Inventory Control

Reasons for Holding Inventories
Economies of Scale
cheaper to produce/order in large batches
Inventory Control
subject to Deterministic Demand
Uncertainties
demand; lead times; delivery of supply
Speculation
finished inventory held in anticipation of a rise in their value or costs
Smoothing
irregularities of demand pattern
Transportation
inventory in transit from one location to other
Costs of Maintaining Control System

can be cheaper to order once a year, than continuously monitor orders and deliveries
Relevant Costs
Holding Costs - Costs proportional to the quantity of inventory held. Includes, for example: a) Physical Cost of Space (3 %) b) Taxes and Insurance (2 %) c) Breakage Spoilage and Deterioration (1 %) d) Opportunity Cost of alternative investment (18 %) (Total: 24 %)
Relevant Costs (continued)

Penalty or Shortage Costs. Including:
Loss of revenue for lost demand Costs of book keeping for backordered demands Loss of goodwill for being unable to satisfy demands when they occur. Generally assume cost is proportional to number of units of excess demand.
Relevant Costs (continued)

Ordering Cost (or Production Cost) Includes both fixed and variable components
I. Inventory Levels for the EOQ Model
K + cx, x > 0, C (x ) = x=0 0,
The EOQ Model: Assumptions

1. 2. 3. 4. 5. 6. Production is instantaneous
There is no capacity constraint, and entire lot is produced simultaneously
The EOQ Model: Notation

D c K h = is the demand rate (in units per year) = unit production cost, not counting setup or inventory costs (in dollars per unit) = setup costs (per placed order) in dollars = holding cost (in dollars per unit per year), if the holding cost consists entirely of interest on money tied up in inventory, h = ic, where i is an annual interest rate = lot size (order size) in units = time between orders (cycle length)
Delivery is immediate
There is no time lag between production and availability to satisfy demand
Demand is deterministic
There is no uncertainty about the quantity or timing of demand
Demand is constant over time

It can be presented as a straight line, so that if annual demand is 365 units, this translates to a daily demand of one unit
Q T
A production run incurs a fixed setup cost

Regardless of the size of the lot or the status of the factory, the setup cost is the same
T = T (Q, )
G(Q) = average annual cost
Products can be analyzed individually

Either there is only a single product or there are no interactions (e.g. shared equipment) between products
G (Q ) = ?
Inventory (I(t))
Relationships
Ordering Costs: (Order amount Q)
Assume Constant Demand
slope = -
Total Costs
What is the average annual cost? G(Q) = average order cost + average holding cost
G(Q) = K + cQ hQ + 2 T
C(Q) = K + cQ Holding Cost: h = Ic =(Interest Rate)(Cost of Inv.) Average Inventory Size? Under constant demand: Q/2 Time Between Orders: = Q/T T = Q/
Rate of consumption T
Time (t) T Time between orders Instantaneous Replenishment
Average ordering cost per time T
Average inventory level at any time
Total Costs
What is the average annual cost?
G (Q) = K + cQ hQ + T 2
The Average Annual Cost Function G(Q)

G (Q ) = h Q K cQ hQ K + + = + + c 2 T T 2 Q
= =
K + cQ hQ + Q 2 hQ K + + c 2 Q
Minimize Annual Costs

G (Q ) = non linear function of Q
Properties of the EOQ Solution

G (Q ) = hQ K + + c 2 Q
Take the derivative of G(Q)

hQ K + c + 2 Q K h G (Q) = + 2 Q2 G (Q ) =
Q =
2 K h
This formula is well-known economic order quantity, is also known as economic lot size This is a tradeoff between lot size and inventory Garbage in, garbage out - usefulness of the EOQ formula for computational purposes depends on the realism of input data Estimating setup cost is not easily reduced to a single invariant cost K
Is this a minimum?
G (Q ) =
2 K 3 > 0, Q > 0 Q
YES!
EOQ:
K h 2 K + = 0 Q* = 2 Q h 2
Example
Uvic requires 3600 gallons of paint annually for scheduled maintenance of buildings. Cost of placing an order is $16 and the interest rate (annual) is 25%. Price of paint is $8 per gallon. How much paint should be ordered, and how often?
Q* = 2 K 2(16)(3600) = = 57,600 = 240 h .25(8)
Order Point for the EOQ Model

Does it matter if < T or > T ? Keep track of time left to zero inventory or set automatic reorder at a particular inventory level, R.
R = *, if < T R = *MOD(/T),
if > T
T=
240 = .07 years* (250 workingdays/year) 3600 = 17.5 workingdays = 18 days Q =
Assumption: Delivery is immediate
There is no time lag between production and availability to satisfy demand Relax this assumption! Let the order lead time to be equal to
Finite Replenishment Rate: II Economic Production Quantity (EPQ)

Assumptions for EOQ: Production is instantaneous
There is no capacity constraint, and entire lot is produced simultaneously
Inventory Levels for Finite Production Rate Model
Delivery is immediate
There is no time lag between production and availability to satisfy demand
Example:
Parts produced at the same factory production rate is P (P > ), arriving continuously.
The EPQ Model: Notation

= is the demand rate (in units per year) = unit production cost, not counting setup or inventory costs (in dollars per unit) K = setup costs (per placed order) in dollars h = holding cost (in dollars per unit per year), if the holding cost consists entirely of interest on money tied up in inventory, h=ic, where i is an annual interest rate Q = size of each production run (order) in units T = time between initiation of orders arrival (cycle length) T = T1 + T2 T1 = production (replenishment) time T2 = downtime H = maximum on-hand inventory G(Q) = average annual setup & holding cost D c
The EPQ Model: Formula

T = T1 + T2
G (Q ) = h
T1 = Q P
Q
H K + 2 T
T2 = T T1 =
Q P
H = (P )T1 = P Q P 2 K
h
2K h
H = slope = P T1
G (Q ) = h
H K h K + = Q 1 + 2 T 2 P Q
Q =
, where h = h1 P
For EOQ:
G (Q ) =
hQ K + Q 2
Q =
The Average Annual Cost Function G(Q)
III EOQ with Quantity Discounts

Under this condition, acquisition cost becomes an incremental cost and must be considered in the determination of the EOQ The total annual material costs (TMC) = Total annual stocking costs (TSC) + annual acquisition cost TSC = (Q/2)C + (D/Q)S + (D)ac . . . more
Model III: EOQ with Quantity Discounts

To find the EOQ, the following procedure is used: 1. Compute the EOQ using the lowest acquisition cost.
If the resulting EOQ is feasible (the quantity can be purchased at the acquisition cost used), this quantity is optimal and you are finished. If the resulting EOQ is not feasible, go to Step 2
III EOQ with Quantity Discounts

3. Compute the EOQ using the acquisition cost
from Step 2. If the resulting EOQ is feasible, go to Step 4. Otherwise, go to Step 2. 4. Compute the TMC for the feasible EOQ (just found in Step 3) and its corresponding acquisition cost. 5. Compute the TMC for each of the lower acquisition costs using the minimum allowed order quantity for each cost. 6. The quantity with the lowest TMC is optimal.
2. Identify the next higher acquisition cost.
Example: EOQ with Quantity Discounts Example: EOQ with Quantity Discounts A-1 Auto Parts has a regional tire warehouse in Atlanta. One popular tire, the XRX75, has estimated demand of 25,000 next year. It costs A-1 $100 to place an order for the tires, and the annual carrying cost is 30% of the acquisition cost. The supplier quotes these prices for the tire: Q ac 1 499 500 999 1,000 + $21.60 20.95 20.90 Economical Order Quantity
EOQi = 2DS/Ci EOQ3 = 2(25,000)100/(.3(20.90) = 893.00

This quantity is not feasible, so try ac = $20.95
EOQ2 = 2(25,000)100/(.3(20.95) = 891.93

This quantity is feasible, so there is no reason to try ac = $21.60
Example: EOQ with Quantity Discounts

Compare Total Annual Material Costs (TMCs) TMC = (Q/2)C + (D/Q)S + (D)ac Compute TMC for Q = 891.93 and ac = $20.95 TMC2 = (891.93/2)(.3)(20.95) + (25,000/891.93)100 + (25,000)20.95 = 2,802.89 + 2,802.91 + 523,750 = $529,355.80 more
Example: EOQ with Quantity Discounts

Compute TMC for Q = 1,000 and ac = $20.90 TMC3 = (1,000/2)(.3)(20.90) + (25,000/1,000)100 + (25,000)20.90 = 3,135.00 + 2,500.00 + 522,500 = $528,135.00 (lower than TMC2) The EOQ is 1,000 tires at an acquisition cost of $20.90.
Basic Inventory Models 1. Sharp Inc., a company that markets painless hypodermic needles to hospitals, would like to reduce its inventory cost by determining the optimal number of hypodermic needles to obtain per order. The annual demand is 1,000 units; the setup or ordering cost is $10 per order; and the holding cost per unit is $0.5. Calculate the optimal number of units to order, and assuming a 250 day working year, find the number of orders and the expected time between orders, and the total annual inventory cost. 2. In problem #1, if on average order delivery takes 3 working days, what is the reorder point? 3. CompuTrade computer suppliers purchases 8,000 microprocessors each year as components in their PC line. The unit cost of each microprocessor is $100, and the cost of carrying one unit in inventory for a year is $3. Ordering cost is $30 per order. Knowing that the company operates 200 days a year, find the following: a. The optimal order quantity; b. The expected number of orders placed each year, and c. The expected time between orders. d. If order delivery takes on the average 10 working days, at what inventory level should the order be placed. 4. A local company supplying plastic chairs with an average annual demand of 1,000 units. The chairs are produced at a rate of 2,000 unit/year. The accounting department estimates that it costs $10 to initiate a production run, each unit costs $1 for each year it is held in inventory. Determine the optimal size of a production run, the time between runs for a 250 day working year, and the average total annual cost. 5. Sisco makes and cells automotive head lights for the retail automotive markets. Sisco forecast is 1,000 units for next year, with an average daily demand of 4 units. However, the production process runs efficiently at 8 units per day. Knowing that the setup cost for a production run is $10 and the holding cost is $0.50 per unit per year. What is the economic order quantity? (283). 6. Use DS for windows to examine the sensitivity of your solution to problem #1, if the demand rate varies from 500 to 1500 units per year. Plot the relationships between the demand rate and the following parameters: a. Optimal order quantity (on one graph). b. Setup cost, holding cost and total cost (on one graph).
Page 1 / 1
MRP
Computerized inventory control & production planning system Schedules component items when they are needed - no earlier and no later
Material Requirements Planning
MRP
Prof.Sherif Sabry - Spring 2010
25
26
When to Use MRP
MRP Inputs & Outputs

Master Production Schedule
Dependent and discrete items Complex products Job shop production Assemble-to-order environments
Product Structure File
Material Requirements Planning
Inventory Master File
Planned Order Releases
Work Orders
Purchase Orders
Rescheduling Notices
2000 by Prentice-Hall Inc
Russell/Taylor Oper Mgt 3/e Prof.Sherif Sabry - Spring 2010
Ch 13 - 3
27
Ch 13 - 4
28
MRP Inputs
Master production schedule
Product structure file
Inventory master file
Drives MRP process with a schedule of finished products Quantities represent production not demand Quantities may consist of a combination of customer orders & demand forecasts Quantities represent what needs to be produced, not what can be produced
Ch 13 - 5
29
Ch 13 - 6
30
Product Structure Tree

Clipboard Level 0
MPS Period Item 1 2 3 4 5 6 7 8 Clipboard 86 93 119 100 100 100 100 100 Lapboard 0 50 0 50 0 50 0 50 Lapdesk 75 120 47 20 17 10 0 0 Pencil Case 125 125 125 125 125 125 125 125
Clip Assembly (10)
Rivet (2)
Board (1)
Level 1
Top Clip (1) Sheet Metal (8 in2)
Bottom Clip (1) Sheet Metal (8 in2)
Pivot (1) Spring Steel (10 in.)
Spring (1) Iron Rod (3 in.)
Pressboard (1)
Finish (2oz.) Level 2
Level 3
Ch 13 - 7
31
Ch 13 - 8
32
Indented Bill of Material

Phantom bills
transient subassemblies never stocked immediately consumed in next stage
Specialized BOMS
K-bills
group small, loose parts under pseudoitem # reduces paperwork
LEVEL 0----1----2----3--2----3--2----3--2----3-1---1----2---2-Ch 13 - 9
ITEM Unit of Measure Clipboard Ea Clip Assembly Ea Top Clip Ea Sheet Metal In2 Bottom Clip Ea Sheet Metal In2 Pivot Ea Iron Rod In Spring Ea Spring Steel In Rivet Ea Board Ea Press Board Ea Finish Oz
33
Quantity 1 1 1 8 1 8 1 3 1 10 2 1 1 2
Ch 13 - 10
34
Specialized BOMS
Engines (1 of 3)
Modular Bill Of Material

X10 Automobile
Modular bills
Exterior Color (1 of 8)
Interior (1 of 3)
Interior Color (1 of 8)
Body (1 of 4)
4-Cylinder (.40) Bright Red (.10) 6-Cylinder (.50) White Linen (.10) 8-Cylinder (.10) Sulphur Yellow (.10) Neon Orange (.10) Metallic Blue (.10) Emerald Green (.10) Jet Black (.20) Champagne (.20)
Ch 13 - 11
Leather (.20) Grey (.10) Tweed (.40) Plush (.40) Light Blue (.10) Rose (.10) Off-white (.20) Cool Green (.10) Black (.20) Brown (.10)
Sports Coupe (.20) Two-Door (.20) Four-Door (.30) Station Wagon (.30)
product assembled from major subassemblies & customer options modular bill kept for each major subassembly simplifies forecasting & planning X10 Automobile example
3 x 8 x 3 x 8 x 4 = 2,304 configurations 3 + 8 + 3 + 8 + 4 = 26 modular bills

35
B/W Checked (.10)

2000 by Prentice-Hall Inc Russell/Taylor Oper Mgt 3/e
Ch 13 - 12
36
Inventory Master File

Physical Inventory On hand Location On order Allocated Cycle Difference 100 W142 50 75 3 -2 00754 00326 07142 1,100 75 1,200 0 8/25 10/5 2 5,000 1 50 25 39 316 100 500 100 3 Usage/Sales YTD usage/sales MTD usage/sales YTD receipts MTD receipts Last receipt Last issue Codes Cost acct. Routing Engr
Inventory Master File, Cont.
Description Item Item no. Item type Product/sales class Value class Buyer/planner Vendor/drawing Phantom code Unit price/cost Pegging LLC
Board 7341 Manuf. Assy B RSR 07142 N 1.25 Y 3
Inventory Policy Lead time Annual demand Holding cost Ordering/setup cost Safety stock Reorder point EOQ Minimum order qty Maximum order qty Multiple order qty Policy code
Ch 13 - 13
37
Ch 13 - 14
38
Inventory Accuracy
The MRP Matrix

Lot size: LT: Gross requirements Scheduled receipts Projected on hand Net requirements Planned order receipts Planned order releases PD 1 2 3 4 5 6 7 8 9 10
1. Maintain orderly stockrooms 2. Control access to stockrooms 3. Establish & enforce procedures for inventory withdrawal 4. Ensure prompt and accurate entry of inventory transactions 5. Take physical inventory count on a regular basis 6. Reconcile inventory discrepancies in a timely manner (use cycle counting)
Item name or number identifying scheduled item LLC low-level-code; lowest level at which item appears in a product structure
Ch 13 - 15
39
Ch 13 - 16
40
Parts Of MRP Matrix

Scheduled receipts
quantity already on order & receipt date released orders become scheduled receipts
Projected on hand
expected on-hand inventory at end of period
Lot size order multiples of this qty; can be min/max qty Net requirements
LT (lead time) time from order placement to receipt Planned order receipts
net amount needed after on-hand adjustments net requirements adjusted for lot-sizing
Planned order releases

planned order receipts offset by lead time
PD (past-due) orders behind schedule Gross requirements demand for item by time period
Ch 13 - 17
41
Ch 13 - 18
42
The Alpha Beta Company

B LT=2
MRP Matrices For A & B

PD 1 2 3 Period 4 5 6 7 8 100 10 10 10 10 10 10 10 10 0 90 90 90
A LT=3
C(3) LT=4 Lot Size 1 1 150 250 100, period 8 200, period 6 ----MPS
D(2) LT=2
D(3) LT=2
Item: A LLC: 0 Lot size: 1 LT: 3 Gross requirements Scheduled receipts Projected on hand Net requirements Planned order receipts Planned order releases
Item On Hand
Scheduled Receipts
10
PD
Period 4
6 200 5 5 5 5 5 5
140
200
250, period 2
Item: B LLC: 0 Lot size: 1 LT: 2 Gross requirements Scheduled receipts Projected on hand Net requirements Planned order receipts Planned order releases
0 195 195 195
Ch 13 - 19
43
Ch 13 - 20
44
MRP Matrices For C & D

5 270 20 130 150 20 20 20 6 7 8
Alpha Beta Planned Order Report
PD
Period 4
Item: C LLC: 1 Lot size: 150 LT: 4 Gross requirements Scheduled receipts Projected on hand Net requirements Planned order receipts Planned order releases 140
140
140
140
140
150
PD
Period 4 585 5 180 185 65 250 185 185 185 6 7 8 115 135 250
Item: D LLC: 1 Lot size: 250 LT: 2 Gross requirements Scheduled receipts Projected on hand Net requirements Planned order receipts Planned order releases
200
200
250 450
450
Period 1 2 3 4 5
Item C D D B A
Quantity 150 250 250 195 90
250
250
Ch 13 - 21
45
Ch 13 - 22
46
Planned Order Report
MRP Action Report

Current date: 9-25-02
Item On hand On order Allocated
#2740 100 200 50
Date 9-25-02 Lead Time 2 weeks Lot size 200 Safety Stock 50
Date Action
Order No.
Gross Scheduled Projected Reqs. Receipts On Hand
Item
Date
Order No. Qty.

7542 200
Action
25 25 50 Expedite SR 10-1
200
9-26 9-30 10-01 10-08 10-10 10-15 10-23 10-27 Release PO 10-13
AL 4416 AL 4174 GR 6470 SR 7542 CO 4471 GR 6471 GR 6471 GR 6473
75 50 25 50
50 25 0 -50 150 75 25 0 -50
#2740 #3616 #2412 #3427 #2516 #2740 #3666
10-08 10-09 10-10 10-15 10-20 10-27 10-31
7648
100 200 50
Expedite Move forward Move forward Move backward De-expedite Release Release
SR 10-1 PO 10-7 PO 10-5 PO 10-25 SR 10-30 PO 10-13 WO 10-24
Key:
AL = allocated PO = purchase order SR = scheduled receipt
CO = customer order WO = work order GR = gross requirements

Ch 13 - 23
47
Ch 13 - 24
48
Manufacturing Resource Planning (MRP II) MRP II Modules

Material requirements planning Capacity planning Shop floor control Purchasing Accounting Financial analysis
Extension of MRP Plans all resources needed for running a business Variations include
Service Requirements Planning (SRP) Business Requirements Planning (BRP) Distribution Requirements Planning (DRP)
Forecasting Customer order entry Production planning / master production scheduling Product structure / bill-of-material processor Inventory control
Ch 13 - 38
49
Ch 13 - 39
50
MRP II Flowchart
Master production schedule Material requirements planning Capacity requirements planning

No Feedback
Business Plan
Marketing Plan
Financial Plan
Feasible?
Yes
Production Plan
Purchase orders Inventory
Work orders Shop floor control Manufacture
No
Feasible?
Yes
more
Ch 13 - 40
51
Ch 13 - 41
52
Problems with MRP
Prospects for MRP/MRP II
Material requirements plan is first; capacity is an afterthought
MRP assumes fixed lead times
Excessive reporting requirements
Ch 13 - 43
53
Coordinates company strategy among different functional areas Responds quickly to what-if? questions at various levels of detail BOM processors, purchase modules, & customer order entry are standard requirements for Manufacturing Information Systems Monitors design & vendor quality, & customer service Builds trust, teamwork, & better decisions Cash-flow planning & profit/cost projections Ch 13 - 44 54 Prof.Sherif Sabry - Spring 2010
SAPs ERP Modules
Ch 13 - 42
55
56
1. Consider the following MRP situation for Part # PBZ-701, given lead time is 2 weeks and available (Stock on Hand) is 30 units Week number Gross requirements Scheduled Receipts ! ! 10 1 60 20 2 3 4 5 80 6 7 8 40 9 10
Construct a product component flow (MRP) table If an economic order quantity of 70 is being established for PBZ-701. What impact does this
have on the product flow table?
2. Patterson Assemblies has a gear assembly that requires part #GA211, with material requirements scheduled as shown below. Average demand is 83 units per week, the cost of placing an order L.E 200, and the inventory carrying charge L.E 1.50 per unit per week. Holding costs are calculated assuming that average inventory is centered within each week. Week number Requirements Quantity ordered Beginning inventory Ending inventory ! ! Using the lot-for-lot ordering rule, complete the MRP table. Calculate the total of ordering and 0 1 20 2 120 3 80 4 0 5 160 6 194 7 20 8 70
holding costs over eight periods. Use EOQ formula, then complete the MRP table. Calculate the total of ordering and holding
costs over eight periods. 3. Ambrex, Inc. has received an order for 70 units of product 20 and 50 units of product 40, to be delivered in twelve weeks. The product structures for products 20 and 40 are shown below. Ambrex has on hand (available) 300 units each of components 31 and 37; there is no stock on hand or on order for other components. Determine the sizes and timing of planned order releases necessary to meet delivery commitments for products 20 and 40.
Legend :
Item no. units required Lead time

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Reasons for Holding Inventories

Costs of Maintaining Control System

Relevant Costs (continued)

Relevant Costs (continued)

I. Inventory Levels for the EOQ Model

K + cx, x > 0, C (x ) = x=0 0,

The EOQ Model: Assumptions

The EOQ Model: Notation

Demand is constant over time

A production run incurs a fixed setup cost

Products can be analyzed individually

Assume Constant Demand

Average ordering cost per time T

Average inventory level at any time

The Average Annual Cost Function G(Q)

Minimize Annual Costs

Properties of the EOQ Solution

Take the derivative of G(Q)

Order Point for the EOQ Model

240 = .07 years* (250 workingdays/year) 3600 = 17.5 workingdays = 18 days Q =

Assumption: Delivery is immediate

Finite Replenishment Rate: II Economic Production Quantity (EPQ)

Inventory Levels for Finite Production Rate Model

The EPQ Model: Notation

The EPQ Model: Formula

The Average Annual Cost Function G(Q)

III EOQ with Quantity Discounts

Model III: EOQ with Quantity Discounts

III EOQ with Quantity Discounts

2. Identify the next higher acquisition cost.

EOQi = 2DS/Ci EOQ3 = 2(25,000)100/(.3(20.90) = 893.00

EOQ2 = 2(25,000)100/(.3(20.95) = 891.93

Example: EOQ with Quantity Discounts

Example: EOQ with Quantity Discounts

Material Requirements Planning

Prof.Sherif Sabry - Spring 2010

Prof.Sherif Sabry - Spring 2010

When to Use MRP

MRP Inputs & Outputs

Product Structure File

Material Requirements Planning

Inventory Master File

Planned Order Releases

2000 by Prentice-Hall Inc

Russell/Taylor Oper Mgt 3/e Prof.Sherif Sabry - Spring 2010

2000 by Prentice-Hall Inc

Russell/Taylor Oper Mgt 3/e Prof.Sherif Sabry - Spring 2010

Master Production Schedule

Master production schedule

Product structure file

Inventory master file

2000 by Prentice-Hall Inc

Russell/Taylor Oper Mgt 3/e Prof.Sherif Sabry - Spring 2010

Russell/Taylor Oper Mgt 3/e Prof.Sherif Sabry - Spring 2010

Master Production Schedule

Product Structure Tree

Clip Assembly (10)

Top Clip (1) Sheet Metal (8 in2)

Bottom Clip (1) Sheet Metal (8 in2)

Pivot (1) Spring Steel (10 in.)