Industrial Management

LOGO
JJ619

CHAPTER 3
INVENTORY CONTROL
MANAGEMENT

PREPAREDE BY:
MD NAJIP BIN TALIBIN

Course Learning Outcomes
1
2
4

.

Upon completion of this course, students should be
able to:

apply the basic concept of industrial management
system in Industry.
Identify the suitable concept industrial
management system in related industry by group
Contents

Inventory control and management concept.
1

Inventory cost.

2

Inventory models for independent demand. 3
4
4

Master scheduling.
4
5

Material Requirement Planning (MRP)

Inventory Control & Management
Concept
1
2
4
1
12-4
What Is Inventory?

Inventory is an idle resource which is usable
and has value.
Stock of items kept to meet future demand
Purpose of inventory management:
how many units to order
when to order

Concept
1
2
4
1
12-5
Objective of Inventory
To meet anticipated demand (make-to-stock)
In-Transit inventory: goods being transported
To take advantage of order cycles or to take
advantage of quantity discounts (cycle stock)

Concept
1
2
4
1
12-6
Objective of Inventory
To protect against stock-outs (safety stocks).
To smooth production requirements (seasonal
inventories).
To decouple production and distribution (WIP
buffers).
To help hedge against price increases
(speculative inventories).

Concept
1
2
4
1
12-7
General Types of Inventory
Official Inventory
Unofficial Inventory

Concept
1
2
4
1
12-8
Types of Inventory
Raw materials
Components - Purchased parts and supplies
Work-in-process (partially completed) products
(WIP)
Items being transported (Finished Goods)
Tools and equipment

Concept
1
2
4
1
12-9
Types of Inventory

Concept
1
2
4
1
Inventory Control Systems
Continuous system (fixed-order quantity)
constant amount ordered when inventory
declines to predetermined level.

Periodic system (fixed-time-period)
order placed for variable amount after fixed
passage of time.

Concept
2
4
1
Inventory Costs
Carrying or Holding cost
- This broad category includes the costs for
storage facilities, handling, insurance,
breakage, taxes and the opportunity cost of
capital.

Ordering cost
- Refer to the managerial and clerical costs to
prepare the purchase or production order.

2
4
1
Inventory Costs
Shortage cost
- Temporary or permanent loss of sales when
demand cannot be met.

Setup Cost
- To make each different product involves
obtaining the necessary materials,
arranging specific equipment setups, filling
out the required paper, charging time &
material and moving out the previous stock
of material.

Inventory Cost
1
2
4
1
Most Important Inventory Costs
Holding Costs Denoted H; includes the variable expenses
incurred by the plant related to the volume
of inventory held
e.g. 15-25%
Ordering Cost Denoted S; fixed, constant money amount
incurred for each order placed
1
2
4
3
Inventory Model For Independent
Demand
Independent demand items are finished
products or parts that are shipped as end
items to customers.
Forecasting plays a critical role
Due to uncertainty- extra units must be
carried in inventory.
1
2
4
3
Demand
Dependent demand items are raw
materials, component parts, or
subassemblies that are used to produce a
finished product.
1
2
4
3
Demand
Economic Order Quantity
(EOQ or Q System)
Economic Production Quantity
(EPQ)
Quantity Discount Model

Three
Mathematical
Models for
Determining
Order Quantity
1
2
4
3
Demand

Economic Order Quantity (EOQ or Q System)
An optimizing method used for determining order
quantity and reorder points
Part of continuous review system which tracks on-
hand inventory each time a withdrawal is made
Economic Production Quantity (EPQ)
A model that allows for incremental product delivery
Modifies the EOQ process to consider cases where
quantity discounts are available
1
2
4
3
Demand
Wiley 2007
Economic Order Quantity
EOQ Assumptions:
Demand is known & constant -
no safety stock is required
Lead time is known & constant
No quantity discounts are
available
Ordering (or setup) costs are
constant
All demand is satisfied (no
shortages)
The order quantity arrives in a
single shipment

1
2
4
3
Demand
Total annual cost= annual ordering cost + annual
holding costs

H
2DS
Q and H;
2
Q
S
Q
D
TCQ =
|
.
|
\
|
+ |
.
|
\
|
=
3
Demand
Continuous (Q) Review System Example: A
computer company has annual demand of
10,000. They want to determine EOQ for circuit
boards which have an annual holding cost (H)
of RM6 per unit, and an ordering cost (S) of
RM75. They want to calculate TC and the
reorder point (R) if the purchasing lead time is 5
days.
1
2
4
3
Demand
EOQ (Q)

Reorder Point (R)

Total Inventory Cost (TC)
units 500
RM6
RM75 * 10,000 * 2
H
2DS
Q = = =
units 200 days 5 *
days 250
10,000
Time Lead x Demand Daily R = = =
RM3000 RM1500 RM1500 RM6
2
500
RM75
500
10,000
TC = + =
|
.
|
\
|
+
|
.
|
\
|
=
1
2
4
3
Demand
Wiley 2007
Economic Production Quantity (EPQ)
Same assumptions as the EOQ except: inventory
arrives in increments & is drawn down as it arrives

1
2
4
3
Demand
Wiley 2007
EPQ Equations
Total cost:

Maximum inventory:
d=avg. daily demand rate
p=daily production rate

Calculating EPQ
|
.
|
\
|
+ |
.
|
\
|
= H
2
I
S
Q
D
TC
MAX
EPQ
|
|
.
|
\
|
=
p
d
1 Q I
MAX
|
|
.
|
\
|

=
p
d
1 H
2DS
EPQ
EPQ Problem: HP Ltd. Produces its premium plant food in 50#
bags. Demand is 100,000 kg per week and they operate 50 weeks.
each year and HP can produce 250,000kg. per week. The setup
cost is RM200 and the annual holding cost rate is RM55 per bag.
Calculate the EPQ. Determine the maximum inventory level.
Calculate the total cost of using the EPQ policy.
|
.
|
\
|
+ |
.
|
\
|
= H
2
I
S
Q
D
TC
MAX
EPQ
|
|
.
|
\
|

=
p
d
1 H
2DS
EPQ
|
|
.
|
\
|
=
p
d
1 Q I
MAX
Demand
|
|
|
.
|
\
|
=
p
d
1 H
2DS
EPQ
Bags EPQ 850 , 77
250000
000 , 100
1 55 .
) 200 )( 000 , 100 )( 50 ( 2
=
|
.
|
\
|

=
|
|
.
|
\
|
=
p
d
1 Q I
MAX
|
.
|
\
|
+ |
.
|
\
|
= H
2
I
S
Q
D
TC
MAX
EPQ
bags MAX I 710 , 46
000 , 250
000 , 100
1 850 , 77 =
|
|
.
|
\
|
=
( ) ( ) 690 , 25 55 .
2
710 , 46
200
850 , 77
000 , 000 , 5
RM TC =
|
.
|
\
|
+ |
.
|
\
|
=
Demand

Same as the EOQ model, except:
Unit price depends upon the quantity ordered

The total cost equation becomes:

|
.
|
\
|
+
|
.
|
\
|
= H
2
Q
S
Q
D
TC
QD
CD +
Demand
Quantity Discount Procedure
Calculate the EOQ at the lowest price
Determine whether the EOQ is feasible at
that price
Will the vendor sell that quantity at that price?
If yes, stop if no, continue
Check the feasibility of EOQ at the next
higher price

Continue to the next slide ...

Wiley 2007
QD Procedure (continued)
Continue until you identify a feasible EOQ
Calculate the total costs (including total item
cost) for the feasible EOQ model
Calculate the total costs of buying at the
minimum quantity required for each of the
cheaper unit prices
Compare the total cost of each option &
choose the lowest cost alternative
Any other issues to consider?

LOGO
4
Master Scheduling
Master Scheduling is a business process
designed to balance demand and supply at
the detailed, mix level.

Master Scheduling is primarily a decision-
making process, performed by an individual
called the Master Scheduler. As such, it is
people-centered; the computers role is to
support the people in their decision-making
activities.
4
Master Scheduling
The output from this process is the Master
Production Schedule, which is the anticipated
build schedule for specific products (or parts of
products) and customer orders.
4
Master Scheduling
The Master Schedule is:

time-phased,
extends for a number of weeks into the future,
is typically expressed in weekly time increments
or smaller.
4
Master Scheduling
Master Production Schedule
Provides basis for:
Making good use of manufacturing resources.
Making customer delivery promises.
Resolving tradeoffs between sales and
manufacturing.
Attaining strategic objectives in the sales and
operations plan.
4
Master Scheduling
What is Master Production Scheduling?
Start with Aggregate plan
(Aggregate Sales & Ops Plan)
Output level designed to meet targets
Disaggregates
Converts into specific schedule for each item
Role of the MPS
Aggregate plan:
Specifies the resources available (e.g.: regular
workforce, overtime, subcontracting, allowable
inventory levels & shortages)
Master production schedule:
Specifies the number & when to produce each
end item (the anticipated build schedule)
Disaggregates the aggregate plan
4
Master Scheduling
4
Master Scheduling
S&OP vs MPS
The role of the sales and operations plan is
to balance supply and demand volume, while
the MPS specifies the mix and volume of the
output
MPS shows when products will be available
in future
Planned production, not forecast
4
Master Scheduling
4
Master Scheduling
Planning Links to MPS
4
Master Scheduling
Basic information which are needed to prepare
the Master Production Schedule (MPS).
a) When the product is completed and can be
sent to the customer.
b) How long is the final assemble.
c) How long is the process to make sub assembly.
d) How long is the component takes time to be
completed.
4
Master Scheduling
Basic information which are needed to prepare
the Master Production Schedule (MPS).
e) List the number of all quantity material to produce
a product.
f) List the completed production processes.
g) Standard time for each operation.
h) Total order quantity from the customer or internal
order as in the stock.
Page 41
Objectives of MPS
Maintain the desired customer service level
Utilize resources efficiently
Maintain desired inventory levels
4
Master Scheduling
Zubair Sdn Bhd will produce a new product for
1,000 units. The product has four stages of
operation which is shown as below:
Operation Operation Time
(hour/unit)
Production
Time (hour)
1 2 600
2 4 400
3 4 400
4 6 600
4
Master Scheduling
Calculate the monthly capacity and the duration
of the production.
Draw Master Production Schedule (MPS).
Analyze the data.
LOGO
Material Requirements Planning
(MRP)
Presented by:

MD NAJIP BIN TALIBIN
MNT 2012
Dependent Demand
For any product for which a schedule
can be established, dependent
demand techniques should be used
MNT 2012
5
Material Requirement Planning
(MRP)
MNT 2012
Dependent Demand
The demand for one item is related
to the demand for another item
Given a quantity for the end item,
the demand for all parts and
components can be calculated
In general, used whenever a
schedule can be established for an
item
MRP is the common technique
5
(MRP)
MNT 2012
1. Master production schedule
2. Specifications or bill of material
3. Inventory availability
4. Purchase orders outstanding
5. Lead times
Effective use of dependent demand
inventory models requires the
following
5
(MRP)
(MRP)
Define fundamental of Material Requirement
Planning (MRP).
Materials requirements planning (MRP) is the
logic for determining the number of parts,
components, and materials needed to produce a
product.

5
(MRP)

MRP provides time scheduling information
specifying when each of the materials, parts,
and components should be ordered or
produced.

MRP is a Computer-based information system
that schedules and orders dependent-
demand inventory components.
5
Benefits of MRP

1. Better response to customer orders
2. Faster response to market changes
3. Improved utilization of facilities and
labour.
4. Reduced inventory levels
MNT 2012
5
(MRP)
MNT 2012
The Planning Process
Figure 14.1
Is capacity
plan being
met?
Is execution
meeting the
plan?
Change
master
production
schedule?
Change
capacity?
Change
requirements?
No
Execute
material plans
Execute capacity
plans
Yes
Realistic?
Capacity
requirements plan
Material
requirements plan
Master production
schedule
5
MNT 2012
Aggregate Production Plan
Months January February
Aggregate Production Plan 1,500 1,200
(Shows the total
quantity of amplifiers)
Weeks 1 2 3 4 5 6 7 8
Master Production Schedule
(Shows the specific type and
quantity of amplifier to be
produced
240-watt amplifier 100 100 100 100
150-watt amplifier 500 500 450 450
75-watt amplifier 300 100
Figure 14.2
5
MNT 2012
Bills of Material
List of components, ingredients, and
materials needed to make product
Provides product structure
Items above given level are called
parents
Items below given level are called
children
5
(MRP)
MNT 2012
BOM Example
B
(2)
Std. 12 Speaker kit C
(3)

Std. 12 Speaker kit w/
amp-booster
1
E
(2)
E
(2)
F
(2)

Packing box and
installation kit of wire,
bolts, and screws
Std. 12 Speaker
booster assembly
2
D
(2)

12 Speaker
D
(2)

12 Speaker
G
(1)

Amp-booster
3
Product structure for Awesome (A)
A
Level
0
MNT 2012
BOM Example
B
(2)
Std. 12 Speaker kit C
(3)

Std. 12 Speaker kit w/
amp-booster
1
E
(2)
E
(2)
F
(2)

Packing box and
installation kit of wire,
bolts, and screws
Std. 12 Speaker
booster assembly
2
D
(2)

12 Speaker
D
(2)

12 Speaker
G
(1)

Amp-booster
3
Product structure for Awesome (A)
A
Level
0
Part B: 2 x number of As = (2)(50) = 100
Part C: 3 x number of As = (3)(50) = 150
Part D: 2 x number of Bs
+ 2 x number of Fs = (2)(100) + (2)(300) = 800
Part E: 2 x number of Bs
+ 2 x number of Cs = (2)(100) + (2)(150) = 500
Part F: 2 x number of Cs = (2)(150) = 300
Part G: 1 x number of Fs = (1)(300) = 300
5
MNT 2012
MRP Structure
Figure 14.5
Output Reports
MRP by
period report
MRP by
date report
Planned order
report
Purchase advice
Exception reports

Order early or late
or not needed

Order quantity too
small or too large
Data Files
Purchasing data
BOM
Lead times
(Item master file)
Inventory data
Master
production schedule
Material
requirement
planning
programs
(computer and
software)
5
MNT 2012
Determining Gross Requirements
Starts with a production schedule for the
end item 50 units of Item A in week 8
Using the lead time for the item,
determine the week in which the order
should be released a 1 week lead time
means the order for 50 units should be
released in week 7
This step is often called lead time
offset or time phasing
5
MNT 2012
From the BOM, every Item A requires 2
Item Bs 100 Item Bs are required in
week 7 to satisfy the order release for
Item A
The lead time for the Item B is 2 weeks
release an order for 100 units of Item B in
week 5
The timing and quantity for component
requirements are determined by the order
release of the parent(s)
5
MNT 2012
The process continues through the entire
BOM one level at a time often called
explosion
By processing the BOM by level, items
with multiple parents are only processed
once, saving time and resources and
reducing confusion
Low-level coding ensures that each item
appears at only one level in the BOM
5
MNT 2012
Gross Requirements Plan
Table 14.3
Week
1 2 3 4 5 6 7 8 Lead Time
A. Required date 50
Order release date 50 1 week
B. Required date 100
Order release date 100 2 weeks
C. Required date 150
Order release date 150 1 week
E. Required date 200 300
Order release date 200 300 2 weeks
F. Required date 300
D. Required date 600 200
Order release date 600 200 1 week
G. Required date 300
5
MNT 2012
Net Requirements Plan
MNT 2012
MNT 2012
Determining Net Requirements
Starts with a production schedule for the
end item 50 units of Item A in week 8
Because there are 10 Item As on hand,
only 40 are actually required (net
requirement) = (gross requirement - on-
hand inventory)
The planned order receipt for Item A in
week 8 is 40 units 40 = 50 - 10
5
MNT 2012
Following the lead time offset procedure,
the planned order release for Item A is
now 40 units in week 7
The gross requirement for Item B is now
80 units in week 7
There are 15 units of Item B on hand, so
the net requirement is 65 units in week 7
A planned order receipt of 65 units in
week 7 generates a planned order release
of 65 units in week 5
5
MNT 2012
A planned order receipt of 65 units in
week 7 generates a planned order release
of 65 units in week 5
The on-hand inventory record for Item B
is updated to reflect the use of the 15
items in inventory and shows no on-hand
inventory in week 8
This is referred to as the Gross-to-Net
calculation and is the third basic function
of the MRP process
MNT 2012
S
B C
12 13 8 9 10 11
20 30 40
Lead time = 6 for S
Master schedule for S
Gross Requirements Schedule
Figure 14.6
1 2 3
10 10
Master schedule
for B
sold directly
Periods
Therefore, these
are the gross
requirements for B
Gross requirements: B 10 40 50 20
40+10 15+30
=50 =45
1 2 3 4 5 6 7 8
Periods
A
B C
Lead time = 4 for A
Master schedule for A
5 6 7 8 9 10 11
40 15 50
5
MNT 2012
The logic of net requirements
Available inventory
Net requirements On
hand
Scheduled
receipts
+ =
Total requirements
Gross
requirements
Allocations +
5
MNT 2012
MRP Planning Sheet
Figure 14.7
5
MNT 2012
Safety Stock
BOMs, inventory records, purchase and
production quantities may not be perfect
Consideration of safety stock may be prudent
Should be minimized and ultimately
eliminated
Typically built into projected on-hand
inventory
5
MNT 2012
MRP Management
MRP is a dynamic system
Facilitates replanning when changes occur
Regenerating
Net change
System nervousness can result from too
many changes
Time fences put limits on replanning
Pegging links each item to its parent
allowing effective analysis of changes
5
MNT 2012
MRP and JIT
MRP is a planning system that
does not do detailed scheduling
MRP requires fixed lead times
which might actually vary with
batch size
JIT excels at rapidly moving small
batches of material through the
system
5
MNT 2012
Lot-Sizing Techniques
Lot-for-lot techniques order just what
is required for production based on
net requirements
May not always be feasible
If setup costs are high, lot-for-lot can
be expensive
Economic order quantity (EOQ)
EOQ expects a known constant
demand and MRP systems often deal
with unknown and variable demand
5
MNT 2012
Lot-Sizing Techniques
Part Period Balancing (PPB) looks at
future orders to determine most
economic lot size
The Wagner-Whitin algorithm is a
complex dynamic programming
technique
Assumes a finite time horizon
Effective, but computationally
burdensome
5
MNT 2012
Lot-for-Lot Example
1 2 3 4 5 6 7 8 9 10
Gross
requirements
35 30 40 0 10 40 30 0 30 55
Scheduled
receipts
Projected on
hand
35 35 0 0 0 0 0 0 0 0 0
Net
requirements
0 30 40 0 10 40 30 0 30 55
Planned order
receipts
30 40 10 40 30 30 55
Planned order
releases
30 40 10 40 30 30 55
Holding cost = $1/week; Setup cost = $100; Lead time = 1 week
5
MNT 2012
Lot-for-Lot Example
1 2 3 4 5 6 7 8 9 10
Gross
requirements
35 30 40 0 10 40 30 0 30 55
Scheduled
receipts
Projected on
hand
35 35 0 0 0 0 0 0 0 0 0
Net
requirements
0 30 40 0 10 40 30 0 30 55
Planned order
receipts
30 40 10 40 30 30 55
Planned order
releases
30 40 10 40 30 30 55
No on-hand inventory is carried through the system
Total holding cost = $0

There are seven setups for this item in this plan
Total ordering cost = 7 x $100 = $700
5
MNT 2012
EOQ Lot Size Example
1 2 3 4 5 6 7 8 9 10
Gross
requirements
35 30 40 0 10 40 30 0 30 55
Scheduled
receipts
Projected on
hand
35 35 0 43 3 3 66 26 69 69 39
Net
requirements
0 30 0 0 7 0 4 0 0 16
Planned order
receipts
73 73 73 73
Planned order
releases
73 73 73 73
Average weekly gross requirements = 27; EOQ = 73 units
5
MNT 2012
EOQ Lot Size Example
1 2 3 4 5 6 7 8 9 10
Gross
requirements
35 30 40 0 10 40 30 0 30 55
Scheduled
receipts
Projected on
hand
35 35 0 0 0 0 0 0 0 0 0
Net
requirements
0 30 0 0 7 0 4 0 0 16
Planned order
receipts
73 73 73 73
Planned order
releases
73 73 73 73
Average weekly gross requirements = 27; EOQ = 73 units
Annual demand = 1,404
Total cost = setup cost + holding cost
Total cost = (1,404/73) x $100 + (73/2) x ($1 x 52 weeks)
Total cost = $3,798
Cost for 10 weeks = $3,798 x (10 weeks/52 weeks) = $730
5
MNT 2012
PPB Example
1 2 3 4 5 6 7 8 9 10
Gross
requirements
35 30 40 0 10 40 30 0 30 55
Scheduled
receipts
Projected on
hand
35
Net
requirements
Planned order
receipts
Planned order
releases
EPP = 100 units
5
MNT 2012
PPB Example
1 2 3 4 5 6 7 8 9 10
Gross
requirements
35 30 40 0 10 40 30 0 30 55
Scheduled
receipts
Projected on
hand
35
Net
requirements
Planned order
receipts
Planned order
releases
Holding cost = $1/week; Setup cost = $100;
EPP = 100 units
2 30 0
2, 3 70 40 = 40 x 1
2, 3, 4 70 40
2, 3, 4, 5 80 70 = 40 x 1 + 10 x 3 100 70 170
2, 3, 4, 5, 6 120 230 = 40 x 1 + 10 x 3
+ 40 x 4
+ =
Combine periods 2 - 5 as this results in the Part Period
closest to the EPP
Combine periods 6 - 9 as this results in the Part Period
closest to the EPP
6 40 0
6, 7 70 30 = 30 x 1
6, 7, 8 70 30 = 30 x 1 + 0 x 2
6, 7, 8, 9 100 120 = 30 x 1 + 30 x 3 100 120 220 + =
10 55 0 100 0 100
Total cost 300 190 490
+ =
+ =
Trial Lot Size
Periods (cumulative net Costs
Combined requirements) Part Periods Setup Holding Total
MNT 2012
PPB Example
1 2 3 4 5 6 7 8 9 10
Gross
requirements
35 30 40 0 10 40 30 0 30 55
Scheduled
receipts
Projected on
hand
35 35 0 50 10 10 0 60 30 30 0
Net
requirements
0 30 0 0 0 40 0 0 0 55
Planned order
receipts
80 100 55
Planned order
releases
80 100 55
EPP = 100 units
5
MNT 2012
Lot-Sizing Summary
For these three examples
Lot-for-lot $700
EOQ $730
PPB $490
5
MNT 2012
Lot-Sizing Summary
In theory, lot sizes should be recomputed
whenever there is a lot size or order
quantity change
In practice, this results in system
nervousness and instability
Lot-for-lot should
be used when
low-cost JIT can
be achieved
MNT 2012
Lot-Sizing Summary
Lot sizes can be modified to allow for
scrap, process constraints, and
purchase lots
Use lot-sizing with care as it can cause
considerable distortion of requirements
at lower levels of the BOM
When setup costs are significant and
demand is reasonably smooth, PPB,
Wagner-Whitin, or EOQ should give
reasonable results
MNT 2012
Extensions of MRP
MRP II
Closed-Loop MRP
MRP system provides input to the capacity plan, MPS, and
production planning process
Capacity Planning
MRP system generates a load report which details capacity
requirements
This is used to drive the capacity planning process
Changes pass back through the MRP system for
rescheduling
5
MNT 2012
MRP in Services
Some services or service items are
directly linked to demand for other
services
These can be treated as dependent
demand services or items
Restaurants
Hospitals
Hotels
5

Industrial Management

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