S pecia l Lecture

: Deta iled Scheduling a nd Pla nning

Inve nto ry Ma na ge me nt : Orde r P la nning .

S e s s io n 1. Inv e nto ry Ma na g e me nt : O rd e r P la nn ing .

O bje c tiv e s :
Ide ntify types of inve ntory a nd how they a re assessed from the ir diffe re nt require me nts a nd impacts on
the pla nning process .
Describe orde r review methodologies a nd a pply the m to diffe re nt types of inve ntory a nd inve ntory
strategies .
Ide ntify lot- s izing techniques , including the effects of orde r- qua ntity constra ints a nd modifies .

1. De f in it io n o f Inve nto ry .
De fin itio n o f Inv e nto ry .
- Thos e stocks o r ite ms us e d to s uppo rt productio n, s uppo rting a ctivitie s , a nd custome r s e rvice .
- De ma nd fo r inve nto ry may be de pe nde nt o r inde pe nde nt.
- Inve nto ry functio ns a re a nticipation, he dge , cycle , fluctua tion, tra ns po rtation, a nd s e rvice pa rts .
- In the the o ry of constra ints .
Inve nto ry is define d a s thos e ite ms purcha s e d fo r re s a le a nd include s finis he d goods ,
ra w ma te ria ls .
Inve nto ry is a lways va lue d a t purcha s e d p rice a nd include s no va lue - a dde d costs , a s
o ppos e d to the tra ditio na l cost a ccounting pra ctice of a dd ing dire ct la bo r a nd a lloca ting
ove rhe a d a s wo rk in proce s s prog re s s tho ugh the p roduction proce s s .
Ty pe s o f Inv e nto ry .
- Raw Mate ria ls (RAW).
RAW re p re s e nts a ny mate ria l inputs us e d in a ma nufa cturing p roce s s .
This include s ma nufa cture d products fro m othe r compa nie s , refe rre d to a s finis he d
goods a t s upplying compa ny.
Ra w mate ria ls fo rm the lowe st leve l of a bill- of- mate ria l structure , a nd typica lly
constitute the lo nge s t po rtio n of c u mulative le a d time .
- Wo rk in P roce s s (W IP).

While ra w ma te ria ls a re in va rious sta ge s of co mpletio n, the y a re refe rre d to a s

wo rk- in- proce s s inve nto ry.
The a mount of wo rk in proce s s diffe rs g re atly from co mpa ny to co mpa ny, de pe nding
o n the pa rticula r prod uction proce s s .
WIP fo rm the middle leve ls of a bill- of- mate ria l structure .

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S pecia l Lecture

: Deta iled Scheduling a nd Pla nning

Inve nto ry Ma na ge me nt : Orde r P la nning .

- Finis he d Goods (FG).

Finis he d goods , o r e nd ite ms , ca n be a co mplete d product o r a s e rvice pa rt.
A finis he d goods is a n ite m that is s old to a custome r o r tra nsfe rre d to a s iste r
d ivis io n in a ve rtica lly inte g rate d co mpa ny.
Ma nufa cturing compa nie s ma y ke e p a stoc k of finis he d goods a t the producing fa cility
o r in a wa re ho us e o r d istribution ce nte r to re duce de live ry le a d time s .
- Ma inte na nce , Re pa ir, a nd Ope rating Supplie s (MRO).
O pe ratio n s upplie s a re ofte n low cost, but nume rous , a nd include office a nd ja nito ria l
s upplie s .
Ma inte na nce a nd s pa re pa rts a re ma inta ine d to s uppo rt uptime a nd ava ila bility
re quire me nts , a nd may include ite ms ra nging from ce nts to te ns of thousa nds of dolla rs .

Re ple nis hme nt is typica lly by vis ua l review, direct one- for- one re place me nt, or reo rde r point.
C la s s ific a tio ns o f Inv e nto ry .
- This ca te go rie s re la te to time - fe nce s that cla s s ify inve nto rie s in stock in re la tions hip to the ir
us efulne s s in s uppo rting the inve nto ry strate gy.
- Cla s s ificatio ns .

Exce s s .
S urplus .
Ina ctive .
O bs olete .
Cons ignme nt.
Ve ndo r Ma na ge d.
1. Exce s s Inve nto ry.
This is inve nto ry proc ure d o r ma nufa cture d in exce s s of curre nt ope rationa l ne e d.
The definition of "curre nt ne e d " must be e sta blis he d by po licy fo r e a ch raw mate ria l.
Exce s s inve nto ry may occur by pla n, s uch a s lot s izing rule s o r a nticipatio n builds , o r
by a ccide nt.
Re a s ons .
: Inve nto ry re co rd e rro r.
: O rde r ca nce llation.
: Engine e ring s upe rs e dure s .
2. Surplus Inve nto ry.
S urplus inve nto ry a pplie s to ite ms in de ma nd, but the a va ila ble ba la nce is we ll in
e xce s s of ne e d.
The compa ny co uld procure o r ma nufa cture this q ua ntity late r be ca us e the s upply is
longe r tha n the ite m's le a d time .

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S pecia l Lecture

Inv e nto ry Ma na g e me nt : O rde r P la nning .

: Deta iled Scheduling a nd Pla nning

3. Ina ctive Inve nto ry.

Ina ctive inve nto ry is co ns ide re d a n a s s et fro m a n a ccounting pe rs pe ctive , but the re is
no fo re s e e a ble de ma nd.
It is the dire ct re s ult of s urplus inve nto ry tha t ha s not be e n us e d within 12 - 18 months
a nd will not be us e d in fo re s e e a ble future .
4. Obs ole te Inve nto ry.
O bs olete inve nto ry will neve r be us e d o r s o ld at full va lue be ca us e the products a re
no longe r p roduce d o r s uppo rte d .
Dis pos ing of the inve nto ry re duce s a compa ny's profit.
5. Cons ignme nt Inve nto ry.
Cons ignme nt inve nto ry occurs whe n the s up plie r p hys ica lly give s the custo me r the
inve nto ry fo r us e a nd the s upplie r reta ins the title of the product until us e d.
The s upplie r pe riodica lly inve nto rie s the co ns igne d product a nd, a s a re s ult, bills the
c usto me r a nd re ple nis he s the cons igne d inve nto ry.
6. Ve ndo r Ma na ge d.
Ve ndo r ma na ge d inve nto ry diffe rs fro m co ns ignme nt in s eve ra l re s pe cts .
The vis ibility of the custo me r's fo re ca sts , s uch a s p romotio ns a nd productio n ra te s , is
s ha re d with the s upplie r.
Vis ibility ca n be a chieve d with va rio us te c hnologica l a dva nta ge s s uc h a s point- of- s a le
info rma tion o r EDI.

2 . O rde r Re v ie w Me tho do lo g ie s .
Ty pe s o f O rde r Re v ie w Me tho do lo g ie s .
- Mate ria l Re q uire me nts Pla nning (MRP).
- Time - Pha s e d O rde r Po int.
- Re o rde r Po int.
- Pe riodic Review.
- Vis ua l Revie w.
- Ka nba n.

O rde r Re v ie w
Me tho d

Ind e pe nde nt
De m a nd

MR P
Re o rde r P o int
Pe rio d ic Re v ie w
V is ua l Re v ie w
Ka n ba n

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De pe nde nt
De m a nd

MRO

S pecia l Lecture

Inv e nto ry Ma na g e me nt : O rde r P la nning .

: Deta iled Scheduling a nd Pla nning

W ha t T he y A ns w e r.
- What is the ne t de ma nd a fte r a ccounting fo r ava ila ble inve nto ry a nd s che dule d re ce ipts ?
- What is the a va ila ble ba la nce afte r a cco unting fo r s afety stock, a lloca tio ns , a nd yie ld a nd
s c ra p a llowa nce s ?
- What qua ntity will ne e d to be o rde re d afte r a cco unting fo r constra ints a nd mod ifie rs ?
- Whe n will o rde rs ne e d to be re le a s e d to p rovide s ufficie nt time fo r proc ure me nt a nd
ma nufa cturing ?
- Whe n will o rde rs ne e d to be re ce ive d to s uppo rt re quire d date s ?

Ma te ria l Re q u ire m e nts P la nn ing (MR P )

- MRP is a proce s s , s uppo rte d by co mpute r logic, fo r ca lculating a n e ntire de ma nd ve rs us
o rde ring p rofile through the pla nning ho rizon.
- MRP's prima ry be nefit is its a bility to a ccommodate o rde ring strate gie s fo r pa rts with va ria ble
de pe nde nt a nd inde pe nde nt de ma nd profile s .
- This a bility a llows the pla nne r to e sta blis h pla ns a nd co ntrols by ite m cate go ry, a nd ite m a s
re quire d, to a chieve the inve nto ry strate gy ta rgets .
- S ome co ns ide ratio ns fo r MRP.

End- ite m de ma nd is ba s e d on a fo re ca st a nd/o r ma ste r s che dule .

De ma nd tre nds to be lumpy a n dis continuo us if not s che dule d in da ily ba tc he s .
This is mo re notice a ble at the lowe r bill of ma te ria l leve ls tha n a t the highe r one s .
Lowe r leve l de ma nd is not fo re ca ste d if the re is a define d bill of mate ria l re latio ns hip ;
it is ca lcula te d .
Little o r no s a fety stock is ne e de d to e ns ure a 100 % s e rvice le ve l fo r thos e pa rts
that a re s ubje ct to o nly de pe nde nt de ma nd , a nd that have s ufficie nt le a d time to me et
s c he dule d re quire me nts .
Re o rde r Po int
- Definitio n of Re o rde r Point.
A s et inve nto ry leve l whe re , if the tota l stock o n ha nd plus on o rde r fa lls to o r be low
that po int, a ctio n is ta ke n to re ple nis h the stock.
RO P = DDLT + S S
whe re RO P = Re o rde r Point.
.

DDLT = De ma nd During Le a d Time

SS = Sa fe ty Stock.

- The re o rde r point te chnique a s s ume s tha t a re ple nis hme nt o rde r ca n be re le a s e d a nd
re ce ive d befo re a stock- o ut occu rs .
- Be ca us e this te chnique is typica lly us e d fo r inde pe nde nt de ma nd ite ms , a s afety stock is
commo nly ma inta ine d.
- An a s s umption of ste a dy de ma nd is a ls o re quire d, whe re the pa st is a n a de qua te ind icato r of
the future .

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S pecia l Lecture

: Deta iled Scheduling a nd Pla nning

Inve nto ry Ma na ge me nt : Orde r P la nning .

Co ntinuous De ma nd a nd Inve nto ry Cha ra cte ristics

The s a le s fo r this ite m a re fa irly re gula r o n a we e kly ba s is .
As units a re withd rawn from inve nto ry to me et the de ma nds , the inve nto ry de cline s
g ra dua lly until it be ca us e ze ro (o ut of stock).
If re ple nis hme nt o rde rs a re pla ce d at judicious time s , the n a n inve nto ry re ce ipt of s o me
p re dete rmine d qua ntity s hould come in at just a bout the time the inve nto ry would be
de plete d.
This bottom g ra ph, ofte n refe rre d to a s a s aw- toothe d g ra ph, is a cla s s ica l mode l of
inve nto ry be ha vio r whe n us a ge is unifo rm a nd re la tive ly co ntinuous .

Fig u re 1. De ma nd a nd Inv e nto ry G ra phs

- Initia l Dete rmination of the Re o rde r Point

Fig u re 2 . A P re lim ina ry Re o rde r Po int

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S pecia l Lecture

: Deta iled Scheduling a nd Pla nning

Inve nto ry Ma na ge me nt : Orde r P la nning .

- The Effe cts of Unce rta inty

Patte rns of de ma nd
1. De ma nd is exa ctly a s pre dicte d
2. De ma nd exce e ds the ave ra ge during the le a d time
3. De ma nd is le s s tha n fo re ca st

Fig u re 3 . The Effe c ts o f Unc e rta in De ma nd

- The Comple te Re o rde r Po int Mode l

To avo id the stockout s ituatio n, s ome s afety stock co uld be a dde d to the d ia g ra m.
The s afety stock is not expe cte d to be us e d if de ma nd fits the p re dicte d patte rn.

Fig u re 4 . The Co mp le te Re o rde r Po int Mo de l

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S pecia l Lecture

: Deta iled Scheduling a nd Pla nning

Inve nto ry Ma na ge me nt : Orde r P la nning .

T ime - Pha s e d O rde r Po int (T PO P).

- An a pproa ch that us e s time pe riods , thus a llowing fo r lumpy withd ra wa ls inste a d of a ve ra ge
de ma nd.
- TPO P ha s a n a dva nta ge ove r re o rde r po int be ca us e it co mbine s de pe nde nt a nd inde pe nde nt
de ma nd in a time - pha s e d ma nne r.
- It ca n be us e d with MRP a s lo ng a s a n a dditiona l ste p is a dde d to combine inde pe nde nt
with de pe nde nt de ma nd in the g ros s re quire me nt line .
- The logic of TPO P illustrate d.
Ste p 1. To dete rmine g ros s re quire me nts .
Technique
Orde r Qua ntity
Safety Stock
Allocated Qty
Le a d- Time
Low Leve l Code

: 600
: 80
: 0
: 2
: 4

Fixe d.
Fixe d.

PART X

Wee ks .

S a le Fo re c a s t.
Inte rpla nt Orde rs .
S pe c ia l Eng ine e ring Ne e ds .
Cha rity Do natio ns .
S pe c ia l Pro motio n.

1
100

2
100
50

3
120

4
100
140

Pe rio ds .
5
6
100
100

Orde r Qua ntity

Safety Stock
Allocated Qty
Le a d- Time
Low Leve l Code

: 600
: 80
: 0
: 2
: 4

8
100
10

9
125

20
30

30
80

S afe ty S to c k Inc re a s e .
A ntic ipatio n build up .

De pe nde nt de ma nd .
Gro s s Re quire me nts .

7
100

40
170

30
190

10
130

20
280

3
130

4
280

5
20
205

5
10
125

0
125

Pe rio ds .
5
6
180
160

7
205

8
125

9
125

Pe rio ds .
5
6
180
160

7
205

8
125

9
125

255

130

605
75
600

50
180

40
160

Tec hnique
Fixed.
Fixed.
Wee ks .

Gros s Re quire me nt.

S c he dule d Re ce ipts .
Proje cte d Ava ila ble .
370
Ne t Re quire me nts .
Planne d Orde r Re ce ipts .
Planne d Orde r Re le as e .

1
170

2
190
600

Ste p 2. To ca lculate the time - pha s e d o rde r po int(s ).

Orde r Qua ntity
Safety Stock
Allocated Qty
Le a d- Time
Low Leve l Code

: 600
: 80
: 0
: 2
: 4

Tec hnique
Fixed.
Fixed.
Wee ks .

Gros s Re quire me nt.

S c he dule d Re ce ipts .
Proje cte d Ava ila ble .
370
Ne t Re quire me nts .
Planne d Orde r Re ce ipts .
Planne d Orde r Re le as e .

1
170
200

2
190
600
610

3
130

4
280

480

200

600

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620
60
600

460

600

S pecia l Lecture

: Deta iled Scheduling a nd Pla nning

Inve nto ry Ma na ge me nt : Orde r P la nning .

Pe rio d ic Re v ie w .
- Known a s a fixe d- inte rva l o rde r syste m, o r fixe d re o rde r cyc le inve nto ry mode l.
- This is a fo rm of inde pe nde nt de ma nd ma na ge me nt mode l in which a n o rde r is pla ce d eve ry
n time units .
- The o rde r qua ntity is va ria ble a nd e s s e ntia lly re pla ce s the ite ms cons ume d du ring the cu rre nt
time pe riod.
- The o rde rs qua ntity mode l be come s mo re co mplicate d whe ne ve r the re ple nis hme nt le a d time
exceeds the review inte rva l, be ca use outsta nding o rde rs the n have to fa cto red into the equation.
- M - x mode l.
M = DD ( L + R ) + S S
Q= M - x - O
whe re

M = Maximum inve nto ry le ve l.

DDL = De ma nd during le a d time .
DDR = De ma nd during revie w pe riod.
S S = Sa fety stock.
Q = O rde r q ua ntity.
x = Inve nto ry

V is ua l Re v ie w .
- The inve nto ry re o rde ring is ba s e d on a ctua lly loo king a t the a mount of inve nto ry on ha nd.
- This methodology is us ua lly us e d fo r low- va lue ite ms .
- A commo n te chnique is to e sta blis h minimum a nd maximum leve ls .
Ka nba n .
- Ka nba n is a s igna l fo r re ple nis hme nt.
- The qua ntity fo r re ple nis hme nt is dete rmine d fro m the rate - ba s e d MRP a s a fixe d- o rde r
q ua ntity, o rde r po int method .
- In a ma nufa cturing e nviro nme nt the upstre a m sta tion doe s not sta rt producing pa rts until it
re ce ive s a s igna l s uch a s a n e mpty bin, o r e mpty floo r s pa ce de s igne d a s a ka nba n.

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S pecia l Lecture

: Deta iled Scheduling a nd Pla nning

Inve nto ry Ma na ge me nt : Orde r P la nning .

3 . Fa c to rs in Lo t- S iz ing De c is io ns .
O rde r Q ua ntity Co ns t ra ints a nd Mo d ifie rs .
- O rde r qua ntity co nstra ints p rovide uppe r a nd lowe r ma c roa djustme nt limits to the ca lcula te d
q ua ntity.
- They co nstra in the fina l qua ntity betwe e n inclus ive maximum a nd minimum limits .
- Uppe r a nd lowe r limits .
Uppe r limits : They re strict the day's s upply o r do lla rs fo r a ny o rde r.
Lowe r limits : They pre ve nt numbe ro us o rde rs fo r inexpe ns ive pa rts from be ing pla ce d.
- O rde r qua ntity modifie rs p rovide a mic roa djustme nt me cha nis m fo r fine - tuning ca lculate d
q ua ntitie s . This ca n be us e d to a djust the qua ntity to s upplie r o r co mpa ny- s pe cifie d o rde r
multiple s , o r to ta ke a dva nta ge of price bre a ks .
- Sc ra p a nd yie ld fa cto rs a re mod ifie rs .

Fig u re 5 . O rd e r Q ua ntity Mo d ifie rs .

- O rde r Qua ntity Constra ints .

Minimum qua ntity ca n be us e d to me et a s upplie r minimum, o r e ns ure that a t le a st a
pa rticula r price bre a k le ve l is me t.
Maximum q ua ntity ca n be s et to re cognize sto ra ge o r tra ns po rt limits (e .g., ta nk ca r).
Minimum dolla r ca n be us e d to o rde r at le a st a s upplie r- o r purcha s ing- e sta blis he d
minimum purcha s e o rde r c ha rge .
Maximum dolla r ca n be us e d to limit inve nto ry inve stme nt leve ls a nd day's s upply, o r
limit ce rta in ite m to co rre s po nd with s igna tu re a utho rization leve ls .
Minimize da y's s upply ca n be us e d to pre ve nt multiple o rde rs fo r the s a me pe riods a s
ca n occ ur with lot- fo r- lot o rde rs in a co ntra ct e nvironme nt, o r limit the numbe r of s ma ll
but fre que nt o rde rs which ca n incu r ino rdina te ha ndling a nd fre ight costs .
Maximum day's s upply is us e d to s uppo rt inve nto ry turns a nd ta rgets , a nd to re cognize
s he lf- life co ns ide ra tio ns .

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S pecia l Lecture

: Deta iled Scheduling a nd Pla nning

Inve nto ry Ma na ge me nt : Orde r P la nning .

- O rde r Qua ntity Mod ifie rs .

A price bre a k qua ntity ca n be e ns ure d on a n individua l o rde r ba s is by s etting o ne of
the price bre a k qua ntitie s a s the s upplie r minimum.
Ro unding qua ntitie s ca n be us e d to me et conta ine r multiple s , s imple numbe rs , a nd to
s implify the cycle counting proce s s .
Minimum de ma nd qua ntity re cognize s tha t ce rta in ite ms a re s ubje ct to la rge is s ue s . A
minimum de ma nd qua ntity e ns ure s that no s ma ll re mna nts a re left p rio r to re ce ipt of
the next o rde r fo r floo rstock a nd othe r bulk- is s ue ite ms .
O rde r qua ntity mod ifie r a cco unts fo r p roce s s yie ld o r s c ra p conditio ns , which must be
a cco unte d fo r in the sta rting inve nto ry qua ntity to a chieve the re quire d e nding qua ntity.
The Co s t As s o c ia te d w ith O rde r Q ua ntity De c is io ns .
- The cost to Ca rry Inve nto ry.
Sto ra ge fa c ility costs .
Counting, tra ns po rting, a nd ha ndling costs .
Ris k of obs o le s ce nce due to e ngine e ring cha nge s o r s poila ge .
Ins ura nce a nd ta xe s .
Ris k of los s d ue to pilfe ra ge .
O ppo rtunity costs .
: Typica lly the la rge st po rtio n of the ca rrying costs .
: The cost of ca pita l re pre s e nts the rate of return tha t the compa ny co uld e a rn fro m
its be st inve stme nt o ppo rtunitie s .
- The cost of Pla cing O rde rs .
The cost of pla cing o rde rs diffe r betwe e n o rde rs pla ce d by purcha s ing to o uts ide
s upplie rs a nd o rde rs pla ce d in a fa cto ry fo r prod uction of the ne e de d p roduct.
This cost pa ra mete r is us ua lly expre s s e d a s the cost to pla ce a s ingle pa rt in a bs o lute
dolla rs .
P rod uction co ntro l costs : Is s uing a nd clos ing o rde rs , s che duling, loa ding, dis pa tching,
a nd expe d iting.
Setup a nd te a rdown costs .
Lost ca pa city cost : The time ta ke n to s et up is lost, pa rticula rly impo rta nt a nd costly
with bottle ne ck wo rk ce nte rs .
Purcha s e o rde r cost : O rde r pre pa ratio n, follow- up, expe diting, re ce iving, a utho rizing
payme nt, a nd the a cco unting cost of re ce iving a nd paying the invoice .

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S pecia l Lecture

: Deta iled Scheduling a nd Pla nning

Inve nto ry Ma na ge me nt : Orde r P la nning .

O rde r Q ua ntity Co s t Co m pa ris o n .

Fig u re 6 . Co s t o f C a rry ing v s . P la c ing O rde rs .

4 . Lo t S iz e Te c hn iq ue s .
Ec o no m ic O rde r Q ua ntity (EOQ ).
- The EOQ co nce pt is prima rily us eful a s a te c hnique fo r dete rmining the re latio ns hip betwe e n
ca rrying a nd o rde ring costs .
- The EOQ fo rmula .
2A S
Ci

EOQ =

whe re

A = Annua l Us a ge .

S = Cost pe r O rde r.

C = Cost of Ite m.

i = Annua l Cost to Ca rry.

- Ca rrying, O rde r, a nd Tota l Cost.

Ca rrying cost.
Q
Ci
2

CC =
O rde r cost.
OC =

A
S
Q

Tota l cost = Ca rrying cost + O rde r cost.

TC =

Q
Ci +
2

A
S
Q

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S pecia l Lecture

: Deta iled Scheduling a nd Pla nning

Inve nto ry Ma na ge me nt : Orde r P la nning .

Fix e d- O rd e r Q ua ntity .
- Us e of a fixe d- o rde r qua ntity is us ua lly dicta te d by s ome co ndition re la te d to s hipping,
ha ndling, o r line re ple nis hme nt.
- Re ga rdle s s of de ma nd va ria bility, s upplie rs re ce ive cons iste nt o rde rs with co ns iste nt o rde r
q ua ntitie s , but a va ria ble fre que ncy.
- It may be dete rmine d ve ry info rma lly, s uch a s a s e at- of- the - pa nts e stimate , o r it might be
ba s e d on s o me fo rm of ca lcula tio n, s uch a s EOQ.
- The fixe d o rde r qua ntity is s hown in :
Orde r Qua ntity
Safety Stock
Allocate d Qty
Lea d- Time

: 600
: 80
: 0
: 2

Low Leve l Code

Tec hnique
Fixed.
Fixed.

Pe rio ds .

Wee ks .

130

160

120

260

130

120

185

115

125

240

80

460
120
500
500

200

570
10
500

450

265

150

Gross Requirement.
Scheduled Receipts .
Projected Available.
370
Net Requirements.
Planned Order Receipts.
Planned Order Release.

500

85
500
500

Fig u re 7 . Fix e d- O rde r Q ua ntity .

Pe rio d- O rde r Q ua ntity .
- Pe riod o rde r qua ntity rule s a re s imila r to pe riod- of- s upply, exce pt that the o rde r cycle is
dete rmine d mo re s cie ntifica lly.
- The a pp roa c h us e s a fo rmula ba s e the EOQ but is s o lve d fo r the optimum numbe r of
pe riods to be cove re d by e a c h o rde r rathe r tha n fo r the optimum qua ntity.
- Thus , the o rde r cycle is ca lcula te d a s we ll a s the o rde r qua ntitie s , whic h cove r the ne e ds
fo r a dis c rete numbe r of pe riods .

Safety Stock = 80
Orde r Qua ntity = POQ
Lead Time = 2
Forecast De ma nd
Scheduled Rece ipts
Projected Ava ila ble
Y
Pla nned Rece ipts
Pla nned Orde r Re leases

Pe rio d s

370

1
130

2
160

3
120

4
260

5
130

6
120

7
185

8
115

240

80

590
630

330

200

80

?
?

630

Ta b le 5 Pe rio ds O rde r Q ua ntity

* Ave rage pe r pe riod =

130 + 160 + 120 + 260 + 130 + 120 + 185 + 115

8

.* A = 152.5 52 = 7930
.*

E OQ =

* POQ =

2A S
=
C i

27930 10
= 650
1. 500 . 25

EOQ
Ave ra ge Pe riod Usage

- 12 -

650
152.5

= 4.26 = 4

= 152.5

S pecia l Lecture

: Deta iled Scheduling a nd Pla nning

Inve nto ry Ma na ge me nt : Orde r P la nning .

Lo t- fo r- Lo t.
- One definition of lot fo r lot is the s um of re quire me nts fo r a pe riod. With MRP re pla nning
nightly, pe riods ca n be a s s ho rt a s one day.
- Co mpa nie s that must o rde r a nd s e g re gate inve nto ry s e pa ra te ly fo r e a c h c usto me r o rde r o r
contra ct ta ke the lot- fo r- lot te chnique furthe r.
- To a ccount fo r the costs of e a ch o rde r, a nd to e liminate o r minimize a ny re s idua ls , ite ms a re
o bta ine d o nly fo r e a ch o rde r.
- No e xplos io n proce s s is re quire d.
- Eve n though, the re a re a dva nta ge s of us ing MRP fo r this o rde ring proce s s .
A common co mpute r syste m is us e d fo r a ll pla nning a nd o rde ring.
The s a me ite m may be s ubje ct to lot- fo r- lot o rde ring fo r ce rta in type s of o rde rs , a nd
re gula r pe riod o r othe r type of o rde ring te chnique fo r othe r o rde rs .
Re s idua ls may exist due to a minimum purc ha s e on a nothe r o rde r, a n o rde r
ca nce llation which le ft inve nto ry in stock, a nd s o o n. The s e re s idua ls will be a pplie d
a utomatica lly by MRP prio r to trigge ring a new o rde r.
Safety Stock = 80

Pe rio ds

Orde r Qua ntity = L4L

Lead Time = 2

Forecast De ma nd

130

160

120

260

130

120

185

115

Scheduled Rece ipts

130

160

80

80

Projected Ava ila ble

80

Pla nned Rece ipts

Pla nned Orde r Re leases

120

260

80

80

80

80

80

120

260

130

120

185 115

130

120

185

115

Ta b le 6 . Lo t- fo r- Lo t

- 13 -

80

S pecia l Lecture

: Deta iled Scheduling a nd Pla nning

Inve nto ry Ma na ge me nt : Orde r P la nning .

Pe rfo rma nc e Che c k.

1. Which of the fo llowing a re cha ra cte rist ics of the time - pha s e d o rde r point (TPO P) me thod ?
. Accommoda te lumpy de ma nd patte rns .
. Us e s a re o rde r po int .
. S hows the timing of pla nne d re ple nis hme nt o rde rs .
A. .

B. ,

C. ,

D. , , .

2. If ca rrying costs we re a djuste d fo r a ll ite ms , with a ll othe r pa ra mete rs re ma ining the s a me , e cono mic
o rde r qua ntitie s would te nd do which of the following ?
A. De c re a s e s lightly fo r o ne o rde ring cycle o nly.
B. Inc re a s e fo r eve ry o rde ring cycle until the ca rrying cost is revis e d downwa rd a ga in.
C. De c re a s e fo r e ve ry o rde ring cycle until the ca rrying cost is revis e d downwa rd a ga in.
D. Not be a ffe cte d at a ll.

3. Which of the fo llowing is a va lid re a s on to o rde r a qua ntity othe r tha n tha t s ugge ste d by the EOQ
fo rmula , give n tha t a ll othe r co nditions fo r us e of the fo rmula a re met ?
. Ina de quate s e lf s a pce .
. Ite m s ubje ct to s po ila ge .
. Cost of the ite m.
A.

B. ,

C. ,

D. , ,

4. A s che dule d re ce ipt is

A. An o pe n o rde r.

B. A pla nne d o rde r.

C. A firm pla nne d o rde r.

D. A re ce ive d o rde r.

5. The compa ny ha d ma de a majo r e ngine e ring de s ign cha nge to the ir most po pula r prod uct line . This
ha s re s ulte d in the tota l re pla ce me nt a nd pha s e d- out of a numbe r of pu rcha s e d ite m. The re is no
futu re de ma nd fo r a ny of the s e ite ms . Which of the fo llowing a ctions a re a pp ropriate in o rde r to e ns u re
that the pla nne r doe s not re ce ive a ction me s s a ge s from MRP fo r the s e ite ms ?
A. Cha nge the low leve l code to ze ro .
B. Cha nge the pla nne r ID to a non- existe nt pla nne r.
C. No a ctio n is re quire d by the pla nne r.
D. Add a la rge qua ntity to a de s igne d "s u rplus " loca tion s o no o rde r a ction is eve r re quire d.

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S pecia l Lecture

: Deta iled Scheduling a nd Pla nning

Inve nto ry Ma na ge me nt : Orde r P la nning .

6. The buye r ha s notice d that ce rta in ite ms a t bill of mate ria l leve l 1- 3 a re o rde re d individ ua lly fo r e a ch
custome r o rde r, but tha t multiple price bre a k a re ava ila ble if the o rde rs a re combine d. Which o ne of
the fo llowing s ugge stions s ho uld be ma de to ma na ge me nt fo r co ns ide ratio ns ?
A. Cha nge the bill of mate ria l leve l fo r the se ite ms to leve ls 4- 6 a nd continue to va lue by a ctua l cost.
B. Us e lot- fo r- lot o rde ring a nd va lue the ite ms a t sta nda rd cost, ba s e d on the most favo ra ble p rice
bre a k.
C. Us e multi- line ite m o rde rs to inte rna lly tra c k ite m qua ntity to custo me r o rde r numbe r, a nd va lue
e a ch ite m by a ctua l coat ba s e d o n tota l o rde r cost.
D. Ide ntify the custome r o rde r numbe r o n the purcha s e o rde r to the s upplie r a s "combine d " a nd
have the s upplie r cha rge a ctua l cost ba s e d o n the o rde r qua ntity.

7. A s upplie r ha s e sta blis he d a minimum qua ntity of 50 units of a pa rticula r ite m a nd a rounding qua ntity
of 10. The Fulbright Compa ny o nly ne e ds 10 units fo r a custom e ngine e ring prod uct. Whic h of the
following a ctio ns s hould be ta ke n ?
A. O rde r the rounding qua ntity of 10.

B. O rde r the minimum qua ntity of 50.

C. O rde r 50 a nd reje ct 40 in re ce iving ins pe ction ba ck to the s upplie r.

D. O rde r 50 a nd dis pos e of 40 in re ce iving befo re the re ce ipt is p roce s s e d.

8. The compa ny ha s a prima ry a nd ba ckup s upplie r fo r a pa rticula r ite m. The p rima ry s upplie r ha s no
rounding qua ntity but the ba ckup s upplie r us e s a proce s s tha t produce s ba tc he s of 10. The re quire
o rde rs in multiple s of 10. Whic h of the following a ctio ns s hould the co mpa ny ta ke ?
A. Igno re the ro unding qua ntity fo r both s upplie rs a nd o nly o rde r from the p rima ry.
B. Esta blis h s e pa rate round ing qua ntitie s fo r both s upplie rs .
C. Esta blis h a sta nda rd rounding q ua ntity of 10 to s implify o rde ring re ga rdle s s of the s upplie r.
D. O rde r what is re quire d re ga rdle s s of s upplie r a nd a cce pt a ny exce s s from the ba ckup s upplie r.

9. The compa ny us e s a ca rrying cost va lue of 0.25. which of the fo llowing is the most effe ctive wa y fo r
a pla nne r to re duce a ctua l ca rrying costs ?
A. Re duce the ca rrying cost us e d in o rde r qua ntity ca lc ulatio ns to ze ro.
B. Us e a n o rde r qua ntity te chnique that is not ba s e d o n ca rrying cost.
C. Bypa s s ce ntra l sto re s a nd stock re ce ive d mate ria l ne a r the po int of us e .
D. Esta blis h a days s upply co nstra ints to limit la rge o rde r qua ntitie s .

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S pecia l Lecture

: Deta iled Scheduling a nd Pla nning

Inve nto ry Ma na ge me nt : Orde r P la nning .

10. The co mpa ny ha s just ne gotiate d to ha ve a ll of the e le ctro nic compo ne nts purcha s e d fro m a loca l
distributo r cha nge d to co ns ignme nt. Which of the fo llowing a ctio ns ne e d to be ta ke n p rio r to the next
re ce ipt fo r the existing inve nto ry ?
A. Co nve rt the ba la nce s to co ns ignme nt to sta nda rdize o n the inve nto ry cla s s ification.
B. Is s ue the ba la nce s to wo rk in proce s s to ze ro out raw mate ria l inve nto ry.
C. Re co rd the ba la nce s a s co mpa ny- owne d inve nto ry s o costs ca n be s e g re gate d.
D. Re d uce the unit costs to ze ro to e liminate payme nts to the s upplie r upo n is s ue .

- 16 -