futur professional e society/ years I<M / finances the *PI creation of C! the beco *merican mes reco Production

In Doseph ?rlic(y

%5C$/

implements the g re=uirements planning M0P" system at DI Case 0acine/ in first manufacturin

@isconsin. The follo)ing year/ Thomas invents <ill the of Bene

Materials rs brea( do)n a bill Processor of materials on a <?MP" computer at for the I<M. first @ith time. <?MP this )ould become the invention/ foundation manufacture pac(aged for M0P

soft)are offerings.

:D'&5 * 1 2 I(* 1 ) 8 M(P

Doseph ?rlic(y and Bene Thomas build upon <?MP to include a production schedule and purchasing plan. *lthough M0P is a major brea(through in the planning of materials/ programmers are limited to only EF of memory. 3evelopers recogni>e the need for capacity planning but the computing po)er just is not there yet.

:DE%F S 5 APICS C (. SA3

S 8 )(

M(P

*PIC! begins a national program of M0P soft)are education and publicity. 6rom %5G% to %5G9/ the number of manufacturing companies running M0P soft)are increases from %9$ companies to over G$$. 3uring that time/ M0P adds sales and operations planning/ master production scheduling/ and capacity planning to become Hclosed loopH M0P.

:DE&5 M(P /)

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Materials Management !ystems later !oft)are International" launches the first commercial net change M0P soft)are in %5G9. In the same year/ Doseph ?rlic(y publishes Materials Production Planning outlining )hat an M0P system contains and ho) it should )or(. This is the prelude to M0P soft)are coming to the masses. !uggested by1 Christopher Bray

:DEG5 M(P M )V

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Minicomputers

arrive

and

offer

manufacturers

cheaper

computing options )ith more processing po)er. I<M comes out )ith M*PIC! for their !ystem4&' and !ystem4&E minicomputer lines. *round the same time/ soft)are developer *!F comes out )ith Manman for 8e)lett-Pac(ard;s minicomputers. Manman is a massive success and *!F =uic(ly comes to dominate the manufacturing systems mar(et.

:DG%5 MA +. 8 AC* .(I +/ (

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@hile M0P proved valuable/ manufacturers found that fre=uent changes in sales forecasts )ere s(e)ing their ability to plan efficiently. Production often failed to align )ith demand. * ne) class of manufacturing soft)are/ Manufacturing 0esource Planning M0P II" emerged to incorporate more sophisticated capacity constraints by consolidating materials planning )ith capacity information related to finance/ plant/ and people.

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-liyahu Boldratt publishes HThe Boal/H a fictional tale of a plant manufacturer that is ordered to turn around an unreliable and unprofitable plant. Boldratt turns the plant around by identifying and removing bottlenec(s in production to ensure a continuous flo) in the manufacturing process. The Boal is thought of as a seminal )or( introducing the theory of constraints and continuous improvement to the 7!. The boo( =uestions )hether the computing po)er of M0P is enough to run operations.

:DG'5 SAP

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Iong a presence in the -uropean soft)are mar(et/ !*P enters the +orth *merican mar(et. !*P becomes a force )ith their 04# mainframe M0P offering in a time )hen mainframe soft)are sales are stalling and the game is changing to)ard PCs and client4server technology. !*P reports strong sales of 04# and =uic(ly gains a leadership position. Many companies follo) the client server approach.

:DD%5 (P S "A, ,) "S M(P

0esearch firm Bartner coins the term enterprise resource planning -0P"/ )hich envelops M0P and M0P II/ as )ell as a range of other

applications/ including1 product lifecycle management/ supply chain management/ logistics/ customer management/ order processing/ financials/ and human resources. Today/ the -0P remains the broadest descriptor of enterprise soft)are applications.

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3espite strong sales of their mainframe 04# soft)are/ !*P decides to go the )ay of client4server technology as they release 04&. !*P;s 04& release is a fundamental change in the )ay soft)are is )ritten and handled. Most soft)are companies follo) suit and develop their soft)are for the client4server platform.

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Increased computing po)er enables

innovators

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Technologies and Manugistics to introduce *dvanced Planning , !cheduling *P!". *P! leverages Hin-memory processingH to run sophisticated planning algorithms that account for supply chain constraints/ in addition to traditional enterprise planning. @ildly successful IP?s for HIT@?H and HM*+7H are follo)ed by manufacturing soft)are vendors People!oft and D3 -d)ards ac=uiring smaller *P! vendors 0ed Pepper and +umetri./ respectively.

,A* :DD%F S 5 M(P M

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0eali>ing that number crunching and demand forecasting can only ta(e you so far/ lean manufacturing soft)are starts to gain in popularity. 6actory Iogic founded %55E" and DCIT 3emand 6lo) technology start to gain )ider acceptance. The intense focus on building to demand forecasts begins to give )ay to building just in time DIT".

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The introduction of the )eb bro)ser and the dramatic gro)th of the Internet led to H)eb-based computing.H In this model/ both the data and the manufacturing soft)are code are hosted in a data center/ )hile end users access applications through their )eb bro)sers. The dramatic improvement in accessibility/ cost of o)nership/ and ease-of-use forced manufacturing soft)are vendors to rethin(/ and often redevelop/ their products/ much li(e they had to )hen client4server replaced mainframes as the computing model of choice.

7%%:5 (P MA ( K

C,I + S

@ith year #$$$ spending coming to an end and the global economy receding/ the -0P mar(et suffers. *ll major -0P vendors report a decline in sales and share prices decline precipitously. @hile a large mar(et remains/ it is clear that the glory days of -0P have past and the

mar(et must begin to consolidate.

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Michigan-based manufacturing soft)are vendor Ple. !ystems =uic(ly ma(es use of the ne) )eb architecture and is the first vendor to offer manufacturing soft)are as a service. The company starts )ith point solutions and )or(s its )ay up to a full suite -0P. Many doubted )hether this model could )or( for manufacturing soft)are. Ple. has proven it is possible.

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6rom #$$# to #$%$/ Infor goes on a massive ac=uisition binge rolling up an astounding &$ different soft)are companies. +otable purchases include M*PIC! #$$9" and !!* Blobal Technologies #$$C"/ a similar Hroll-upH consolidator. The ac=uisition strea( consolidates much of the manufacturing soft)are mar(et outside of !*P and ?racle.

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More manufacturing soft)are vendors follo) Ple.;s lead and moved their manufacturing soft)are to the cloud. 6our notable vendors added a cloud option to their portfolio1 !*P <usiness <y3esign/

-picor -.press/ +et!uite Manufacturing -dition/ and Infor !yteIine. *s the cloud gains in adoption/ more are li(ely to follo) suit.

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@here )ill M0P soft)are head ne.tJ !ince the %5C$;s/ M0P has been about trying to predict demand more accurately. 0efinements in the soft)are;s capabilities focused primarily on calculating constraints more accurately. The future of M0P )ill be about developing more responsiveness to demand rather than simply trying to predict it. The soft)are )ill evolve to meet need of manufacturers to plan their materials re=uirements in a dynamic )ay.
8

$6 SC)P )8 MA* (IA, ( S).(C P,A++I+/ I+ MA+.8AC*.(I+/

The basic functions of an M0P system include - inventory control/ bill of material processing/ and elementary scheduling. M0P helps organi>ations to maintain lo) inventory levels. It is used to plan manufacturing/ purchasing and delivering activities. HManufacturing organi>ations/ )hatever their products/ face the same daily practical problem that customers )ant products to be available in a shorter time than it ta(es to ma(e them. This means that some level of planning is re=uired.H Companies need to control the types and =uantities of materials they purchase/ plan )hich products are to be produced and in )hat =uantities and ensure that they are able to meet current and future customer demand/ all at the lo)est possible cost. Ma(ing a bad decision in any of these areas )ill ma(e the company lose money. * fe) e.amples are given belo)1 %K If a company purchases insufficient =uantities of an item used in manufacturing or the )rong item" it may be unable to meet contract obligations to supply products on time. #K If a company purchases e.cessive =uantities of an item/ money is )asted - the e.cess =uantity ties up cash )hile it remains as stoc( and may never even be used at all. &K <eginning production of an order at the )rong time can cause customer deadlines to be missed. M0P is a tool to deal )ith these problems. It provides ans)ers for several =uestions1 'K @hat items are re=uiredJ 9K 8o) many are re=uiredJ CK @hen are they re=uiredJ M0P can be applied both to items that are purchased from outside suppliers and to subassemblies/ produced internally/ that are components of more comple. items. The data that must be considered include1

%K The end item or items" being created. This is sometimes called Independent 3emand/ or Ievel H$H on <?M <ill of materials". #K 8o) much is re=uired at a time. &K @hen the =uantities are re=uired to meet demand. 'K !helf life of stored materials. 9K Inventory status records/ records of net materials available for use already in stoc( on hand" and materials on order from suppliers. CK <ills of materials/ details of the materials/ components and sub-assemblies re=uired to ma(e each product. GK Planning 3ata/ this includes all the restraints and directions to produce the end items. This includes such items as/ 0outings/ Iabor and Machine !tandards/ Luality and Testing !tandards/ Pull4@or( Cell and Push commands/ Iot si>ing techni=ues i.e. 6i.ed Iot !i>e/ Iot-6or-Iot/ -conomic ?rder Luantity"/ !crap Percentages/ and other inputs.

)ut@uts
There are t)o outputs and a variety of messages4reports1 %K ?utput % is the H0ecommended Production !cheduleH )hich lays out a detailed schedule of the re=uired minimum start and completion dates/ )ith =uantities/ for each step of the 0outing and <ill of Material re=uired to satisfy the demand from the Master Production !chedule MP!". #K ?utput # is the H0ecommended Purchasing !cheduleH. This lays out both the dates that the purchased items should be received into the facility *+3 the dates that the Purchase orders/ or <lan(et ?rder 0elease should occur to match the production schedules. Messages and 0eports1 &K Purchase orders/ an order to a supplier to provide materials. 'K 0eschedule notices. These recommend cancelling/ increasing/ delaying or speeding up e.isting orders.

10

&6 )2J C*IV S )8 M(P

Material re=uirement planning is processed )hich production planning and inventory control system/ and its three objectives are as follo)s1 %K Primary objective is to ensure that material and components are available for production/ and final products are ready for dispatch. #K *nother primary objective is to not only maintain minimum inventory but also ensure right =uantity of material is available at the right time to produce right =uantity of final products. &K *nother primary objective is to ensure planning of all manufacturing processes/ this scheduling of different job )or(s as to minimi>e or remove any (ind of idle time for machine and )or(ers.

11

C)+C P*

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The earliest mechanism used to manage inventory )as the reorder-point4reorder-=uantity system. 7nder the reorder-point system/ the depletion in the supply of each inventory item )as monitored and a replenishment order )as issued )henever the supply dropped to a predetermined =uantity the reorder point ?rlic(y/ %5G9". This system suffered from t)o main difficulties. ?ne )as the enormous tas( of setting up schedules/ (eeping trac( of large numbers of parts and components/ and coping )ith schedule and order changes. The other )as a lac( of differentiation bet)een independent demand end-items or finished goods" and dependent demand ra) materials/ subassemblies/ components". 3uring the %5C$s in the 7nited !tates/ led by computer manufacturers - in particular/ I<M -there )as a )ave of )idespread use of computers in business. *s a result/ a ne) manufacturing planning and control system called material re=uirements planning M0P" )as disseminated among *merican manufacturers. Doseph ?rlic(y/ one of the major M0P innovators/ defined M0P as follo)ing1 * material re=uirements planning M0P" system/ narro)ly defined/ consists of a set of logically related procedures/ decision rules/ and records alternatively/ records may be vie)ed as inputs to the system" designed to translate a master production schedule into time-phased net re=uirements/ and the planned coverage of such re=uirements/ for each component inventory item needed to implement this schedule. In other )ords/ M0P is a computer-based information system that translates master schedule re=uirements for end items into time-phased re=uirements for sub-assemblies/ components/ and ra) materials2. It )or(s bac()ard from the due date using lead time and other information to determine )hen and ho) much to order. The main purposes of a basic M0P system are to control inventory levels/ assign operating priorities for items/ and plan capacity to load the production system.
12

2) 2ASIC P(I+CIP, S )8 MA* (IA, ( S).(C

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The initials M0P stand for Material 0e=uirements Planning or Manufacturing 0esource Planning. M0P is a control system for inventory and production planning. *n M0P system must accomplish three goals. The first is to ensure that materials are available for production and products are available for consumers )hen re=uired. The M0P also needs to (eep inventory levels as lo) as possible. 6inally/ the M0P must plan delivery schedules/ manufacturing activities and purchasing activities. I+V
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%K 6rom the point of vie) of a business/ finished products sitting in inventory are a )aste of money/ because they cost money to store. Ideally the business should be able to manufacture products and then immediately transfer them to the customer. M0P )or(s to (eep inventory levels as lo) as possible by optimi>ing manufacturing processes on the basis of empirically derived (no)ledge about ho) long manufacturing processes ta(e. I+P .*S #K !everal types of data and information need to be fed into the M0P process. :ou need to (no) the type of end item that needs to be created/ as )ell as ho) many of these items you re=uire at a particular point in time. In addition to this/ you need to consider the Hshelf lifeH of the item. *ssemble a bill of materials/ )hich includes details about the components/ materials and subitems needed to ma(e each item. ).*P .*S &K ?nce the M0P system processes all of the input/ you can produce t)o primary forms of output. The first output consists of the 0ecommended Production !chedule. This describes the minimum beginning and finishing dates of each step in the manufacturing process. It also includes the bill of materials re=uired for each manufacturing step. The second major output is the 0ecommended Purchasing !chedule. This describes the dates on )hich the factory should receive the inputs to the manufacturing process and the dates that the purchase orders should be made.

13

&" M(P P)SI*I)+ I+ ( ,A*I)+ *) )*1 ( 8.+C*I)+S M0P is not a stand-alone system. It rather coordinates )ith other activities of the operation process in order to foster strength of the planning and controlling function. 6igure %.$ demonstrates ho) M0P fits into the flo) of the other operational activities

Product and service design Process planning and facility layout

Strategic apacity Planning !"ong#range capacity re$uire%ents)

&ggregate Planning !'e%and for aggregated end#ite%s)

'(S&))*+)&,(-. /aster sc0edule !'e%and for specific end#ti%es)

*oug0 ut sc0edule) apacity Planning !1alidation %aster

/aster Production Sc0edule!Production re$uire%ents for end ti%e)

/&S,+* S 2+'3"(.) P*- +SS

/aterial *e$uire%ents Planning ! /*P) 1(& 4"-&' *+P-*,5

'etailed apacity *e$uire%ents Planning !S0ort# range capacity re$uire%ents) *e$uire%ents Sc0edules ! 6or ra7 %aterials8 su9asse%9lies8 co%ponents)

Sc0eduling

8ig :6 %5 )@eration floC using M(P *s can be seen from 6igure %.$/ based on the master production schedule/ )hich specifies the production re=uirements for each end-item/ M0P calculates the re=uirements schedules for dependant items - ra) materials/ subassemblies and components - )hich are needed in order to
14

produce the re=uired =uantity of each end-item. @ithout the input from the master production schedule/ M0P could not operateA and )ithout another e.tended step )hich is Hdetailed capacity re=uirements planningH/ M0P output could not be validated and used to determine the dependent demands.

'" I+V +*)(4 MA+A/ M +*

%K -ffective inventory management is all about (no)ing )hat is on hand/ )here it is in use/ and ho) much finished product results. #K Inventory management is the process of efficiently overseeing the constant flo) of units into and out of an e.isting inventory. This process usually involves controlling the transfer in of units in order to prevent the inventory from becoming too high/ or d)indling to levels that could put the operation of the company into jeopardy. Competent inventory management also see(s to control

15

the costs associated )ith the inventory/ both from the perspective of the total value of the goods included and the ta. burden generated by the cumulative value of the inventory. %K <alancing the various tas(s of inventory management means paying attention to three (ey aspects of any inventory. The first aspect has to do )ith time. In terms of materials ac=uired for inclusion in the total inventory/ this means understanding ho) long it ta(es for a supplier to process an order and e.ecute a delivery. Inventory management also demands that a solid understanding of ho) long it )ill ta(e for those materials to transfer out of the inventory be established. Fno)ing these t)o important lead times ma(es it possible to (no) )hen to place an order and ho) many units must be ordered to (eep production running smoothly. #K Calculating )hat is (no)n as buffer stoc( is also (ey to effective inventory management. -ssentially/ buffer stoc( is additional units above and beyond the minimum number re=uired to maintain production levels. 6or e.ample/ the manager may determine that it )ould be a good idea to (eep one or t)o e.tra units of a given machine part on hand/ just in case an emergency situation arises or one of the units proves to be defective once installed. Creating this cushion or buffer helps to minimi>e the chance for production to be interrupted due to a lac( of essential parts in the operation supply inventory. &K Inventory management is not limited to documenting the delivery of ra) materials and the movement of those materials into operational process. The movement of those materials as they go through the various stages of the operation is also important. Typically (no)n as a goods or )or( in progress inventory/ trac(ing materials as they are used to create finished goods also helps to identify the need to adjust ordering amounts before the ra) materials inventory gets dangerously lo) or is inflated to an unfavorable level. 'K 6inally/ inventory management has to do )ith (eeping accurate records of finished goods that are ready for shipment. This often means posting the production of ne)ly completed goods to the inventory totals as )ell as subtracting the most recent shipments of finished goods to buyers. @hen the company has a return policy in place/ there is usually a sub-category contained in the finished goods inventory to account for any returned goods that are reclassified as refurbished or second grade =uality. *ccurately maintaining figures on the finished goods inventory ma(es it possible to =uic(ly convey information to sales personnel as to )hat is available and ready for shipment at any given time.

16

%K In addition to maintaining control of the volume and movement of various inventories/ inventory management also ma(es it possible to prepare accurate records that are used for accessing any ta.es due on each inventory type. @ithout precise data regarding unit volumes )ithin each phase of the overall operation/ the company cannot accurately calculate the ta. amounts. This could lead to underpaying the ta.es due and possibly incurring stiff penalties in the event of an independent audit.

$6:# ' PAI+, SS S* PS *) I+V +*)(4 MA+A+/ M +*

Inventory is the conse=uence of many different strategic and tactical choices across an organi>ation/ and Inventory optimi>ation is the science of ma(ing these choices more rational/ profitable/ and data driven. Ste@ :5 Anal>Je the structure of the inventories A2C A+A,S4SIS )8 I+V +*)(I S +ot all products are e=ually important. :ou certainly have enough )or( to do and therefore you can not spend the same amount of time )ith products that can hardly be sold as )ith the bestsellers. The *<C analysis is supposed to enable you to focus on the essential processes in the supply chain. Its goal is to separate the essential from the nonessential. The focus of this activity is to be directed to the most profitable area * parts"/ )hile the costs in the other areas are to be reduced by the simplification of processes for e.ample/ by implementing a usage control". The *<C analysis is a primary analysis. It can be used as a basis for follo)-up or secondary analyses such as the segmentation or the M:N analysis. A4K A+A,4SIS !urely you agree that for some items are easier to forecast demand than for some others. This analysis helps you to find items easier to forecast so you can automate their ordering and spend more time to forecast demand for those items" )hich are more difficult to predict. The M:N analysis enables you to perform the ne.t step of the inventory analysis and tells us about the fluctuation of demand for some products The follo)ing typical classification has been generally established1
17

X materials - characteri>ed by a constant/ non-changing usage over time. The re=uirements fluctuate only slightly around a constant level so that the future demand can basically be forecast =uite )ell. 7nfortunately/ e.perience has sho)n that even the forecast for M products can be poor. Y materials - The usage of these materials is neither constant nor sporadic. @ith : materials/ you can often observe trends/ for e.ample/ that the usage increases or decreases for a)hile/ or that it is characteri>ed by seasonal fluctuations. 6or these materials/ itOs harder to obtain an accurate forecast. Z materials - These materials are not used regularly. The usage can strongly fluctuate or occur sporadically. In these cases/ you can often observe periods )ith no consumption at all. The creation of a forecast is e.tremely demanding and very difficult. It is useful to further subdivide the N materials into N% and N# materials/ the latter being used even less regularly than the N% materials. This enables you to trigger detailed counteractive measures for particularly critical materials.
nd

Ste@5 *urning dead inventor> into cash

8o) to detect HdeadH stoc( at an early stage )hen )e sell them - but slo)er/ so that later they do not become pure cost. *nalysis of the Inventory turnover allo)s us to detect HdeadH stoc( on time in order to proactively reduce the costs of their care in the future. ;rd Ste@5 3etermination of Inventor> Policies Safety Stock - Cost of Inventory can be a substantial amount of money. <ut it is possible to define a safety stoc( for each item based on desired availability in accordance to importance and fluctuation of items. !o this cost could be lo)er if you use calculation of !afety stoc( )ith !even !teps Inventory ?ptimi>er. Cycle Stock is portion of stoc( available or planned to be available in a given period for normal demand/ e.cluding e.cess stoc( and safety stoc(. This functionality helps procurement professionals in determining the ordering =uantities

18

$ Ste@5 Anal>Je the reasons for eLcess inventories * system and method is developed for root cause analysis and early )arning system in order to detect inventory problems in early stage.

th

& Ste@5 Clearl> define the res@onsibilit> for inventories Ii(e =uality/ customer service/ and plant safety/ inventory must be promoted throughout the organi>ation as everyone;s responsibility. !urely you;ll need someone to be in charge but the =uestion is )ould it be procurement manager he is responsible for reducing the costs"/ or is it better to do it sales manager he (no)s )hat clients )ant". @hoever )ould it be you must be careful not to implement conflict goals into responsibilities of those people.
th

th

' Ste@5 Identif> and monitor> inventor> Ke> Performance Indicators !KPI# @hen )e reach this step is not yet finished. in fact almost never. It is necessary to constantly monitor and control inventory and compare them )ith the set policy reserves. 8o)ever/ the FPIs used to achieve better results/ it is challenging tas(

&# MAS* ( P()3.C*I)+ SC1 3.,

* Master Production !chedule or MP! is the plan that a company develops for production/ inventory/ staffing/ etc. It sets the =uantity of each end item to be completed in each )ee( of the planning hori>on. It is the plan for all future production of end items MPS In@uts 6orecast demand !ales demand MPS )ut@ut Production plan 0esource re=uirements

19

Inventory levels - target stoc(/ days of cover Production lead times <atch si>e rules !helf life/ ma(e span rules 0esource capacity

*vailable stoc( projections

The MP! gives production/ planning/ purchasing/ and top management the information needed to plan and control the manufacturing operation. The application ties overall business planning and forecasting to detail operations through the MP!. The MP! )ill drive detailed material and production re=uirements through the Material 0e=uirements Planning module and via Production !cheduling to provide a detailed shop floor plan.

*1 MPS P()C SS !tarting )ith !ales and 6orecast demands/ a company )ill typically profile its !F7s into fast and slo) moving items runners/ repeaters and strangers" and decide on the appropriate target stoc( levels based on trading account customer and mar(et e.pectations of service level. The products lead times or throughput rates must be (no)n or estimated" and the available resources capacity must be (no)n. Constructing a valid MP! involves matching demand )ith capacity. This activity is often referred to as capacity planning.

20

&# C)MP)+ +*S )8 MA* (IA, ( S).(C P,A++I+/

%K M0P is used to derive the master schedule from the forecast/ the sales order or both. The master schedule is the foundation of all the operations/ )ith M0P handling all the ordering and scheduling of the inventory ra) materials/ components/ etc". ?ne big advantage of M0P is that it analyses and plans your future needs for all dependant demand items. If an item is not needed/ you donOt plan for it anymore.

The bills of material in tabular form sho) the product structure/ )hich basically lists all the
different component parts and sub-assemblies that ma(e up product/ sho)ing the lead times and relationships bet)een each components.

%K The <?M diagrams sho) the same information as the bills of material but are represented in a diagrammatical sense.

21

%K The M0P calculations are derived from the bills of material and the <?M diagrams. This tabular data represents the =uantity of each component of the final product that is re=uired and the current period of time that it is re=uired for. #K The M0P system outputs a variety of information that can be used by the company/ both for the planning side and the management side of the factory operations. These outputs include order release notices for the placement of orders that may have been planned by the M0P simulator system. &K The capacity and master schedule need to be managed correctly to help reduce the )or(load and ma.imi>e the effectiveness. Management has a big responsibility in this and ho) they choose to plan ahead and ho) effective they are/ )ill in turn effect their decisions on the right approach and ho) effective the M0P system is. If certain areas become stressed and overloaded/ jobs may end up being pushed bac( past their due date and end up being late. Planning is very important to help the company become more efficient/ reduce costs and increase profits. 'K Information systems are a competitive tool )hen running alongside traditional stoc( control systems. * computeri>ed M0P system is reliant on the fact that the demand for lo)-level components is brought about from the production of an end product of )hich the production level is planned. The system itself )ill ma(e it easy to put together the production schedule saving vast amount of money that )ould other)ise be spent on labor time to do the same activity. 9K M0P does not ta(e into account the level of capacity of )hat can or cannot be handled by the shop floor. M0P is best used in manufacturing companies )ith products that have lots of assemblies and is based on )hat is to be sold/ )or(ing bac()ards from a delivery date/ using the just in time concept DIT". CK If the M0P system is controlled and designed )ell/ inventory levels can be reduced/ by reducing the amount of )or(-in-progress @IP". *n M0P system improves customer service by reducing the amount of late orders/ creates higher levels of productivity/ and helps the company respond to changes in demand much =uic(er.

22

&6:# MA* (IA, ( S).(C P,A++I+/ C)MP.*A*I)+

Iet us understand M0P computations by )ay of e.amples1

Lam@le :1 !uppose you need to produce %$$ units of product * eight )ee( from no)/ )here product * re=uires one unit of product < and t)o units of product C/ )hile product C re=uires one unit of product 3 and t)o units of product -. 8o) many units of each type do you needJ In this e.ample it is easy to compute the re=uirements of each item to produce %$$ units of product *1 0e= <" P %$$/ 0e= C" P #$$/ 0e= 3" P #$$/ 0e= -" P '$$. !uppose further that the lead-times for the products are as follo)s1 Product */ four )ee(s/ product < three )ee(s/ product C t)o )ee(s/ products 3 and - one )ee( each. !ince the production lead-time for product * is four )ee(s/ )e must have products < and C available at the end of )ee( four. !ince product < has a lead time of three )ee(s/ )e need to release the production of product < by the end of the first )ee(. !imilarly/ product C need to be released for production at the end of )ee( t)o/ )hile products 3 and - must be released for production at the end of )ee( one.
* material re=uirements plan has been developed for product * based on the product structure of * and the lead-time needed to obtain each component. Planned order releases of a parent item are used to determine gross re=uirements for its component items. Planned order release dates are simply obtained by o setting the lead times. The computations and steps re=uired in the M0P process are not complicated. They involve only simple arithmetic. 8o)ever/ the bill-of-materials e.plosion must be done )ith care. @hat may get complicated is the product structure/ particularly )hen a given component is used in dierent stages of the production of a finished item.

&67" *1 , V , )8 A+ I* M

To form a useful bill of material matri. it is convenient to order the items by levels. The level of an item is the ma.imum number of stages of assembly re=uired to get the item into an end product.
23

Lam@le 71 Consider a system )ith t)o end items/ item % and item #. Item % re=uires t)o units of item * and one unit of item C. Item # re=uires one unit of item </ one unit of item 3 and three units of item -. Item * re=uires one unit of item < and t)o units of item 6. Item < re=uires t)o units of item C and one unit of item -. Item C re=uires one unit of item 6 and three units of item B. Item 3 re=uires t)o units of item < and one unit of item C. The levels of the items are1 Ievel $1 Items % and #. Ievel %1 Items * and 3. Ievel #1 Item <. Ievel &1 Items C and -. Ievel '1 Items 6 and B

&6;# ).*,I+ )8 M(P P()C SS

!tarting )ith end items the M0P process goes through the follo)ing steps %. -stablish gross re=uirements. #. 3etermine net re=uirements by subtracting scheduled receipts and on hand inventory from the gross re=uirements &. Time phase the net re=uirements. '. 3etermined the planned order releases "ee=
/ross (e<uirements

&

'

Schedules recei@ts +et (e<uirements

*ime9Phased +et (e< Planned )rder releases

24

*able :6: 5 M(P *A2, The planned order releases aggregated over all the end items )ill result in the gross re=uirements for level one items / the gross re=uirements for this items are then netted and time phased to determined their o)n order releases. The process is continued until all the items have been e.ploded. Table %.% sho)s a typical M0P table.

Lam@le ;1 M0P computations are sho)n in Table %.% )here the lead-time is t)o )ee(s. 8ere the planned releases )ere obtained by solving a @agner-@hitin problem )ith time-varying demand. More often/ ho)ever/ M0P )ill plan releases in a lot-by-lot fashion.

"ee=
/ross (e<uirements

: %$ %$ %9 '9

7 %9 #9

; #9

$ &$

& '9

' #$

E &$

Schedules recei@ts +et (e<uirements

*ime9Phased +et (e<

%' &$ $ '9 '9

&$ #$ 9$

'9 &$

#$

&$

Planned )rder releases

*A2, :6: 5 Standard M(P table

&6$# AP 3I*I+/ A+3 3 8 ((I+/ SC1 3., 3 ( CI P*S

The process of determining net re=uirements/ as outlined above/ is to subtract scheduled receipts and on hand inventory from the gross re=uirements. ?ccasionally/ because of anticipated changes in the MP!/ )e )ill find that the scheduled receipts are not enough to cover the gross re=uirements )ithin a lead-time. Consider/ for e.ample/ Table %.#/ and assume that the lead-time is three )ee(s. +otice that the schedule has a net re=uirement of %9 units in period #. *n order

25

placed for %9 units in period % )ill arrive in period '/ so it )ould need to be e.pedited to be ready by period #. *n easier alternative/ is to issue an e.pedite notice to the schedule receipt of period &/ stating that )e need %9 units by period #. !uppose that it is only possible to have %$ units ready by period #. Then )e )ill have a shortfall of five units. @hen a shortage occurs/ it is important to bac(trac( and identify the source of demand. It may be that %$ of the %9 units re=uired in period # are for actual orders/ )hile the other five are in anticipation of future demand. In this case/ )e )ill allocate the %$ units to the actual order and avoid a stoc( out. ?n the other hand/ there may be changes in the MP! that ma(e scheduled receipts unnecessary. In that case/ the schedule receipts can be deferred to a later period.

"ee= /ross (e<uirements Scheduled (ecei@ts +et re<uirements

: %$ %$

7 %9 %9

; #9 #9

$ &$ &$

& '9 '9

' #$ #$

E &$ &$

*A2, :6 7 5 L@editing in M(P

C" A3VA+*A/ S & 3ISA3VA+*A/ S )8 MA* (IA, ( -.I( M +*

P,A++I+/

Material 0e=uirements Planning or M0P is a computeri>ed inventory management system that helps production managers plan and schedule the purchase of ra) materials and component parts for manufacturing facilities. M0P systems are driven by outstanding orders or foretasted orders or a combination of the t)o in order to ensure ade=uate inventory of dependent demand items to meet production re=uirement.

26

A3VA+*A/ S

I+V

+* )( 4

V ,S

%K M0P systems allo) inventory managers to reduce the level of component parts and ra) materials inventory. *n M0P system )or(s bac()ard from the production schedule to determine the e.act amount of inventory necessary to meet production demand. Maintaining lo)er inventory levels reduces the amount of capitol tied up in inventory and reduces inventory carrying costs.

C) + )MI CA,

)( 3

(I+ /

#K ?ver time an M0P system reveals the ideal lot si>es that should be purchased of each component item or ra) material. <y ta(ing into account the production demand for the item/ carrying costs/ =uantity price brea(s and transportation costs the most cost effective order amount can be determined )ith great accuracy. P( )3 .C *I )+ P,A ++ I+ / &K Production of finished goods is dependent on the availability of the ra) materials and component parts. M0P can identify shortages in inventory items so managers can shift production assets to the manufacture of other items )here the constituent parts are on hand. ") ( K SC 1
3., I+ /

'K M0P systems provide a clear picture of the inventory available for the production process. Managers can use this information to schedule )or( cre)s to meet the needs of the manufacturing process )ithout over staffing the production line. C.S *) M
(

(V IC

9K Information provided by an M0P system can help customer service representatives to provide customers )ith accurate order delivery dates.

27

3ISA3VA+*A/ S

Material 0e=uirements Planning

M0P" is a soft)are module that plans materials and

manufacturing parts and assemblies. M0P operates )ithin larger soft)are systems for manufacturing companies called manufacturing resource planning M0P II" or enterprise resource planning -0P". M0P focuses on planning of the various levels of manufacturing and purchasing necessary to ac=uire and produce a product. M0P )or(s particularly )ell in environments that are stable in terms of batch-=uantity si>es and length of time to perform manufacturing processes. In situations )here batch si>e and time variability increases or )here competing programs li(e lean manufacturing e.ist/ M0P can be difficult to apply and use.

A3

* IM

S A+ 3

2A *C 1 SI K

%K Iead time is the length of time it ta(es to either purchase material or manufacture a product. M0P uses average lead times for each part to help calculate )hen a part )ill be ready and bac(s off that date to determine )hen a part must start. Planned start and availability dates are calculated for upcoming purchase orders and )or( orders. The average lead time assumes an average batch si>e or =uantity. The average =uantity is also used to calculate the plan for proposed purchase order or )or( order =uantities. ?ften these averages are violated as purchasing and manufacturing actually ta(e place. This leads to differences in plans and actual )or(.

S1 )P 8, ) ) ( SC 1

3 .,I+ /

#K M0P only deals )ith start and availability dates for parts. The processes to ma(e a part could encompass several steps in fabrication. These steps )ithin the start and complete dates are scheduled by shop floor soft)are systems. !hop floor systems also operate on average or standard hours for labor and machinery to perform functions. Qarying =uantities can vary the schedule. Misalignment of M0P and shop floor schedules is potentially a disadvantage.

28

CA PA CI* 4 P, A+ +I+ / %K Capacity planning soft)are ta(es the shop floor schedules and totals labor and machine hours re=uired for specific )or( areas over increments of time. 8ours per day or )ee( is accumulated so that each )or( area can understand the potential )or( load and plan for it. If the shop floor schedules are not aligned )ith the M0P plans/ then the capacity plan )ill not align )ith M0P. These misalignments can cause poor and conflicting decisions to be made about the allocation of people/ materials and other resources re=uired to run the company.

C) + 8,IC *I+ / P( ) / (AMS #K Iean manufacturing may create conflict )ith M0P. <ecause lean manufacturing targets manufacturing processes and often causes changes to )or( areas and processes/ assumptions about shop floor schedules and M0P plans can become outdated. Iean manufacturing and M0P can co-e.ist but care must be ta(en to understand the changes re=uired by lean and ho) they impact M0P batch si>es and lead times. !imilarly/ a move to repetitive manufacturing/ )hich emphasi>es rates and flo)s of product/ can result in changes in batch si>e and lead times that conflict )ith M0P assumptions. M0P in either situation can become less useful and a disadvantage )hen implementing other manufacturing programs.

ISS.

S "I* 1

M(P S 4S*

MS

&K * (ey issue )ith M0P systems lies in the integrity of the data fed into the M0P system. If there are any errors in the inventory information then the information produced by the M0P system )ill also contain errors. This is an e.ample of the BIB? principle/ or HBarbage In Barbage ?utH principle. In addition/ M0P systems lac( fle.ibility )hen products ta(e different amounts of time to be manufactured. M0P also does not ta(e into account capacity/ and so can produce solutions that are practically impossible to implement.

29

E# M(P II
Manufacturing 0esource Planning M0P II" embeds additional procedures to address the shortcomings of M0P. In addition/ M0P II attempts to be an integrated manufacturing system by bringing together other functional areas such as mar(eting and finance. The additional functions of M0P II include forecasting/ demand management/ rough-cut capacity planning 0CCP"/ and capacity re=uirement planning C0P"/ scheduling dispatching rules/ and input4output control. M0P II )or(s )ithin a hierarchy that divides planning into long-range planning/ medium range planning/ and short-term control.

G# (P S4S* MS A+3 2),*9 )+S

-nterprise resource planning -0P" systems are e.tensions of M0P systems that run on a single database in a client server environment. -0P systems support mar(eting and finance departments in addition to the production department. !ignificant coordination advantages arise )hen all functions dra) and add to the same data. !*P is currently the leading provider of -0P systems. Many companies such as i# Technologies and Manugistics have developed bolt-ons programs that run on top of -0P systems. These companies address specific problems that are not solved by -0P. 6or e.ample/ a better forecasting system or a finite-capacity scheduler can be added to !*P. Iately !*P has developed many of the capabilities that )ere formerly available only through bolt-ons.

D# J.S* I+ *IM ! JI*#

"hat is Just in *imeM
Dust in time is a highly coordinated processing system in )hich goods move through the system/ and services are performed/ just as they are needed. In short/ the just-in-time inventory system is all about having the right material/ at the right time/ at the right place/ and in the right =uantity2 )ithout the safety net of inventory/ the implications of )hich are broad for the implementers.

30

1istor>
%K The techni=ue )as first used by the 6ord Motor company as described e.plicitly by 8enry 6ordOs My Iife and @or( %5##". #K The techni=ue )as subse=uently adopted and publicised by Toyota Motor Corporation of Dapan as part of its Toyota Production !ystem TP!".

2enefits
%R Io)er stoc( holding means a reduction in storage space )hich saves rent and insurance costs #R *s stoc( is only obtained )hen it is needed/ less )or(ing capital is tied up in stoc( &R There is less li(elihood of stoc( perishing/ becoming obsolete or out of date 'R *voids the build-up of unsold finished product that can occur )ith sudden changes in demand 9R Iess time is spent on chec(ing and re-)or(ing the product of others as the emphasis is on getting the )or( right first time

Problems
%R There is little room for mista(es as minimal stoc( is (ept for re-)or(ing faulty product. #R Production is very reliant on suppliers and if stoc( is not delivered on time/ the )hole production schedule can be delayed . &R There is no spare finished product available to meet une.pected orders/ because all product is made to meet actual orders ho)ever/ DIT is a very responsive method of production.

M(P vs6 JI*

%R 6or a company )hich is small and just starting up M0P ordering system )ould be better suited if you implemented DIT then as a small company you )ould be trying to brea( into a mar(et/ if the DIT system goes )rong as I am sure )e all agree this is very ris(y" then youOll be unable to get your product on the shelves for customers to buy and if this happened on a regular occasion

31

then your reputation from consumers )onOt be good )hich is critical from a ne) companies point of vie). %R ?n the other hand being a large reputable company )ith a solid reputation and brand image maybe the DIT system should be implemented as this type of company )ill be able to invest at ma(ing this system a success/ as DIT dramatically reduces cost and )aste these savings )ill influence the price of the product in order to compete )ith other competitors.

32

CAS S*.34 : 5 I+3.S*(IA, C1 MICA,S /().P

.SI+/ M(P A+3 )-ISA8 *4 S*)CK 8)( (A" MA* (IA,S I+V +*)(4 C)+*(),

I+*()3.C*I)+
@ith the advent of the Material 0e=uirements Planning M0P" revolution/ it has become necessary to develop criteria for selecting and changing available techni=ues for ra) materials inventory control. The purpose of this case study is to e.plore the utility of the t)o principal techni=ues/ M0P and -conomic ?rder Luantity4!afety !toc( -?L4!!".

)-ISS
-?L4!! is particularly applicable if the product utili>ing the ra) materials has a simple process structure and is produced continuously over time at a fairly uniform rate. * simple e.ample is a chemical process )hich re=uires only a fe) major ingredients in terms of usage levels" to yield a finished product. Ideally/ the economic running si>es are )ell (no)n/ and the budgeted production rate is relatively constant over long time periods/ although process do)ntime does occur. The case for -?L4!! is enhanced if the process machinery is used to ma(e only a fe) different products/ limiting scheduling and time-phasing complications. In such situations/ there are t)o decisions/ )hich must be made1 the order si>e and the policy to protect against lead time and usage fluctuations.

S1IPM +* SIK
Many materials are often ordered in bul( only once a year or once a =uarter. The fi.ed cost used in -?L calculations should then represent the cost of processing a release for a truc( or rail car. +ormally/ S%$-#$ per release is appropriate. The order =uantity resulting from the direct application of the -?L formula often must be adjusted to full carloads or truc(loads. This is especially true for bul( commodity chemicals/ )hich have lo) value per pound and relatively high freight cost per pound. The general problem can be handled by comparing the sum of

33

annual ordering/ holding/ and freight costs at the traditional -?L and the freight brea(-even points and for multiple car4truc( loads if applicable".

SA8 *4 S*)CK
.sage/ changing usage patterns in a generally stable continuous process operation can result for several reasons1 %" Changing process efficiencies/ #" *djusting the production rate in response to changing mar(et conditions/ and &" Process do)n time. This demand variation can be captured in several )ays. 6or instance/ daily production sheets can yield an historical ra) material usage distribution by utili>ing the process coefficients. 7se this approach if it is reasonable to assume that materials re=uirements )ill fluctuate in a similar fashion during the upcoming =uarter.

*lternatively/ analy>e forecasted4budgeted materials usage over the ne.t =uarter and determine the implied daily usage rates. If the variation in these is small/ use the average or ma.imum as a point estimate of daily usage. This approach is preferable if the usage rates are (no)n to be fairly stable because there is say" a limited range of economic production rates. Iead-time/ lead-time e=uals the order processing delays for both the supplier and receiver plus the transit time. ?rder processing time may consist of1 %" +otification time for release of cars or truc(s/ #" Time before material can be produced/ and &" Paper)or( delay. The time for %" and &" can usually be reduced to a point estimate/ )hile point #" is normally a range. Thirty recent observations are ade=uate to develop a transit time probability plot.

@e )ish to indicate some)hat parenthetically" that lead-time performance evaluations are useful in other conte.ts. 6or instance/ they can enable purchasing agents to =uantify th e level of service provided by the vendors. If multiple suppliers are utili>ed/ this information can be a significant input into contract negotiations over price and percentage allotment.

34

The lead-time demand distribution IT33"/ (no)ing both the ra) materials demand and leadtime probability distributions/ )e can perform a Monte Carlo simulation to obtain the IT33. * simple *PI program can be )ritten to perform the simulation using the discrete probability fre=uency distributions. * sample program and terminal session )ill be sent to the reader upon re=uest."

If )e use a point estimate of demand/ )e need only multiply each term in the lead time probability distribution by the constant demand to get the IT33. If lead time is constant say + days" and demand can be fitted by normal distribution/ the IT33 is normal )ith mean e=ual to + times the mean demand and variance e=ual to + times the demand variance.

Chance of stoc(-out/ typically this is set at a very lo) level since the conse=uence of a stoc(-out is usually the shutdo)n of a production process. The cost and availability of emergency ordering e.g./ less than truc(load shipments and airfreight". *s )ell as the cost of shutting do)n the production line/ must be compared to the cost of holding additional inventory in setting the protection level.

MA* (IA, ( S).(C P,A++I+/

M0P is particularly applicable for comple. process structures )here ra) material demands are large/ non- uniform/ and dependent on scheduled product completion dates. * simple e.ample is a made-to-order chemical economically produced in a se=uence of )ell-defined batch si>es/ each of )hich utili>es many ra) materials. To facilitate our discussion of the applicability of M0P/ )e need to define the basic steps of this approach.

*1 M(P APP()AC1
The nucleus of the M0P modeling structure is the translation of scheduled product completion dates into amount and timing of gross materials re=uirements by Oe.ploding2 the various sub processes. It is easiest to proceed from the top to bottom of the process structure. The steps are1 %" 3etermine gross re=uirements over the planning hori>on. a" 3evelop a standard conversion table yielding number of input units per output for each process.
35

b" *t each level determine the number and type of input units re=uired for the ne.t higher level and the process time bet)een levels. T ?nce )e have climbed do)n the process tree2 the amount and desired receipt date for each ra) material are (no)n. #" 3etermine net re=uirements over time by incorporating materials on hand and scheduled for delivery. &" 3etermine ra) material lead times as previously discussed. In general/ the ma.imum reasonable lead-time should be used if there are significant fluctuations. '" Broup re=uirements into orders. There are t)o basic approaches. a" *d hoc usually several options are presented in canned M0P pac(ages. 6or e.ample/ order one carload at a time/ combine every three periodsO demands into an order/ and so forth. b" *nalytical strangely enough/ this option is usually not provided in standard M0P routines. If the fi.ed order processing costs are significant/ utili>e a dynamic lot-si>e algorithm such as the @agner-@hitin model U'V or one of its variations e.g./ see <lac(burn and Funreuther U%V or Iiberatore U#V" to determine the si>e and timing of orders. *djust to full carloads as necessary.

S)M P()2, MS I+ APP,4I+/ M(P I+ P()C SS I+3.S*(I S

%" !tandard conversion factors for each chemical process must be utili>ed to accomplish the materials e.plosion.2 8o)ever/ the actual proportion may vary )ith the =uality of the materials and other factors. In addition/ there may be =uality differences re=uired by certain customers and these may not be achieved during every run. This may re=uire many more process structures to be defined/ implying data storage and computational difficulties. #" * (ey assumption of M0P is that the production schedules over the planning hori>on" are (no)n )ith certainty. Clearly/ outages and inventory buildups can result from schedule changes. These effects can be minimi>ed by maintaining some safety stoc( during the production cycle and in finished goods. 0esearch in this area is just no) getting under)ay. &" * more fundamental problem arises in the modeling of the chemical process itself. 6or e.ample/ many chemical processes have by-products/ )hich have economic value or are
36

recycled into the main process. This complicates the determination of both input4output coefficients and the value per unit output/ and produces process tree structures )hose stages are interdependent. '" M0P cannot al)ays safely ignore machine assignment and capacity utili>ation issues. 6or e.ample/ if there is pea(ing of orders it is necessary to adjust the schedule to smooth production and ta(e advantage of the economics of longer run lengths and larger batch si>es. 9" If production due dates are based on uncertain sales forecasts and process lead times are long/ the M0P approach may loc( the process into a schedule )hich allo)s little fle.ibility to adjust to a changing order pattern. ?ne conclusion is that the subset of chemical processes amenable to the M0P approach needs further definition along the lines suggested above. *nother is that )e should strive for a hybrid system of production planning )hich captures the benefits of time phasing )hile minimi>ing the impact of uncertainty in the planning hori>on.

APP,4I+/ A 142(I3 APP()AC15 A CAS S*.34 I+ C1 MICA, P()C SSI+/

Consider the follo)ing case study )hich resulted from my inventory control audit of 6MCOs Industrial Chemical Broup plants. It centers on the Modesto plant/ )hich produces barium and strontium chemicals. The processes of interest combine either barite ore or celestite )ith co(e and some other materials to produce barium or strontium carbonate/ respectively. <oth of these products are produced on the same e=uipment. 8o)ever/ production planning and inventory control procedures are difficult to implement because the mar(ets fluctuate considerably and the cost of a production changeover is significant. *n e.amination of the usage rates for materials used in the carbonate production processes indicates that classical2 *<C analysis2 is again applicableA about E$Wof the total dollar value of ra) materials purchases is provided by about #$W of the ra) materials. !ince the ra) materials other than co(e/ barite/ and celestite materials are used continuously/ ordered infre=uently/ and tie up a negligible amount of )or(ing capital/ there is no need to incorporate them into a detailed analysis. 7pon investigation/ it is found that both processes use co(e at
37

nearly the same rate and are normally run at 59W capacity. 8o)ever/ usages do fluctuate some)hat over short periods for reasons similar to those presented in the -?L4!! section. 6or these reasons/ )e employed the -?L4!! approach for co(e and based the usage factor on the ma.imum of the t)o budgeted rates. The lead time pattern has substantial variation/ )hich led to the setting of the safety stoc( and the reorder point. In our discussions )ith plant personnel/ )e emphasi>ed the need for regular revie) of both the demand and lead time parameters. This simple procedure had a major impact because of another facet of the problem/ )hich )e no) briefly describe. In-plant storage space for co(e )as restricted/ necessitating the usage of incoming rail cars as inventory storage bins. *lthough this practice )as convenient and avoided a substantial capital outlay/ the associated demurrage costs )ere substantial. Thus/ the principal impact of our inventory control efforts for co(e )as reduction of its monthly demurrage bill by about '$W. ?n the other hand/ a time-phased approach )as used for barite and celestite because of the discontinuity of their respective runs. 8istory demonstrates that although the daily usage of these ores is fairly uniform during their respective runs/ the length of their production runs are subject to mar(eting pressures/ as previously suggested. It is then necessary to build some safety stoc( into the general M0P frame)or(. 3iscussions )ith the materials manager led us to postulate that a )ee(Os )orth of material )as necessary for each process as safety stoc(. It should he noted that the time phasing of orders )as complicated by several e.ternal factors. 6or instance/ celestite is not produced domestically and our sole +orth *merican supplier faces several critical problems associated )ith rail car procurement and the stability of his labor force. These factors e.plain the large fluctuations in the historical lead time patterns that )ere observed. *t the re=uest of plant manufacturing personnel/ an ideal ordering schedule2 )as prepared under the follo)ing set of assumptions1 %" !hipment of one rail car per day continuously over specified time periodsA #" * safety stoc( of seven days ra) materials usage )as to be held at the plantA &" Time phasing based on ma.imum historical lead-time and recent input4output factors. 8o)ever/ subse=uent discussions )ith the purchasing agent and the plant-manufacturing manager indicated that assumption %" )as not totally acceptable because the present purchase supply contract re=uired ordering of carloads in appro.imately e=ual monthly =uantities regardless of our production schedule. This led to subse=uent negotiation )ith the supplier and
38

his eventual acceptance of a shipping policy/ )hich places monthly minimums and ma.imums on the number of rail cars available for shipment. It is interesting to note that additional e.pected inventory reductions )ere gained because the ma.imum number of monthly carload shipments )as greater than our previous assumption of one shipment per day. This schedule as adjusted during %5GG provided a )or(ing capital reduction of S&C/$$$ or about %#W over %5GC inventory levels. The true savings from the control system )ere actually larger/ since substantially more strontium carbonate production occurred in %5GG than in %5GC and these and other deviations from schedule necessitated an increase in safety stoc(.

C)+C,.SI)+
The selection of ra) materials inventory management techni=ues is as much an art as it is a science. It is often necessary to consider many seemingly e.ternal factors to arrive at an acceptable solution. The -?L4!! and M0P approaches have spheres of applicability as previously discussed. In moderately comple. systems/ a hybrid approach is often ample. Care should be ta(en in large M0P implementations not to over model2 the potential process structures and to allo) for the impact of uncertainty. It is especially important in the application of across-the-board systems )hether -?L4!! or M0P" to be a)are of special cases as illustrated in the previous section. There is no substitute for an in-depth understanding of the/ )hole problem2 for (ey manufacturing processes.

39

CAS S*.34 75 I+V +*)(4 MA+A/ M +* C)+*(), A* "A,9MA(*

"A,9MA(* 2ACK/().+3

@al-Mart )as founded in %5C# )hen the firm opened its first store in rural 0ogers/ *r(ansas. It )as incorporated to @al-Mart !tore Inc. in ?ctober %5C5. The firm has gro)n to become the 7nited !tates and the )orldOs largest retail outlet. It is the largest single job creator )ith over t)o million employees. It is the largest retail outlet in the )orld. The company is committed to a business model of driving costs out of supply chains to enable consumers save money and live better. This is done anytime any)here. @al-Mart use retails stores and online stores as its main distribution channels of its products. *s per Danuary #$%# the @al-Mart had an appro.imate of %.' million associates in the 7nited !tates. The store has GE$ $$$ international associates. @alMart net sales for the year #$%# )ere S''&.5 billion/ an increase of 9.5 percent. The stores consolidated operating income gre) by 'W to S#C.C billion. The companyOs diluted earnings per share )ere S'.9'. In the same year the company added 9#.# million s=uare feet through %/%C$ additional units. This )as in a summation of ac=uisitions in the 7nited Fingdom and !outh *frica. @al-Mart fiscal year #$%& sales are appro.imated to be S'CC billion @al-Mart !tores/ Inc./ #$%#". P()3.C*S A+3 S (VIC S @al-Mart offer a )ide range of products that include retails goods li(e electronic goods/ boo(s/ home furnishings/ music do)nloads. The store also offer photo lab services inside the store and online. Customers drop their photographs for developing via a store (ios( or they can upload them through the corporate )ebsite. The store also offers pharmacy services/ financial services and )ireless services through partners li(e T-mobile.

40

C)MP *I*I)+ @al-Mart competitors are spread all over the )orld because the store operates in all regions of the )orld. In +orth *merica/ @al-martOs primary competition includes department stores li(e Fmart/ !hop(o and Meijer. It faces competition from CanadaOs Nellers/ Biant tiger and the 0eal Canadian !uperstore. The store faces competition from Me.icoOs Commercial Me.icana and !oriana. "A,9MA(*S P()3.C* MIA

P()3.C*
@al-Mart hosts products that range from electronics/ music/ movies/ furniture/ boo(s/ baby shop/ clothing/ sports items/ health care products/ pharmaceutical/ toys/ photography/ grocery and je)elry. The company has also incorporated electronic commerce )here it offers online shopping and shipping of products from its stores to any destination in the )orld. The company has installed a very reliable and )arranted system that enables customers to purchase directly through mega stores over the internet. This has helped the store reduce the cost of operation through operation e.pense reductions. The company has e.hibitions )here private labeled brands and other brands li(e Cott beverages are mar(eted at the storeOs various outlets. The companies that supply the stores )ith food items have been re=uested to use technologies that are environment friendly )ill maintaining the nutritional value of these foods. @al-Mart store is one stop shop )here an individual can buy all he or she )ants either online on by visiting the various outlets available in the )orld.

P(IC
@al-Mart does not produce any brand. It e.hibits various brands. The store has a huge )orld)ide net)or( that floc( )ith customers due t its discount pac(ages that attract and tempt customers. The store is the largest retailer in the )orld. This ma(es it an economic force that enables it to run the pricing policy that provides customers )ith lo) rates. These rates are not available any)here else. The company stands on this basic policy of providing products and services at lo) rates. The company has a universal bar code that acts as the bench mar( for the company. This has helped shift the po)er form manufactures to retailers. The company has
41

lo)ered the prices of all its grocery items by %9W of the local mar(et price. ?ther products that have lo)er rates than the local mar(et price include electronic goods and technological products. The company has a policy that for any manufacturer retailing items at @al-Mart stores is that it has to reduce the price of increase the =uality of its products. This price policy favors only producers )ith products selling fast in the mar(et. Thus/ @al-Mart has ensured that its customers get value for their money.

P,AC
@al-Mart provides its goods and services through its three main divisions. They include !amOs Club/ @al-Mart !tores 7nited !tates and @al-Mart international. The companyOs outlets are mar(eted in different names in Dapan/ India/ 7nited Fingdom/ !outh *merica/ China/ !outh *frica and Dapan. The store is a huge net)or( of stores. They range from small mar(ets/ cash and carry stores/ membership )arehouse clubs/ food and drugs. @al-MartOs other net)or(s general merchandise stores and soft discount stores. @al-Mart outlets are mostly large building )ith an average of %5G/ $$$ s=uare feet.

P()M)*I)+
The company has its o)n in-store promotional activities that include sales promotions. They include product bundling and pricing strategies. The companyOs online store earns the firm revenues. This is gotten from customers placing online gifts. The sales turnover of the company increases due to its pricing strategy. The company uses everyday lo) prices2/ value of the day2 strategy to lure customers to its stores. The electronic commerce site has slogans that tempt customers to buy the products. -.amples include grab it before it is gone2.

42

C)+3I*I)+S *1A* , 3 *) IMP, M +*A*I)+ )8 I+V +*)(4 C)+*(), A* "A,9MA(* C)MPA+4 (.++I+/ ).* )8 S*)CK <ig stores li(e @al-Mart can be hard to carry out an inventory manually. @ith the inventory control system the staff restoc(s after ta(ing the inventory off the rac(. The system enables them to determine )hich brand/ models and si>es that consumers are buying often. This ma(es the )hole system efficient. This system prevents the store from running out-of stoc(. The system alerts the employees to replenish the store after a sale. This prevents cases )here products go out of stoc( )ithout the (no)ledge of the manager. Purchasing on the other hand is notified on the spot. This enables them to place orders throughout the day. The technology is used to improve operations. The tag is disabled at chec(out. Management of suppliers )as a problem in the organi>ation. The system )as implemented in order to manage suppliers. *fter the implementation of the system/ the number of suppliers )as reduced. The suppliers )ere also made partners )ith @al-Mart. Inventory management )as a nightmare at @al-Mart. This )as due to the large number of products/ processes and services the firm )as dealing )ith. The system reduced the order-shipbill cycle. Information could also be easily shared online from one store or department to another. @al-Mart is very e.pansive )ith branches round the )orld. To manage all the channels )as time consuming and tedious )or(. The implementation of the system also ensured that channel management )as eased. 3ocuments li(e a bill of landing/ purchase order and advanced ship notices can be moved easily over the system. The system after implementation eliminated the barriers that e.isted in payment. @al-Mart )as lin(ed to its suppliers and distributors by the system. This ensured that payment could be made electronically.

43

@al-Mart operated in various )orld regions that use different currencies. The system eliminated financial management problems that )ere facing the company. The management of the company )ould manage various foreign e.change currencies using the system. Information bet)een various stores )as a problem before the implementation of the system. The system facilitated and improved flo) of information among sales and production and customer functions. Implementation of the operational management tool )as done in #$$9. This )as after various failures of the bar-code system. This system had challenges li(e inefficiency and slo) operations. Inventory )as also a problem. 0estoc(ing of the store used to be done after a )ee(. 8o)ever/ )ith the implementation of the ne) management tool inventory )as eased. ?ther problems faced by the store included supply problems/ payments and chec(-out. IMP, M +*A*I)+ )8 I+V +*)(4 C)+*(), MA+A/ M +* *)),S @al-Mart )as able to reduce unproductive inventory by allo)ing stores to manage their o)n stoc(s/ reducing pac( si>es across many product categories/ and timely price mar(do)ns.

Instead of cutting inventory across the board/ @al-Mart made full use of its IT capabilities to ma(e more inventories available in the case of items that customers )anted most/ )hile reducing the overall inventory management.

@al-Mart also net)or(ed its suppliers through computers. The Company entered into collaboration )ith P,B for maintaining the inventory in its stores and built an automated reordering system/ )hich lin(ed all computers bet)een P,B factory through a satellite communication system. P,B then delivered the item either to @al-Mart distribution centre or directly to the concerned stores.

<enefits from that are @al-Mart could monitor its stoc( levels in the stores constantly and also identify the items that )ere moving fast. P,B could also lo)er its costs and pass on some of the savings to @al-Mart due to better coordination.
44

-mployees at the stores had the Magic @and2/ a hand-held computer )hich )as lin(ed to instore terminals through a radio fre=uency net)or(. <enefits from that these helped them to (eep trac( of the inventory in stores/ deliveries/ and bac( up merchandise in stoc( at the distribution centers.

The order management and store replenishment of goods )ere entirely e.ecuted )ith the help computers through Point-?f-!ales P?!" system. Through this system/ it )as possible to monitor and trac( the sales and merchandise stoc( levels on the store shelves.

@al-Mart also made use of the sophisticated algorithm system )hich enabled it to forecast the e.act =uantities of each item to be delivered/ based on inventories in each store. It benefits by providing accurate data that even bul( items could be bro(en and supplied to the stores. X

@al-Mart also used a centrali>ed inventory data system using )hich the personnel at the stores could find out the level of inventories and the location of each product at any given time. It is also sho)ed )hether a product )as being loaded in the distribution centre or )as in transit on a truc(. ?nce the goods )ere unloaded at the store/ the store )as furnished )ith full stoc(s of inventories on a particular item and the inventory data system )as immediately updated.

@al-Mart also is using bar code technology and radio fre=uency technology to manage its inventories and enabled accurate distribution of goods .7sing bar codes and fi.ed optical readers/ the goods could be directed to the appropriate doc(/ from )here they )ere loaded on to the truc(s for shipment.

@al-Mart o)ned the largest and most sophisticated computer system in private sector. The company used Massively Parallel Processor MPP" computer system to trac( the movement of goods and stoc( levels.

@al-Mart used Cross-3oc(ing system. In a cross-doc(ing system/ pallets of material are received on one doc(/ bro(en do)n into customer specified loads )hile still on the doc( and transferred to outbound truc(s. Items are not placed in slots for storage.
45

( S.,*S )8 IMP, M +*A*I)+ )8 I+V +*)(4 C)+*(), MA+A/ M +* *)),

Information flo) )as eased at the company. This is because all the associates get the dayOs ne)s at once. *ny other event is relayed in real-time. This ma(es operations and management easy/ efficient and cheap. @or(ers )ere reduced. This is because some of the roles that )ere being done manually li(e inventory ta(ing )ere automated by the ne) inventory tool. This in the end saved @al-Mart large sums of money that )ould other)ise have been used to pay )ages. Increased productivity by @al-Mart due to less time ta(en to carry out roles li(e restoc(ing and inventory. !ales increased because the tool ensured that all the products are available for customers at the right time and place. The system alerted the attendants on all products in the store. It could provide information on the e.piry date/ re-stoc(ing level/ price/ si>e/ local and =uantity. This increased productivity of @al-Mart thus increasing profits accrued. Blobal management tools are of utmost importance to companies li(e @al-Mart. This is because these tools eliminate procedural and informational bottlenec(s. This increases the efficiency of @al-MartOs decision and order timing. The use of the inventory tool by @al-Mart has helped it improve its business processes both in the 7nited !tates and Internationally. The ris(s associated )ith ma(ing errors due to perceived demand changes in the supply chain go done because )ith the use of the inventory tool/ the data becomes relevant and more accurate <onacich , @ilson/ #$$9". The implementation of the management tool by @al-Mart improved operations at the store. Customers got =uality service and efficiently. This )as achieved through the supply chain visibility and more accurate ordering decisions. The system enabled @al-Mart to lo)er the costs related )ith inefficient inventory decisions and handling. This is because ordering and sales are closely aligned than any other process in the operation of the store. The inventory tool is used by @al-Mart to avoid having e.cess inventory )hile attracting price-minded consumers. The implementation of the inventory tool by @al-Mart increased the efficiency of its inventory management. The technology has also been implemented by its suppliers because inventory is
46

handled by both @al-Mart and the suppliers. This tool has enabled @al-Mart to replenish its products faster than )hen it )as using bar code technology. 8.*.( A* "A,9MA(* The future @al-Mart )ill focus its attention on smaller stores as consumers are shifting from outof-to)n shopping centers. This has been attributed to high costs of fuel/ penetration of technology/ consumers do not )ant to be faced )ith many things they cannot afford and rise in number of online stores. This has been demonstrated by recent @al-Mart developments )here it is launching small stores in neighborhood mar(ets. These stores can be lin(ed )ith the rest of the stores using the management tool. lectronic commerce Internet has penetrated the )orld at an alarming rate. Increase in smart phones and cheap computers and the mar(et have increased the demand for electronic commerce. The number of online stores offering electronic commerce has also increased. This has made the number of traditional visit stores shrin( in si>e at a very high rate. @al-Mart should ta(e advantage of social net)or(ing and mobile application that are ta(ing over the lives of many consumers to roll out an efficient electronic commerce system. This )ill have consumers shop for products over the internet and have them delivered to their proffered destinations. Increase in social net)or(ing has influenced shopping habits of many customers. /oing green CustomersO demands and various campaigns advocating for cost savings have led many retailers/ @al-Mart included to ta(e not of environmental matters. This has been demonstrated by opening of a @al-Mart/ Doplin/ Mo. That use energy efficient bulbs. These bulbs use I-3 lighting and they are complemented by sunlight and concrete flooring made of recycled materials. @al-Mart has plans to install solar po)er to its stores in order to reduce the pressure on the environment. Sci9fi solutions

47

@ith the installation of the ne) management tool/ @al-Mart can install in-store scanning to run its operations. This technology can be used to shift from channel-centric to customer centric. This can enable retailers reach consumers at home/ )or( and during commute time <ruton , @hite/ #$%$". Ac<uisitions @al-Mart in future can e.pand and open ne) store through ac=uisition. This method cautions an organi>ation against mar(et forces. The company ac=uires an already e.isting store in the mar(et )ith a customer base and premise. *ll the company does is change management and introduce ne) products and services. This in the end reduces the starting capital of the firm. C)+C,.SI)+ Information technology has been employed by @al-Mart to improve its business process. The inventory tool has decreased the costs of doing business for @al-Mart )hile increasing efficiency and profits. The tool has helped increase the =uality of products on display through timely restoc(ing )hile avoiding having e.cess inventory. @al-Mart through the use of technology/ it can afford to offer consumers goods at lo) prices because it can control its costs. The costs of its products are also determined by the efficiency or inefficiency of its suppliers. The implementation of a management tool has increased the productivity of the firm/ lo)ered the amount spent to pay its stuff and increased return on investment tremendously. This has been attributed to lo) cost of doing business.

48

+ "S A(*IC,
MA* (IA, ( -.I( M +* P,A++I+/5 D ,IV S A+3 C).+*I+/

In its latest version, M(P is one of several tools used for ca@acit> and materials @lanning6 3oug 2artholomeC Y Industry @ee( *rp. %%/ #$$C

*round for decades/ the trusty material re=uirements planning M0P" system continues to be used in one form or another by many manufacturers. !ure/ at most medium-si>e and larger companies/ M0P has been overshado)ed by its fancier/ multi-application big brother/ enterprise resource planning -0P"/ a client-server-based system. 8o)ever/ it still plays an important role. !tatistics from I"; <est Plants finalists demonstrate M0P has continued relevance to

manufacturing. *mong <est Plants finalists in #$$' and #$$9/ E$W had implemented M0P/ and another EW had plans to implement it. In the days )hen manufacturers generally did large-volume production runs because e=uipment changeovers )ere time consuming and e.pensive/ M0P )as hard to beat. 7sing a sales forecast/ it could be used to handle the bill of materials and routing/ the purchase orders needed/ and the shop orders to build products -- all )ith an emphasis on inventory accuracy. * later version/ manufacturing resource planning/ called M0P II/ added accounting and other business processes. ?ne big dra)bac( of M0P/ though/ )as that its planning HbrainH )as predicated on a HpushH system rather than the more popular HpullH system of manufacturing. HPull manufacturing short-circuited much of the M0P process/H observes <ill !)anton/ vice president of research at *M0 0esearch in <oston. H*s a result/ people tended to shut off some of the detailed material planning capabilities.H -ven so/ !)anton points out/ manufacturers still find a need to use parts of the M0P logic to give their suppliers a daily forecast.
49

H@ith a pull system/ the orders come in/ and companies respond to them/ but they need some forecasting capability to be sure they have ade=uate capacity on hand/H he says. Case in point1 H@e don;t use all the features of M0P/H says Mar( *umann/ controller at +ohl Corp./ a ma(er of fiberglass insulation products for electrical s)itches. The Mil)au(ee firm uses M0P Plus/ a pac(age from 8ori>on !oft)are in +aperville/ Ill./ for <?M and routings/ costing/ purchasing/ receiving/ inventory updates and accounting. -ven so/ +ohl does not fully depend on M0P for production planning. H@e do our production scheduling by )or(ing off the bac(log report run from M0P/ )hich sho)s us )hat jobs are due and )hen they are due/H e.plains Day @nu(/ project manager. H6rom a manufacturing point of vie)/ M0P is very user friendly.H M0P systems/ too/ are evolving. HThe style of M0P )e are evolving is more of a replenishment style/H says Mi(e 8art/ president of 3<* !oft)are in *tascadero/ Calif./ )hich also targets small manufacturers )ith its just-released 3<* Manufacturing +e.t Beneration pac(age. HThere;s generally a high degree of frustration )ith the scheduling capability in an M0P program/ but )e;re blending scheduling and M0P together in a )ay that reflects the latest ideas in replenishment. H:ou used to need to plan M0P re=uirements a long time in advance/ but no) a steel company )ill drop off )hat you need )hen you need it/H 8art adds. HThere;s much more interest in pull planning/ so companies are setting their order levels a lot lo)er than they used to.H

50

2,)/ A(*IC,
& PAI+, SS S* PS *) I+V +*)(4 MA+A/ M +*

Inventory management is not the sort of thing that gets most entrepreneurs; blood flo)ing--until their inventory manager leaves. That;s e.actly )hat happened to Marc Isaacson/ the C-? of online integrative pharmacy Qillage Breen *pothecary/ in #$$E. Isaacson filled the position by promoting a purchasing assistant. <efore long/ the company )as running out of its most popular items. H*t the very least/ )e lost those particular sales and in some cases/ )e lost the customers/H Isaacson says. 8e estimates the total loss at #W to &W of sales. Isaacson;s first fi. )as to start using a Hblue dotH system1 putting a blue dot ne.t to each of his appro.imately %/$$$ best-selling items/ ma(ing them easier to identify/ and re=uiring three to four )ee(s; of stoc( for each. *bout #W of Qillage Breen;s inventory used to be out of stoc( at any given timeA after using blue dot/ that number came do)n to just $.9W. H+ot only does this mean )e don;t have to disappoint our customers/ but this has raised morale among the staff as )ell/H says Isaacson/ )hose <ethesda/ Md.-based company has about 9$ employees. HThey don;t have to deal )ith the frustration of not being able to fulfill an order.H Properly managing your inventory involves more than ma(ing good hires and getting blue dots ne.t to your best sellers--although those are e.cellent first steps. 8ere are some common mista(es entrepreneurs ma(e in managing their inventory/ and ho) to fi. them. :6 *oo much inventor> *fraid of being caught short/ it;s easy to spend too much on inventory/ )hich can eat up )or(ing capital and erode profits. @arehousing isn;t free/ of course/ and inventory that sits on a shelf is subject to damage/ depreciation/ and even obsolescence. ?ld inventory can be very hard to move. :our options aren;t great/ says Paul 8uppert>/ a logistics e.pert )ith The Progress Broup/ a supply chain consulting company based in *tlanta. H:ou may end up mar(ing it do)n/ selling to discounters/ or shipping it to overseas li=uidators.H

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*o fiL it5 !tart )ith some decent projections of ho) much supply you;ll need and )hen you;ll need it. The best gauge is )hat you;ve sold in the past. If you;ve sold %$$ items per month for the past %# months/ chances are that you;ll need %$$ this month. Then there;s seasonality1 3o you usually see a fourth =uarter spi(e )ith holiday salesJ ?r/ if you;re in the home and garden business/ do you see more activity in the spring selling seasonJ H:ou can also identify and =uantify less obvious patterns such as month-end spi(es/H says 8uppert>. 76 Inaccurate Inventor> *rac=ing ?nce you (no) ho) much you need/ you have to ma(e sure you actually have it on hand. ?pportunities for miscounts are every)here1 during receiving/ during order fulfillment and the all-too-common pilferage. In manufacturing/ says 8uppert>/ you;ve also got to account for yield or scrap during production. *o fiL it5 7sing electronic data interchange -3I" and bar code scanning can help eliminate data entry errors. 8uppert> suggests implementing a system of so-called Hcycle counting.H Choose a fe) items a day and compare the inventory record to the actual count. <est sellers should get counted more often. ;6 ,ac= of Priorities It can ta(e an outsi>ed amount of time and resources to (eep trac( of all the details for each inventory item. !ome triage is in order. *o fiL it5 6ocus on the items that matter most. Benerally/ E$W of demand )ill be generated by #$W of your items. !pend most of your effort on those H*H items/ forecasting/ revie)ing in-stoc( position and reordering more fre=uently. The ne.t highest-selling &$W of items/ the H<H items/ )ill typically generate about %$W of sales. The slo)est selling HCH items account for half the items you stoc(/ but only generate %$W of your sales. $6 .sing S@readsheets
It may seem natural to use spreadsheets such as Microsoft -.cel or Iotus %#& to trac( your inventory. <ut !id 8elms/ director of IT at Martinsville/ Qa.-based 3iversified 3istribution/ )hich provides third-party logistics services/ says you;re as(ing for trouble if you use spreadsheets that )ay. 8e says it;s easy for spreadsheets to be accidentally deleted or for changes
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to be lost. *nd he says there;s no foolproof )ay for multiple people )or(ing on inventory to synchroni>e their spreadsheets. *o fiL it5 7se soft)are such as Luic( boo(s or Peachtree. :es/ these are better-(no)n as accounting pac(ages/ but they include inventory features and )ill ma(e it easy to get a dollar value for your inventory. They can also provide you )ith a central database. &6 +o 2ac=u@ Plan
CongratulationsZ :ou;re happily bar-coding a)ay/ and you;ve got your inventory in Luic(boo(s or Peachtree. +o) )hat happens if there;s a fire or your computer is badly damaged or stolenJ

*o fiL it5 6irst/ ta(e a deep breath and consider the )orst-case scenario/ such as fire or theft. :our bac(up plan can be as simple as saving critical data to a removable thumb drive. Dust don;t leave it at the office." !oft)are such as +orton Bhost or !ymantec <ac(up -.ec can get the job done/ too. *nd it;s not a bad idea to send a bac(up copy of your inventory data to your accountant every month/ says 8elms. *fter all/ )hy should the fun of inventory be limited to your employeesJ

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In simple terms/ )e can ans)er the =uestion of )hat is M0P soft)areJ2 by considering all of the potential supply and demand that could occur in a manufacturing environment and the inventory and item information that could affect one of t)o things1 =uantity and lead time. Su@@l> Material re=uirements planning soft)are ta(es into account all possible inventory supply including on-hand inventory =uantities by )arehouse or stoc(ing location/ manufacturing )or( orders producing finished goods inventory/ inbound )arehouse transfers replenishing inventory from another )arehouse location/ and purchase orders for ra) materials. !upply can be either actual supply real orders" or planned supply based on forecasts and suggested supply orders from the M0P soft)are". 3emand Material re=uirements planning soft)are demand includes customer real and forecast sales orders or shipments/ outbound transfer orders to replenish another )arehouse from a centrali>ed )arehouse/ and component re=uires purchased or intermediate assemblies" for upstream manufacturing )or( orders. 3emand can be actual real purchase orders/ transfer orders/ or )or( orders" or planned demand based on forecasts". Inventor> Parameters The =uestion of @hat is M0P2 must also consider item/ inventory/ and manufacturing parameters )hich affect both =uantity and lead time. 6or e.ample/ ho) much does the M0P soft)are suggest that )e orderJ This )ill depend on )hatOs in stoc( supply"/ )hatOs on order supply"/ )hat )eOve sold or plan to sell or to transfer out demand"/ and )hat our stoc(ing levels or safety stoc( is set to in inventory. @e also need to consider if there are minimum order =uantities )ith our vendors/ order multiples re=uired by our vendors/ and the same for manufacturing )or( orders minimum )or( order =uantities and minimum manufacturing multiples".

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Iead times are pic(ed up by the Material re=uirements planning soft)are from inventory and are easily defined for various suppliers by item and by )arehouse. There may also be internal lead times for =uality assurance testing/ inspection/ stoc(ing/ etc. Manufacturing lead times are generated by routing and bill of material plus the longest lead time for the bill of material components and may also include =ueue time time spent )aiting for drying/ cooling/ or to move to the ne.t operation"/ move time from one operation to the ne.t"/ outside processing time spent at a third party supplier for services such as heat treating/ coating/ plating/ etc."/ and other factors. In todayOs )orld/ most manufacturers no longer as( @hat is M0P soft)are2 but rather/ they are Material re=uirements planning soft)are e.perts using systems li(e *nytime !upply Chain to gain a competitive edge especially )hen they are manufacturing and distributing products sourced and4or sold overseas )ith longer lead times.

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