MIM 558

1. MIM 558 Inventory Lean/JIT

2. Why Do We Have Inventories?

3. Why Do We Have Inventories? • Cover Up For • Customers’ Unreliable Forecasts • Our Unreliable Forecasts, Bad Planning • Inaccurate Shop Floor Scheduling • Poor Inventory Control • Poor Internal Quality • Unreliable Supplier Deliveries, Quality • Unreliable Transportation • Excessive Supplier Lead Times • Excessive Set-Up Times • Poor Maintenance

4. Reasons to Keep Inventories • Seasonal Demand Exceeds Capacity • Hedges • Supply • Price In general, we should maintain inventories: • if they provide a competitive or strategic advantage, OR • if inventories will provide necessary goods unavailable any other way.

5. Inventory Types • Raw Materials and Components • Work-in-Process • Finished Goods • Maintenance, Repair and Operating Supplies • Squirrel Stock • Excess, Surplus, Scrap

6. Inventory Carrying Costs

7. Inventory Carrying Costs • Cost of Capital • Lost Opportunity Cost • Borrowing Costs • Inventory Labor • Wages • Fringe Benefits • Capital Investments • Building • Material Handling Equipment • Storage Racks

8. Inventory Carrying Costs • Variable Costs • Heat and Light • Taxes and Insurance • Shrinkage and Obsolescence • Tracking Costs • Computer Time & Data Entry

9. Inventory Transaction Costs

10. Classifications of Inventories • Emergency Inventories • Active Inventories • Expensed Inventories

11. Economic Order Quantity

12. Safety Stock Calculations • Safety Stock is a Function of Variability in Demand DURING LEAD TIME • Stockouts Often Are Caused By INTERACTION Between Lead Times Longer Than Normal and Demand Greater Than Normal

13. Safety Stock Calculations • Many Methods of Calculation • Average Use During Lead Time = Safety Stock • Maximum Use During Lead Time - Average Use During Lead Time = Safety Stock • Mean Absolute Deviation • Dangers of “Letting The Computer Do It”

14. Mean Absolute Deviation Step 1: Calculate Average Lead Time Usage Step 2: Compare Each Period’s Usage to Average Step 3: Calculate Average Difference Step 4: Select Inventory Response Rate Step 5: Calculate Safety Stock (Average Difference x Multiplier from Step 4)

15. Usage Variability and Service Levels MAD Std Dev Svc Lvl 1.0 .8 58% 1.5 1.2 77% 2.0 1.6 89% 2.5 2.0 95% 3.0 2.4 98% 3.5 3.2 99.5% 1 MAD = .8 Std Dev 1 Std Dev = 1.25 MAD

16. Minimum and Maximum • Min = Reorder Point (ROP) • Min = Average Use During Lead Time + Safety Stock • Max = EOQ + Safety Stock

17. Inventory Management Tools • ABC Analysis • Inventory Turnover Ratio

18. Inventory Management • Objectives • Assure Critical Item Availability • Minimize Investment • Measures • ABC Analysis • Level of Investment • Number of Turns • Inventory Response Rate • Overall and By Class • Days/Weeks of Supply

19. Inventory Management • An Alternative View of ABC • Criticality • Lead Time • Cycle Counting • Risk Pooling • Trading Premium Transportation for Inventory • Hold Slow Movers at Only One or Two Central Locations

20. Total Cost of Ownership • INV Cost = (Avg Inv + SS) x unit price x ICC • ADMIN Cost = # Orders x PO Cost • TC = INV Cost + ADMIN Cost • As Inventory Sits, Its Value Declines, Its Costs Increase

21. Consignment Inventories • Definition • Inventory Carrying Cost Sharing • Advantages • Investment • Availability • Potential Problems • Ownership • Flexibility • Minimum Turns

22. Grocery Inventory • If We Spend $500 Per Month On Groceries, and • If We Bought Groceries Like We Buy Indirect Supplies: • 1 Turn = $6,000 of Groceries On Hand • 2 Turns = $3,000 “ “ “ • 6 Turns = $1,000 “ “ “

23. What Is Impact Of Increasing Turns By 1?

24. Inventory Technologies • Bar Coding • ASRS • RF Technologies • Voice Pick • RFID Systems • Computer Controlled Warehouse Activities • Automated Reordering

25. JIT/Lean

26. JIT Redefines Waste • Traditional Waste Definition • Idle Men or Machines • Any Under-capacity Operation • Focus is on the PROCESS • Optimization of each operation JIT Waste Definition • Idle Inventory • Any Activity That Does Not Add Value • Focus is on OUTPUT of the Process • Don’t Make or Do Anything Until It Is Needed • Optimize the Entire Flow - Not Just A Process

27. Seven Wastes of JIT • Overproduction • Waiting • Process • Unnecessary Transportation • Motion • Material/Inventory • Defects

28. Five “S” • Sort (Eliminate anything unnecessary) • Straighten (Often used, most easily accessible, everything in its place) • Sweep, Shine (Clean and keep clean) • Standardize (Same task, same way) • Sustain (No backsliding)

29. JIT Prerequisites • Inventory Reduction is Byproduct • Primary JIT Advantage is Quality • JIT Prerequisites • Stable Design • Stable Schedule • Faultless Shop Floor Quality • Absolutely Reliable Supply Base • Quality • On-Time Delivery • Accurate Data • JIT is NOT Just Prompt Deliveries

30. Just-in-Time • Fundamental Objectives • Eliminate Waste • Increase Flexibility • Reduce Lead Times • Idle Inventory = Waste

31. JIT Features • Pull, Not Push System • Improves Materials Flow • Reduces Throughput Time • Reduces Inventories • Improves Quality • Reduces Inventories

32. JIT Features • Improves Supply Base • Improves Quality of Raw Materials • Improves On-Time Delivery • Reduces Inventories • Reduced Set-Ups • Increases Flexibility • Reduces Lot Sizes • Reduces Inventories

33. JIT Features, cont. • Improved Maintenance • Assures Machine Availability • Reduces Inventories • Reduces Space Requirements Reductions in Inventories From JIT Implementation are By-products of Process Improvements The Major Benefit of JIT is Improved Quality

34. JIT Implementation • Set-up Reduction • Cellular Layout (flow) • SPC on the Shop Floor • Kanban - Pull System • Preventive Maintenance • Multifunctional Workers • Capacity Control • Jidoka

35. JIT Impacts on Supply Chains • Purchasing • Few Suppliers • Long Term Close Relationships • Receiving • No Receiving • No QC Checks • Inventory Levels • Minimal Raw Materials, Work-in-Process, Finished Goods • MRO May Be Stable

36. JIT Applications • JIT Works Best For • MTS Firms • ATO Firms • Products in Maturity or Saturation Phases of Product Life Cycle • JIT Is Most Difficult For • ETO Firms • Products in Early Growth or Late Decline Phases of Product Life Cycle • Push/Pull Boundaries

37. ‘Pull’ Strategies • JIT is a Pull Process • Final Customer • Manufacturing Processes • Basic Raw Material • Push/Pull Boundary • Align Supply Chain Strategies • Inventory Levels, Fill Rates • Inventory Locations • Postponement • Collaborative Logistics • Supplier Strategic Focus

38. Process Improvement • Continuous Improvement • Breakthroughs • PDCA (Plan, Do, Check, Act) Deming • DMAIC (Define, Measure, Analyze, Improve, Control)

39. DMAIC • D Define a problem or improvement opportunity. • M Measure process performance. • A Analyze the process to determine the root causes of poor performance; determine whether the process can be improved or should be redesigned. • I Improve the process by attacking root causes. • C Control the improved process to hold the gains.

40. Process Improvement • Really Understand Customer Needs • Establish Standard Procedures / Train • Standardize Materials and Machinery • Simplify Everywhere • Synchronize Flow • Continuously Evaluate and Improve • Kaizen Blitz • Administrative Processes, too

41. Questions, Comments, Observations, Conclusions, Arguments?