Agenda

1. Materials ManagementBUS 3 – 141Ensuring Continuous Supply and Optimizing Inventory Levels September, 2011

2. Agenda • Questions from Last Week • Teams to be established by next week • “Ensuring Continuous Supply” • Optimizing Inventory Levels • MRP overview

3. Reasons for Carrying Inventory • Revenue • Have what Customers want, when they want it • Compensate for non-linear demand that doesn’t match your capacity • Buffer for upside demand • Buffer for when competitors cannot deliver • Buffer against unexpected internal supply problems Carrying Buffer inventory is necessary, but continuous, relentless efforts to minimize variability, and thus eliminate the need for the Buffers is greatly preferred

4. Reasons for Carrying Inventory • Cost • Minimize shortages, to avoid delays and idle time • Optimize plant, people, and equipment utilization • Obtain volume discounts for favorable unit pricing • Hedge against future price increases Optimizing utilization and unit pricing are valuable only when the goods made or purchased will SOLD to a paying Customer in a reasonable time The cost of a STOCKOUT is hard to quantify, but is to be AVOIDED at all times

5. Costs of Inventory • Carrying Costs • Capital (Interest and Opportunity Costs) • Warehouses and Stock rooms • Personnel • Insurance • Damage and Loss • Theft • Insurance • Taxes • Other Costs • Ordering Costs • Setup Costs • Stockout Costs • Lost Sales • Idle labor and equipment • Expedite fees

6. ABC Classification – the 80/20 Rule Applied * From Leenders, Johnson, Flynn, and Fearon, Purchasing and Supply Management, Thirteenth Edition, McGraw Hill Irwin

7. ABC Classification is not based on unit cost Unit Cost Annual Volume Annual Spend A High High High A High Medium High A Medium High High A Low Very High High B High Low Medium B Medium Medium Medium B Low High Medium C Medium Low Low C Low Medium Low C Low Low Low C Items can still stop a production line and cause Customer Shipments to be missed!

8. Example of how Inventory is Consumed and Reordered INVENTORY cycle stock ROP ROP = L × d TIME lead time (L) * From Leenders, Johnson, Flynn, and Fearon, Purchasing and Supply Management, Thirteenth Edition, McGraw Hill Irwin

9. Saw tooth Logic 1. Demand / Consumption INVENTORY 2. Signal & Response to Signal 4. Replenishment Re- Order Point TIME 3. Demand during Lead Time lead time (L)

10. Lot Sizing: The Economic Order Quantity (EOQ) CTmin total cost Annual Cost ($) carrying costs ordering costs EOQ Quantity Ordered A conceptual model that balances Carrying Costs and Ordering Costs. Somewhat limited, but often useful for C Items * From Leenders, Johnson, Flynn, and Fearon, Purchasing and Supply Management, Thirteenth Edition, McGraw Hill Irwin

11. Lot Sizing: Order Quantities

12. Lot Sizing: Order Quantities Fixed Quantity Same quantity whenever material is needed Fixed Period Calculates requirements for n periods. Example = 4 periods E O Q Calculated to balance Inventory & Ordering Costs Supplier Multiple Similar to Fixed Lot-For-Lot Maps exactly to Requirements

13. Material Requirements Planning Introduction and Overview

14. Lead Time Production Transit Receipt Planning Ordering Materials Set up Production Packaging Will be addressed directly in Later Chapters

15. Forecasting • Estimate of future events • Weather • Future Sales • Stock Prices • Other • Several Methods • Quantitative • History and Patterns • Leading Indicators (Housing Starts & Furniture) • Qualitative • Judgment • Consensus Forecasts WILL be wrong – the goal is to predict as closely as possible

16. A Forecast serves many Purposes WHAT is done and WHY? Region Product Line Channel Features Product Customer Revenue Planning Revenue Scenarios Allocation Criteria Commissions & Quotas Scheduling Factory Volumes Materials Planning Balancing Factory Capacity Assessing Direct Cost @ Mixes Analyzing Absorption implications Estimating TAM and Share Pricing Targets Programs & Promotions Margins @ Mixes Message to Analysts Business Need / Benefit

17. Forecast accuracy varies over time Over Expected Errors 0 +1 +2 +3 +4 ………………………………………… +n Time in Future (Weeks) Under The further into the future, the harder to predict details with accuracy

18. Highest Level MRP Logic Product Planning Demand Planning Master Production Scheduling Material Planning Production Delivery & Service

19. MRP Logic is Constantly Balancing Supply & Demand What you NEED (Demand) What you HAVE (Supply) • Final Assemblies • Sales Orders • Forecast • Components and Subassemblies: • Higher level Starts • Higher level Work Order Shortages • Stockroom Inventory • WIP Stores Inventory • Open Work Orders • Open Purchase Orders What you NEED TO GET and WHEN you need to get it (MRP output) • Planned Purchase Orders • Planned Work Orders • Rescheduled Work Orders • Rescheduled Purchase Orders

20. Types of Inventory Maintenance, Repair, & Operating Supplies (MRO) Raw Materials Resale Items Work In Process (WIP) Finished Goods (FGI) Manufacturing All Chocolate Cake Finished Goods Cake Icing Subassembly (WIP) Raw Material Water Egg Mix MRO Raw

21. Item/Descr. Where Used QPA OH LT Past Due 31-Jan 7-Feb 14-Feb 21-Feb 28-Feb SJSU141 MB1234 1 0 1 Gross Requirement 0 50 50 70 100 40 Mother Board On Order 0 70 100 10 0 0 Projected Available 0 20 70 10 -90 -130 Planned Order Complete 0 0 0 0 90 40 Planned Order Starts 0 0 0 90 40 0 Cum Planned Order 0 0 0 0 90 130 MRP “Nets” Inventory Balance On Hand just like a Checkbook is Equivalent to:

22. Item/Descr. Where Used QPA OH LT Past Due 31-Jan 7-Feb 14-Feb 21-Feb 28-Feb SJSU141 MB1234 1 0 1 Gross Requirement 0 50 50 70 100 40 Mother Board On Order 0 70 100 10 0 0 Projected Available 0 20 70 10 -90 -130 Planned Order Complete 0 0 0 0 90 40 Planned Order Starts 0 0 0 90 40 0 Cum Planned Order 0 0 0 0 90 130 MRP Netting Logic Illustration Lead Time Quantity Per Assembly Quantity On Hand

23. MRP is EXTREMELY DEPENDENT on ACCURATE DATA The system MUST see ALL inventory in ALL of these categories at ALL times In WIP Open Work Orders Open Purchase Orders In Receiving In the Stockroom In a higher Assemblies In Finished Goods Shipped In a WIP Location EVERY time inventory is moved, a TRANSACTION must be executed