IMRP Handout

OPERATIONS MANAGEMENT
Chapters 13 & 15
Inventory Management
&
Resource Planning
Alexander Solodkin
Learning Objectives
• Explain why companies keep inventory and how advances in IT
have impacted inventory decisions
• Discuss the key elements and costs of inventory, and the
relationship between inventory costs and customer service
• Contrast continuous and periodic inventory systems, and learn
about inventory classification systems
• Utilize basic inventory models to calculate order quantity and
related measures, as well as the annual cost of inventory
• Determine the appropriate reorder point in a continuous
inventory system based on a target service level
• Calculate the order quantity for a periodic inventory system
• Develop understanding of MRP system, Master Production
Schedule, and Capacity Requirements Planning
Copyright ©2017 John Wiley & Sons, Inc. 13-2

Inventory Definitions
What is Inventory?
Those stocks or items used to support production,
supporting activities, and customer service
— APICS Dictionary
What is inventory management?
Inventory management is responsible for the maintenance

of the accurate and timely status of on-hand balances, on
order quantities, and the financial value of finished goods,
components and raw materials physically present at
stocking locations
Adapted from: APICS Instructor Kit. (September 2014), Principles of Operations Management: Principles of Inventory Management. PIM 2-6
13-3
Classes of Inventory
Raw Materials/Commodities
Work In Process (WIP)
Finished Goods
Distribution Channel
Maintenance, Repair, and Operating Supplies (MRO)
Service Parts
Damaged and Obsolete

13-4
Purpose of Inventory
Demand Buffer Separate demand from supply
Demand Enable high customer service levels

Uncertainty regardless of variability in demand
Provide for a steady flow of materials

Supply
and components regardless of variability
Uncertainty in supply
Lot-Size Capitalize on short-term sales and

Economies purchasing opportunities
Increase production center operations
Process
and scheduling by providing a buffer of
Flexibility
production inventories
13-5
Functions of Inventory
Excess inventory caused by ordering or
Cycle (lot size) producing in batches that exceed the demand
Planned excess inventory to cover unplanned

Safety variations in demand and supply orders
Inventory purchased or built in advance of

Anticipation demand, such as seasonality or promotions
Inventory that is in transit by ship, railcar,

Transportation pipeline, airplane, or truck from point of origin to
point of consumption
Inventory that is purchased to take advantage
Hedge of price and cost opportunities
13-6
Inventory Management Objectives
Inventory enables companies to serve
Serviceability
The presence their
of inventory
customersis the result
without of an
stockout
informed trade-off decision between the
Reducing
and the cost of inventory without
Costcost of acquiring
Reduction stocking inventories
reducing customer serviceability
and the ability to meet or exceed a targeted
level of customer responsiveness
Process Inventory enables the efficient use of
Efficiency equipment and workforce
Effective inventory management enables

Capital Budgets firms to attain targeted return on
investment (ROI)
13-7
What Does Inventory Management Do?
 Setting
Settinginventory
inventorypolicy
policy
 Setting
Settinginventory
inventoryorder
orderparameters
parameters
 Selecting
Selectinginventory
inventoryplanning
planningtechniques
techniques
Planning  Performing
Performinginventory
inventoryplanning
planning
 Forecasting
Forecasting
 Planning
Planningschedule
schedulemaintenance
maintenance
 Performing
Performing performancereview
performance review
 Generating purchase orders
 Generating manufacturing orders
Acquisition 

Expediting orders
Calculating costs
 Performing order audits
 Performing order performance reviews
 Validating order receipt
 Performing order receipt
 Configuring warehouse storage
 Performing stock put away
 Maintaining high inventory accuracy
Stockkeeping 

Conducting cycle counting
Conducting annual physical inventory
 Applying lean techniques
 Calculating inventory value
 Assessing inventory performance
Disposition 

Disbursing inventory from stock to source of demand
Purging damaged and obsolete inventories
 Performing inventory balance adjustments
Adapted from: APICS Instructor Kit. (September 2014), Principles of Operations Management: Principles of Inventory Management. 13-8
PIM 2-9
Levels of Inventory Management
• Item Inventory Management
• Management of inventory at the individual item
stocking level
• Characteristics:
• Establishment of decision rules governing individual
item management and performance
• Determination of how individual items are to be
planned and controlled
• Management focused on variety, stocked quantities,
and costs
• Linked to actual ordering, manufacture, storage, and
shipping of individual items
13-9
Levels of Inventory Management (cont.)
• Aggregate Inventory Management
• Management of inventory according to product/family
grouping rather than the individual item level
• Characteristics:
• Target is inventory aggregated by family level, product
grouping, volume, or other criteria
• Cost is more important than stocked quantities
• Facilitates management focus on cost-benefit trade-offs
• Enables application of aggregate planning models for
manufacturing, safety stock, and transportation
• Enables performance measurement of customer service,
operations efficiency, and inventory cost objectives
13-10
Strategic Inventory Management Process
Business Strategy
Marketing/ Network
Inventory
Supply Design
Strategy
Strategy Strategy
Decisions OK? Service Level OK? Channel OK?

Inventory
Replenishment OK? Control
Mechanisms
Performance Measurement
13-11
Strategic Inventory Management Issues
Role of finished Which and what volumes of finished goods
goods to stock
What is the variety of finished goods that
Inventory variety should be stocked
Use of manufacturing and distribution

Role of outsourcing
outsourcing for inventory management
Number of stocking locations required to

Locations
meet customer service targets
Inventory Decisions regarding the depth and
management complexity of inventory control systems
Assignment of responsibility to a group or
Inventory decisions individual for inventory management
13-12
Purpose of Decoupling/Buffering Inventories
Inventory
Uncertainty
Demand Supply Production

Uncertainty Uncertainty Uncertainty
Inventory
Buffers
13-13
Two Forms of Demand
• Dependent
• Demand for items used to produce final
products
• Tires for autos are a dependent demand item
• Independent
• Demand for items used by external customers
• Cars, appliances, computers, and houses are
examples of independent demand inventory

Components of Inventory Decisions
Cost-Benefit Cycle
Trade-Off Inventory
Inventory Inventory Safety

Performance Management Inventory
Inventory Seasonal
Costs Inventory
13-15
Defining Cycle Inventory
Inventory
Expected demand
Q/2
Cycle
Inventory
Q = 250 units T = 10 days

Cycle inventory = Q / 2 = 250 units / 2 = 125 units
The average amount of inventory on hand for a product sufficient to
satisfy demand during the replenishment lead time.
PIM 3-12
Defining Safety Inventory
Inventory
Expected demand
Q/2
Cycle
Inventory
S
Safety Stock
T Time
13-17
Defining Safety Inventory
Inventory
Expected demand
Q/2
Cycle
Inventory
S
Safety Stock
T Time
Q = 1,000 units T = 10 days
Q / 2 = 1,000 units / 2 = 500 units
S = 500 units / 2 = 250 units
Q/2 + S = 500 units + 250 units = 750 units
A quantity of stock planned to be in inventory to protect against
fluctuations in demand or supply (APICS Dictionary)
PIM 3-13
Defining Seasonal Inventory
Inventory
5
Expected
4 demand
2
Seasonal
inventory
1
0
0 1 2 3 4 5 6 7 8 9 10 11 12
Months
Quarter 1 Quarter 2 Quarter 3 Quarter 4

APICS Dictionary
Inventory built up to smooth production in anticipation of a
peak seasonal demand.
PIM 3-14
Inventory Costs
Unit Total production or purchasing cost for one unit
Cost incurred during reordering, such as

Ordering
preparation, order creation, and put away
Cost incurred when holding inventory in stock
Carrying
over a period of time
Costs associated with stockout, including lost
Stockout
sales, backorder, expediting, and reordering
Costs for new labor and equipment due to
Capacity-related
unplanned increases in capacity
Valuation Selection of the inventory valuation method
Cost of stocking and disposing of surplus and

Surplus/obsolete
obsolete inventories
Costs arising from transportation equipment
Transportation to move channel inventory
13-20
Ordering Costs
Product planner and buyer costs
Supplies and operating expenses
Order generation costs
Setup and teardown costs
Lost capacity costs
Transportation costs
Receiving and put-away costs
Miscellaneous overheads
13-21
Inventory Carrying Cost Components
The cost of holding inventory, usually defined as a
percentage of the dollar value of inventory per unit of
time (generally one year)
Capital Service Risk Storage

Costs Costs Costs Costs
Inventory Carrying Costs
13-22
Inventory Replenishment
Management
Replenishment Planning Process
Inventory Plan
Inventory Lead Times/ Trigger Point

Balance Safety Stocks Accuracy
Accuracy
Accuracy OK? Values OK? Model OK?
Quantities OK? Order Quantity

Accuracy
Acquisition Plan
13-24
Components of Inventory Replenishment
Management
Determines the rate at which an item’s
Demand inventory is consumed
Determines the average amount of
Cycle Stock inventory on hand for a product sufficient
to satisfy demand during the lead time
Determines the extra inventory a company
Safety Stock
decides to hold in addition to cycle stock
Replenishment Determines the available inventory on-

Trigger hand balance at which a replenishment
order is triggered
On-Hand Determines the current available quantity
Balance of an item
13-25
Components of Inventory Replenishment
Management (cont.)
Determines when an item should be

Review Interval reviewed for replenishment
Determines the span of time between

Lead Time when a replenishment order is released
and when it is received into inventory
Determines the replenishment quantity
Order Quantity needed to restore inventory above the
trigger point
Determines the standard replenishment
Lot Size
quantity for an item
13-26
Inventory Control Systems
• Continuous system (fixed-order-quantity)
• the inventory level on-hand and on-order for this
system is checked whenever a change in inventory
level occurs
• constant amount ordered when inventory declines to
predetermined level (reorder point)
• Periodic system (fixed-time-period)
• order placed for variable amount after fixed period of
time
• essentially replaces the items consumed during the
current time period
Adapted from: 1. APICS Instructor Kit. (September 2014), Principles of Operations Management: Principles of Inventory Management. PIM 4-10
2. Roberta S. Russell, Bernard W. Taylor (2017) Operations and Supply Chain Management, 9th Edition, Wiley, Hoboken, N.J.
13-27
Continuous Versus Periodic Review
Issue Continuous Periodic

Lower maintenance expense X
Ordering by item family
Lower inventory investment X
Replenishment predictability X
Overall control X
Fast-moving items X
Low cost bulk items X
Higher customer service levels X
Use of computer required X
Lower purchase order costs X
13-28
Inventory Replenishment Principles
Fixed Planning The planning data elements are fixed and
Elements may not reflect current replenishment needs
Continuous review replenishment time is a
Replenishment
variable; periodic review order quantities are
Uncertainty
a variable
The order quantity is based on some form of

Order Quantity
economic order quantity (EOQ)
Safety stock is assumed to be on hand at all

Safety Stock times to guard against stockout
Available stock is statistically one-half the

Available Stock
order quantity plus the safety stock
13-29
Replenishment Ordering Techniques
Replenishment determined by physically

Visual Review reviewing the inventory on-hand balance
Fixed order system using two containers: one
Two-Bin for picking and one for reserve
A fixed-time-period, variable quantity system -
Periodic Review a fixed review cycle is established and
replenishment occurs at the time of review
A targeted quantity is statistically determined
Order Point that is used as the trigger for replenishment
Replenishment is triggered using non-
Lean computer tools, such as a kanban card
13-30
Replenishment Ordering Techniques (cont.)
Calculates the impact of uncertainty

Supply Lead resulting from variances in supplier
Time Uncertainty delivery lead times
Time-Phased Utilizes material requirements planning

Order Point (MRP) logic for inventory planning in a
(TPOP) priority sequenced, time-phased manner
Ordering size based on the

Replenishment classification and annual usage of a
by Item Class stocked item
13-31
Continuous Inventory System
Economic Order Quantity (EOQ) Models
• EOQ
• continuous inventory system
• optimal order quantity that will minimize total inventory costs
• Basic EOQ model
• Demand is known with certainty and is constant over time
• No shortages are allowed
• Lead time for the receipt of orders is constant
• Order quantity is received all at once
• Production quantity model
• Order is received gradually, as inventory is simultaneously being depleted
• non-instantaneous receipt model
• assumption that Q is received all at once is relaxed
• p - daily rate at which an order is received over time, the production rate
• d - daily rate at which inventory is demanded
• Order cycle
• the time between receipt of orders in an inventory system

Inventory Order Cycle

EOQ Cost Model

Production Quantity Model
p – production rate, daily rate at which the order is received over time
d – demand rate, daily rate at which inventory is demanded
Adapted from: Roberta S. Russell, Bernard W. Taylor (2017) Operations and Supply Chain Management, 9th Edition, Wiley, Hoboken, N.J.
13-36
Quantity Discounts with Constant Carrying Cost

Reorder Point
• Inventory level at which a new order is placed
R = dL
where
d = demand rate per period

L = lead time

Variable Demand with a Reorder Point

Safety Stock
• Safety stock
• buffer added to on hand inventory during lead time
• Stockout
• an inventory shortage
• Service level
• probability that the inventory available during lead
time will meet demand
• P(Demand during lead time <= Reorder Point)

Order Point with Safety Stock
Demand
Trigger Point
Order Order
Point Quantity
Inventory
Quantity Guard Against

Safety Stock Stockout
Time
Replenishment Lead Time
OP = Demand x Lead Time
+ Safety Stock
PIM 4-20, 4-24
Reorder Point For a Service Level
Adapted from: Roberta S. Russell, Bernard W. Taylor (2017) Operations and Supply Chain Management, 9th Edition, Wiley, Hoboken, N.J.
13-42
Periodic Review Inventory System
Periodic Review System Technique
Review Cycle
Target 1 2 3
Inventory
Order
Quantity
A
Demand
Review
Point
Quantity
Replenishment
Receipt
Lead
Time Safety Stock
13-44
Inventory Classification Systems
The ABC Classification System
• Class A
• 5 – 15 % of units
• 70 – 80 % of value
• Class B
• 30 % of units
• 15 % of value
• Class C
• 50 – 60 % of units
• 5 – 10 % of value

The Long Tail Approach Example
• 60% of total cost per unit sold
Items in the tail account for more inventory per dollar revenue (by a factor of 3 or more) than
other items due to:
- High variability
- Long lead times
Adapted from: Simchi-Levi D. (2012), Managing Complexity with Long Tail Analysis. http://www.sctvchannel.com. 13-47
Retrieved 14 January 2013
Intelligent Demand Classification
Adaptive Intelligent Inventory Optimization by (AI+IO) Llamasoft combines advanced classification
and segmentation of demand patterns with dynamic inventory target setting
Adapted from: Llamasoft (2013), The Next Generation of Inventory Optimization has Arrived. http://www.llamasoft.com
13-48
Retrieved 26 September 2013
Inventory Accuracy
Impact of Inaccurate Inventory
Lost Sales
Shortages of essential items
Surpluses of unnecessary items
Missed Schedules
Low Productivity
Late Deliveries
Excessive Expediting
Premium Purchase Order and Freight Costs
13-50
Inventory Accuracy Tool Kit
3 P’s of inventory control
Transaction management
Tolerance management
Periodic physical inventory
Cycle counting
Electronic data collection
13-51
3 P’s of Inventory Control
 Responsibility  Controlled Access  Simple

 Authority  Adequate Manning  Complete
 Training  Transaction Control  Timely
13-52
Transaction Management
Accuracy is the Key!
WIP Scrap
WIP Issue Finished Interbranch
Pick Issue
WIP Goods Transfer
Receipt
Internal
Receipt Put Away Adjustment Shipment
Move
Order
Returns
Inventory Record
13-53
Periodic and Perpetual Inventory Review
 Methods of Recording Inventory Transactions:
− Periodic Inventory System
• Physical inventory is counted at specific dates, at least
yearly
− Perpetual Inventory System
• Careful and timely recording of each inventory
transaction as it occurs
13-54
Year-End (Periodic) Physical Inventory
Physical Inventory Disadvantages:
 The focus is on financial reporting
 Factories and warehouses will often need
A be
to physical inventory
closed down duringtaken at some
the count
What isthere
a year-end
recurring
Since or(e.g.,
isinterval
pressure periodic physical
monthly,
to complete the
quarterly, orsoon
physical as inventory?
annual physical inventory)
as possible,
inaccuracies inevitably occur
 Nonoperations people often participate in
APICS Dictionary
the counting, causing further inaccuracies
 The accuracy of the new balances begins
to deteriorate steadily as each day moves
away from the count date
13-55
Cycle Counting – Definition
An inventory accuracy audit technique where
inventory is counted on a cyclic schedule rather than
once a year. A cycle inventory count is usually taken
on a regular, defined basis (often more frequently for
high-value or fast-moving items and less frequently
for low-value or slow-moving items). Most effective
cycle counting systems require the counting of a
certain number of items every workday with each
item counted at a prescribed frequency. The key
purpose of cycle counting is to identify items in error,
thus triggering research, identification, and
elimination of the cause of the errors.
13-56
Cycle Counting Methods
ABC Item are counted based on their usage frequency
Items are grouped and counted in a specific storage

Zone zone
Location A predetermined number of locations are checked

Audit in a period
A cycle count is triggered by the occurrence of an
Special item transaction event
Counts
Cycle counting advantages:
 Timely detection and correction of inventory control problems (root cause)
 Minimal or no loss of production time
 High level of counting accuracy
 Focus on the critical items providing the most profitability to the organization
 Ability to establish a continuous inventory accuracy improvement program
PIM 5-32
Cycle Counting Process Steps
Inventory stratified into A, B, and C items;
Design and
cycle count policies and procedures drafted
Preparation and finalized
All participating personnel trained on the cycle

Instruction count policies and procedures
Prior to cycle count sheet generation, all

Determine Initial inventory balance records established as a
Balances baseline
Cycle count sheets are generated; counts
Initiate Cycle performed; and validation, adjustments, and
Counting Program possible recounts performed
Root cause error analysis is performed by
Root Cause Error
inventory control to determine the source of
Analysis inventory balance record inaccuracy
13-58
Periodic Physical Inventory vs. Cycle Counting
Auditing Methods
Periodic Inventory Cycle Counting
 Counting is continual
 Physical count of all
inventory  Updates records and finds
and prevents causes of error
 Supports appraisal of
inventory value for the  Items are counted in cycles,
annual financial statements some more frequently than
others
 For the benefit of
stakeholders in the  For the benefit of operations
company improvement and customer
service
13-59
Electronic Data Collection
Bar Coding, Auto ID, and RFID
Packing and containerization
Allocation and auto-order backflushing
Picking automation: hand-held devices, speech

recognition, pick-to-light
IPC tagging and special labeling
Pallet management and conveyors
Automated storage and retrieval systems (AS/RS)

13-60
Resource Planning
Resource
Planning
for
Manufacturing

Material Requirements Planning (MRP)
• Computerized inventory control and production
planning system
• When to use MRP?
• Dependent demand items
• Discrete demand items
• Complex products
• Job shop production
• Assemble-to-order environments

Manufacturing Resource Planning (MRP II)
• Sometimes called MRP, in contrast with mrp (“little” mrp);

more recent implementations are called ERP (Enterprise
Resource Planning).
• Extended MRP into:

• Master Production Scheduling (MPS)
• Rough Cut Capacity Planning (RCCP)
• Capacity Requirements Planning (CRP)
• Production Activity Control (PAC)
Source: Hopp , Wallace J.; Spearman, Mark L. (2001), Factory Physics: Foundations of Manufacturing Management, New York, NY: McGraw-Hill, p. 136
15-64
MRP II Planning Hierarchy
Long-range Demand
Forecast
planning
Resource Aggregate Production

Planning Planning
Rough-cut Capacity Master Production Demand

Planning Scheduling Management
Intermediate- Bills of
Material
range Material Requirements
planning Planning
Inventory
Status
Job Capacity Requirements
Pool Planning
Job Routing
Release Data
Short-term
control
Job
Dispatching
Source: Hopp , Wallace J.; Spearman, Mark L. (2001), Factory Physics: Foundations of Manufacturing Management, New York, NY: McGraw-Hill, p. 136
15-65
Demand Characteristics
Independent demand Dependent demand
100 x 1 =
100 tabletops
100 tables 100 x 4 = 400 table legs
Continuous demand
400 – Discrete demand
400 –
300 –
No. of tables
300 –
No. of tables
200 –
200 –
100 –
100 –
1 2 3 4 5
Week M T W Th F M T W Th F

Material
Requirements
Planning

MRP Inputs and Outputs
• Inputs • Outputs
– Master production – Planned order
schedule releases
– Product structure file • Work orders
• Purchase orders
– Item master file
• Rescheduling notices

Master Production Schedule
• Drives MRP process with a schedule of finished
products
• Quantities represent production not demand
• Quantities may consist of a combination of customer
orders and demand forecasts
• Quantities represent what needs to be produced,
not what can be produced
• Quantities represent end items that may or may not
be finished products
• Cumulative lead time
• total length of time needed to manufacture a product
• Time fence
• Management-specified date within which no changes are
allowed in the MPS

Product Structure File
• Contains computerized bill of material for every

item produced
• Bill of Material
• list of all materials, parts, and assemblies needed to
make an item
• includes quantities, parent-component relationships,
and order quantities

Master Production Schedule
PERIOD
MPS ITEM 1 2 3 4 5
Pencil Case 125 125 125 125 125
Clipboard 85 95 120 100 100
Lapboard 75 120 47 20 17
Lapdesk 0 50 0 50 0

Product Structure Diagram for a Clipboard

Product Structure Diagram for a Clipboard

Multilevel Indented Bill of Material (BOM)
LEVEL ITEM UNIT OF MEASURE QUANTITY
0---- Clipboard ea 1
-1--- Clip Assembly ea 1
--2-- Top Clip ea 1
--2-- Bottom Clip ea 1
--2-- Pivot ea 1
--2-- Spring ea 1
-1--- Rivet ea 2
-1--- Press Board ea 1

Specialized BOMs
• Phantom bills
• Transient subassemblies
• Never stocked
• Immediately consumed in next stage
• K-bills (kit numbers)
• Group small, loose parts under pseudo-item number
• Reduces paperwork, processing time, and file space

Specialized BOMs
• Modular bills
• Plan production of products with many optional
features
• Product assembled from major subassemblies and
customer options
• Modular bill kept for each major subassembly
• Simplifies forecasting and planning
• X10 automobile example
• 3 x 8 x 3 x 8 x 4 = 2,304 configurations
• 3 + 8 + 3 + 8 + 4 = 26 modular bills

Modular BOMs

Time-Phased Bills
• An assembly chart shown against a time
• Forward scheduling
• start at today‘s date and schedule forward to
determine the earliest date the job can be finished. If
each item takes one period to complete, the
clipboards can be finished in three periods
• Backward scheduling
• start at the due date and schedule backwards to
determine when to begin work. If an order for
clipboards is due by period three, we should start
production now

Time-Phased Assembly Chart
– An assembly chart shown against a time scale

Item Master File
DESCRIPTION INVENTORY POLICY
Item Pressboard Lead time 1

Item no. 7341 Annual demand 5000
Item type Purch Holding cost 1
Product/sales class Comp Ordering/setup cost 50
Value class B Safety stock 0
Buyer/planner RSR Reorder point 39
Vendor/drawing 07142 EOQ 316
Phantom code N Minimum order qty 100
Unit price/cost 1.25 Maximum order qty 500
Pegging Y Multiple order qty 1
LLC 1 Policy code 3

Item Master File
PHYSICAL INVENTORY USAGE/SALES
On hand 150 YTD usage/sales 1100
Location W142 MTD usage/sales 75
On order 100 YTD receipts 1200
Allocated 75 MTD receipts 0
Cycle 3 Last receipt 8/25
Last count 9/5 Last issue 10/5
Difference -2
CODES
Cost acct. 00754
Routing 00326
Engr 07142

The MRP Process
• Exploding the bill of material
• Netting out the inventory
• Netting
• the process of subtracting on-hand quantities and
scheduled receipts from gross requirements to
produce net requirements
• Lot sizing
• determining the quantities in which items are usually
made or purchased
• Time-phasing requirements

Lot Sizing in MRP Systems
• Lot-for-lot ordering policy
• Fixed-size lot ordering policy
• Minimum order quantities
• Maximum order quantities
• Multiple order quantities
• Economic order quantity
• Periodic order quantity

Capacity Requirements Planning (CRP)

Capacity Requirements
Planning (CRP)
• Creates a load profile
• Identifies under-loads and over-loads
• Inputs
• Planned order releases
• Routing file
• Open orders file

Calculating Capacity
• Capacity - Maximum capability to produce
• Rated Capacity
• Theoretical output that could be attained if a process were
operating at full speed without interruption, exceptions, or
downtime
• Effective Capacity
• Takes into account the efficiency with which a particular
product or customer can be processed and the utilization of
the scheduled hours or work
Effective Daily Capacity = (no. of machines or workers) x

(hours per shift) x (no. of shifts) x (utilization) x ( efficiency)

Calculating Capacity
• Utilization
• Percent of available time spent working
• Efficiency
• How well a machine or worker performs compared
to a standard output level
• Load
• Standard hours of work assigned to a facility
• Load Percent
load
• Ratio of load to capacity Load Percent = x 100%
capacity

Relaxing MRP Assumptions
• Material is not always the most constraining
resource
• Lead times can vary
• Not every transaction needs to be recorded
• Shop floor may require a more sophisticated
scheduling system
• Scheduling in advance may not be appropriate
for on-demand production.

Enterprise Resource Planning (ERP)
• Software that organizes and manages a
company’s business processes by
• sharing information across functional areas
• integrating business processes
• facilitating customer interaction
• providing benefit to global companies

Organizational Data Flows

ERP’s Central Database

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OPERATIONS MANAGEMENT

Copyright ©2017 John Wiley & Sons, Inc. 13-2

What is inventory management?

Inventory management is responsible for the maintenance

Work In Process (WIP)

Maintenance, Repair, and Operating Supplies (MRO)

Damaged and Obsolete

Demand Enable high customer service levels

Provide for a steady flow of materials

Lot-Size Capitalize on short-term sales and

Planned excess inventory to cover unplanned

Inventory purchased or built in advance of

Inventory that is in transit by ship, railcar,

Effective inventory management enables

Decisions OK? Service Level OK? Channel OK?

Use of manufacturing and distribution

Number of stocking locations required to

Demand Supply Production

Copyright ©2017 John Wiley & Sons, Inc. 13-14

Inventory Inventory Safety

Q = 250 units T = 10 days

Quarter 1 Quarter 2 Quarter 3 Quarter 4

Cost incurred during reordering, such as

Valuation Selection of the inventory valuation method

Cost of stocking and disposing of surplus and

Supplies and operating expenses

Order generation costs

Setup and teardown costs

Lost capacity costs

Receiving and put-away costs

Capital Service Risk Storage

Inventory Carrying Costs

Inventory Lead Times/ Trigger Point

Accuracy OK? Values OK? Model OK?

Quantities OK? Order Quantity

Replenishment Determines the available inventory on-

Determines when an item should be

Determines the span of time between

Issue Continuous Periodic

The order quantity is based on some form of

Safety stock is assumed to be on hand at all

Available stock is statistically one-half the

Replenishment determined by physically

Calculates the impact of uncertainty

Time-Phased Utilizes material requirements planning

Ordering size based on the

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d = demand rate per period

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Quantity Guard Against

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• 60% of total cost per unit sold

3 P’s of inventory control

Periodic physical inventory

Electronic data collection

 Responsibility  Controlled Access  Simple

Items are grouped and counted in a specific storage

Location A predetermined number of locations are checked

 Minimal or no loss of production time