Ch 13 Quantitative Models for Materials Planning

7/27/2019 Ch 13 Quantitative Models for Materials Planning

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Quantitative Models

for Materials PlanningChapter 13


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Planning Materials Requirements

Planning importance

Begins with the design of a product


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To plan manufacturing requirements, everystock item must be analyzed periodically to:

Forecast demand for the next period Determine acquisition lead time

Plan usage during the lead time

Establish quantity on hand

Determine reserve or safety stock requirements

Place units on order


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Accurate future requirements for eachstock item or product play a central role in

materials control. Materials planning deals with two

fundamental factors:

The quantity

The time to purchase


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Determination of how much and when tobuy involves two conflicting kinds of cost:

The cost of carrying inventory The cost of inadequate carrying


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Cost of Carrying inventory

Investment cost

Property rent/storage cost

Insurance Handling cost

Deterioration and shrinkage of stocks

Obsolescence


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Cost of Inadequate carrying

Extra purchasing, handling andtransportation cost

Higher price due to small order quantity Frequent stockouts resulting in disruptions

production schedule

Additional clerical costs

Inflation-oriented increases in prices

Lost sales and loss of GOODWILL


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Economic Order Quantity

EOQ Amount of inventory to be ordered

at one time for purposes of minimizingannual inventory cost.


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The quantity to be ordered at a given timemust be determined by balancing two

factors: The cost of carrying (possessing) materials

The cost of ordering (acquiring) materials


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Formula

EOQ= 2* annual required units*cost per order Cost per unit of material*carrying cost percentage

OR

EOQ= 2*RU*CO CU*CC


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Formula

The formula is based on the following relationships:

RU/EOQ= No.of orders placed annually

RU*CO/EOQ= Annual ordering cost

EOQ/2= Avg. no of units in inventory at any point

in time

CU*CC*EOQ/2= Annual carrying cost


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Example

Estimated requirement for the next year:2400units

Cost of the item per unit: $1.50 Ordering cost: $20

Inventory carrying cost: 10%


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Solution

EOQ= 2*2400*$20

$1.50*10%

EOQ= 800 units


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It is also possible to express EOQ in dollarsrather than in units.

EOQ= 2*AB I

A= annual requirement in dollars

B= ordering cost(per order) Inventory carrying costs.


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Example

Estimated requirement for the next year:2400units

Cost of the item per unit: $1.50 Ordering cost: $20

Inventory carrying cost: 10%


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Solution

A= 2,400*$1.50= $3,600

B= $20

I= 10% per year

EOQ= 2*3,600*$20

0.10

EOQ= $1,200 total cost.


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Cost of carrying inventory can becalculated and expressed numerically

Cost of not carrying inventory is difficult tobe calculated; yet they must be considered

upon ordering quantities.


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Graph

Total

annual costto order andcarry

Annualcarryingcost

Annual

orderingcost

Low point

Economicorder quantity


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Quantity Price Discounts

Purchasing in large quantities

Earns discounts and reduces per unit freight cost

But it increases investment in inventories

Therefore larger quantities should be

purchased only if the earned discount ismore than the cost of additional investment


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Inventory Turnover

Ratio between COGS and averageinventory investment

Number of times per period that inventoryis physically replaced

The higher it is the better

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Ch 13 Quantitative Models for Materials Planning