Topic 5 - Procurement and Inventory Control

TEST 1
Topics: 1 5
Date: 24 October 2014 (Friday)
Venue: Exam Hall Level 8
Time: 8 -10 PM
10/11/16
NY- MEM 575: Courtesy of Mc

Graw Hill and Pearson-Prentice
Operations
Management
Topic 5 Procurement
and Inventory Control
(JIT & LEAN OPERATION)
UiTM Shah Alam

Lecturer: Pn. Nurul Hayati Abdul Halim
T1-A14-12A
10/11/16
NY- MEM 575: Courtesy of Mc Graw Hill and

Pearson-Prentice Hall
Learning Objectives
When you complete this chapter you should be
able to:
1. Discuss the functions of inventory
2. Explain the use of ABC Analysis, Cycle Counting and Record
Accuracy.
3. Explain and use the EOQ model for independent inventory
demand
4. Apply the EOQ and Quantity Discounts Models
5. Compute a reorder point and safety stock
6. Explain the functions of Supply Chain Management in relation to
the Inventory Management.
7. Explain the relation between the inventory management against
the JIT and Lean productions/operations.
10/11/16

Inventory Management
The objective of inventory
management is to strike a balance
between inventory investment and
customer service
10/11/16
NY- MEM 575: Courtesy of Mc Graw Hill

and Pearson-Prentice Hall
Importance of Inventory
1. One of the most expensive assets of
many companies representing as much
as 50% of total invested capital
2. Operations managers must balance
inventory investment and customer
service
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Functions of Inventory
1. To provide a selection of goods for
anticipated demand and to separate
the firm from fluctuations in demand
2. To decouple or separate various parts
of the production process
3. To take advantage of quantity
discounts
4. To hedge against inflation
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Types of Inventory
1. Raw material
Purchased but not processed
2. Work-in-process (WIP)
Undergone some change but not completed
A function of cycle time for a product
3. Maintenance/repair/operating (MRO)
Necessary to keep machinery and processes
productive
4. Finished goods
Completed product awaiting shipment
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The Material Flow Cycle

Cycle time
95%
Input
Wait for
inspection
Wait to
be moved
Move Wait in queue Setup

time
for operator
time
5%
Run
time
Output
Figure 12.1
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Managing Inventory
1. How inventory items can be classified
(ABC analysis)
2. How accurate inventory records can
be maintained (Cycle counting)
3. How to establish an effective control of
inventories
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ABC Analysis
1. Divides inventory into three classes
based on annual dollar volume
Class A - high annual dollar volume
Class B - medium annual dollar volume
Class C - low annual dollar volume
2. Used to establish policies that focus

on the few critical parts and not the
many trivial ones
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10
ABC Analysis
ABC Calculation: Analysis done for a Chip Manufacturer
(1)
(2)
(3)
ITEM
STOCK
NUMBER
PERCENT
OF
NUMBER
OF ITEMS
STOCKED
ANNUAL
VOLUME
(UNITS)
#10286
(5)
(6)
(7)
UNIT
COST
ANNUAL
DOLLAR
VOLUME
PERCENT
OF ANNUAL
DOLLAR
VOLUME
CLASS
1,000
$ 90.00
$ 90,000
38.8%
#11526
500
154.00
77,000
33.2%
#12760
1,550
17.00
26,350
11.3%
350
42.86
15,001
6.4%
#10500
1,000
12.50
12,500
5.4%
#12572
600
$ 14.17
$ 8,502
3.7%
#14075
2,000
.60
1,200
.5%
100
8.50
850
.4%
#01307
1,200
.42
504
.2%
#10572
250
.60
150
.1%
#10867
#01036
10/11/16
20%
(4)
30%
50%
8,550
$232,057
100.0%
72%
A
A
B
23%
5%
11
Percentage of annual dollar usage
ABC Analysis
80
70
60
50
40
30
20
10
0
A Items
B Items
|
|
|
|
10 20 30 40
Figure 12.2
C Items
|
50
60
70
80
90 100
Percentage of inventory items

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12
ABC Analysis
Other criteria than annual dollar volume
may be used
High shortage or holding cost
Anticipated engineering changes
Delivery problems
Quality problems
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13
ABC Analysis
Policies employed may include
1. More emphasis on supplier development for
A items
2. Tighter physical inventory control for A items
3. More care in forecasting A items
10/11/16
NY- MEM 575: Courtesy of Mc Graw

Hill and Pearson-Prentice Hall
14
Record Accuracy
1.
Accurate records are a critical

ingredient in production and
inventory systems
Periodic systems require regular

checks of inventory
Perpetual inventory tracks receipts

and subtractions on a continuing basis
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Two-bin system
May be semi-automated
15
Record Accuracy
2.
3.
4.
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Incoming and outgoing

record keeping must be
accurate
Stockrooms should be secure
Necessary to make precise decisions
about ordering, scheduling, and
shipping
16
Cycle Counting
1. Items are counted and records updated on a
periodic basis
2. Often used with ABC analysis
3. Has several advantages
i.
Eliminates shutdowns and interruptions
ii. Eliminates annual inventory adjustment

iii. Trained personnel audit inventory accuracy
iv. Allows causes of errors to be identified and
corrected
v. Maintains accurate inventory records
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17
Cycle Counting Example

5,000 items in inventory, 500 A items, 1,750 B items, 2,750 C
items
Policy is to count A items every month (20 working days), B items
every quarter (60 days), and C items every six months (120 days)
CYCLE
COUNTING
POLICY
ITEM
CLASS
QUANTITY
500
Each month
1,750
Each quarter
2,750
Every 6 months
NUMBER OF ITEMS
COUNTED PER DAY
500/20 =
25/day
1,750/60 =
29/day
2,750/120 =
23/day
77/day
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18
Control of Inventories
1. Can be a critical component
of profitability
2. Losses may come from
shrinkage or pilferage
3. Applicable techniques include
i.
Good personnel selection, training, and

discipline
ii. Tight control of incoming shipments
iii. Effective control of all goods leaving facility
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19
Inventory Models
1. Independent demand - the demand for
item is independent of the demand for
any other item in inventory; eg automobiles,
computers, etc.
2. Dependent demand - the demand for

item is dependent upon the demand for
some other item in the inventory; eg: parts
that make up the automobiles and computers,
etc.
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20
Inventory Models
1. Holding costs - the costs of holding or
carrying inventory over time
2. Ordering costs - the costs of placing an
order and receiving goods
3. Setup costs - cost to prepare a machine
or process for manufacturing an order
May be highly correlated with setup time
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21
Holding Costs
TABLE 12.1
Determining Inventory Holding Costs

COST (AND RANGE)
AS A PERCENT OF
INVENTORY VALUE
CATEGORY
Housing costs (building rent or depreciation,
operating costs, taxes, insurance)
6% (3 - 10%)
Material handling costs (equipment lease or

depreciation, power, operating cost)
3% (1 - 3.5%)
Labor cost (receiving, warehousing, security)
3% (3 - 5%)
Investment costs (borrowing costs, taxes, and

insurance on inventory)
11% (6 - 24%)
Pilferage, space, and obsolescence (much

higher in industries undergoing rapid change like
PCs and cell phones)
3% (2 - 5%)
Overall carrying cost

10/11/16
26%
22
Holding Costs
TABLE 12.1
Holding costs vary considerably depending

on the business, location, and interest
rates. Generally greater than 15%, some
high tech and fashion items have holding
costs greater than 40%.
Determining Inventory Holding Costs

COST (AND RANGE)
AS A PERCENT OF
INVENTORY VALUE
CATEGORY
Housing costs (building rent or depreciation,
operating costs, taxes, insurance)
6% (3 - 10%)
Material handling costs (equipment lease or

depreciation, power, operating cost)
3% (1 - 3.5%)
Labor cost (receiving, warehousing, security)
3% (3 - 5%)
Investment costs (borrowing costs, taxes, and

insurance on inventory)
11% (6 - 24%)
Pilferage, space, and obsolescence (much

higher in industries undergoing rapid change like
PCs and cell phones)
3% (2 - 5%)
Overall carrying cost

10/11/16
26%
23
Inventory Models for Independent

Demand
Need to determine when and
how much to order
1. Basic economic order quantity
(EOQ) model
2. Production order quantity model
3. Quantity discount model
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24
Basic EOQ Model

Important assumptions
1. Demand is known, constant, and independent
2. Lead time is known and constant
3. Receipt of inventory is instantaneous and
complete
4. Quantity discounts are not possible
5. Only variable costs are setup (or ordering)
and holding
6. Stockouts can be completely avoided
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25
Inventory Usage Over Time

Figure 12.3
Inventory level
Total order received

Order
quantity = Q
(maximum
inventory
level)
Minimum
inventory 0
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Usage rate
Average
inventory
on hand
Q
2
Time
26
Minimizing Costs
Objective is to minimize total costs
Table 12.4(c)
Total cost of
holding and
setup (order)
Annual cost
Minimum
total cost
Holding cost
Setup (order) cost
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Optimal order
quantity (Q*)
Order quantity

27
Minimizing Costs
1. By minimizing the sum of setup (or ordering)
and holding costs, total costs are minimized
2. Optimal order size Q* will minimize total cost
3. A reduction in either cost reduces the total
cost
4. Optimal order quantity occurs when holding
cost and setup cost are equal
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28
Minimizing Costs
Q = Number of pieces per order
Q* = Optimal number of pieces per order (EOQ)
D = Annual demand in units for the inventory item
S = Setup or ordering cost for each order
H = Holding or carrying cost per unit per year
Annual setup cost = (Number of orders placed per year)
x (Setup or order cost per order)
=
Annual demand
Number of units in each order
D
= S
Q
10/11/16
Setup or order
cost per order
Annual setup cost =

D
S
Q
29
Minimizing Costs
Q
Q*
D
S
H
= Number of pieces per order

= Optimal number of pieces per order (EOQ)
= Annual demand in units for the inventory item
= Setup or ordering cost for each order
= Holding or carrying cost per unit per year
Annual holding cost = (Average inventory level)
x (Holding cost per unit per year)
=
Order quantity
2
(Holding cost per unit per year)
Q
= H
2
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D
S
Q
Q
Annual holding cost = H
2
Annual setup cost =
30
Minimizing Costs
Q
Q*
D
S
H
= Number of pieces per order

= Optimal number of pieces per order (EOQ)
= Annual demand in units for the inventory item
= Setup or ordering cost for each order
= Holding or carrying cost per unit per year
Optimal order quantity is found when annual setup
cost equals annual holding cost
D
S=
Q
Q
H
2
D
Annual setup cost = S
Q
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Solving for Q*
Annual holding cost =
Q
H
2

2DS Q2 H
2DS
Q2
H
Q*
2DS
H
31
An EOQ Example
Determine optimal number of needles to order
D = 1,000 units
S = $10 per order
H = $.50 per unit per year
Q*
2DS
H
2(1,000)(10)
Q
40,000 200 units
0.50
*
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32
An EOQ Example
Determine expected number of orders
D = 1,000 units
Q* = 200 units
S = $10 per order
Expected
Demand
number of = N = Order quantity
orders
N=
10/11/16
D
=
Q*
1,000
= 5 orders per year
200

33
An EOQ Example
Determine optimal time between orders
D = 1,000 units
Q* = 200 units
S = $10 per order
N = 5 orders/year
Expected
Number of working days per year
time between = T =
Expected number of orders
orders
T=
10/11/16
250
5
= 50 days between orders

34
An EOQ Example
Determine the total annual cost
D = 1,000 units
Q* = 200 units
S = $10 per order
N = 5 orders/year
T = 50 days
Total annual cost = Setup cost + Holding cost
TC
D
Q
S H
Q
2
1,000
200
($10)
($.50)
200
2
(5)($10) (100)($.50)
$50 $50 $100

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35
The EOQ Model

When including actual cost of material; P
Total annual cost = Setup cost + Holding cost + Product cost
TC
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D
Q
S H PD
Q
2

36
Robust Model
The EOQ model is robust
It works even if all parameters and
assumptions are not met
The total cost curve is relatively flat in
the area of the EOQ
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37
An EOQ Example
Determine optimal number of needles to order
D = 1,000 units 1,500 units Q* = 200 units
S = $10 per order
N = 5 orders/year
T = 50 days
D
Q
TC S H
Q
2
Only 2% less than the total cost of $125

when the order quantity was 200
1,500
200
($10)
($.50)
200
2
$75 $50 $125
10/11/16
1,500
244.9
($10)
($.50)
244.9
2
6.125($10) 122.45($.50)
$61.25 $61.22 $122.47

38
Reorder Points
EOQ answers the how much question
The reorder point (ROP) tells when to order
Lead time (L) is the time between placing and
receiving an order
ROP =
Demand
per day
Lead time for a new

order in days
=dxL
d=
10/11/16
D
Number of working days in a year
39
Reorder Point Curve

Figure 12.5
Inventory level (units)
Q*
10/11/16
Resupply takes place as order arrives
Slope = units/day = d
ROP
(units)
Lead time = L
Time (days)

40
Reorder Point Example

Demand = 8,000 iPods per year
250 working day year
Lead time for orders is 3 working days, may take 4
d=
D
Number of working days in a year
= 8,000/250 = 32 units
ROP = d x L
= 32 units per day x 3 days = 96 units
= 32 units per day x 4 days = 128 units
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41
Quantity Discount Models

Reduced prices are often available when larger
quantities are purchased
Trade-off is between reduced product cost and
increased holding cost
TABLE 12.2
A Quantity Discount Schedule
DISCOUNT
NUMBER
DISCOUNT QUANTITY
DISCOUNT (%)
DISCOUNT
PRICE (P)
0 to 999
no discount
$5.00
1,000 to 1,999
$4.80
2,000 and over
$4.75
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42

Total annual cost = Setup cost + Holding cost + Product cost
TC
where
D
Q
S H PD
Q
2
Q = Quantity ordered
P = Price per unit
D = Annual demand in units
H = Holding cost per unit per year
S = Ordering or setup cost per order
Q*
2DS
IP
Because unit price varies, holding cost (H) is

expressed as a percent (I) of unit price (P)
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43

Steps in analyzing a quantity discount
1. For each discount, calculate Q*
2. If Q* for a discount doesnt qualify, choose
the lowest possible quantity to get the
discount
3. Compute the total cost for each Q* or
adjusted value from Step 2
4. Select the Q* that gives the lowest total
cost
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44

Total cost curve for discount 2
Total cost $
Total cost
curve for
discount 1
Total cost curve for discount 3
b
a
1st price
break
0
10/11/16
Q* for discount 2 is below the allowable range at point a and

must be adjusted upward to 1,000 units at point b
2nd price
break
1,000
2,000
Order quantity
Figure 12.7
45
Quantity Discount Example

Calculate Q* for every discount
10/11/16
2DS
Q
IP
*
Q1* =
2(5,000)(49)
= 700 cars/order
(.2)(5.00)
Q2* =
2(5,000)(49)
= 714 cars/order
(.2)(4.80)
Q3* =
2(5,000)(49)
= 718 cars/order
(.2)(4.75)
46

Calculate Q* for every discount
10/11/16
2DS
Q
IP
*
Q1* =
2(5,000)(49)
= 700 cars/order
(.2)(5.00)
Q2* =
2(5,000)(49)
= 714 cars/order
(.2)(4.80)
1,000 adjusted
Q3* =
2(5,000)(49)
= 718 cars/order
(.2)(4.75)
2,000 adjusted
47

TABLE 12.3
Total Cost Computations for Wohls Discount Store

ORDER
QUANTITY
ANNUAL
PRODUCT
COST
ANNUAL
ORDERING
COST
ANNUAL
HOLDING
COST
DISCOUNT
NUMBER
UNIT
PRICE
$5.00
700
$25,000
$350
$350
$25,700
$4.80
1,000
$24,000
$245
$480
$24,725
$4.75
2,000
$23.750
$122.50
$950
$24,822.50
TOTAL
Choose the price and quantity that gives the

lowest total cost
Buy 1,000 units at $4.80 per unit
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48
Probabilistic Models and

Safety Stock
1. Used when demand is not constant or certain
2. Use safety stock to achieve a desired service
level and avoid stock-outs
ROP = d x L + ss
Annual stockout costs = the sum of the units short x
the probability x the stockout cost/unit
x the number of orders per year
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49
ROP Example
An apple distributor has a demand of 8,000 iPods per year. The firm operates a
250-day working year. On average, delivery of an order takes 3 working days. Find
RoP.
Demand per day, d
Annual demand (D)

= ----------------------------------------Number of working days per year
8,000
= -----------250
= 32 units per day.
RoP = d L
= 32 units/day x 3 days
= 96 units.
i.e. When stock drops to 96, an order should be placed. And the order will arrive 3
days later just as the firms stock is depleted.
50
Safety Stock Example

ROP = 50 units
Orders per year = 6
Stockout cost = $40 per frame

Carrying cost = $5 per frame per year
NUMBER OF UNITS
ROP
PROBABILITY
30
.2
40
.2
50
.3
60
.2
70
.1
1.0
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51
Safety Stock Example

ROP = 50 units
Orders per year = 6
Stockout cost = $40 per frame

Carrying cost = $5 per frame per year
SAFETY
STOCK
ADDITIONAL
HOLDING COST
20
(20)($5) = $100
10
(10)($5) = $ 50
TOTAL
COST
STOCKOUT COST
$0
$100
= $240
$290
(10)(.2)($40)(6) + (20)(.1)($40)(6) = $960
$960
(10)(.1)($40)(6)
A safety stock of 20 frames gives the lowest total cost

ROP = 50 + 20 = 70 frames
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52
Supply Chain Management

Supply Chain: the sequence of organizations
their facilities, functions, and activitiesthat are
involved in producing and delivering a product
or service.
** Sometimes referred to as value chain
Supply Chain Management: Strategic
coordination of the supply chain for purpose of
integrating supply and demand management Stevenson
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53
Supply-Chain Management
The integration of activities that
procure materials and services,
transform them into intermediate
goods and final products, and
deliver them to customers; of
which related to purchasing and
outsourcing activities _Heizer
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54
10/11/16

55
The objective of supply chain
management is to coordinate
activities within the supply chain
to maximize the supply chains
competitive advantage and
benefits to the ultimate consumer
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56
The Supply Chains Strategic

Importance
1. The coordination of all supply chain
activities, starting with raw materials
and ending with a satisfied customer
2. Includes suppliers, manufacturers
and/or service providers, distributors,
wholesalers, retailers, and final
customer
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57
The Supply Chains Strategic

Importance
3. Large portion of sales dollars spent on
purchases
4. Supplier relationships increasingly
integrated and long term
Improve innovation, speed design, reduce
costs
5. Managing supplier relationships has

added emphasis
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58
Facilities
1.
2.
3.
4.
5.
6.
10/11/16
Warehouses
Factories
Processing centers
Distribution centers
Retail outlets
Offices

59
Functions and Activities

1.
2.
3.
4.
5.
6.
7.
8.
10/11/16
Forecasting
Purchasing
Inventory management
Information management
Quality assurance
Scheduling
Production and delivery
Customer service
60
Typical Supply Chains

Production
Purchasing
10/11/16
Distribution
Receiving Storage Operations Storage

61
Typical Supply Chain for a Manufacturer

Supplier
Supplier
Supplier
Storage
Mfg.
Storage
Dist.
Retailer
Customer
Figure 11.1a
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62
Typical Supply Chain for a Service

Supplier
Storage
Service
Customer
Supplier
Figure 11.1b
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63
GOODS & SERVICE FLOW; CLOCKWISE

CASH FLOWS; COUNTERCLOCKWISE
SUPPLY
CHAIN
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64
Need for Supply Chain Management

1. Improve operations
2. Increasing levels of outsourcing
3. Increasing transportation costs
4. Competitive pressures
5. Increasing globalization
6. Increasing importance of e-business
7. Complexity of supply chains
8. Manage inventories
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65
Bullwhip Effect
Figure 11.3
Demand
Initial
Supplier
Final Customer
Inventory oscillations become progressively

larger looking backward through the supply chain
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66
Global Supply Chains

Increasingly more complex
Language
Culture
Currency fluctuations
Political
Transportation costs
Local capabilities
Finance and economics
Government
Regulatory issues
Environmental issues
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67
Benefits of Effective Supply Chain

Management
Organization
Benefit
Campbell Soup
Doubled inventory turnover rate
Hewlett-Packard
Cut supply costs 75%
Samsung
Reduce inventory buffer from 21 to 15 days
Wal-Mart
Largest and most profitable retailer in the

world
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68
Benefits of Supply Chain Management
10/11/16
Lower inventories
Higher productivity
Greater agility
Shorter lead times
Higher profits
Greater customer loyalty
Integrates separate organizations into a
cohesive operating system
69
Elements of Supply Chain Management

Table 11.1
Element
Typical Issues
Customers
Determining what customers want
Forecasting
Predicting quantity and timing of demand
Design
Incorporating customer wants, manufacturing, and time
Processing
Controlling quality, scheduling work
Inventory
Meeting demand while managing inventory costs
Purchasing
Evaluating suppliers and supporting operations
Suppliers
Monitoring supplier quality, delivery, and relations
Location
Determining location of facilities
Logistics
Deciding how to best move and store materials
10/11/16

11-70
Effective Supply Chain

Requires linking the market, distribution
channels processes, and suppliers
Supply chain should enable members to:
10/11/16
Share forecasts
Determine the status of orders in real time
Access inventory data of partners

71
Successful Supply Chain

Trust among trading partners
Effective communications
Supply chain visibility
Event-management capability
The ability to detect and respond to

unplanned events
Performance metrics
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72
SCOR Metrics
Figure 11.5
Perspective
Reliability
On-time delivery
Order fulfillment lead time
Fill rate (fraction of demand met from stock)
Perfect order fulfillment
Flexibility
Supply chain response time

Upside production flexibility
Expenses
Supply chain management costs

Warranty cost as a percent of revenue
Value added per employee
Assets/utilization
10/11/16
Metrics
Total inventory days of supply

Cash-to-cash cycle time
Net asset turns

73
RFID Technology
Used to track goods in supply chain
RFID tag attached to object
Similar to bar codes but uses radio
frequency to transmit product information
to receiver
RFID eliminates need for manual counting
and bar code scanning
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74
CPFR
Collaborative Planning, Forecasting, and
Replenishment
Focuses on information sharing among
trading partners
Forecasts can be frozen and then
converted into a shipping plan
Eliminates typical order processing
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75
Supply Chain Issues

Strategic
Issues
Design of the
supply chain,
partnering
Tactical Issues
10/11/16
Inventory policies
Purchasing policies
Production policies
Transportation
policies
Quality policies
Operating Issues
Quality control
Production planning
and control
NY- MEM 575: Courtesy of Mc Graw Hill and PearsonPrentice Hall
76
Supply Chain Benefits and Drawbacks

Table 11.4
Problem
Potential
Improvement
Benefits
Possible
Drawbacks
Large
inventories
Smaller, more
frequent deliveries
Reduced
holding costs
Traffic congestion
Increased costs
Long lead
times
Quick response
Delayed
differentiation
Disintermediation
May not be feasible

May need to absorb
functions
Large
number of
parts
Modular
Fewer parts
Simpler
ordering
Less variety
Outsourcing
Reduced cost,
higher quality
Loss of control
Cost
Quality
Variability
Shorter lead times,

better forecasts
Able to match
supply and
demand
Less variety
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Just-In-Time, TPS, and

Lean Operations
JIT is a philosophy of continuous and
forced problem solving via a focus on
throughput and reduced inventory
TPS emphasizes continuous
improvement, respect for people, and
standard work practices
Lean production supplies the
customer with their exact wants when
the customer wants it without waste
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Just - in -Time (JIT)

A highly coordinated processing system
in which goods moving through the
system, and services are performed, just
as they are needed.
JIT is a pull demand system
The ultimate goal of JIT is a balanced
system
Achieves a smooth, rapid flow of
materials through the system
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Just-In-Time (JIT)
Powerful strategy for improving operations
Materials arrive where they
are needed when they are
needed
Identifying problems and
driving out waste reduces
costs and variability and
improves throughput
Requires a meaningful
buyer-supplier relationship
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Benefits of Just-In-Time Systems

Reduced inventory levels
High quality
Flexibility
Reduced lead times
Increased productivity
Increased equipment utilization
Reduced scrap and rework
Reduced space requirements
Reduced setup costs
Pressure for good vendor relationships
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JIT Inventory
Inventory is at the minimum level
necessary to keep operations running
TABLE 16.2
JIT INVENTORY TACTICS
Use a pull system to move inventory
Reduce lot sizes
Develop just-in-time delivery systems with suppliers
Deliver directly to point of use
Perform to schedule
Reduce setup time
Use group technology
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Reduce Variability
Inventory level
Process
downtime
Scrap
Setup
time
Quality
problems
Late deliveries
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Figure 16.3
83
Reduce Variability
Inventory
level
Process
downtime
Scrap
Setup
time
Quality
problems
Late deliveries
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Figure 16.3
84
Reduce Variability
Inventory
level
No scrap
Setup
time
reduced
Quality
problems
removed
No late
deliveries
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Process
downtime
removed

Figure 16.3
85
Reduce Inventory
Reducing inventory uncovers the
rocks
Problems are exposed
Ultimately there will
be virtually no
inventory and no
problems
Shingo says Inventory is evil
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Reduce Lot Sizes

Figure 16.4
Inventory
200
Q1 When average order size = 200

average inventory is 100
Q2 When average order size = 100
average inventory is 50
100
Time
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Kanban
Kanban is the Japanese word for card
(signal or visible record)
The card is an authorization for the next
container of material to be produced
A sequence of kanbans
pulls material through
the process
Many different sorts of
signals are used, but
the system is still called
a kanban
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Kanban
1. User removes a
standard sized
container
2. Signal is seen by
the producing
department as
authorization to
replenish
Signal marker
on boxes
Figure 16.8
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Part numbers
mark location
89
Advantages of Kanban
Allow only limited number of faulty or
delayed material
Problems are immediately evident
Puts downward pressure on bad
aspects of inventory
Standardized containers reduce
weight, disposal costs, wasted space
and labor
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Transitioning to a JIT System

Get top management commitment
Decide which parts need most effort
Obtain support of workers
Start by trying to reduce setup times @
costs
Gradually convert operations
Convert supplier to JIT
Prepare for obstacles commitment
supplier resistant
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Lean Operations
Is about waste elimination
Broader than JIT in that it is externally
focused on the customer
Starts with understanding what the
customer wants
Optimize the entire process from the
customers perspective
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Eliminate Waste
Waste is anything that does not add
value from the customer point of view
Storage, inspection, delay, waiting in
queues, and defective products do not
add value and are 100% waste
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Ohnos Seven Wastes

Overproduction
Queues
Transportation
Inventory
Motion
Overprocessing
Defective products
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Eliminate Waste
Other resources such as energy, water,
and air are often wasted
Efficient, sustainable production
minimizes inputs, reduces waste
Traditional housekeeping has been
expanded to the 5Ss
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The 5Ss
Sort/segregate when in doubt, throw it out
Simplify/straighten methods analysis tools
Shine/sweep clean daily
Standardize remove variations from
processes
Sustain/self-discipline review work and
recognize progress
Two additional Ss
Safety built in good practices
Support/maintenance reduce variability and unplanned

downtime
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Building a Lean Organization

Transitioning to a lean system can be
difficult
Lean systems tend to have the following
attributes
Use JIT techniques
Build systems that help employees produce
perfect parts
Reduce space requirements
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Building a Lean Organization

Lean systems tend to have the following
attributes
Develop partnerships with suppliers
Educate suppliers
Eliminate all but value-added activities
Develop employees
Make jobs challenging
Build worker flexibility
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Lean Sustainability
Two sides of the same coin
Maximize resource use and economic
efficiency
Focus on issues outside the immediate
firm
Driving out waste is the common
ground
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Lean Operations in Services

The JIT techniques
used in manufacturing
are used in services
Suppliers
Layouts
Inventory
Scheduling
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Lets Recap
1. Discuss the functions of inventory
2. Explain the use of ABC Analysis, Cycle Counting and Record
Accuracy.
3. Explain and use the EOQ model for independent inventory
demand
4. Apply the EOQ and Quantity Discounts Models
5. Compute a reorder point and safety stock
6. Explain the functions of Supply Chain Management in relation to
the Inventory Management.
7. Explain the relation between the inventory management against
the JIT and Lean productions/operations.
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Topic 5 - Procurement and Inventory Control

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NY- MEM 575: Courtesy of Mc

UiTM Shah Alam

NY- MEM 575: Courtesy of Mc Graw Hill and

NY- MEM 575: Courtesy of Mc Graw Hill and

NY- MEM 575: Courtesy of Mc Graw Hill

NY- MEM 575: Courtesy of Mc Graw Hill

NY- MEM 575: Courtesy of Mc Graw Hill

NY- MEM 575: Courtesy of Mc Graw Hill

The Material Flow Cycle

Move Wait in queue Setup

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2. Used to establish policies that focus

NY- MEM 575: Courtesy of Mc Graw Hill

Percentage of annual dollar usage

Percentage of inventory items

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NY- MEM 575: Courtesy of Mc Graw

Accurate records are a critical

Periodic systems require regular

Perpetual inventory tracks receipts

Incoming and outgoing

Eliminates shutdowns and interruptions

ii. Eliminates annual inventory adjustment

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Cycle Counting Example

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Good personnel selection, training, and

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2. Dependent demand - the demand for

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Determining Inventory Holding Costs

Material handling costs (equipment lease or

Labor cost (receiving, warehousing, security)

Investment costs (borrowing costs, taxes, and

Pilferage, space, and obsolescence (much

Overall carrying cost

Holding costs vary considerably depending

Determining Inventory Holding Costs

Material handling costs (equipment lease or

Labor cost (receiving, warehousing, security)

Investment costs (borrowing costs, taxes, and

Pilferage, space, and obsolescence (much

Overall carrying cost

Inventory Models for Independent

NY- MEM 575: Courtesy of Mc Graw Hill

Basic EOQ Model

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Inventory Usage Over Time

Total order received

Setup (order) cost

NY- MEM 575: Courtesy of Mc Graw Hill and

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NY- MEM 575: Courtesy of Mc Graw Hill

= Number of pieces per order

(Holding cost per unit per year)

NY- MEM 575: Courtesy of Mc Graw Hill and

= Number of pieces per order

Annual holding cost =

NY- MEM 575: Courtesy of Mc Graw Hill

NY- MEM 575: Courtesy of Mc Graw Hill