3. Inventory Planning
• The process of determining the optimal quantity and
timing of Inventory for the purpose of aligning it
with sales and production capacity .
•Inventory planning has direct impact a company's
cash flow and profit margins especially for
smaller businesses that rely upon a quick turnover
of goods or materials.
5. Advantages of inventory planning
You know your stock levels
You can conduct stock rotation
You can optimize and reduce stock of items that don’t
move that quickly
You can move you quick moving items to the front
thereby speeding up picking
You can quick identify items that are not moving that
you can remove from your inventory
6. Disadvantages of inventory
planning
It doesn’t stop staff stealing stock
It can waste a lot of effort if not implemented and
maintained correctly
It doesn’t replace incompetent management
It can be very expensive and the return on investment
can take a long time
It requires a lot of staff training and you may loose
some staff on the way
8. Material Requirement Planning
Material requirements
planning (MRP) is a
production planning
and inventory control system
used to manage
manufacturing processes.
Most MRP systems
are software-based, while it is
possible to conduct MRP by
hand as well.
9. What can MRP do ?
Reduce Inventory Levels
Reduce Component shortages
Improve Shipping Performance
Improve Customer Service
Improve Productivity
Simplified and Accurate Scheduling
Reduce Purchasing Cost
Improve Production Schedules
10. Conti….
Reduce Manufacturing Cost
Reduce Lead Times
Less Scrap and Rework
Higher Production Quality
Improve Communication
Improve Plant Efficiency
Reduce Fright Cost
Reduction in Excess Inventory
Reduce Overtime
11. Three Basic Steps Of MRP
Identifying Requirements
Running MRP – Creating the Suggestions
Framing the Suggestions
12. Step 1: Identifying the
Requirements
Quantity on Hand
Quantity on Open Purchase Order
Quantity in/or Planned for Manufacturing
Quantity Committed to Existing Orders
Quantity Forecasted
16. Primary MRP Reports
Planned orders to be released at a future time.
Order release notices to execute the planned orders.
Changes in due dates of open orders due to
rescheduling.
Cancellations or suspensions of open orders due to
cancellation or suspension of orders on the master
production schedule.
Inventory status data.
17. Secondary MRP Reports
Planning reports, for example, forecasting inventory
requirements over a period of time.
Performance reports used to determine agreement
between actual and programmed usage and costs.
Exception reports used to point out serious
discrepancies, such as late or overdue orders.
18. What is Master Production
Schedule ?
A Master Production Schedule or MPS is the plan that
a company has developed for production, inventory,
staffing, etc. It sets the quantity of each end item to be
completed in each week of a short-range planning
horizon. A Master Production Schedule is the master
of all schedules. It is a plan for future production of
end items.
19. The Master Production Schedule gives production,
planning, purchasing, and top management the
information needed to plan and control the
manufacturing operation. The application ties overall
business planning and forecasting to detail operations
through the Master Production Schedule.
20. Bill of Materials (BOM)
A listing of all the subassemblies, intermediates, parts, and
raw materials that go into a parent assembly showing the
quantity of each required to make an assembly.
Basically, a bill of material (BOM) is a complete list of the
components making up an object or assembly.
Bills of materials come in different types specific to
engineering (used in the design process), manufacturing
(used in the manufacturing process), and so on. A
manufacturing BOM is of vital importance in materials
requirement planning (MRP) and enterprise resource
planning (ERP) systems.
21. Benefits of a BOM
Improve material management by responding to changes
in production.
Reduce inventory levels and obsolete parts.
Reduce manufacturing costs.
Minimize clerical and engineering efforts by optimizing
the tasks of maintaining and changing multi-level bills.
Supports variable length part numbers and unlimited
descriptive text.
Easy methods for accessing part information
22. Inventory Control is the supervision of
supply, storage and accessibility of items in
order to ensure an adequate supply without
excessive oversupply
23. Objectives of inventory control
Protection against fluctuations in demand
Better use of men, material & machines
Protection against fluctuations in output
Control of stock volume
Control of stock distribution
24. Major activities of inventory
control
Planning the inventories
Procurement of inventories
Receiving and inspecting the inventories
Storing and issuing the inventory
Recording the receipt and issues of inventories
Physical verification of inventories
Follow-up function
Material standardisation and substitution
25. Steps in Inventory Control
Deciding the maximum-minimum limits of
inventory
Determination of Reorder point
Determination of Reorder quantity
ABC Analysis
26. ABC analysis (Inventory)
ABC analysis is an inventory categorization
method which consists in dividing items into three
categories, A, B and C: A being the most valuable
items, C being the least valuable ones. This method
aims to draw managers’ attention on the critical
few (A-items) and not on the trivial many (C-items).
27. The ABC approach states that, when reviewing inventory, a
company should rate items from A to C, basing its ratings on the
following rules:
A-items are goods which annual consumption
value is the highest. The top 70-80% of the annual
consumption value of the company typically accounts for
only 10-20% of total inventory items.
B-items are the interclass items, with a medium
consumption value. Those 15-25% of annual consumption
value typically accounts for 30% of total inventory items.
C-items are, on the contrary, items with the lowest
consumption value. The lower 5% of the annual
consumption value typically accounts for 50% of total
inventory items.
28. Purpose of inventory
To maintain independency of operation
To meet variation in product demand
To allow flexibility in product scheduling
To provide a safeguard for variation in raw material
delivery time
To take advantages of economic purchase order size
30. Independent Demand
An inventory of an item is said to be falling into the
category of independent demand when the demand
for such an item is not dependant upon the demand
for another item.
Finished goods Items, which are ordered by External
Customers or manufactured for stock and sale, are
called independent demand items.
Independent demands for inventories are based on
confirmed Customer orders, forecasts, estimates and
past historical data.
31. Dependant Demand
If the demand for inventory of an item is dependant
upon another item, such demands are categorized as
dependant demand.
Raw materials and component inventories are
dependant upon the demand for Finished Goods and
hence can be called as Dependant demand inventories.
32. Difference between independent
demand & dependent demand:
One of the biggest differences in inventory is between
dependent and independent demand. Understanding
this difference is important as the entire inventory
policy for an item is based on this.
Independent demand is demand for a finished
product, such as a computer, a bicycle, or a pizza.
Dependent demand, on the other hand, is demand for
component parts or subassemblies.
For example, this would be the microchips in the
computer, the wheels on the bicycle, or the amount of
cheese on the pizza.
33. Inventory System
A set of policies and controls that monitors levels of
inventory and determines what levels should be
maintained, when stock should be replenished, and how
large orders should be
34. Single Period Inventory Models
A single period inventory model is used to identify the
amount of inventory to purchase given a perishable
good or single opportunity to purchase.
The amount of the single order is based on balancing
the cost of over- and under-estimating demand. This is
a very common problem in areas such as:
Overbooking of airline seats or hotel rooms
Ordering of fashion items
Any type of one-time order (t-shirts for a sporting
event)
35. Multi period inventory system
Demand for the product is constant and uniform throughout the period
Lead time (time from ordering to receipt) is constant
Price per unit of product is constant
Inventory holding cost is based on average inventory
Ordering or setup costs are constant
All demands for the product will be satisfied (No back orders are
allowed)
36. Fixed- order
quantity models/
EOQ(Economic
Order Quantity)
Fixed- time
periods
models/p-model
multi period
inventory
system
37. Economic Order Quantity(EOQ)
Economic order quantity is the order quantity that
minimizes total inventory holding costs and ordering
costs.
The framework used to determine this order quantity
is also known as Wilson EOQ Model or Wilson
Formula
The model was developed by Ford W. Harris in 1913
38. Fixed-time periods models/p-model
This is similar to the fixed–order quantity model;
it is used when the item should be in-stock and ready to use.
In this case, rather than monitoring the inventory level and
ordering when the level gets down to a critical
quantity, the item is ordered at certain intervals of time,
for example, every Friday morning. This is often
convenient when a group of items is ordered together. An
example is the delivery of different types of bread to a
grocery store. The bakery supplier may have 10 or more
products stocked in a store, and rather than delivering each
product individually at different times, it is much more
efficient to deliver all 10 together at the same time and on
the same schedule.
39. Assumptions
The ordering cost is constant.
The rate of demand is known, and spread evenly
throughout the year.
The lead time is fixed.
The purchase price of the item is constant i.e. no
discount is available
Only one product is involved.
40. Basic Fixed-Order Quantity (EOQ) Model Formula
Total
Annual =
Cost
Annual
Purchase
Cost
To find EOQ
TC=DC+D/S
Q
H
2
Annual
Ordering
Cost
S +
D
Q
TC = DC +
Annual
Holding
Cost
+ +
17-40
TC=Total annual
cost
D =Demand
C =Cost per unit
Q =Order quantity
S =Cost of placing
an order or setup
cost
R =Reorder point
L =Lead time
H=Annual holding
and storage cost
per unit of inventory
41. Deriving the EOQ
Using calculus, we take the first derivative of
the total cost function with respect to Q, and
set the derivative (slope) equal to zero,
solving for the optimized (cost minimized)
value of Qopt
Q =
2DS
H
=
2(Annual Demand)(Order or Setup Cost)
Annual Holding Cost OPT
_
Reorder point, R = d L
_
d = average daily demand (constant)
L = Lead time (constant)
We also need a
reorder point to
tell us when to
place an order
17-41
42. EOQ Example (1) Problem Data
Given the information below, what are the EOQ and
reorder point?
Annual Demand = 1,000 units
Days per year considered in average
daily demand = 365
Cost to place an order = $10
Holding cost per unit per year = $2.50
Lead time = 7 days
Cost per unit = $15
17-42
43. EOQ Example (1) Solution
Q =
2DS
H
=
2(1,000 )(10)
= 89.443 units or OPT 90 units
2.50
d =
1,000 units / year
365 days / year
= 2.74 units / day
_
Reorder point, R = d L = 2.74units / day (7days) = 19.18 or
20 units
In summary, you place an optimal order of 90 units. In
the course of using the units to meet demand, when
you only have 20 units left, place the next order of 90
units.
17-43
44. Carrying Cost Of Inventory
This is the cost a business incurs over a certain period
of time, to hold and store its inventory
Businesses use this figure to help them determine
how much profit can be made on current inventory.
It also helps them find out if there is a need to produce
more or less, in order to keep up with expenses or
maintain the same income stream.
45. Different Types of Inventory Costs
1. HoldingCarrying cost
2. Ordering costs:
3. Storage costs:
4. Setup/production change costs :
46. HoldingCarrying cost
They are expenses such as storage, handling, insurance,
taxes, obsolescence, and interest on funds financing the
goods.
These charges increase as inventory levels rise. To
minimize carrying costs, management makes frequent
orders of small quantities.
Holding costs are commonly assessed as a percentage of
unit value, rather than attempting to derive monetary value
for each of these costs individually.
This practice is a reflection of the difficulty inherent in
deriving a specific per unit cost, for example, obsolescence
or theft.
47. Ordering costs:
Ordering costs are those fees associated with placing
an order, including expenses related to personnel in
purchasing department, communications, and the
handling of related paper work.
Lowering these costs would be accomplished by
placing small number of orders, each for a large
quantity.
Unlike carrying costs, ordering expenses are generally
expressed as a monetary value per order.
48. Storage costs:
When the stock of the item is depleted, an order for
that item must wait until the stock is replenished or be
cancelled
There is a trade off between carrying stock to satisfy
demand and the cost resulting from stock out
49. Setup/production change costs
To make each different product involves obtaining the
necessary material, arranging specific equipment
setup, filling out the required papers, appropriately
charging time and materials, and moving out the
previous stock of material
If there were no cost or loss of time in changing from
one product to another, many small lots would be
produced.
These would reduce inventory levels, with a resulting
saving in cost.