Chapter 12: Inventory Management

intermediate term (next 12 months), plans for

permanent, overtime, and PT/temp/subcontracted
workforce and production changes. Process
production. If X 0, ending inventoryi = X,
Reorder Point (ROP): when inventory drops
involves recording sales, production, and inventory backorderi=0. If X<0 ending inventoryi = 0, and
below this level, reorder. If demand and purchase
levels of previous months, and updating forecasts backorderi= -X
lead time are constant, ROP = d(LT) where
d=demand rate, LT=lead time (same units of time). for next 12 months, seeing if production changes are 2. Average inventory for the period is (beginning +
feasible.
If not constant, need safety stock: stock held in
ending inventory)/2
excess of demand due to variability of demand/lead Aggregate operations planning: monthly planning 3. Beginning inventoryi = ending inventoryi-1
time, reduces risk of stock out: running out of
for sum of all products in same family (produced in
for Trial and error: determine the
inventory. ROP = expected demand during a lead same facility) for the next 12 months or so. Covers Procedure
output by permanent workers (during
time + safety stock. Safety stock depends on: 1.
seasonal demand products, need to make decision production
regular time) for each period. Determine the total
demand and lead time variability 2. desired service on employment, production and inventory.
units short if
level. Service level: 1. lead time service level 2.
Aggregation: concerned about group of similar
only
annual service level (fill rate).
products or entire product line, for service use FTE permanent
Lead time service level: (cycle service level)
(full time equivalent) E.g. lump of ice cream
workers are
probability that demand will not exceed inventory products as a single product, or 30% of space to
used during
on hand during a lead time (no stock-out). Annual womens clothing (regardless of brand, and type). regular time,
service level: percentage of annual demand filled Demand Options: usually handled by marketing. 1. and the
from stock on hand (fill rate). Safety stock=zdLT
Pricing (shift from peak to off-peak periods) 2.
periods short.
where z=safety factor (# of SD above expected
Promotion (advertising to conform to capacity) 3. Determine the
demand), dLT=SD of demand during lead time.
Early orders, before peak season 4. Backorders
cheapest way
ROP Using Lead Time Service Level: find z using (depends on if customers agree, must consider
to meet units
normal
distribution table. Stock costs) 5. Exporting (during off season, especially for short (hire
out risk = 1
lead time service level. seasonal products temperature cycle) 6.
temp or PT
workers, or
When only
demand is variable we Complementary products (e.g. snow blowers and
lawn
mowers,
AC
and
use permanent
use:
heaters)
workers OT).
Where
d(Bar)
Sample table
Capacity
=average
daily
Options: 1. Hiring temporary workers (bring full- (example #s)
demand,

time
workers
during
peak
season,
or
add/reduce
d
=SD of
number of shifts. Union
daily
contracts, costs, and
demand,
Aggregate
lack of workers
LT=lead time in
Services
must
be
considered)
2.
Using
overtime/idle
time
days. (Replace
daily/day with
Planning:
(but costs more and may lower productivity) 3.
any time period).
important
part time workers (temporary, less than 20
differences: 1.
When Hiring
hours,
no
benefits)
4.
Stockpiling
inventories
(if
Services occur
both
product
when they are
demand and lead time is variable we use: allows for it,
rendered
where LT(bar) =average lead time (of
watch for
(cant
period). LT=SD of lead time
storage, inventory, obsolescence/spoilage costs) 5. inventory or
period. *assumes LT and
Subcontracting (asking another company to do it) backorder), thus need to match capacity with
demand are independent!
Inputs to AOP: requires good information:
demand 2. If labour intensive, measure aggregate
resources (production rate/capacity, warehouse
plan in terms of time or FTE instead of output
demand forecasts, policy statements
measure. Yield management: application of
ROP Using Annual Service Level: given a desired capacity),
(overtime,
maximum
temp/PT
workers,
inventory
variable pricing strategy to allocate capacity based
service level SLannual (i.e. item fill rate). Use these
levels),
and
costs
(inventory
holding,
backorder,
on capacity availability (e.g. high price during peak,
steps: 1. Calculate E(z)= Q(1- SLannual)/dLT , where hiring, wage rates, overtime).
low price during off season, to maximize revenue).
Q is order quantity, E(z) is standardized expected
number of units short during order cycle 2. Look for Outputs from AOP: projected levels of inventory, Master Production Schedule (MPS): anticipated
the associated z-value in the E(z) conversion table output, and employment. Also total cost of the plan. build schedule expressed in quantity and timing of
each product for next 12 weeks or so (shorter than
3. Use z-value in the above three ROP formulas.
Basic AOP Strategies: 1. Maintain level
APP, and update every week). Break down
ROP= expected demand during lead time + zdLT
output/workforce 2. Change output to match
aggregate production plan into specific products
Min/Max Model: instead of instantaneous review, demand period by period 3. Use a combination.
schedule (i.e. disaggregate it). Setting up
inventory is reviewed every RP = review period:
Level output/workforce strategy: maintain steady production
for different products wastes time, need to minimize
rate of output and workforce while meeting
total
inventory
holding and setup cost while meeting
variations in demand and changes demand. Rough-cut
capacity planning (RCCP):
in required safety stock by using converting the MPS into
requirements for key
seasonal
inventories.
Uses
fixed
resources
in
order
to
test feasibility of proposed
EOQ = Q0 = (2DS/H)
number of workers equal to average FTE
MPS,
i.e.
checking
capacity
of production,
requirements for next 12 months. Usually for
warehouse facilities, labour, vendors, ensure no
deficiencies. Or done with linear programming.
Fixed-Interval/Order up to Level Model: orders durable goods, long shelf life.
placed at fixed time intervals, inventory brought up Chase demand strategy: matching output to
MPS Inputs: 3 inputs for each product: beginning
to the order up to level. Need: 1. Order interval 2. forecasted demand for the period (and required
demand forecasts each week, and
changes in safety stock). Uses smaller number of FT inventory,
The order up to level for each item.
orders (already committed to customers).
meets peak demand using PT/temporary customer
Assume
production
cycle is short (i.e. issued order
Determining the Order Interval: By minimizing workers,
subcontractors, and overtime. Hold less
will be complete the same week), negative
total annual holding and ordering costs of all SKUs workers,
inventory
(lower
inventory
related
costs),
and
inventory
is
backorder.
from a supplier. OI=order interval (in fraction of
necessary for service organizations.
yr), S=fixed ordering cost per purchase order,
MPS Outputs: 3 outputs for each week for each
s=variable ordering cost per SKU (assume same for Must consider: company policy, and cost. Policy
product: projected inventory (end of each week),
all SKUs), n = # of SKUs purchased, Rj=unit cost of sets constraints on things like minimum FT workers, planned production, and resulting uncommitted
also unions impose restrictions.
SKU j, i=annual holding cost rate, Dj=annual
planned inventory (available to promise (ATP)
demand of SKU j. Total annual inventory control General procedure for aggregate production
inventory). Projected on-hand inventory =
cost (TC)=
planning: 1. Determine product groups that can be inventory from previous week current weeks
aggregated (fewer the better) 2. Determine total
requirements. *current weeks requirement is
Optimal Order
demand forecast in next period (~12 months) 3.
max(forecast, committed customer orders).
Interval =
Identify
set
of
feasible
labour
schemes
so
total
Continue until project on-hand inventory is negative
Use OI* number
production
meets/exceeds
total
demand
and
and then choose to produce that week (at EPQ if
of days per year = order
required
safety
stock
for
each
period
4.
Determine
possible). ATP inventory = (planned production that
interval
the total labour and inventory holding cost of the
week) - (sum of customer orders in all weeks before
Determining the Order up to
plan. Repeat steps 3 and 4 until lowest cost
next production week). If for first week add in
Level: should be enough until next
beginning inventory. Used to quote realistic delivery
Trial
and
Error
Technique:
developing
order arrives. We look at variable demand and
tables/worksheets or graphs that enable managers to dates to customers.
constant lead time. Imax=expected demand during
determine
the
production
levels
that
meet
projected
Stabilizing the MPS: can be disruptive (the closer
order interval and LT + safety stock =
demand and safety stock requirements. Dont
the changes happen). Time fences: points of time
necessarily result in optimal (lowest cost) plan.
that separate zones of a master production schedule.
Where
d(bar) = Assumptions: 1. Only one aggregate group 2. No Emergency zone (weeks 1-4), require top
average
daily
management approval, affects
key
allowance made for holidays and different # of
demand. OI = Order interval (length of time
resource
workdays in months 3. No allowance for safety
between orders), days. LT = lead time, z = safety
stock for each period, but can hold seasonal stock,
factor (# of SD above expected demand), d = SD of and initial/desired end of planning horizon
daily demand. Replace daily/day with any period of inventory. Backorders allowed but cleared by end
time for all variables.
of period 4. All production in terms # of units of
aggregate measure (not labour hours/workers) 5.
Q = Imax inventory position, Q = order quantity
Total cost of regular production, overtime
production, backorder, inventory, all linear
Chapter 13: Aggregate Operations Planning
function of # of aggregate product 6. Production of
unit can be associated with one worker in terms of
Capacity and product decisions: Long term
(product selection, facility size and location, major hours and labour cost 7. Hiring cost per unit is
hiring cost per work divided by number of units a
equipment decisions, and layout of facilities),
worker makes in one period, charged to first
intermediate term (general levels of employment,
period of employment 8. Inventory holding cost is
output, and inventories), and short term (master
charged to average level of inventory held during a
production scheduling (MPS), material
requirements planning (MRP), and scheduling jobs, period, backorder change in amount of backorders
commitments for other products. Trading zone (5workers, and equipment). Longer term defines the carried to next period.
capacity constraints of shorter term.
Calculating Inventories in each period: 1. Ending 7), approved by middle management, can usually
production with another product. Planning
Sales and operations planning (S&OP): process inventory or backorder in any period i, calculate X trade
zone (8-12) changes without management approval,
of integrating sales forecasts with operations plans. = beginning inventoryi + (Output forecast)i
by
demand
planner and master scheduler.
backorder
where
output
is
sum
of
regular,
Usually once a year with monthly updates, for
i-1

MPS in Process Industries: use raw materials and

process into many products, usually has a base
product, then differentiate it into different SKUs.
Thus schedule using 2 levels: first by family, then
SKUs within the family. E.g. Ice cream base is the
same (family), then different flavours made (SKUs
within family). Changing family takes much longer
than SKU within a family.
Chapter 14: Material Requirements Planning
(MRP) and Enterprise Resource Planning (ERP)
ERP: manage and coordinate all the resources, info,
and functions of an organization from a shared
database.
Dependent demand: demand for components
derived from the plan for production of finished
goods. e.g. parts for a car, but the finished car itself
is independent since demand is not known.
Independent demand is usually steady once
seasonality is taken out. Dependent demand is
usually lump since production doesnt take place
uniformly, only certain times. We look at dependent
demand items in this chapter.
MRP: activity that determines the plans for
purchasing and production of dependent demand
components. Determined by working backwards
through MPS. Dependent demand items should be
treated differently from independent demand.
Inputs to MRP: bills of materials (breakdown of
products), MPS (how many finished products
needed and when), inventory on hard and on order
(open shop/purchase orders already issued), and
lead times. Outputs from MRP: planned order
releases, immediate order releases, and various
reports.
Master Production Schedule (MPS): the
anticipated build schedule stating which end items
are to be produced, when, and in what quantities for
the next 12 weeks or so. Cumulative lead time:
sum of the lead times that sequential phases of a
process require, from ordering components to
completion of final assembly. *planning horizon
must be longer than this.
Bill of Materials (BOM): listing of all components
(raw material, parts, subassemblies) needed to
produce on unit of a product. Product structure
tree: hierarchical diagram of the components
needed to assemble a product. Can be made into an
indented BOM, indent for every subassembly.

Special types of BOM: 1. Planning bill (pseudo

situations. Net-change MRP: immediately update
bill/kit): combination of several BOMs, reduce
only MRP tables affected by a change, best for
number of BOMs necessary for planning. E.g. 75% frequent change situations. MRP system
blue, 25% white, each require 2m of thread. Then nervousness: similar to bullwhip effect, small
we list 1.5m of blue and 0.5m of white thread 2.
changes on top of tree can have big quantity effects
Modular bill: arranged in product modules or
at the bottom. Backflushing: exploding an end
options. Used to reduce number of BOMs when a items BOM to determine the quantities of the
product consists of many modules, each with a few components that much have been used to make the
options 3. Phantom bill (transient bill): item
item; eliminates the need to collect detailed usage
usually not kept in inventory, but may sometimes be info on production floor.
needed. Zero lead time, special stock code so will MRP Outputs:
not be regularly ordered. * If BOM is inaccurate,
Primary Reports: 1. Immediate order releases
can lead to magnified errors in production as one
the execution of week 1 planned-order
moves up the product structure tree. *Each item in authorize
2. Planned order releases indicate the
stock needs separate description file, info about the releases
amount and timing of future purchase/work orders
item, purchase lead time, and quantity on hand.
3. Changes to open orders: revisions to due
MRP Processing: takes end items requirements
date/quantities.
specified by MPS and puts them into time-phased Secondary Reports: 1. Performance-control
requirements for fabrication of parts or assembly of reports: evaluation of system operation, including
subassemblies, and purchase of purchased parts and deviations from plans and cost information 2.
raw materials using the BOM, offset by the lead
Demand history reports: data for forecasting
times and netted for any inventory on hand or on
future component requirements.
order. Net requirements in period t = gross
requirements in period t projected inventory at the Safety stock: generally, not needed with dependent
demand items. But practically, good if bottleneck
start of period t scheduled receipt in period t +
safety stock in period t. If the equation is negative, process or has a scrap rate (leaves shortages).
Determine where there is variability in order to
then we have no net requirement.
account for safety time (instead of safety stock).
Timing and sizing of orders are determined by
Lot Sizing: looking lot size for purchase or
planned-order releases. Timing of receipt is
production order. Since demand is lumpy, difficult
indicated by planned-order receipts.
use models like EOQ. Can try grouping
Gross requirement: demand for an item during a to
orders. Must take into account, nature
time period without regard of amount on hand or on consecutive
of
demand (degree of uniformity), relative
order. Scheduled receipt: open order scheduled to importance
of holding cost vs ordering cost, and any
arrive at beginning of period. Projected on-hand: other considerations
affecting ordering.
expected inventory at beginning of time period. Net
Part-Period
Method: determine number of periods
requirement: actual amount needed in time period.
to order for at the same time. Economic part period
Planned-order receipt: quantity planned to be
received in the beginning of the period. Planned- (EPP) = setup (or ordering) cost / unit holding cost
per period
order release: quantity planned to be released
(ordered) in the beginning of the period.
Find how much to order by cumulative lot sizes and
extra inventory carried x periods carried to get part
Lot-for-lot ordering: order sizes equal to net
requirements. Lot-size ordering: minimum lot sizes periods. End when cumulative part period is closest
to the EPP. E.g. EPP = 84.
per order
Pegging: identifying the immediate parent
items that have generated a given set of
requirements for an item.
A MRP is a living document that always
changes, and time keeps on moving. Regenerative
MRP: batch-type approach, recomputes all the
MRP quantities periodically. Best for stable