Purposes of Inventory1. To maintain independence of operations.

2. To meet variation in product demand.

3. To allow flexibility in production scheduling.

4. To provide a safeguard for variation in raw material delivery time.

5. To take advantage of economic purchase-order size.

Basic Fixed-Order Quantity Model and Reorder Point Behavior Exhibit 13.3

R = Reorder pointQ = Economic order quantityL = Lead time

L L

Q QQ

R

Time

Numberof unitson hand

Inventory Costs• Holding (or carrying) costs.

– Costs for storage, handling, insurance, etc.• Setup (or production change) costs.

– Costs for arranging specific equipment setups, etc.

• Ordering costs.– Costs of someone placing an order, etc.

• Shortage costs.– Costs of canceling an order, etc.

Cost Minimization Goal

Ordering Costs

HoldingCosts

QOPT

Order Quantity (Q)

COST

Annual Cost ofItems (DC)

Total Cost

By adding the item, holding, and ordering costs together, we determine the total cost curve, which in turn is used to find the Qopt inventory order point that minimizes total costs.

Basic Fixed-Order Quantity (EOQ) Model Formula

TC = DC + DQ

S + Q2

H

Total Annual Cost =Annual

PurchaseCost

AnnualOrdering

Cost

AnnualHolding

Cost+ +

TC = Total annual costD = DemandC = Cost per unitQ = Order quantityS = Cost of placing an order or setup costR = Reorder pointL = Lead timeH = Annual holding and storage cost per unit of inventory

Fixed-Order Quantity Model with Safety Stock Formula

timeleadduringdemandofdeviationstandard = yprobabilit servicespecifiedafordeviationsstandardofnumber the= z

periodper demand averageforecast = d

periods timelead = LPointReorder = R

:Where

Z+ Ld = R

L

L

R = Average demand during lead time + Safety stock

Determining the Value of L

2dL

d

d

L

1i

2dL

(L) =

constant, is andt independen isday each Since

i periodin demand ofdeviation standard is where

=

i

i

i

• The standard deviation of a sequence of random events equals the square root of the sum of the variances.

ABC Classification System• Items kept in inventory are not of equal importance

in terms of:

– dollars invested

– profit potential

– sales or usage volume

– stock-out penalties

0

3060

30

60

AB

C

% of $ Value

% of Use

So, identify inventory items based on percentage of total dollar value, where “A” items are roughly top 80 %, “B” items as next 15 %, and the lower 5% are the “C” items.

Schedule Performance Measures

• Meeting due dates of customers or downstream operations.

• Minimizing the flow time (the time a job spends in the process).

• Minimizing work-in-process inventory.

• Minimizing idle time of machines or workers.

Principles of Work Center Scheduling

1. There is a direct equivalence between work flow and cash flow.

2. The effectiveness of any job shop should be measured by speed of flow through the shop.

3. Schedule jobs as a string, with process steps back-to-back.

4. A job once started should not be interrupted.

Principles of Job Shop Scheduling (Continued)

5. Speed of flow is most efficiently achieved by focusing on bottleneck work centers and jobs.

6. Reschedule every day.

7. Obtain feedback each day on jobs that are not completed at each work center.

8. Match work center input information to what the worker can actually do.

Principles of Job Shop Scheduling (Continued)

9. When seeking improvement in output, look for incompatibility between engineering design and process execution.

10. Certainty of standards, routings, and so forth is not possible in a job shop, but always work towards achieving it.

Just-In-Time (JIT)Defined

• JIT: an integrated set of activities designed to achieve high-volume production using minimal inventories (RM, WIP, FG).

• JIT involves:– the elimination of waste in production effort. – the timing of production resources (e.g., parts

arrive at the next workstation “just in time”).

JIT Demand-Pull Logic

Customers

Vendor

Vendor

Vendor

Vendor

Sub

Sub

Fab

Fab

Fab

Fab

Final Assembly

Minimizing Waste: Inventory Hides Problems

Work inprocess queues(banks)

Changeorders

Engineering designredundancies

Vendordelinquencies

Scrap

Designbacklogs

Machine downtime

Decisionbacklogs

Inspectionbacklogs

Paperworkbacklog

Example: By identifying defective items from a vendor early in the production process the downstream work is saved.

Example: By identifying defective work by employees upstream, the downstream work is saved.

Kanban

• Japanese word for card– Pronounced ‘kahn-bahn’ (not ‘can-ban’)

• Authorizes production from downstream operations– ‘Pulls’ material through plant

• May be a card, flag, verbal signal etc.• Used often with fixed-size containers

– Add or remove containers to change production rate

Minimizing Waste: Kanban Production Control Systems

Exhibit 10.6

Storage Part A

Storage Part AMachine

Center Assembly Line

Material Flow

Card (signal) Flow

Withdrawal kanban

Production kanban

Characteristics of JIT VendorPartnerships

• Few, nearby suppliers• Long-term contract agreements• Steady supply rate• Frequent deliveries in small lots• Buyer helps suppliers meet quality• Suppliers use process control charts• Buyer schedules inbound freight

Respect for People• Level payrolls

• Cooperative employee unions

• Subcontractor networks

• Bottom-round management style

• Quality circles (Small group involvement activities)

JIT Implementation Issues• Level the Facility Load

• Eliminate Unnecessary Activities

• Reorganize Physical Configuration

• Introduce Demand-Pull Scheduling

• Develop Supplier Networks

Goldratt’s Rules of Production Scheduling

• Do not balance capacity balance the flow.• The level utilization of a nonbottleneck

resource is not determined by its own potential but by some other constraint in the system.

• Utilization and activation of a resource are not the same.

• An hour lost at a bottleneck is an hour lost for the entire system.

• An hour saved at a nonbottleneck is a mirage.

Goldratt’s Rules of Production Scheduling (Continued)

• Bottlenecks govern both throughput and inventory in the system.

• Transfer batch may not and many times should not be equal to the process batch.

• A process batch should be variable both along its route and in time.

• Priorities can be set only by examining the system’s constraints. Lead time is a derivative of the schedule.

Goldratt’s Theory of Constraints (TOC)

• Identify the system constraints.• Decide how to exploit the system constraints.• Subordinate everything else to that decision.• Elevate the system constraints.• If, in the previous steps, the constraints have

been broken, go back to Step 1, but do not let inertia become the system constraint.

Saving Time

Bottleneck Nonbottleneck

What are the consequences of saving time at each process?

Rule: Bottlenecks govern both throughput and inventory in the system.

Rule: An hour lost at a bottleneck is an hour lost for the entire system.

Rule: An hour saved at a nonbottleneck is a mirage.

Drum, Buffer, Rope

A B C D E F

Bottleneck (Drum)

Inventorybuffer

(time buffer)Communication

(rope)

Market

Exhibit 17.9

Quality Implications of synchronous manufacturing

• More tolerant than JIT systems– Excess capacity throughout system.

• Except for the bottleneck– Quality control needed before bottleneck.

Inventory Cost Measurement:Dollar Days

• Dollar Days is a measurement of the value of inventory and the time it stays within an area.

Dollar Days = (value of inventory)(number of days within a department)

Example

Benefits from Dollar Day Measurement

• Marketing– Discourages holding large amounts of finished

goods inventory.• Purchasing

– Discourages placing large purchase orders that on the surface appear to take advantage of quantity discounts.

• Manufacturing– Discourage large work in process and producing

earlier than needed.

Comparing Synchronous Manufacturing to MRP

• MRP uses backward scheduling.

• Synchronous manufacturing uses forward scheduling.

Comparing Synchronous Manufacturing to JIT

• JIT is limited to repetitive manufacturing

• JIT requires a stable production level

• JIT does not allow very much flexibility in the products produced

Comparing Synchronous Manufacturing to JIT (Continued)

• JIT still requires work in process when used with kanban so that there is "something to pull."

• Vendors need to be located nearby because the system depends on smaller, more frequent deliveries.