MANAGEMENT
Lecture Note Six
Fahmy Radhi
What is Inventory?
Stock of materials
Stored capacity
1995
Corel Corp.
Examples
Raw material
Work-in-progress
Maintenance/repair/operating
supply
Finished goods
Independent versus
Dependent Demand
Independent demand - demand
for item is independent of demand
for any other item, e.g. Finished
Goods
Dependent demand - demand for
item is dependent upon the
demand for some other item, e.g.
Raw Material, Components, Work-in-
Process
Inventory Costs
Holding costs - associated with
holding or carrying inventory
over time
Ordering costs - associated
with costs of placing order and
receiving goods
Setup costs - cost to prepare a
machine or process for
manufacturing an order
Inventory Models
ROP
(units)
Time
(days)
Lead Time = L
EOQ Model
How Much to Order?
Annual Cost
t C u r ve
a l C os ve
To t u r
Minimum C o st C
l din g
total cost Ho
Minimum
inventory 0
Time
Computing Average
Inventory
Inventory Level
Day
Beginning Ending Average
1 (order received) 10 8 9
2 8 6 7
3 6 4 5
4 4 2 3
5 2 0 1
d
Ch 1 Optimal Production Quantity,
p
2 DCs
2 DCo Q*
Q* d
d Ch 1
Ch 1 p
p
Quantity Discount Model
TC for Disc. 3
TC for Disc. 2
Q* for Disc. 2
Order Quantity
0 1,000 2,000
Use of Safety Stock
Safety stock: additional stock that is kept
on hand
It is used only when demand is uncertain
Main purpose: to avoid stockouts when the
demand is higher than expected
ROP = d x L (normal condition)
ROP = d x L + SS (demand is uncertain)
Because it is dealing with decision under
risk, knowing the probability of demand is
necessary.
Safety Stock with Known
Stockout Costs
Case of ABCO
ROP = 50 units (= d x L)
Ch = $5 (per unit per year)
Cso = $40/unit (stockout cost)
Optimal number of orders per year is 6
Objective: to find the reorder point,
including safety stock, that will minimize
total expected cost
Total expected cost is the sum of expected
stockout cost plus expected additional
carrying cost
MRP
MRP - a computer-based information
system designed to handle ordering
and scheduling of dependent-demand
inventories. It is designed to answer:
what, how much, and when is it
needed.
MRP Design
MRP Inputs
MRP Processing
MRP Outputs
MRP Design
MRP Inputs
Master Schedule - contains which end
items are to be produced and when these
are needed, and in what quantities.
Bill of Materials (BOM) - contains a
listing all of the assemblies, subassemblies,
part, and raw materials that are needed to
produced one unit of finished product.
Inventory Record File - contains
information on the status of each item by
time period
MRP Processing
MRP Processing involves taking the
end-item requirements specified by
the master schedule and exploding
them into time-phased requirement
of reassembles, parts, and raw
materials using the bill of material
offset by lead times.
MRP Processing
Some terms used in MRP processing :
Gross Requirement (GR) - Total expected demand
for an items of raw material during each time period
Schedule Receipts (SR) - open orders scheduled
to arrive from vendors or else where in the pipeline
Projected On Hand (BOP) - expected amount of
inventory that will be on hand at the beginning of
each time period. BOP = SR + Inv. Last Period
Net Requirement (NR) - The actual amount
needed in each time period
Planned-order receipts (POR ) - quantity
expected to be received by the beginning of the
period in which it is shown
Planned-order Releases (PORs ) - planned
amount order in each time period
MRP Processing
Lot-for-Lot Ordering (LFLO) - order
size equal to net requirement
Lot-Size Ordering (LSO) - order
unequal to net requirement
Safety Stock (SS) - stock that must be
available on hand during period time
Formulas:
BOP = SR + Inv. available from last period
NRt = GRt - BOPt + SS
MRP Outputs
Primary Reports concern production and
inventory planning and control:
planned orders - the amount and timing of future orders
orders release - the execution of planned order
changes - the revision of due dates or order quantities as
well as cancellations of orders
Secondary reports - concern such things as
performance control, planning, and exceptions:
performance control reports - evaluation of system
operation, including deviations from plans and cost
information
planning reports - data useful for assessing future
materials requirements
exception report - data on any major discrepancies
encountered
Product Structure Tree
MRP Problem
A firm that produced wood shutters and bookcases
has received two orders for shutters; one for 100
shutters and one for 150 shutters. The 100-unit
orders are due to at the start of week 4 of the
current schedule, and 150-unit order is due for
delivery at the start of week 8. Each shutter
consists of four slated wood section and two frames.
The wood section is made by firm, and fabrication
takes one week. The frames are ordered, and lead
time is two weeks. Assembly of the shutters
required one week. There is a scheduled receipt of
70 wood sections in week 1.
Determine the size and timing of planned-order
releases necessary to meet delivery requirement
under each of these conditions:
Lot-for-Lot Ordering
Lot-size Ordering with a lot size of 320 units for frames and
70 units for wood sections
Develop a Master Schedule
Week 1 2 3 4 5 6 7 8
Number
Quantit 10 10
y 0 0
A Product Structure Tree
Shutter