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Chapter: 1

Order qualifiers: A supplier must meet the set minimum requirements to be


considered a viable competitor in the market place.

Order winners: To win orders supplier must have characteristics that


encourage customers to choose its products and services over competitors.

Design and availability takes much importance during the introduction stage in
the PLC.

Delivery and Quality takes more importance during the growth.

Delivery and price takes more importance during the Maturity phase.

Four basic manufacturing strategy :


o Engineer to order: Lead time comprise from Design to manufacture
assemble and ship. Customer is highly involved in the product design.
Inventory will not be purchased until needed by manufacturing.
o Build to order: Inventory of raw materials in warehouse, Lead time
comprises of manufacture, assemble and ship.
o Assemble to order: Manufacture of subassemblies have been done. Lead
time comprises assemble and ship. Customer involvement is little in
choosing the component part option needed.
o Build to stock: Build in anticipation of getting orders. Lead time is
shortest only shipping time will be the overall lead time of a product for a
customer. Customer has little direct involvement in product design.

Supply chain comprise of three main activities:


o Physical supply
o Manufacturing planning and control
o Physical distribution

In downstream dominant flow of products and services, in upstream dominant


flow is demand and design information.

Three main flow:


o Flow of material
o Flow of information
o Flow of money (funds transfer)
In addition to this a new trend is recycle, reuse and disposal.

Chapter: 2

Priority relates to what products are needed, how many and when they are
needed.

Priority will be established by marketplace itself. Manufacturing is responsible


for devising a plan to satisfy the market demand if possible.

Capacity is the capability of manufacturing to produce goods and services.

Manufacturing planning and control:

o Strategic business plan


o Production plan (sales and operations plan (S&Op.))
o Master production schedule
o Material requirement planning
o Purchasing and production activity control
Strategic business plan:
o A statement of major goals and objectives the company expects to achieve
over next 2 to 10 years. The plan gives general direction about how the
company hopes to achieve major objectives. It is based on long range
forecasts and includes participation from marketing, finance, production
and engineering. In turn, plan provides direction and coordination
among marketing, production, financial and engineering plans.
o Level of detail is not high in business plan.
o Often stated in dollars rather than units.
o Strategic business plans often reviewed every six months to a year.
Production plan:
o Given the objectives set in strategic business plan, production
management is concerned with,
Quantities of each product group that must be produced in each
period.
The desired inventory levels.
The resources required in each period.
The availability of resources needed.
o Level of detail is not high: will have major categories of products as detail.
o Planning horizon is usually 6 to 18 months and is reviewed each month
or quarter.
Master production schedule:
o A plan for production of individual end items.
o It breaks down production plan to show, for each period, the quantity of
each end item to be made.
o Inputs of MPS are production plan, the forecast of each individual
end items, sales orders, inventories and existing capacity.
o Level of detailing is more than production plan.
o Planning horizon is usually 3 to 18 months but primarily depends on the
purchasing and manufacturing lead times.
o Review period is weekly or monthly.
Material requirement plan:
o Its the plan for production and purchase of components used in making
an item in the master production scheduling.
o It shows the quantities needed and when manufacturing intends to make
or use them.
o Level of detail is high.
o Planning horizon is at least as long as combined purchase and
manufacturing lead times.
Purchasing and production activity control:
o Represents the implementation and control phase of production planning
and control.
o Purchasing controls the flow of raw materials into the factory
o Production activity and control controls the flow of work through the
factory.
o Planning horizon is very short from day to a month.
o Level of detail is very high.
o Plans reviewed and revised daily.

Sales and operations planning:


o It is the process for continually revising the strategic business plan and
coordinating plans of various departments.
o It involves sales and marketing, product development, operations and
senior management where operations represents supply and marketing
as demand.
o SOP is the forum in which production plan is developed.
Manufacturing resource planning:
o Strategic business plan incorporates the plan that has been agreed by all
three groups: Marketing, finance and Production.
o Marketing must agree that their plans are realistic and attainable
o Finance must agree on financial viability of the plan
o Production must agree on the capabilities to meet the requirements.
o Manufacturing planning and control is the fully integrated system which
is called as manufacturing resource planning (MRP II).
o MRP II coordinated marketing and production.
Making production plan:
o Based on existing market plan and available resources, the production
plan sets level of manufacturing activity for some time period.
o Production plan sets general levels of inventory and production. It
establishes the general level of production rates which helps achieve the
objectives of strategic business plan.
o Basic three strategies to be used for production :
Chase strategy
Level strategy
Subcontracting

o Advantage to the chase strategy is at any given point of Time Company


would be producing what is exactly required. So inventory can be kept at
the minimum level.
o Level strategy has only one disadvantage: stockpile of inventory during
the low demand period.
o Subcontracting means, always produce at the level of minimum demand
and meeting any additional demand through subcontracting.
o Subcontracting can mean buying extra amounts demand or turning
away extra demand by increasing prices when demand is high or by
extending lead times.
Level production:
o Total production = Total forecast + back orders + ending inventory
opening inventory
o In terms of backlog :
Total production = total forecast + opening backlog Ending
backlog
Resource Bill: It is the quantity of critical resources (materials, labor, and
bottleneck operations).
Make to stock maintain required level of inventory

Make to order maintain the planned backlog

Chapter: 3
Master production scheduling forms a basis for calculating capacity and
resources required.

Information required to device an MPS plan :

o Production plan
o Forecast for an individual end item
o Actual orders received for customers and for stock replenishments
o Inventory levels for individual end items
o Capacity restraints

Rough cut capacity planning: Once preliminary master production scheduling


is formulated, it has to be checked against the available capacity.
o It includes critical resources including bottleneck operations, labour and
critical materials which are scarce or having long lead time.
o That has to be done at individual unit level for bottleneck resources.

Master schedule decisions:


o Make to stock products - A limited number of standard items are
assembled from many components. MPS is usually schedule of finished
goods.
o Make to order products Many different products from a small number
of components are made. MPS is usually a schedule of actual
customer orders.
o Assemble to order products Many end items are made from
combinations of basic components and subassemblies. MPS is usually
planned using final assembly schedule.

For MPS minimum planning horizon is the longest cumulative lead time.

MPS & Delivery promises:

o Available to promise is the portion of inventory and planned production


that is not already committed and is available to the customer.
o ATP is calculated by adding scheduled receipts to the beginning
inventory and then subtracting actual orders scheduled before the next
scheduled receipt.
o Scheduled receipt: It is an order that has been issued either to
manufacturing or to a supplier.
o ATP will be calculated at the period when scheduled receipts are going to
arrive. Any leftover inventory which is not consumed need to be included
in the next ATP calculation.
o If customer orders are greater than the scheduled receipts, in this
case the previous ATP is reduced by the amount needed.

Projected available balance:


o That is calculated based on whatever is maximum amongst forecast and
actual orders.
o It is calculated in one of the two ways, whether the period is before or
after the demand time fence.
o Demand time fence is the number of periods beginning with period
1, in which changes are not expected due to excessive cost caused
by schedule disruption.

For periods before demand time fence it is calculated as:


o PAB = prior period PAB or on hand balance + MPS customer orders
o This ignores forecast and calculations are based on actuals only. Any
change needs to be approved by senior management.

For periods after demand time fence, forecast influence the PAB so it is
calculated based on greater of forecast and customer orders.
o PAB = prior period PAB + MPS greater of customer orders or
forecast

Time fences:
o Frozen zone: Capacity and materials are committed to specific orders.
o Slushy zone: Capacity and materials are committed to less extent.
The extent of slushy zone is called as planning time fence. Within
time fence system will not reschedule MPS orders.
o Liquid zone: Any change can be made to the MPS as long as it is within
the limits set by production plan. Changes to MPS will occur.

Chapter: 4
Demand is of two types: Independent & Dependent
MPS can only be of independent demand items.
Dependency can be horizontal or vertical.
Material requirement planning is an input to production activity control.
MRP plans the release and receipt of the orders.
Input to material requirement planning is :
o Master production schedule
o Bill of material
o Inventory records
MPS is a statement of which end items are going to be produced, the quantities
of each and the dates they are to be completed.
Bills of material structures:
o Product tree: Tree structure
o Parent-component relationship:
o Multilevel bill: Having multiple levels, most parent level is 0 and it goes
as 1, 2, 3 Bill of material is not completed till all branches of the
product structure tree end in a purchased part.
o Multiple bill: Having different BOM for the slight change in the
components used for making two different types of part having same
kind.
o Single level bill: Having only single level showing parent and immediate
sub-assembly, reducing the need for different individual BOM creation
for the variants.
o Indented bill: Having parent on the left and the sub parts are indented to
right having req. of qty for each sub part.
o Summarized part list: Having all the required parts summarized in one
bill regardless of the way product will be made or assembled.
o Planning bill: they are the artificial grouping of components for planning
purpose. If we have 27 diff. variant of tables. We will shows percentage
req. of each component based on forecast and history on single bill.

Material requirement planning process:


o There may be plenty of operations happen between components and
parent. These operations will be controlled by production activity
control and not material requirement planning.
o The purpose of MRP is to determine the components needed, quantities,
and due dates so items in MPS are made on time.

Basic MRP techniques:


o Exploding and offsetting :
Exploding: It is the process of multiplying the requirements by
usage quantity and recording the appropriate requirements
throughout the product tree.
Offsetting: It is the process of placing exploded requirements in
their proper periods based on lead time.
Planned order release: The order for components required for
period 5 should be placed in period 4 for LT 1 week.
Planned order receipt: The order should be received at the
respective stage if the schedules are made for production of parent
components scheduled for that period.
o Gross and net requirement: Gross is the inventory required to make a
parent product regardless of consideration of WIP. Net requirement will
be calculated based on (Gross On hand inventory).
The planned order release of parent becomes the gross
requirement of components.

o Releasing orders:
Planned order releases are only planned and not actually
released.
Order of material should not be released until planned order
release date arrives.
The meaning of releasing an order is to give authorization to
purchase or manufacture to make the compound.
When the planned order is actually released then planned
order receipt is canceled and a scheduled receipt is created in
its place.

o Open orders :
Scheduled receipt on the MRP record are open orders on the
factory and are the responsibility of purchasing and of production
activity control. When goods are received into inventory and
available for use, the order is closed out, and the scheduled receipt
disappears to become part of the on hand inventory.

o Planning horizon: The number of periods in the record is called


planning horizon. It should be at least as long as the cumulative product
lead time.
o Action bucket: Immediate or most current period is called the action
bucket.
o Capacity requirement planning :
o Low-level coding and netting :
o Multiple bills of material :

Chapter: 5
Capacity required: It is the capacity of the system or resource needed to
produce a desired output in a given time period.
Load: It is the amount of released and planned work assigned to a facility for a
particular time period.
Capacity available is the rate at which work can be withdrawn from the system
and load is the amount of work in the system.
Capacity planning is the process of determining the resources required to meet
the priority plan and the methods needed to make that capacity available.
Planning levels:
o Resource planning: Long range capacity resource requirements and
directly linked to production. If resource plan cannot be devised to meet
the production plan, the production plan has to be changed.
o Rough-cut capacity planning: MPS is the key source behind this
planning analysis. The purpose is to check the feasibility of MPS, provide
warning of any bottlenecks, ensure utilization of work centers and advise
vendors of capacity requirements.
o Capacity requirement planning: It is directly linked to material
requirement planning. It is concerned with individual work centers and
calculates work center loads and labor requirements for each time period
at each work center.

Inputs to capacity requirement planning:


Open order file
Material requirements plan
Routing file
Work center file
Open shop order appears as a scheduled receipt on the material
requirement plan. It is a released order for a quantity of a part to be
manufactured and completed on a specific date.
Open order file is a record of all active shop orders.

Planned order releases: planned orders are determined by computers MRP


logic based upon the GROSS requirements for a particular part.

Work center file: It contains information on capacity and move, wait, queue
time associated with the center.

Move time: It is the time normally taken to move material from one workstation
to another.
Wait time: It is the time a job is at a work center after completion and before
being moved.

Queue time: It is the time a job waits at a work center before being handled.

Lead time: It is the sum of queue, setup, run, wait and move times.

Two ways of determining capacity available:

Demonstrated capacity is figured from historical data.


Calculated or rated capacity is based on available time, utilization
and efficiency.

Rated capacity: available time * utilization * efficiency

Utilization: (hours actually worked/available time) * 100%


Efficiency: (actual rate of production/standard rate of production) * 100%

Back scheduling: It is the process to start with due date and using the lead
times to work back to find the start date for each operation. This process is
called back scheduling.

Work center file has all information from queue, run, setup, move, wait time to
work center capacity.
Chapter: 6
Dispatching: Releasing orders to shop floor as authorized by the material
requirement plan.
Manufacturing systems:
o Flow manufacturing:
This is concerned with the production of high-volume standard
products.
If the units are discrete it is called repetitive
manufacturing and if goods are made in continuous flow
then it is called as continuous manufacturing.
Routings are fixed. Work centers are arranged according to
that.
Variety is really less and special tooling are used for making
the product.
Less changeover and inventory buildup.
Throughput times are low.
Capacity is fixed by the line.

o Intermittent manufacturing:
Process flow.
Many variations in product design, process requirements and
order quantities.
Flow of work through the shop is varied and depends on design of
particular product.
Machines are grouped together according to the function they
perform.
Throughput times are generally long. There will be inventory
buildup
Machine changeovers are more.
Capacity required depends on the particular mix of products being
built and is difficult to predict.

o Project manufacturing:

Data requirements:
o Planning files:
Item master file
BOM
Routing file
Work center master file
o Control files:
Shop order master file
Shop order detail file
Setup time and run time comes under the control of industrial engineering
department.
Queue, wait and move time comes under the control of manufacturing and
production activity control department.

Scheduling techniques:

o Forward scheduling:
Material procurement and operation scheduling for a component
starts once order is received. The operations scheduled forward
from this date. This results in completion before due date and
accounts for inventory buildup.
This is useful to decide the earliest delivery date for the
product.
This kind of scheduling is helpful to calculate how long it will take
to complete a task.
This is useful in developing the promise dates for the customers or
figuring out whether an order behind schedule can be caught up.

o Backward scheduling:
The last operation in the routing is scheduled first and it is
scheduled for completion at the due date.
This logic is used in MRP planning system.
WIP is reduced but because there is a little slack time in system,
customer service may suffer.
This scheduling is normally used in production as it reduces
inventory

Infinite loading:
o Analysis can have over and under loading situation.
Finite loading:
o No overloading situation.
Operation overlapping:
o In operation overlapping, next operation is allowed to begin before the
entire lot is completed on the previous operation.
o It reduces the total manufacturing lead times because the second
operation starts before the first operation finishes all the parts in the
order.
o Move costs are higher if the operations done on different machines are
not close enough.
o It may increase the queue at second operation if the operation on
first lot at second operation is not completed before lot arrival.
o It potentially reduce the capacity if the second operation is idle
waiting for the parts from first operation.
o If run time on second operation is long the first lot should be of
small size and if run time on second operation on short then first
lot should be large enough to reduce the risk of idle time increase.

Operation splitting:
o The order is split into two or more lots and run on two or more machines
simultaneously.
o It is justified when setup time is less than run time.
o A suitable work center is idle.

Bottleneck:
o Overloaded workstations are called as bottlenecks.
Throughput:
o It is the total volume of production passing through a facility. Bottleneck
controls throughput of all products processed by them.
o If work center feeders feed bottleneck more than it can produce then
excess inventory will be built up.
o Work should be scheduled at the rate bottleneck can process the work.
o Work centers fed by bottlenecks have their throughput controlled by
them and the schedules should be determined by that of the bottlenecks.
Managing bottlenecks:
o Establish time buffer before each bottleneck: It is an inventory place
before each bottleneck because bottleneck must not be starved.
o Controlling the rate of material feeding the bottleneck: Bottleneck must
be fed at the rate equal to the capacity so the time buffer remains
constant. The first operation in the sequence of operations is called
a gateway operation.

Feeding operations have to protect the time buffer by scheduling backward in


time from the bottleneck.

Theory of constraints and drum-buffer-rope:


o IESEO:
Identify: One thing to note that constraint limits the throughput
and not inventory or production.
Exploit: Find methods to maximize the utilization of the constraint
toward productive throughput.
Subordinate: Effective utilization of constraint is the most
important issue. Everything else is secondary.
Elevate: Find ways to increase available hours of constraint.
Once its resolved find another and repeat.
Scheduling with Theory of constraints:
o Drum: Pace of production. This represents the master scheduling of the
production, which is focused around the pace of the throughput as
defined by the constraint.
o Buffer: Constraint should never be starved. A time buffer should always
be establish in front of constraint.
o Rope: Jus as an analogy, rope pulls production to the constraint for the
necessary processing.

The largest portion of lead time is Queue time.


Dispatching: It is the function of selecting and sequencing available jobs to be
run at individual work centers.
Dispatching rules:
o FIFO: Rule ignores due date and processing time.
o EDD: Earliest due date. Processing time is not considered.
o ODD: Earliest operation due date. Jobs are performed according to their
operation due date. Due date and processing time both are taken into
account.
o SPT: Shortest process time. Ignores due date, but try to maximize the
number of jobs processed.

Critical ratio: Index of the relative priority of an order to other orders at the
work center.
o CR = (due date present time)/lead time remaining = Actual time
remaining/lead time remaining.
o If CR <1, behind schedule.
o If CR = 1, on track.
o If CR >1, ahead of schedule.
o If CR =0 or less, already late.
Chapter: 7
Functional specifications: They are concerned with the end use of the item and
what item is expected to do.
Value analysis: The systematic use of techniques that identifies a required
functions, establish a value for that function and finally provide that function at
the lowest overall cost.
Selecting supplier:
o Sourcing:
Sole sourcing implies that only one supplier is available because
of patents, technical specifications, raw material, location
Multiple sourcing is use of more than one supplier for an item.
The potential advantages of multiple sourcing are that competition
will result in lower price and better service and that will be a
continuity of supply.
Single sourcing is a planner decision by the organization to select
one supplier for an item when several sources are available. It is
intended to produce long term partnerships.
Price determination:
o Fair price: It is competitive, gives the seller a profit, and allows the buyer
ultimately to sell as a profit.
o Prices have upper and lower limit. Market decides the upper limit and
seller decides the lower limit.
o Fixed cost: Costs incurred no matter the volume of sales.
o Variable cost: Directly associated with the amount produced or sold.
Total cost = Fixed cost + (variable cost per unit)(Number of units)

Unit cost = fixed cost/number of units + variable cost per unit

As number of units produced increases, the unit cost decreases.

Buyers can lower the unit price paid by increasing the volume per order
using ling-term contracts or through the standardization of parts.

Sellers also offers quantity discounts to encourage larger orders, also


taking advantage of this reduction in unit cost.
Break even point = When total cost line intercept revenue line at one
point that point is called as BEP & at that point of time,
o REVENUE = TOTAL COST

Sales volume less than break-even point shows loss and more than that
shows profit.

Revenue = total cost

(Price per unit) (units sold) = fixed cost + (variable cost per unit) (number
of units)

Competitive bidding:

o Price negotiations:
Commodities: Price is set by the market supply and demand and
can fluctuate widely. Negotiation is concerned with contracts for
future prices.
Standard products: Items are standard and the choice of suppliers
large, prices are determined on the basis of catalog prices. Not
much room for negotiations.
Items of small value: Price negotiations of little purpose. Prime
objective is to keep the cost of ordering low.
Made to order items: Generally can be negotiated.

Impact of NRP on purchasing:


o Purchasing can be separated in two types of activities:
Procurement
Supplier scheduling and follow up
o Sometimes planner and buyer job are combined into a single job done by
one person.
o Planer/Buyer do the material planning for the items under their control,
communicate the schedules to the suppliers, follow up and resolve
problems, and work with other planners and the master scheduler when
delivery problems arise.
Contract buying:
o Developing a long term contract with a supplier for the frequent
orders for small quantity to be authorized to release against the
contract.

Contract buying ensures suppliers a given amount of business and commits


them to allocate that amount of their capacity to customer. Suppliers are more
responsive to customer needs and can react quickly to changes in schedules.
Because customers know the capacity will be available when needed, They can
delay ordering until they are more sure of their requirements..
Supplier flexibility and reliability

Vendor managed inventory: Supplier manages inventory of certain items in


the customer facility. Supplier owns the inventory until the customer actually
withdraws it for use, after which the customer then pays for that use. Supplier
is responsible of maintaining adequate level of inventory. This is useful for lower
value products that have relatively standard design.

Internet/Intranet/Extranet

CRM includes several activities with the intent to build and maintain a
strong customer base. Customer wants and needs are assessed and cross
functional team from the company work to align company activities
around those customer needs.

Supplier relationship management is focused on building long term


relationships with key suppliers.

Bullwhip effect: Where there is an uncertainty in supply chain based on the


use of forecast and uncertainty is then exaggerated by the lead timer effects
and differences in lot sizes as material moves through the supply chain.

o Effect can produce large fluctuations in demand for raw materials


based on relatively small changes in demand from the customer end
of the supply chain.
Blanket ordering: It is a purchase order the customer makes with its supplier
which contains multiple delivery dates over a period of time, often negotiated to
take advantage of predetermined pricing. It is normally used when there is a
recurring need for expendable goods.
Chapter: 8
Demand management: It is a function of recognizing and managing all demands
for products.
o In long term, demand projections are for strategic business planning.
o In medium term, purpose is to aggregate demand for production
planning.
o In short term it is to support MPS.
Demand patterns:
o Trend: Trend can be level, having no change from period to period, or it
can rise or fall
o Seasonality
o Random variation: it occurs where many factors affect demand.
o Cycle

Stable: the demand patterns for those which retain the same general shape are
stable.
Dynamic: opposite of above statement.
Average demand is the same for both stable and dynamic and it is usually
the average demand that is forecast.
Dependent demand items are not generally forecasted as they can be calculated
from the independent demand item.

Principles of forecast:
o Forecasts are usually wrong.
o Every forecast should include an estimate of error.
o Forecasts are more accurate for families or group.
o Forecasts are more accurate for nearer time period.

Anything that can be done in order to reduce lead time will improve
forecast accuracy.

Forecasting techniques:
o Qualitative techniques: Historical analogy, Test-market, Delphi method
o Extrinsic techniques: These are projections based on external indicators
which relate to demand for a companys products.
This method is mostly useful for forecasting the total demand
for a firms products rather than individual end items.
o Intrinsic techniques: Uses historical data to forecast.
Always forecast average demand.

Moving average method:

o If there is a trend in demand and a longer period is used for moving


average method, forecast does not react quickly. If shorter period is
used then it reacts quickly. But forecast will always lags behind the
trend.

o Moving average always lags in trend, the longer it will be, and causes the
greater lag.

o If demand having random variations, short term forecasting will react


quickly and will shows wrong data.

o This method is useful where you have stable demand.

Exponential smoothing:

o It does not require a user to keep lot of historical data.


o This method uses old forecasted data and the new data.
o New forecast = $*(actual this term demand) + ( 1- $ ) * (forecast of last
term demand)

Exponential smoothing is short range forecasting.


It works well with stable demand items.
Exponential smoothing technique will detect trends, although the
forecast will lag the actual demand if a definite trend exists.
If a low co-efficient factor is used as 0.1 then old forecast is heavily
weighted and changing trend will not be picked up easily.
If large factor is used as 0.4 then forecast will react sharply to
changes in demand and will be erratic if there is sizable random
fluctuation.

Seasonality:

Useful indication of degree of seasonal variation for a product is the seasonal


index.
This shows how much the demand during the season will be above or below the
average demand for the product.

Seasonal index = period average demand/average demand for all periods.

Average demand for all periods is the value that averages out seasonality
that is called as deseasonalized demand.

Seasonal index = period average demand/ deseasonalized demand.

Total of all seasonal indices should be equal to total number of periods.

Deseasonalized data must be used for forecast.

Tracking forecast (forecast error):


o Forecast error: it is the difference between actual demand and forecast
demand.
o Error can occur in two ways: 1) Bias and 2) random variation.
o Bias: Cumulative actual demand may not be same as forecast. It is
the systematic error in which the actual demand is consistently
above or below the forecast.
Mean absolute deviation:
o Calculate total error ignoring the plus and minus sign and take
average.
o MAD = |E|/n

Normal distribution:
o Two important characteristics:
Central tendency and dispersion.

o Central tendency is forecast, dispersion is standard deviation.


o +/-1 MAD of average about 60% of time
o +/-2 MAD of average about 90% of time
o +/-3 MAD of average about 98% of time

Tracking signal:
o Bias exists when cumulative actual demand varies from forecast.
o If variation is due to random variation, the error will correct itself and
nothing should be done to adjust forecast.
o If error is due to bias, forecast needs to be corrected.
o In normal circumstances actual demand will be within +/-3 MAD.

o Tracking signal = (algebraic sum of forecast errors/MAD)


Chapter: 9
Anticipation inventory: It is built up in anticipation of future demand.
Fluctuation inventory: It is held to cover random unpredictable fluctuation in
supply and demand. Companies keep safety stock for this reason.
Lot size inventory (cycle stock): Items are purchased in quantities greater
than needed immediately create lot size inventory.
Cycle stock: It is lot size inventory only. It is the part of inventory which gets
depleted gradually as customers orders come in and is replenished cyclically
when suppliers orders are received.
Transportation inventory: It exists because of the time needed to move goods
from one location to another location. This is nothing but pipeline or
movement inventory.

I = (t * A)/365

Hedge inventory: The price of products fluctuates according to world supply


and demand. If buyers expect prices to rise, they can purchase hedge
inventory when prices are low.
It is easy to meet seasonal demand by level production.
Inventory can help increase the bottleneck resource capacity.
Fewer setups and lower setup costs per item.
Inventory is only okay to be carried if benefits exceeds the costs of
carrying the inventory.

Inventory costs are calculated based on the average inventory during period.

Inventory cost = (beginning of period on hand inventory + ending on hand


inventory)/2

Balance sheet:

o Equity: Assets - liability


o Liability: payable and owed money
o Assets: capital, cash, accounts receivables, inventory
o Retained earnings: excluding capital assets, assets- liability
Income statement:
o Revenue: sale of goods and services
o Expenses: cost incurred in the process of making revenue.
o Income: Revenue expenses

Inventory turns: Convenient measure of how effectively inventory is used.


o Inventory turns : (annual cost of goods sold/average inventory in
dollars)

Inventory turn = (1000000/500000) = 2

Which means that with $500000 of Inventory Company is able to generate $1000000
in sales. So through better material management we can reduce the $0.5M cost.

Days of supply: Inventory on hand/average daily use


Chapter: 10
Main objective of inventory management is:
1) Maintain certain level of customer service.
2) Reduce overall costs involved.

Stock keeping unit: Control is exercised through individual items in a particular


inventory.
Lot or batch: A quantity produced together and sharing the same production
costs and specifications.

Lot-for-Lot: This rule says to order exactly what is needed - no more - no less.
The order quantity changes whenever requirement changes.

Lot-for-lot requires time phased information such as provided by material


requirement plan or MPS. Since items are orders when required so this
system creates no unused lot size inventory. Because of this it is the best

method for planning A items and used in JIT environment.

Fixed order quantity: this rules specifies the number of units to be ordered
each time an order is placed for an individual item. Disadvantage of this method
is it does not minimize the costs involved.

Min-Max system: A variation on the fixed order quantity is this system. In this
system, an order is placed when the quantity available falls below the order
point. The quantity ordered is the difference between the actual quantity
available at the time of order and the maximum.

Economic order quantity assumptions:

o Demand is relatively constant and known.


o The item is produced or purchased in lots or batches and not
continuously.
o Order preparation costs and inventory carrying costs are constant and
known.
o Replacement occurs all at once.
The above assumptions are usually valid for finished goods whose demand
is independent and fairly uniform.
There is no reason to calculate EOQ for,
o Made to order items in which customer specifies the order quantity.
o Shelf life of product is short
o Length of run is limited by tool life or raw material batch size.
Average lot size inventory = order quantity/2
Number of orders per year = annual demand/order quantity.
Annual demand = (average lot size inventory * days/weeks)

Relevant costs associated with inventory are,

o Annual cost of placing orders.


o Annual cost of carrying inventory.

A = annual usage in units


S = ordering cost in dollars per order
I = annual carrying cost rate as a decimal or percentage
C = unit cost in dollars
Q = order quantity in units

Annual ordering cost = number of orders * costs per order

= (A/Q) * S

Annual carrying cost = average inventory * cost of carrying 1 units for 1 year

= average inventory * unit cost * carrying cost

= (Q/2) * c * I

Total cost = (A/Q) * S + (Q/2) * c * I

For any situation in which annual demand, cost of ordering and cost of carrying
inventory are given, the total cost will depend upon the order quantity (Q).

Carrying cost = ordering cost


Qic/2 = AS/Q

Q = sqrt(2*A*S/ic)

To reduce lot size,


o Cost of ordering needs to be reduced.

Two different EOQ models:


o Monetary unit lot size
o Non-instantaneous receipt model

Monetary unit lot size:


o All parameters are similar except annual usage will come as dollar value
rather than unit value.

o EOQ = sqrt( 2 * Ad * S/i)

Non-instantaneous receipt model:


o Where we are not receiving everything at once. Ordered material is being
produced over an extended period of time, yet material is received for the
order as it is being produced.
o EOQ = sqrt((2AS/IC)(P/P-D))

Quantity discounts:
o Savings in purchase cost.
o Ordering costs are reduced because fewer orders are placed since larger
quantities are being ordered.
o Inventory carrying costs are higher because of larger quantities.

Order quantities for families of product when costs are not known:
o For families of product, ordering costs and carrying costs are generally
same for each item.
o Now,
Q = sqrt(2* Ad * S/i)

o Now S and i are similar for all items. So ratio 2S/I must be same
for all items in the family,
o K = sqrt(2S/i)

o Q=K * sqrt(Ad)
Q = Ad/N
K* sqrt(Ad) = Ad/N
K = sqrt(Ad)/N

o Period order quantity:


o Period order quantity lot size rule is based on the same theory
as economic order quantity. It uses EOQ formula to calculate
economic time between the orders.

Period order quantity = EOQ/average weekly usage


So when the order is placed, it will cover the demand till the outcome
from period order quantity weeks.

Lumpy demand: When demand is not uniform and replenishment is


not occurring at once, EOQ will not produce best results. We need to
use period order quantity.

Chapter: 11
Order point system: when quantity on had in inventory falls to a
predetermined level, it is called as order point.
o OP = Demand during lead time + SS
o OP = (Average demand for a period) +SS

Average demand = Order quantity/2 + SS


Safety stock is a calculated extra amount of stock carried and is generally used
to protect against uncertainty.
Safety lead time is used to protect against timing uncertainty by planning order
releases and order receipts earlier than required.

Normal curve:

o +/- 1 sigma, shows that 68.2% of points are within this area about the
nominal value.
o +/- 2 sigma, 95.4%
o +/- 3 sigma, 99.6%

Standard deviation:
o It shows how close the actual value is from the nominal value.
o Calculate the deviation for each period by subtracting the actual demand
from the forecast demand.
o Square each deviation.
o Add the squares of the deviation.
o Divide the value by number of periods to determine the average of the
squared deviations.
o Calculate the squared rood of the value.

The deviations in demand are for same time intervals as the lead time. If
the lead time is one week, then the variation in demand over a one-week
period is needed to determine the safety stock.
Different forecasts and lead time intervals:
o Sigma(LTI)/Sigma(FI) = SQRT(LTI/FI)
o New safety stock/Old safety stock = SQRT(New interval/old interval)

Two bin system:


o A quantity of an item equal to order point quantity is set aside (Second
bin) and not touched until all the main stock is used up. When this stock
needs to be used, the production control or purchasing department is
notified and a replenishment order is placed.
o The two bin system is a simple way of keeping control of C items.
Because they are of low value, it is best to spend the minimum amount
of time and money controlling them.

Periodic review system:


o In order point system, an order is placed when the quantity on hand fails
to a predetermined level called the order point.
o The review period is fixed but the order quantity is allowed to vary.
o The quantity on hand plus quantity ordered must be sufficient to last
until the next shipment is received.
o Quantity on hand plus the quantity ordered must equal the sum of the
demand during the lead time + demand during review period + safety
stock.
T = D(R + L) + SS

o Order quantity is such cases is,


Q = T I,
T = Maximum inventory level
I = Inventory on hand

Distribution inventory:
o Decentralized system:
Each distribution center first determines what it needs and when,
and then places orders in central supply.
Each center orders on its own without regard for the needs of the
others, available inventory at central supply or the production
schedule of the factory.
The advantage of decentralized system is each unit operates on
their own and thus reduce communication and co-ordination
expense.
Disadvantage is the lack of coordination and effect this may have
on inventories, customer service and factory schedules.
Decentralized system is sometimes called as Pull system. As
orders are placed on central supply and pulled through system.
o Centralized system:
All forecasting and order decisions are made centrally.
Stock is Pushed out into system from central supply.
Distribution centers have no say about what they receive.
Disadvantage is poor local service level.

Chapter: 12
Marshal the shipment: Goods making up a single order are brought together
and checked for omissions or error. Order records are updated.
Dispatch the shipment: Orders are packaged, shipping documents are
prepared and goods are loaded on the right vehicle.
Cube utilization and accessibility:
o Warehouse capacity depends on how high goods can be stored.
o A palate standard dimensions are 48 inch deep * 40 inch side and 4 inch
thick.
o If we are placing two pallets side by side we need to keep 2 inch
allowance between them so they can be moved.
o Pallets can be stacked, usually the number of stacked pallets are three.
o Cube utilization is the use of space horizontally and vertically.
o One way to increase cube utilization is to install tiers of racks so lower
pallets can be removed without disturbing the upper ones.

Working stock: Stock from which withdrawals are made. Can be located near to
marshalling and shipping area,
Reserve stock: Used to replenish the working stock can be located more
remotely.
This allows order picking to occur in a compact area and replenishment of the
working stock in bulk by pallet or container load.

Fixed location: Minimum of record keeping.


o Poor cube utilization
o If demand is uniform then presumably the average inventory is half the
order quantity and enough space is allocated for full order quantity.
o On the average only 50%of the cube space is utilized.
o This system is used in small warehouses where space is not at a
premium, where throughput is small and where there are a few SKUs.

Floating location: Here goods are stored wherever there is appropriate space
for them.
o Improved cube utilization.
o Warehouse efficiency is greatly improved.

Point of use storage: JIT environment


o Floor stock materials C category goods.
Central storage: reduction of safety stock as user does not need to carry their
own safety stock.
Order picking and assembly:

o Area system: order picker circulates throughout the warehouse selecting


the items on the order as super market. Items are then taken to shipping
area. Order is self marshalling in that when order picker is finished, the
order is complete.
o Zone system: warehouse is divided into zones and order pickers work
only in their own area. Order is divided up by zone and each order picker
selects those items in their zone and sends to the marshalling area where
order is assembled for shipment. A variation of the zone system is to
have the order move to the next zone rather than to the marshaling
area.
o Multi order system: similar to zone system but focusing on more than
one order for picking.

Inventory audit:
o Periodic (usually annually) counts of all items
o Cyclic( usually daily) counts of specific items
o It is important to audit record accuracy but more important to audit the
system to find the causes of record inaccuracy and eliminate them.
Cyclic counting does this, but periodic audits tend not to.
o Zone method: Items are grouped by zones to make counting more
efficient. The system is used when fixed location system is used, or
when work in process or transit inventory is counted.
o Location audit system: In floating location system, goods can be stored
anywhere. In location audit system, a predetermined number of stock
locations are checked each period.

The zone method is ideal for fast moving items. If a


floating location system is used, a combination of ABC &
location audit is appropriate.

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