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Chapter 6 Quantity & Delivery

Chapter 6 Quantity & Delivery. By: Paul Batchelor, Paige Frank, Matthew Johnson, Priscilla Mak, Missy McCormick. Why Do We Care?. Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand Models Service Levels MRP Game Case 6-3.

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Chapter 6 Quantity & Delivery

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  1. Chapter 6Quantity & Delivery By: Paul Batchelor, Paige Frank, Matthew Johnson, Priscilla Mak, Missy McCormick

  2. Why Do We Care? Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand Models Service Levels MRP Game Case 6-3 • Continuous improvement and organizational goals drive management attitudes to quality, quantity and delivery • Ch 5 – Quality • Ch 6 – Quantity and Delivery

  3. Classification of Purchases PURCHASES ABC Forecasting Inventory Carrying Costs Inventory JIT Demand Models Service Levels MRP Game Case 6-3 • Direct/Indirect Purchases • Types of Requirements • i.e. raw materials, resale items, packaging, etc. • Frequency of Purchase • Stock Items • i.e. whether or not purchases are for stock replenishment • Physical/Chemical Nature • Transport Type • Monetary Value – ABC Classification

  4. ABC Classification Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand Models Service Levels MRP Game Case 6-3 • Concentrates efforts in the areas of highest payoff • Reduces paperwork and managerial effort, but maintains a high service coverage • Steps: • Calculate purchase value (unit price x number of units) • Classify the purchase value of each item into groups of high annual purchase value (A), medium value (B), low value (C) • Concentrate time and effort on A & B items versus on C items

  5. Forecasting Purchases ABC FORECASTING Inventory Carrying Costs Inventory JIT Demand Models Service Levels MRP Game Case 6-3 • Forecasts of usage, supply, market conditions, technology, price, etc., are always necessary to make good decisions • Sales forecasts drive the need for raw materials, parts and subassemblies

  6. Review of Forecasting Techniques Purchases ABC FORECASTING Inventory Carrying Costs Inventory JIT Demand Models Service Levels MRP Game Case 6-3 • Qualitative Forecasting • Gathering opinions from a number of people • Delphi Technique • Quantitative Forecasting • Using past data to predict the future • Causal Models • Time Series Forecasting

  7. Inventory Purchases ABC Forecasting INVENTORY Carrying Costs Inventory JIT Demand Models Service Levels MRP Game Case 6-3 • Inventory policy has a great influence on purchase quantity decision • Need to know: • How much to order • When to order • How much to carry

  8. Inventory Costs Purchases ABC Forecasting INVENTORY Carrying Costs Inventory JIT Demand Models Service Levels MRP Game Case 6-3 • Main types of inventory costs • Carrying Costs • Holding Costs • Possession Costs • Other costs • Ordering or Purchase Costs • Setup Costs • Stockout Costs • Price Variation Costs

  9. Article: “Poor Inventory Control” Purchases ABC Forecasting INVENTORY Carrying Costs Inventory JIT Demand Models Service Levels MRP Game Case 6-3 • Areas of investigation: • Bills of Material (BOM) • Receiving Policies • Do You Know Each Part’s ATP? • Engineering Changes • Scrap Reporting • Lead Times • Reorder Triggers • Warehouse Locator System

  10. Basic Elements of Carrying Costs Purchases ABC Forecasting Inventory CARRYING COSTS Inventory JIT Demand Models Service Levels MRP Game Case 6-3 1) Capital Costs 2) Inventory Service Costs 3) Storage Space Costs 4) Inventory Risk Costs • After carrying costs have been estimated, annual carrying costs can be calculated

  11. Inventory Carrying Costs Purchases ABC Forecasting Inventory CARRYING COSTS Inventory JIT Demand Models Service Levels MRP Game Case 6-3 (CC per year) = (avg. inventory value) x (inventory CC as a % of inventory value) Avg. inv. value = (avg. inv. in units) x (material unit cost)

  12. Inventory Carrying Costs Purchases ABC Forecasting Inventory CARRYING COSTS Inventory JIT Demand Models Service Levels MRP Game Case 6-3 CC = Q/2 x C x I Where: CC = carrying cost per year Q = order quantity for the material C = delivered unit cost of the material I = inventory carrying cost for the material, as a % of inventory value

  13. Forms of Inventory Purchases ABC Forecasting Inventory Carrying Costs INVENTORY JIT Demand Models Service Levels MRP Game Case 6-3 1) Raw Materials and Purchased Parts 2) Work In Process 3) Finished Goods 4) MRO Items 5) Resale Items

  14. Functions of Inventory Purchases ABC Forecasting Inventory Carrying Costs INVENTORY JIT Demand Models Service Levels MRP Game Case 6-3 • Roles of Inventory: • Transit or Pipeline Inventories • Cycle Inventories • Buffer/Safety Stocks • Anticipation Inventories • Decoupling Inventories WHY??

  15. Inventory Systems Purchases ABC Forecasting Inventory Carrying Costs INVENTORY JIT Demand Models Service Levels MRP Game Case 6-3 • Inventory has costs associated with storage • Systems developed to decrease stocks: • Just-in-time (JIT) • Kanban • Materials Resource Planning (MRP)

  16. Just-in-Time (J.I.T.) Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand Models Service Levels MRP Game Case 6-3 • What is it? • Goals • Integration with process and production function • Layout • Automation • standardization • Quality is the key! • 3 principles

  17. J.I.T. Continued Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand Models Service Levels MRP Game Case 6-3 • Kanban systems • What will J.I.T. accomplish?

  18. Dependent vs. Independent Demand Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT DEMAND Models Service Levels MRP Game Case 6-3 • Independent • Fixed-Quantity Model • Fixed-Period Model • Dependent • MRP

  19. Fixed-Quantity Model Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand MODELS Service Levels MRP Game Case 6-3 • Reorder when inventory drops to a reorder point • Consider safety stock • Calculations • Optimal Order Quantity (EOQ) • Reorder Point

  20. Fixed-Period Model Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand MODELS Service Levels MRP Game Case 6-3 • Reorder only at review time • Count inventory at the fixed interval period • Inventory level should prevent stockouts • Calculation: • Optimal Order Period

  21. Formula Variables Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand MODELS Service Levels MRP Game Case 6-3 • S = Order cost • R = Annual demand • K = Carrying cost percentage • C = Purchase cost • L = Lead time

  22. Example: Fixed-Quantity Model See pg 212-213 of text – Refer to handout Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand MODELS Service Levels MRP Game Case 6-3 Given: R = 900 units K = 25 percent L = 10 working days C = $45 / unit S = $50 / order

  23. Calculation Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand MODELS Service Levels MRP Game Case 6-3 EOQ Qopt = √ (2RS / KC) Qopt = √ (2 * 900 * 50) / (25% * 45) Qopt = 89 units Reorder point P = LR/250 Assume 250 working days P = (10 * 900) / 250 = 36 units

  24. Example: Fixed-Period Model Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand MODELS Service Levels MRP Game Case 6-3 • Topt = (2S)/(RKC) • Solution: • R = 900 units • C = $45 / unit • K = 25 percent • S = $50 / order • Topt = (2S)/(RKC) • Topt = (2)(50) • (900)(0.25)(45) • Topt = 0.1 • = 0.1*250 working days • = 25 reorder times per year Note: 250/25 = 10 working days

  25. Example: Fixed-Period Model Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand MODELS Service Levels MRP Game Case 6-3 • Reordering every 10 working days minimizes total costs • Carrying costs • Order costs • Order must meet demand for 20 days: • Review period (10 working days) • Lead time (10 working days)

  26. Safety Stock and Service Levels Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand Models SERVICE LEVELS MRP Game Case 6-3 • Service Coverage • Percentage of requests that are immediately served • Stockout Costs • Loss of business due to running out of inventory

  27. Safety Stock and Service Levels Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand Models SERVICE LEVELS MRP Game Case 6-3 • Critical Fractile = Cu/(Cu + Co) • Where • Cu = the cost of understocking • Co = the cost of overstocking

  28. Safety Stock and Service Levels Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand Models SERVICE LEVELS MRP Game Case 6-3 • Critical Fractile: • Difficult to determine • 95% or 19:1 • Understocking is generally more costly than overstocking • Exception: “bait and switch”

  29. MRP Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand Models Service Levels MRP Game Case 6-3 • Used for dependent demand • Goals of MRP: • Minimize inventory • Maintain high service coverage • Coordinate delivery schedules and manufacturing and purchasing activities

  30. D A I L Y D O U B L E

  31. Case 6-3: Abbey Paquette Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand Models Service Levels MRP Game CASE 6-3 Abbey Paquette, Purchasing Agent for Pentz International, has been instructed by the new President to reduce annual inventory carry costs from two and a half million to zero by year end. Upon further investigation, the firm’s database was filled with outdated, inaccurate information. Much of the inventory still on the system was not actually in stock.

  32. Problems Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand Models Service Levels MRP Game CASE 6-3 Immediate Problem: • How to cut inventory carrying costs? Basic Problems: • Lack of internal and external information systems • Poor inventory controls • Poor communication with employees

  33. Analysis Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand Models Service Levels MRP Game CASE 6-3 • No system to classify inventory • No knowledge of required inventory • No forecasting • May have resulted in unnecessary spending & stockout costs

  34. Analysis Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand Models Service Levels MRP Game CASE 6-3 • No analysis/system to measure carrying costs • Goal: minimize total annual costs • Timing considerations • Obsolescence • Tradeoff between different costs: • Inventory carrying costs vs. ordering costs • Inventory carrying costs vs. stockout costs • Inventory carrying costs vs. safety stock costs

  35. Analysis Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand Models Service Levels MRP Game CASE 6-3 • Minimal supplier relationships • Inconsistent data • Top management does not understand purchasing function • Overabundance of small tasks minimizes time for strategy • Low level of automation

  36. Analysis Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand Models Service Levels MRP Game CASE 6-3 • Current system of inventory tracking and control is not very useful or accurate • Employees are not following the system and have not been properly trained on how to use the system • The quality of the entire process is reduced without the problem being fixed

  37. Alternatives Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand Models Service Levels MRP Game CASE 6-3 • Immediate reduction of inventory • Goal: Zero inventory • Refrain from reordering, until it is absolutely necessary • Utilize J.I.T. • Gradual reduction of inventory • Goal: Some inventory • Continue to reorder, but in smaller quantities • May require improved supplier relationships

  38. Class Discussion • Split into 2 groups and prepare to defend why the following should be chosen: Alternative #1 – Group A Alternative #2 – Group B

  39. Our Solution … Gradual Reduction of Inventory (Alternative #1)

  40. Implementation: Short TermTime frame: August to end of December Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand Models Service Levels MRP Game CASE 6-3 • Comprehensive Analysis • ABC classification • Supplier relations • EOQ Analysis • Research information systems • MRP • EDI-INT • Barcode scanning

  41. Implementation: Short TermTime frame: August to end of December Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand Models Service Levels MRP Game CASE 6-3 • Choosing information systems. • Consult other employees • Meet with Isaac Chisholm • Explain issues with Zero inventory • Present the plan of action

  42. Implementation: Medium Term Time frame: January to the end of December Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand Models Service Levels MRP Game CASE 6-3 • Get employee buy-in • Implement new Information Systems • Barcode inventory management system • Internet-based EDI system • Hire a consultant • Train employee to do cycle counting

  43. Implementation: Long Term Time frame: January and on Purchases ABC Forecasting Inventory Carrying Costs Inventory JIT Demand Models Service Levels MRP Game CASE 6-3 • Continue working with suppliers and employees to achieve a stockless inventory purchasing system • Use checks and balances • Generate feedback from employees • Analyze the average carrying cost to determine the plan’s success

  44. QUESTIONS? THANK YOU!

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