20180908-Production Planning And Inventory Management-Eng.Hamza Tahboob

Lot Sizing & Safety Stock Lot Size Safety Stock Item Quantity that is Quantity of Stock made or purchased planned to be in inventory to protect against fluctuation in Demand or Supply

Lot sizing Techniques • Fixed Order Quantity (FOQ) • Economic Order Quantity (EOQ) • Lot for Lot (L4L) • Periods Of Supply (POS) • Period Order Quantity (POQ) • Minimum order Cost (MOC)

Fixed Order Quantity (FOQ) Specify a number of units arbitrarily to be ordered each time an order is placed for a particular item

Example Order Quantity FOQ 500 Safety Stock = 80 Lead Time = 2 12345678 weeks 130 160 120 260 130 120 185 115 Gross Requirement Scheduled Receipts Projected Available || 370 Planned Receipts Planned Order Releases

Example Order Quantity FOQ 500 Safety Stock = 80 Lead Time = 2 12345678 weeks 130 160 120 260 130 120 185 115 Gross Requirement Scheduled Receipts 240 80 460 200 570 450 265 150 Projected Available || 370 500 500 Planned Receipts Planned Order Releases 500 500

Economic Order Quantity (EOQ) A type of fixed order quantity that determines the amount of an item to be purchased or made at one time The target is to minimize the combined cost of order (acquiring) and carrying inventory EOQ =√(2CpD/CH) D= Annual demand for the item Q= Order quantity CP = Cost of order preparation or Setup cost CH= Inventory carrying cost per unit per year

Example Setup cost = $10/order Cost of item = $1.50/unit Inventory carrying cost = 25% /year Order Quantity EOQ Safety Stock = 80 Lead Time = 2 12545678 weeks 130 160 120 260 130 120 185 115 Gross Requirement Scheduled Receipts Projected Available || 370 Planned Receipts Planned Order Releases

Example Setup cost = $10/order Cost of item = $1.50/unit Inventory carrying cost = 25% /year Order Quantity EOQ Safety Stock = 80 Lead Time = 2 12545678 weeks 130 160 120 260 130 120 185 115 Gross Requirement Scheduled Receipts 240 80 610 350 220 100 585 450 Projected Available || 370 650 650 Planned Receipts Planned Order Releases 650 650

Lot-for-Lot (L4L) Also called discrete order quantity. It generates planned orders in quantities equal to the net requirements in each period. No extra on-hand inventory. Used for perishable food items or items for which the market fluctuates widely.

Example Order Quantity L4L Safety Stock = 80 Lead Time = 2 12345678 weeks 130 160 120 260 130 120 185 115 Gross Requirement Scheduled Receipts Projected Available || 370 Planned Receipts Planned Order Releases

Example Order Quantity L4L Safety Stock = 80 Lead Time = 2 12345678 weeks 130 160 120 260 130 120 185 115 Gross Requirement Scheduled Receipts 240 80 80 80 80 80 80 80 Projected Available || 370 120 260 130 120 185 115 Planned Receipts Planned Order Releases 120 260 130 120 185 115

Periods of Supply (POS) Lot size will be equal to the net requirements for a given number of periods (e.g. weeks) into the future

Example Order Quantity POS 3wk Safety Stock = 80 Lead Time = 2 12345678 weeks 130 160 120 260 130 120 185 115 Gross Requirement Scheduled Receipts Projected Available || 370 Planned Receipts Planned Order Releases

Example Order Quantity POS 3wk Safety Stock = 80 Lead Time = 2 12345678 weeks 130 160 120 260 130 120 185 115 Gross Requirement Scheduled Receipts 240 80 470 210 80 380 195 80 Projected Available || 370 510 420 Planned Receipts Planned Order Releases 510 420

Period Order Quantity (POQ) Uses EOQ to calculate a fixed number of period requirements to include in each order POQ = EOQ / Avg. Period Usage In case of fraction, round to the nearest number

Example Order Quantity POQ Safety Stock = 80 Lead Time = 2 12545678 weeks 130 160 120 260 130 120 185 115 Gross Requirement Scheduled Receipts Projected Available || 370 Planned Receipts Planned Order Releases

Example Order Quantity POQ Safety Stock = 80 Lead Time = 2 12545678 weeks 130 160 120 260 130 120 185 115 Gross Requirement Scheduled Receipts 240 80 590 330 200 80 ? ? Projected Available || 370 630 Planned Receipts Planned Order Releases 630

Benefits of MRP • Low levels of in-process inventories • Ability to track material requirements • Ability to evaluate capacity requirements • Means of allocating production time • Ability to easily determine inventory usage by backflushing • Backflushing: Exploding an end item’s bill of materials to determine the quantities of the components that were used to make the item.

Requirements of MRP • Computer and necessary software • Accurate and up-to-date – Master schedules – Bills of materials – Inventory records • Integrity of data

Capacity Planning Capacity requirements planning: The process of determining short-range capacity requirements. Load reports: Department or work center reports that compare known and expected future capacity requirements with projected capacity availability. Time fences: Series of time intervals during which order changes are allowed or restricted.

Capacity Planning Develop a tentative Use MRP to master production simulate material schedule requirements Convert material Revise tentative requirements to master production resource requirements schedule Is shop No capacity No adequate? Can Yes capacity be changed to meet Firm up a portion requirements of the MPS Yes Change capacity

ERP • Enterprise resource planning (ERP): – Next step in an evolution that began with MPR and evolved into MRPII – Integration of financial, manufacturing, and human resources on a single computer system.

ERP Software – ERP software provides a system to capture and make data available in real time to decision makers and other users in the organization – Provides tools for planning and monitoring various business processes – Includes • Production planning and scheduling • Inventory management • Product costing • Distribution

Sequencing • Sequencing: Determine the order in which jobs at a work center will be processed. • Workstation: An area where one person works, usually with special equipment, on a specialized job.

Sequencing Everything is #1 Priority • Priority rules: Simple heuristics used to select the order in which jobs will be processed. • Job time: Time needed for setup and processing of a job.

Priority Rules • FCFS - first come, first served • SPT - shortest processing time • EDD - earliest due date • CR - critical ratio • S/O - slack per operation • Rush - emergency

Inventory Independent Demand Inventory: a stock or store of goods A Dependent Demand B(4 C(2 ) ) D(2 E(1 D(3 F(2 )) )) Independent demand is uncertain. Dependent demand is certain.

Inventory Models • Independent demand – finished goods, items that are ready to be sold – E.g. a computer • Dependent demand – components of finished products – E.g. parts that make up the computer

Types of Inventories • Raw materials & purchased parts • Partially completed goods called work in progress • Finished-goods inventories • Replacement parts, tools, & supplies • Goods-in-transit to warehouses or customers

Functions of Inventory • To meet anticipated demand • To smooth production requirements • To decouple operations • To protect against stock-outs • To take advantage of order cycles • To help hedge against price increases • To permit operations • To take advantage of quantity discounts

Objective of Inventory Control • To achieve satisfactory levels of customer service while keeping inventory costs within reasonable bounds – Level of customer service – Costs of ordering and carrying inventory Inventory turnover is the ratio of cost of goods sold to average inventory investment.

Company A 2014 2015 2016 2017 650,000 900,000 820,000 760,000 COGS 95,000 150,000 125,000 80,000 Avg Inventory Inventory Turnover 7 6 7 10 Inventory Days 53 61 56 38

Company A 2014 2015 2016 2017 COGS 650,000 900,000 820,000 760,000 Avg Inventory 95,000 150,000 125,000 80,000 Inventory Turnover Inventory Days

Effective Inventory Management • A system to keep track of inventory • A reliable forecast of demand • Knowledge of lead times • Reasonable estimates of – Holding costs – Ordering costs – Shortage costs • A classification system

Key Inventory Terms • Lead time: time interval between ordering and receiving the order • Holding (carrying) costs: cost to carry an item in inventory for a length of time, usually a year • Ordering costs: costs of ordering and receiving inventory • Shortage costs: costs when demand exceeds supply

ABC Classification System Classifying inventory according to some measure of importance and allocating control efforts accordingly. A - very important High B - mod. important C - least important Annual $ value of items A Low B C Low High Percentage of Items

Economic Order Quantity Models • Economic order quantity (EOQ) model – The order size that minimizes total annual cost • Economic production model • Quantity discount model

Assumptions of EOQ Model • Only one product is involved • Annual demand requirements known • Demand is even throughout the year • Lead time does not vary • Each order is received in a single delivery • There are no quantity discounts

The Inventory Cycle Q Profile of Inventory Level Over Time Quantity Usage on hand rate Reorder point Receive Place Receive Place Receive Time order order order order order Lead time

Cost Minimization Goal The Total-Cost Curve is U-Shaped Annual Cost QO (optimal order quantity) Ordering Costs Order Quantity (Q)

Economic Production Quantity (EPQ) • Production done in batches or lots • Capacity to produce a part exceeds the part’s usage or demand rate • Assumptions of EPQ are similar to EOQ except orders are received incrementally during production

Economic Production Quantity Assumptions • Only one item is involved • Annual demand is known • Usage rate is constant • Usage occurs continually • Production rate is constant • Lead time does not vary • No quantity discounts 12-91

Total Costs with PD Cost Adding Purchasing cost TC with PD doesn’t change EOQ TC without PD 0 EOQ PD Quantity

Fixed-Order-Interval Model • Orders are placed at fixed time intervals • Order quantity for next interval? • Suppliers might encourage fixed intervals • May require only periodic checks of inventory levels • Risk of stockout • Fill rate – the percentage of demand filled by the stock on hand

Optimal Stocking Level Service level = Cs Cs = Shortage cost per unit Cs + Ce Ce = Excess cost per unit Ce Cs Service Level Quantity So Balance point

Example 15 • Ce = $0.20 per unit • Cs = $0.60 per unit • Service level = Cs/(Cs+Ce) = .6/(.6+.2) • Service level = .75 Ce Cs Service Level = 75% Quantity Stockout risk = 1.00 – 0.75 = 0.25

SUMMARY • Inventory serves a useful purpose in the supply chain. Help to minimize the need for inventory by carefully managing those factors that drive inventory levels up. • Inventory items can be divided into two main types: Independent demand and dependent demand items. The systems for managing these two types if inventory differ significantly.

SUMMARY • The two classic systems for managing independent demand inventory are periodic review and perpetual review systems. • The economic order quantity (EOQ) is the order quantity that minimizes total holding and ordering costs for the year. Even if all the assumptions don’t hold exactly, the EOQ gives us a good indication of whether or not current order quantities are reasonable. • The reorder point formula allows us to determine the safety stock (SS) needed to achieve a certain cycle service level. In general, the longer the lead times are, and the greater the variability of demand and lead times, the more SS we will need.



Purchasing • Purchasing is responsible for obtaining the materials, parts, and supplies and services needed to produce a product or provide a service. • Purchasing cycle: Series of steps that begin with a request for purchase and end with notification of shipment received in satisfactory condition.