IM 2024 Handouts

1/8/2024
IM 00
INVENTORY & MATERIAL
MANAGEMENT
ME3161
Nguyễn Như Phong
nnphong@hcmut.edu.vn; www.isem.edu.vn
https://www.smashwords.com/profile/view/nnphong
https://www.researchgate.net/profile/Phong-Nguyen-64
Industrial Systems Engineering, BKU - VNU
(Lecturing Materials for ISE)
01/2024
January 24 Nguyen Nhu Phong 1
Course Objective
 To offer knowledge & skills
 to manage Inventory Systems effectively
 to plan Inventory Systems
 to control Inventory Systems
 to improve Inventory Systems
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LEARNING OUTCOMES
LO.01: Know basic knowledge of Inventory Management

LO.02: Understand how to plan working stock
LO.03: Understand how to plan safety stock
LO.04: Understand how to plan single order inventory
LO.05: Understand how to plan dependent demand inventory
LO.06: Understand how to plan distribution inventory
LO.07: Understand how to control Inventory Systems
LO.08: Understand how to improve Inventory Systems
LO.09: Apply soft skills
Course Contents
1. Inventory Management
2. Continuous demand inventory planning
3. Discrete demand inventory planning
4. Stochastic inventory planning
5. Single order inventory planning
6. Material requirement planning
7. In process inventory planning
8. Distribution requirement planning
9. Inventory Control
10. Inventory Improvement
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REFERENCE MATERIALS
1. Nguyễn Như Phong. Lecture notes on IMM. http://e-
learning.hcmut.edu.vn/;
2. www4.hcmut.edu.vn/~nnphong. TA. Nguyễn Hữu Phúc
3. Richard Tersine. Principles of Inventory and Materials Management. 4th
Edition. The University of Oklahoma. Prentice-Hall International, Inc.
4. Phong Nguyen Nhu. Inventory Management. National University Press.
2003, 2005, 2010.
5. Phong Nguyen Nhu. Inventory Management. ISBN: 9781005496982.
https://www.smashwords.com/books/view/1043441
6. Phong Nguyen Nhu. Inventory Planning & Control. National University
Press. 2013.
7. Phong Nguyen Nhu. Inventory Planning. ISBN: 9781005734466.
https://www.smashwords.com/books/view/1058788
REFERENCE MATERIALS
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REFERENCE MATERIALS
ResearchGate presentations
1. www.researchgate.net/publication/374197231_Inventory_Management
2. www.researchgate.net/publication/374197000_Continuous_Demand_Inventory_Planning
3. www.researchgate.net/publication/374197236_Discrete_Demand_Inventory_Planning
4. www.researchgate.net/publication/374197247_Stochastic_Inventory_Planning
5. www.researchgate.net/publication/374197250_Single_Order_Inventory_Planning
6. www.researchgate.net/publication/374197098_Material_Requirement_Planning
7. www.researchgate.net/publication/374197161_In_Process_Inventory_Planning
8. www.researchgate.net/publication/374197380_Distribution_Inventory_Planning
9. www.researchgate.net/publication/374197278_Inventory_Control
10. www.researchgate.net/publication/374197398_Inventory_Improvement
Nguyen Nhu Phong
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1/8/2024
Schedule
 Main class: (15 + 6) * 2 = 21 * 2

 Theory
 Group Assignments
 Sub class: Task force.
 Group Homework
 Utilities
 Final Exam
 12 Groups
Nguyen Nhu Phong
Schedule
W S Contents LO
1 1 Inventory Management 01
2 2, 3 Continuous demand inventory planning 02
3 4 Discrete demand inventory planning 02
4,5 5, 6, 7 Assignment 01 – IM, DIP. 01, 02, 09
6 8, 9 Stochastic inventory planning 03
7 10 Single order inventory planning 04
8 11 Material requirement planning 05
9, 10 12, 13, 14 Assignment 02 – SIP, SOP, MRP 03, 04, 05, 09
11 15 In process inventory planning 05
12 16, 17 Distribution requirement planning 06
13 18 Inventory Control & Improvement 07, 08
14, 15 19, 20, 21 Assignment 03 – WIP, DRP, IC, II 05, 06, 07, 08, 09
- - Final Exam 01-08
Nguyen Nhu Phong
5
1/8/2024
Course Evaluation
 C1: 20%
 Assignment 01 20%
 C2: 30%
 C3: 50%
 Final Exam 50%
 GHW Bonus
Nguyen Nhu Phong
Course Evaluation
 Rules of final exam: FE Score < 3
 Rules of absentee
 Absentee >= 20% Examination prohibited
 Final Exam Score = 0 < 3
 Absentee < 20% : Minus per each
 Research
 Course Bonus (+1) & Thesis Advisee Priority
 Paper / Project
 Topics – DSS Software, Fuzzy Inventory Planning
 Attitude assessment
 Plus & minus
Nguyen Nhu Phong
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TEACHING METHODS
1. Lecturing
2. Homework
3. Utilities
4. Assignment
5. Case Study
6. Clips
7. Games
LEARNING STRATEGIES
 Full class time participation

 Active learning
 Group working to do
 homework
 utilities
 assignment
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IM 01
INVENTORY MANAGEMENT
Nguyễn Như Phong

01/2024
INVENTORY MANAGEMENT
 Inventory types
 Inventory functions
 Inventory management
 Inventory problem classifications
 Inventory systems
 Inventory properties
 Inventory costs
 Inventory Flow Cycle
 Production strategies
 JIT
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Inventory types
 Raw materials
 In process goods
 Finished goods
 Supplies
Inventory types
FG Sale
Idle SP
Use
RM
IPG
Incomplete
Transformation
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Inventory types
Organization SP RM WIP FG
A. Retailers
Goods * *
Services *
B. Distributors * *
C. Manufacturers
Project * * *
Intermittent process * * *
Continuous process * * * *
Inventory types
 Working stock – cycle / lot size
 Safety stock – buffer / fluctuation
 Seasonal stock – anticipation / stabilization
 Pipeline stock – transit
 Decoupling stock – between stages
 Psychic stock – display inventory
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Inventory functions
 Difficult to synchronize supply & demand
 Factors
 Time
 Discontinuous
 Uncertainty
 Economy
Inventory management
 Inventory planning
 Min cost
 St. Service level
 Inventory control
 Inventory improvement
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Inventory goal
Department Function Inventory goal Inventory inclination

Marketing Sell Good service High
Production Produce Efficient lot size High
Purchasing Buy materials Low cost per unit High
Finance Provide capital Efficient capital use Low
Engineering Design Avoid obsolescence Low
Inventory problem classifications
 Order repetitiveness
 Demand
 Supply source
 Lead time
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 Order repetitiveness
 Single
 Repeat
 Demand
 Constant / Variable
 Independent / Dependent

 Supply source
 Outside
 Inside
 Lead time
 Constant
 Variable
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Inventory systems
 Perpetual Inventory systems
 Periodic Inventory systems
 Single order Inventory systems
 MRP
 DRP
Inventory properties
 Demand
 Size, rate, pattern.
 Replenishments
 Size, rate, lead time
 Constraints
 Space, capital, facility, personnel
 Administrative decisions
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Inventory costs
 P - Purchase/ Production
 C - Order / Setup costs
 H - Holding costs
 S - Stockout / Depletion costs
Inventory cost accumulation profile

Cost Storage
Storage
Assembly
Storage
Storage Fabrication Subassembly
RM WIP FG
Manufacturing Cycle Time t
Throughput Time FG Shipment

RM acquisition
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Supply
Purchasing
Inventory Flow Cycle

RM & SP
 Scheduling/Timing
P control
 Synchronization
 Driving force WIP
P control
FG
Sale
Demand
Production strategies
 Determine the types of inventory held
 Production strategies
 Make to stock – MTS
 Make to order – MTO
 Assemble to order – ATO
 Engineering to order - ETO
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Production strategies
ETO
MTO
ATO
MTS
Engineering Procurement Fabrication Assembly Delivery
JIT
 Production strategy
 developed by the Japanese
 challenge classical inventory theory.
 JIT
 right product
 right quantity
 right time
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JIT
 Inventory – waste
 Ideal lot size
 Q=1
 not EOQ
Course Structure
IM
CDIP DDIP
SIP
SOIP
MRP WIP
DRP
IC II
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1. ACS of JO Truck Scheduling and Inventory Management for Multiple Warehouses. 18
IM Papers 2.
3.
An ABC Analysis Model for the Multiple Products IC - A CS. 02
An analysis of Inventory Turnover In The Belgian Manu. Industry, Wholesale And Retail. 33
4. An EPQ Model with Imperfect PS with Rework of Regular P&S Return. 04
www.isem.edu.vn 5.
6.
An Optimal Production Model For Disposing Excessive Deteriorating Stocks. 20
An order level EOQ model for deteriorating items in a SWS with PDDS. 26
7. A FH Algorithm for Dynamic Lot Sizing Problems with Lifecycle Demand Patterns. 05
8. A Mixed IP Model Formulation for Solving the Lot-Sizing Problem. 19
9. Analyzing Material Management Techniques on Construction Project. 07
10. Applying Actual Usage Inventory Management Best Practice in a Health Care SC. 17
11. Batch Size Modeling In A Multi-Item, Discrete MS Via An Open Queuing Network. 21
12. Buffering against lumpy demand in MRP environments. 36
13. Chain Store Inventory: A Cross Sectional Evaluation. 22
14. Demands, Backorders, Service Level, Lost Sales and Effective Service Level. 08
15. Determination of IC Policies at Urafiki Textile Mills Co Ltd. 14
16. Financial Effects Of Inventory Management In Trading Companies - EOQ Model. 09
17. Holding Inventory with Stochastically Mean Reverting Purchase Price. 23
18. Inventory Control Models In The Private Sector Of Nigerian Economy . 24
19. Improved IM System for a Jute Mill - A Case Study. 06
20. Inventory Management- A Case Study. 15
21. IM: A Tool of Optimizing Resources in a Manufacturing Industry A CS of Coca-Cola
22. Inventory management in distribution systems –case of an Indian FMCG company. 16
23. Inventory Management in SMM Companies and Its Main Dilemmas. 30
24. Inventory Management and Its Effects on Customer Satisfaction. 32
25. Inventory Optimization in a Pump Industry Using Kraljic’s Matrix. 25
26. Just In Time Approach In Inventory Management. 34
27. Minimizing Inventory Costs by properly choosing the level of Safety Stock. 35
28. Modeling Inventory Management System at Distribution Company: Case Study. 12
29. Note: An Application of the EOQ Model with Nonlinear H.Cost to IM of Perishables.
30. Optimal Order Quantity Assuming The Component Part Quantity Is A Random Variable. 27
31. Revised MRP for reducing inventory level and smoothing order releases. 37
32. Safety Stock and Forecast Error. 13
33. SC Inventory Control: A Comparison Among JIT, MRP, and MRP With ISUS. 29
34. Studying Material IM for Sock Production Factory. 03
35. The Calculation of ECC and SOC to Determine the RM’s Optimal Arrival LT. 01
36. The Leontief´s Equation to improve the learning process of MRP system. 38
37. Vendor Managed Inventory in Wood Processing Industries. 28
January 24 Nguyen Nhu Phong 38. Vendor Managed Inventory. A Sawmills Potential Offering for Builders Merchants. 31 37
My IM Case Studies in www.isem.edu.vn

1. Xây dựng hệ thống quản lý vật tư tồn kho cho cty Sonion VN. Lê Văn Thêm. K1997.
2. Xây dựng hệ thống hoạch định vật tư cho cty Vinappro. Lê Quốc Khánh. K1997.
3. Xây dựng hệ thống hoạch định tồn kho rời rạc cho cty VNP. Nguyễn Tài Sỹ. K1998.
4. Xây dựng hệ thống hoạch định vật tư cho cty VNP. Hồ Đắc Vũ. K1998.
5. Xây dựng hệ thống hoạch định tồn kho cho cty NBC. Nguyễn Phong Bảo. K1999.
6. Xây dựng hệ thống quản lý vật tư tồn kho cho cty SD Wooden Toy. Trần Công Thuận. K2000.
7. Cải tiến hệ thống quản lý vật tư tồn kho cho nhà máy HL. Đặng Thiên Vương. K2003.
8. Xây dựng hệ thống Hoạch định vật tư cho cty Tempearl. Nguyễn Ngọc Hưng. K2003.
9. Xây dựng hệ thống quản lý vật tư tồn kho cho May Phú Thịnh. Phùng Lê Nhật Sang. K2003.
10. Xây dựng Hệ thống hoạch định vật tư cho cty FOV. Trần Quốc Bảo. K2003.
11. Xây dựng hệ thống quản lý vật tư tồn kho cho cty SEE. Biện Công Thế. K2004.
12. Xây dựng hệ thống hoạch định tồn kho cho cty East West Industry. Nguyễn Lê Hải Thuận. K2005.
13. Xây dựng hệ thống hoạch định tồn kho cho cty JC. Nguyễn Thị Kim Loan. K2006.
14. Xây dựng hệ thống hoạch định tồn kho cho cty Cầu Tre. Trần Lê Quang, Lê Nguyễn Ngọc Minh. K2007.
15. Xây dựng hệ thống hoạch định tồn kho cho cty Thiên Long. Phạm Thị Ngọc Trang. K2011.
16. Hoạch định tồn kho công ty Intel Products Vietnam. Nguyễn Phương Nguyên. K2017. 2021.
17. Dự báo & Hoạch định tồn kho công ty sản xuất thương mại Á châu. Lê Trung Tín. K2017. 2021.
18. Hoạch định tồn kho công ty nhựa Duy Tân. Trần Thị Kiều Linh. K2019. 2023
19. Hoạch định tồn kho công ty Công ty Sanofi-Aventis Việt Nam. Vũ Hà My. K2019. 2023
19
1/8/2024
IM 02
CONTINUOUS DEMAND
INVENTORY PLANNING
Nguyễn Như Phong
01/2024
CONTINUOUS DEMAND
INVENTORY PLANNING
 Continuous demand inventory planning
 Fixed order size systems - FOSS
 Fixed Order Interval Systems - FOIS
 Batch Type Production Systems
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Continuous demand inventory planning

 A reason for having inventory
 buy/produce items in economic lot size
 Optimum inventory policies
 determine economic lot size

 Parameters required
 Demand
 Inventory costs
 Lead time
 Assumptions
 Deterministic –
 parameters calculated with certainty.
 Independent & constant / continuous demand
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 Inventory planning
 How much/many and when to order ?
 How much/many and when to produce ?
 Order
 Fixed order size systems - FOSS
 Fixed order Interval Systems - FOIS
 Produce
 Batch Type Production Systems
Fixed order size systems - FOSS

 Fixed order size systems
 Economic Order Quantity - EOQ
 Backordering
 Quantity Discount
 All-Units Quantity Discount
 Incremental Quantity Discount
 Price Increases
 Special Sale Prices
 Known Price Increase
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Fixed order size systems

 How much/many and when to order ?
 Q Systems
 Reorder point - B
 Order size - Q
Economic Order Quantity - EOQ

 Assume:
 Constant, continuous, known demand
 Constant, known LT.
 Constant, known inventory costs
 No stockout
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Inv

 Parameters
 P – unit purchase cost
 R – annual demand
 C – ordering cost per order
 H – unit holding cost per year
 F – fraction holding cost per year:
 L – Lead time
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CR HQ C
TC  PR   HQ / 2
Q 2
dTC H CR
  2 0 PR
dQ 2 Q
 CR / Q
2CR 2CR Q* Q
Q*    EOQ
H PF
TC*  PR  HQ *
B  RL

EX:
R = 8000 u/y, P = 10 $/u, C = 30 $/o
H = 3 $/u.y, LT = 2 w
 Q = SQRT ( 2*30*8000/3 ) = 400
TC* = 10  8000 + 3  400 = 81200 $

B = 8000  2 / 52 = 307.7 u
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EOQ Sensitivity
 How the outputs
 influenced by input changes
 Error factors
 R, C, H: actual values
 R’, C’, H’: estimated values
XR = R’/R
XC = C’/C
XH = H’/H
EOQ Sensitivity
 Q error fraction
Q - Q* XCX R
Q   1
Q* XH
 TVC error fraction
TVC 
TVC - TVC * X - 1
 XCX R X H  1  Q
2
*
TVC 2XQ
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EOQ Sensitivity
Ex: R=2000, C=25, H=20
R’=1000, C’=50, H’=10
 XR = 1000 / 2000 = 0.5
XH = 10 / 20 = 0.5
XC = 50 / 25 = 2
2  0.5
ΔQ  - 1  0.414 41.4%
0.5
ΔTVC  X C X R X H - 1  2  0.5 0.5 - 1  - 0.293 - 29.3%
Backordering
 Backorder
 demand filled later than desired
 Assumed - All shortages

 satisfied from the next shipment
 Variables & parameters

 Stockout time period t3
 Stockout size J
 Unit backordering cost K
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Backordering
IL
Q-J
t2 
R
J
t3 
Q R
t3
t2 J t
t1
Backordering
CR H(Q - J) 2 KJ 2
TC  PR   
Q 2Q 2Q
2CR H  K
 Q* 
H K
TC/ Q  0
 J  HQ (H  K)
* *
TC/ J  0 Q* - J *  KQ* (H  K)
TC *  PR  KJ *
B  RL N - J *
t 3max  J * R
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Backordering
EX:
R = 8000 u/y, P = 10 $/u, C = 30 $/o,
H = 3, L = 2w, K = 1 $/u*y.

Q* = 800 u J* = 600 u
B = -292 u TC+* = 80600 $
t3 = 0,075 y = 3,9 w
All-Units Quantity Discount
P0 , U 0  Q  U1
P , U  Q  U
 1
Pi  
1 2
.......... .
Pj , U j  Q  U j  1

P0  P1  ......  Pj
U : Price- break Quantity
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1. Starting with P0,
 calculate each EOQ
 until a valid EOQ, QV obtained
2. Calculate the TC for
 QV, and
 all price-break quantity larger than QV
3. Select the quantity with the lowest TC
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R = 8000 u/y, C = 30 $/O, F =0.3
10 $/u , Q  500
P
9 $/u , Q  500
2 * 30 * 8000
Q*9   422 u _ No
9 * 0.3
2 * 30 * 8000
*
Q10   400 u _ Yes
10 * 0.3
30 * 8000 10 * 0.3 * 400
TC (400)  10 * 8000    81200
400 2
30 * 8000 9 * 0.3 * 500
TC (500)  9 * 8000    73155
500 2
 EOQ  500 u
Incremental Quantity Discount

 Unit Purchase Cost P0 , U 0  U1 - 1
P , U  U - 1
 1
Pi  
1 2
.......
Pj , U j  U j 1

 Lot size price
Mi = Di + PiQ, Ui  Q < Ui + 1
i
Di   (Ue - 1)(Pe-1 - Pe )
e 1
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Mi CR FQ M i
TC  R 
Q Q 2 Q
(C  D i )R Pi FQ FD i
 Pi R   
Q 2 2
dTC 2R(C  D i )
 0  Q*i 
dQ Pi F

TC1
TC2 TC3
TC4
U1 U2 U3
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1. Calculate the EOQ for each UPC
2. Determine which EOQs are valid
3. Calculate the TC for each valid EOQ
4. Select the valid EOQ with the lowest TC.

EX: R = 4800 u/y, C = 40 $/O, F = 0,25
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2 * 4800 * (40  0)
Q*0   392 (valid)
10 * 0.25
2 * 4800 * (40  399)
Q1*   1369 (valid)
9 * 0.25
Q*2  2166 (valid)
Q*3  4062 (not valid)
(40  0) * 4800 10 * 0.25 * 392 0.25 * 0
TC 0  10 * 4800     48979.8 ($)
392 2 2
TC 2  45527.57 ($)
 EOQ  2166 u, TC  45527.57 $
Special Sale Prices

 Temporary discount the UP
 during a regular replenishment
 Parameters
 Regular price P
 Current price P-d
 The unit price decrease d
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Special Sale Prices

 Special order Q^
 to max the cost different during Q^/R
Special Sale Prices

Q̂ FQ̂
TC s  (P - d) Q̂  (P - d) C
2 R
Q* FQ* Q* Q̂ - Q* CQ̂
TC n  (P - d) Q*  P (Q̂ - Q* )  (P - d)  PF  *
2 2R 2 R Q
2
*
2C (P - d) FQ̂ * dFQ
g  TC n - TC s  (d  * ) Q̂ - - dQ - -C
Q 2R 2R
2
dg dR PQ* C (P - d)  Q̂* 
0  Q̂ 
*
  g  *
 Q * - 1
dQ̂ (P - d) F P - d P  
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Special Sale Prices

EX: R = 8000 u/y, P = 10 $/u, d = 1$/u,
C=30 $/o, F = 0.3,
 Q* = 400
1* 8000 10 * 400
Q̂*    3407 (u)
(10 - 1) * 0.3 10 - 1
2
30 * (10 - 1)  3407 
g  - 1  1525.85 ($)
10  400 
Known Price Increase

 Assume
 the unit price increased by k on some day t1
 LT = 0 *
Q  2CR PF
Q*a  2CR (P  k)F
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q Q̂ Q̂ q q
TC s  PQ̂  Q̂PF  PF  PF  C
R 2 R 2 R
Q* Q̂ q q CQ̂
TC n  (P  k)Q̂  a (P  k)F  PF  *
2 R 2 R Qa
 (P  k)FQ*a PFq  PFQ̂ 2
g  TC n - TC s   k  - Q̂ - -C
 R R  2R
dg kR (P  k)Q*a
 0  Q̂*   -q
dQ̂ PF P
 Q̂*  2 
 g  C  *  - 1
*
 Q  
 

EX: R = 8000 u/y, P = 10 $/u, k = 1$/u,
C=30 $/o, F = 0.3, q = 346 u
 Q*a  2 * 30 * 8000 [(10  1) * 0.3]  381
kR (P  k) Q*a
Q̂*   - (q - B)
PF P
1* 8000 11* 381
  - (346 - 308)
10 * 0.3 10
 622
 3048  2 
g *  30  - 1  42.43
 400  
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Fixed Order Interval Systems - FOIS

 Periodic / Time based
 When to order
 The fixed review period T
 How many to order
 Stock Position - SP
 Max. Inv. Level - E

 T Systems
 Order interval T
 Max inventory level E
 Models EOI
 Single items
 Multiple items
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EOI - Single items
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EOI - Single items

PFR
TC  PR  mC 
2m
T  1 m (n)
C PFR
TC  PR   T
T 2
dTC
 0  T *  2C PFR
dT
m*  1 T *  PFR 2C
E  RT  RL
TC *  PR  HRT *
EOI - Single items

EX: R = 8000 u/y, P = 10 $/u, C=30 $/o,
F = 0.3, L = 10 d, N = 250 d/y
2 * 30
 T*   0.05 (y)  12.5 d
3 * 8000
R 8000 * (12.5  10)
E  (T  L)   720 (u)
N 250
TC*  10 * 8000  3 * 8000 * 0.05  81200 ($)
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EOI - Multiple items

 Retailers & wholesalers place joint orders
 Min stock level review
 Min inventory maintenance
 Logistics & transportation cost savings
 Optimum interval T
 Minimize inventory costs for the group
 Max inventory level Ei set for each item.

n
C  nc TF n
TC   Pi R i    Pi R i
i 1 T 2 i 1
dTC 2(C  nc)
 0  T*  n
F Pi R i
dT
i 1
n
TC  (1  FT ) Pi R i
* *
i 1
E *i  R i (L  T)
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EX: C = 1.5 $/o, c = 0.5 $/o, F = 0.2 /y, L=1m
2 * (1.5  3.5)
 T*   0.158 (y) (1.9 m  2m)
0.2 * 2000
R (T  L) R i R
E *i  i  (2  1)  i
12 12 4
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Batch Production Systems

 Products
 made to stock in lot sizes (batches)
 Multiple products
 produced on the same equipment

 Planning batch production
 the optimum number of units
 in each production run
 to minimize total annual costs
 Batch scheduling
 the order of production & the number of each item
 to produce in each sequence
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 Models
 Economic Production Quantity EPQ
 Backordering
 Made or Buy Decision
 Multiple items
 Runout Time ROT
 Aggregate Runout Time AROT
Economic Production Quantity EPQ

 Entire orders
 received into inventory instantaneously.
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 R – annual demand (u/y)
 P – unit production cost ($/u)
 Q – production order quantity (u)
 p – production rate (u/d)
 r – demand rate (u/d)
 C – setup cost per production run ($)
 H – holding cost ($/uy)
 L – lead time (d)
 tp – production time (d)
 m – annual number of production runs

CR HQ (p - r)
TC  PR  
Q 2p
dTC CR H(p - r)
-  0
dQ Q2 2p
2CRp
 Q* 
H(p - r)
 TC *  PR  HQ* (p - r)/p
t *p  Q* /p
B  rL
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EX: R = 20000 u/y, r  20000 / 250  80 (u/d)
P = 100 $/u, 2 * 20 * 20000 *100
Q*   632
p = 100 u/d, 10 * (100 - 80)
C = 20 $ R 20000
m   31.6 r/y
H = 10 $/uy, Q* 632
L = 4 d, B  80 * 4  320 (u)
N = 250 d/y 10 * 632 * (100 - 80)
TC*  50 * 20000 
100
 1.001.264 ($)
Backordering
 Finite stockout / backorder costs k ($/uy)
2CRp Hk
Q* 
H(p - r) k
HQ*k(p - r)
TC *  PR 
(H  k)p
RL HQ* (p - r)
B -
N (H  k)p
m  R Q*
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Backordering
EX: R = 20000 u/y,
2 * 20 * 20000 *100 10  5
P = 100 $/u, Q  1095 (u)
 20000  5
p = 100 u/d, 10 * 100 - 
 250 
C = 20 $
20000
H = 10 $/uy, m  18.3 (r/y)
1095
L = 4 d, 20000 * 4 10 *1095 * (100 - 80)
B -  174 (u)
N = 250 d/y 250 (10  5) *100
k = 5 $/uy
Made or Buy Decision

 Whether to purchase / manufacture an item.
 Influence factors
 Plant capacity
 In-house capabilities (personnel, equipment)
 Reliability of supply
 Alternative resource uses
 …
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Made or Buy Decision

 MBD
 EOQ:Q*o, TC*o
 EPQ: Q*p, TC*p
 Make decision.
MBD
EX: R = 2500 u/y,
F = 10%
Buy: P = 25 $/u,
C = 5 $/o
Make: P = 23 $/u
p = 10000 u/d,
C = 50 $/s
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MBD
2CR 2 * 5 * 2500
 Q*0    100 (u)
PF 25 * 0.1
TC*0  PR  HQ*  25 * 2500  2.5 *100  62750 ($)
2CRp 2 * 2500 * 50 *10000
Q*p    381 (u)
PF(p - r) 0.1* 23 * (10000 - 2500)
HQ* (p - r)
TC*p  PR 
p
23 * 0.1* 381* (10000 - 2500)
 23 * 2500   58157 ($)
10000
 Make
Multiple items
 Intermittent production processes
 a number of products share the same equipment
 on a rotating basis
 Variables
 ti = Qi / pi , i = 1  n : production time for ith item
 ts : slack time
 T=N/m : production cycle time
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Multiple items
n n
1 n H i R i (p i - ri )
TC   Pi R i  m  Ci   p
i 1 i 1 2m i 1 i
n
dTC  H R (p i i i - ri ) p i
 0  m*  i 1
n
2  Ci
dm
i 1
n n
TC*   Pi R i  2m*  Ci
i 1 1
Q i  R i m*
n
N   R i pi
1
Multiple items
EX: N = 250 d/y
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Multiple items
5
R
1
i p i  210  250
 H R (p - R
i i i i N) pi
m 1
 10
2 C i
Multiple items
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Multiple items
T *  N m*  25 (d)
t s  25 - 21  4 (d)
TC*   Pi R i  2m*  Ci  189040 ($)
Runout Time ROT

 Heuristic batch production scheduling
 schedule the sequence of production lot sizes
 according to the time when inventory depleted
 based on
 the depletion times
 inventory levels of items in the group
 assume
 lot sizes established
 sufficient capacity to satisfy demand requirement
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Runout Time ROT

 Runout Time
ROTi = Ii / Di
 Ii – current inventory position of item i
 Di – demand per period for item i.
 Decision rule
 the lower the ROT
 the more urgent it is to replenish the item
Runout Time ROT
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Runout Time ROT
Total time for a batch

T = tQi = 110 (h)
Aggregate Runout Time AROT

 Scheduling items in a family
 to avoid any shortages of individual items
 Adjust production lot sizes
 based on the current inventory levels
 allocate capacity to assure capacity feasibility
 Inventory for each item
 depleted at the same time
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AROT = (IMH + TAMH) / TFMH
 MH – Machine hours
 IMH – Inventory in MHs for all item
 TAMH – Total MHs available during the planning period
 TFMH – Total MHs forecasted per period for all items

 The available & required capacity
FMH = tsp* D, IMH = tsp * I
 AROT
 Gross requirement for each item
GR = D * AROT
 Net requirement / lot size for each item
Q = GR – I  ROTi = GRi /Di = AROT
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EX: TAMH = 90 h
93  90
AROT   4.88
37.5
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IM 03
DISCRETE DEMAND
INVENTORY PLANNING
Nguyễn Như Phong
01/2024
DISCRETE DEMAND
INVENTORY PLANNING
 Deterministic Discrete Demand Systems
 Lot For Lot Ordering – LFL
 Periodic order Quantity – POQ
 Silver-Meal Algorithm – SMA
 Least unit cost – LUC
 Part Period Algorithm – PPA
 Incremental Part Period Algorithm – IPPA
 Wagner-Whitin Algorithm – WWA
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Deterministic Discrete Demand Systems

 Demand
 deterministic – known with certainty
 vary drastically over time.
 occur at discrete interval / point of time
 time-phased in equal time increments
 either dependent (MRP) or independent (DRP)

 Independent Discrete Demand
Syntetos & Boylan, 2005
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 Smooth demand: ADI <= 1,32; COV2 <= 0,49.
 Intermittent demand: ADI >= 1,32; COV2 < 0,49.
 Erratic demand: ADI < 1,32; COV2 >= 0,49.
 Lumpy demand: ADI >= 1,32; COV2 >= 0,49.


 Known demand in periods at the beginning
 Finite planning horizon with several periods
 Lot sizes include demands in 1 / more periods
 No orders scheduled in 0-demand periods
 Zero lead time.
 Replenishment at once at the period beginning.
 No shortage / stockout
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 Holding cost per period.
 No quantity discounts
 Inventory costs & LT –
 Known with certainty
 Time invariant
 Ignore demand beyond the planning horizon.
 Zero initial inventory

 Parameters
 P: unit purchase cost ($/u)
 C: ordering cost per order ($/o)
 H: holding cost per period ($/p)
 h: holding cost fraction per period (/p)
 n: number of period in planning horizon
 Rk: demand in period k, k = 1 n
 R: average demand rate per period (u)
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Lot For Lot Ordering – LFL

 Orders
 scheduled for each period demand occurs
Qk = Rk , k=1: n
 Holding cost eliminated
LFL
Ex: P=50 $, C=100 $ , h=0.02
 H = hP = 1 $
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LFL
 For systems
 with large holding cost, small order cost
 Eg. Expensive items, items occasionally needed
 Assembly line
 high volume, continuous production
Periodic Order Quantity – POQ

 Determine the replenish order interval
 the number of period demands
 covered by each order
 Same logic as EOI
EOI  EOQ  2C
R RPh
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POQ
Ex: P=50 $, C=100 $ , h=0.02
 H = hP = 1 $
 R = 31
POQ
2 x 100
EOI   2.54  3
31 x 50 x 0.02
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Silver-Meal Algorithm – SMA

 Edward Silver & Harlem Meal
 Heuristic lot sizing algorithm
 based on the least period cost
 Minimize the average cost per period
 as the replenish order interval increased
SMA
 Replenishment period T
 Incremental holding cost:
IHCi = Ph(i-1)Ri
 Cumulative holding cost
T
CHC (T )   IHCi
i 1
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SMA
 Total variable cost:

TVC(T) = C + CHC(T)
 Average cost per period
TVC T 
MVC (T ) 
T
SMA
 T to minimize MVC(T)
MVC(T+1) > MVC(T)
 The lot size T
Q   Ri
i 1
 Replenishment period
 re-initialized at period T+1
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SMA
Ex: P=50 $, C=100 $ , h=0.02
 H = hP = 1 $
SMA
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SMA
Least unit cost – LUC

 Heuristic lot sizing algorithm
 similar to SMA
 based on the least unit cost
 Minimize the average cost per unit
 as the replenish order interval increased
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LUC
 Replenishment period T
 Incremental holding cost:
IHCi = Ph(i-1)Ri
 Cumulative holding cost
T
CHC (T )   IHCi
i 1
 Total variable cost:
TVC(T) = C + CHC(T)
 Average cost per unit MVC (T )  TVC (T ) / Q , Q T
  Ri
T T
i 1
LUC
 T to minimize MVC(T)
MVC(T+1) > MVC(T)
 The lot size T
Q   Ri
i 1
 Replenishment period
 re-initialized at period T+1
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LUC
Ex: P=50 $, C=100 $ , h=0.02
 H = hP = 1 $
LUC
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LUC
Part Period Algorithm – PPA

 Heuristic lot sizing approach
 based on the least total cost
 by balancing ordering & holding costs
 Select the number of periods
 cover by the replenish order
 accumulated holding costs
 just exceed the ordering cost
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PPA
T T
Ph i  1Ri  C   i  1Ri 
C
i 1 i 1 P.h
 Economic part period: EPP = C/Ph

 Accumulated part periods:
APP(T )   i  1Ri
T
i 1
 Stopping rule:
Max T: APP(T)  EPP
PPA
 Stopping rule:
Max T: APP(T)  EPP
 The lot size
T
Q   Ri
i 1
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PPA
Ex: P=50 $, C=100 $ , h=0.02
 H = hP = 1 $  EPP = … = 100
PPA
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PPA
Incremental Part Period Algorithm –

IPPA
 Heuristic lot sizing approach
 similar to PPA
 based on the least total cost
 by balancing ordering & incremental holding costs
 Select the number of periods
 cover by the replenish order
 incremental holding costs
 just exceed the ordering cost
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IPPA
C
Ph(T  1) RT  C  (T  1) RT 
Ph
 Economic part period: EPP = C/Ph

 Incremental part periods:
IPPi = (i-1)Ri
IPPA
 Stopping rule:
Max T: IPPi  EPP
 The lot size
T
Q   Ri
i 1
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IPPA
Ex: P=50 $, C=100 $ , h=0.02
 H = hP = 1 $
IPPA
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IPPA
Wagner-Whitin Algorithm – WWA

 Optimum approach
 Minimize total costs
 Using Dynamic Programming
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WWA
1. Calculate the total variable cost matrix TVC
 for all possible alternatives
 for a time horizon consisting N periods
2. Define the minimum possible cost fe
 in periods 1 through e
3. Define the optimal order schedule
 Translate the optimum solution fn
 to order quantity
WWA
 Calculate the total variable cost matrix
 placing an order in period c
 satisfy requirenment in periods c to e
e
zce  c  hP Qce  Qci  , 1  c  e  n
i c
e
Qce   Rk
k c
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WWA
 Define the minimum possible cost fe
f e  min f ce , c  1 e
f ce  f z
c1 ce
 f0 = 0
 fn: the cost of the optimal order schedule
WWA
 Define the optimal order schedule
 translate the optimum solution fn
 to order quantity
fn = zwn + fw-1
= zwn + zv,w-1 + fv-1
= zwn + zv,w-1 + … + z1,,u-1 + f0
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WWA
Ex: P=50 $, C=100 $ , h=0.02
 H = hP = 1 $
The total variable cost matrix

zce
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fe
 f1 = min {f0 + z11 } = min {0 + 100} = 100

 f2 = min {f0 + z12 , f1+z22}
= min {0+100, 100+100}= 100
 f3 = min {f0 + z13 , f1+z23, f2+z33} = …
fe
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Define the optimal order schedule

f6  258  z36  f2  z36  z12  f0  z12  z36
Algorithm comparison
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IM 04
STOCHASTIC INVENTORY
PLANNING
Nguyễn Như Phong
01/2024
STOCHASTIC INVENTORY
PLANNING
 Stochastic Inventory Systems
 Lead time demand
 Statistical analysis
 Safety Stock
 Stockout Costs Models
 Service Levels Models
 (s-S) models
 Fixed Order Interval Systems
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Stochastic Inventory Systems

 Random parameters
 Demand
 Lead time
 Demand - Random variable
 Constant average demand
 Known distribution
 Lead time demand – random variable
Stochastic Inventory Systems

 Working stock
 what expected 2 be used
 during a given time period

 determined by the average demand
 Safety stock
 not depend on lot size
 held 2 reduce stockout costs
 trade off bw. stockout & holding costs
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Lead time demand M

 Variable lead time demand
 Variable demand
 Variable lead time
 Statistical analysis
 Theoretical distributions
 Empirical distributions
Variable demand, constant lead time
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Variable lead time, constant demand
Variable lead time,

constant demand D = 5u/w
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Variable lead time & demand
M  D L
LI D 2 2
 2  D  L2  L  D2
M  D L
L NI D   2 2
 2  D  L2  L  D2   L D
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M = D x L  (0, 1, 2, 3, 4 )  P(M) ?
Eg. M = 1
L = 1, D1 = 1: 0.75 x 0.5 = 0.3750
L = 2, D1 = 0 ,D2 = 1 : 0.25 x 0.3 x 0.5 = 0.0375
L = 2, D1 = 1 ,D2 = 0 :0.25 x 0.5 x 0.3 = 0.0375
 P(M=1) = 0.4500
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GHW: M = f(D,L) ?
Find M distribution
by Monte Carlo Simulation
Empirical distribution
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Theoretical distributions
 Normal distributions
 Continuous, high demands
 Poisson distributions
 Discrete, low demands
 Negative exponential distributions
 Continuous demands
 Retail & wholesale situations
Statistical analysis
 Optimize probabilistic systems
 Minimize expected costs
 Demand –
 stochastic
 static
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 Lead time demand

 M . f ( M ) dM

M  0

M max

 0
 M . p(M )

  ( M  M ) f ( M ) dM
2

 2  0

M max

 0
 ( M  M ) 2 p( M )
 Stoc-kout probability

 f ( M )dM

P( S )  P( M  B)   B

M max
M p( M )
 B 1
P( S )  P( M  B)  F ( B)  1  F ( B)
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 Expected stockout quantity

  ( M  B) f (M )dM

E ( M  B)   B

M max
 M
( M  B) p( M )
 B 1
Safety Stock
 Cover the demand during replenishment LT
 Protect against a stockout
 after reorder point reached
 prior 2 receipt of an order
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Safety Stock
 Safety Stock
 Decrease stockout costs
 Increase holding costs
 Optimum Safety Stock - Min expected costs
 Stockout costs
 Holding costs
Safety Stock
 High Safety Stock & Reorder point
 High stockout costs
 High SL
 Low holding costs
 High variability of LT demand
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Safety Stock
 Back order

S   ( B  M ) f ( M )dM  B  M
0
 Lost order
B  
S   ( B  M ) f ( M )dM   ( B  M ) f ( M )dM   ( B  M ) f ( M )dM
0 0 B
S  B  M  E (M  B)
Stockout Costs Models

 Back order – Stockout Cost
 per unit
 per outage
 Lost order – Stockout Cost
 per unit
 per outage
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Back order – Stockout Cost per unit A

R
TCS  SH  E ( M  B) * A
Q

S   ( B  M ) f ( M )dM  B  M
0

E ( M  B)   ( M  B) f ( M )dM
B

AR
Q B
 TCS  H ( B  M ) (M  B) f (M )dM

dTCS AR
0H  P(M  B)  0
dB Q
HQ
 P( M  B)  F ( B)  P( s) 
AR
 B*
 S  B*  M
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R = 1800 u/y, H = 0.3, A = 1 $/u, Q=600 u

 M  53
HQ 0.3 x600
 P( s)    0.1
AR 1x1800
B = 56
 S  B*  M  56  53  3
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Back order – Stockout Cost per outage G

R
TC S  S .H  G.P( M  B)
Q
RG
 TC S  H ( B  M )  F ( B)
Q
dTs GR
H f ( B)  0
dB Q
HQ
 f ( B) 
GR

M ~ P()
L = 1 w ,  =M= 5 u , N = 52 w/y ,
H= 5 $/uy , G = 5 $ , Q = 13 u
HQ 5 x13
 f ( B)    0.05
GR 5 x52x5
B 8

S 3
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M ~ N (M , )
S  z
B  M  z
BM
z

e z / 2
2
HQ
f ( z)    . f ( B)  
2 GR

L = 1w, N = 52 w/y ,M = 20 u , = 4 u
H = 5 $/uy , G = 10 $ ,Q = 26 u
H Q 4 x5 x 26
 f ( z)    0.05
GR 10x52x 20
 z  2.03
S = 2.03x4 = 8.12 = 8 u
B = M+ S = 20 + 8 = 28 u
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Lost order – Stockout Cost per unit A

B
S   ( B  M ) f ( M )dM
0
 
S   ( B  M ) f ( M )dM   ( B  M ) f ( M )dM
0 B
S  B  M  E ( M  B)
R AR
TC S  SH  E ( M  B) A  H ( B  M )  (  H ) E ( M  B)
Q Q
dTS S AR
 0 H (  H ) P( M  B)  0
dB Q
HQ
 P( M  B)  F ( B)  P( S ) 
AR  HQ
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Q = 1000 u, R = 5000 u, H = 10 $/uy, A = 50 $/u
10 x1000
P( S )   0,038  B  400
50 x5000  10 x1000
Lost order – Stockout Cost per outage G
S  B  M  E ( M  B)
R
TC S  HS  P( M  B)G
Q
GR
TC S  H ( B  M )  H .E ( M  B)  P( M  B)
Q
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Lost order – Stockout Cost per outage G
R
TC S  HS  P( M  B)G
Q
GR
TC S  H ( B  M )  H .E ( M  B)  P( M  B)
Q
dTCS GR
 H  H .F ( B)  f ( B)  0
dB Q
f ( B ) HQ
 
F ( B ) GR
Service Levels Models

 Stockout costs unknown
 SL – the ability
 to meet customer demand from stock
 High SL
 high ability to meet customer demand
 high inventory level
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Service Levels Models

 Service levels
 per order cycle
 per unit demanded
Service levels per order cycle
SLC  1  P( M  B)
S  B  M  Ma  M
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SL = 87.5%
 P(S) = 1-SL = 0.125

 B = 70
 S = 70 – 60 = 10
M ~ N(M=60, =20 ),
SLC = 95%
P(M>B) = 0.05  z = 1.64
 B=M-z = 60 + 1.64x20 = 92.8 ( 93 u)

 S = B-M =93 – 60 =33 u
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D= 2 u/d,
M ~ P(M),
L = 4 d,
SLC = 96.6%
 M = D L = 8 u
P(M>B) = 0.034  B = 13 u
 S = 13 – 8 = 5 (u)

D = 2 u/d,
M ~ E(M),
L = 4 d,
SLC = 95%
 M = D L = 8 u
P(M>B) = 0.05
 B / M = 3
 B = 3xM = 24 u
 S = 24 – 8 = 16 u
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Service levels per unit demanded

 The percentage of demand satisfied
 Back order
E ( M  B)
SLu  1 
Q
 Lost order
E ( M  B)
SLu  1 
Q  E ( M  B)

 M ~ N((M, ):
E(M>B) = .E(z)
 .E ( z )
 SLu  1 
Q
Q
 E( z)  (1  SLu )

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SLu =0.99, Q = 60 u, M ~ N(M=53, =2 )
Q 60 x(1  0.99)
E( z)  (1  SLu )   0.3
 2
 z = 0.22
 B = 53 + 0.22x2 = 53.4 (54 u).
S = 54 – 53 = 1 (u)

SLu = 0.99,
Q = 60
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M max
E ( M  B)   ( M  B) p ( M )
M  B 1

E(M>B) = Q(1 – SLu)
= 60(1 – 0.99)
= 0.6 (u)
E(M>B) = 0.6
 B = 54
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Imputed Service Levels Stockout Costs

 Imputed Stockout Costs
 Associated with Service Levels
 Back order
HQ HQ
P( M  B)   AB 
AR R.P( M  B)
 Lost order
HQ HQ[1  P( M  B)]
P( M  B)   AL 
AR  HQ R.P( M  B)
Imputed Service Levels Stockout Costs

H = 5 $/uy, R = 18,000 u/y,
Q = 1200 u, SL = 87.5%
5 x1200
 AB   2.67
18,000x0.125
5 x1200(1  0.125)
 AL   2.33
18,000 x0.125
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(s-S) models
 M ~ N(M ,M)
 SS = zM ; z  
 s = M + SS
 S=Q+s
(s-S) models
 L ~ ND (L,L) ,
 D ~ ND (D,L)
 M = D*L
 M= D * L
 M= (LD2 + DL2)
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(s-S) models
TV distributor case
L = 2t
 = 97%
Q = 679 u

z=1,88
 = 44.58 u/w
 = 32.08 u/w
M = 89.16 u
SS = 86.2 u
s = 176 u
S = 765 u
Fixed Order Interval Systems

 T systems
 T
T *  Q * / R 2C / RH
 E
 M: demand during lead time & cycle time
 Models:
 Cost models
 SL models
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Cost models
SL models
SLC  1  P( M  E )
E (M  E )
SLu  1 
TR
110
1/8/2024
IM 05
SINGLE ORDER
INVENTORY PLANNING
Nguyễn Như Phong
01/2024
SINGLE ORDER
INVENTORY PLANNING
 Single Order Inventory Systems
 Known demand & lead time
 Known demand, variable lead time
 Variable demand, known lead time
 Variable demand & lead time
111
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Single Order Inventory Systems

 Only 1 replenishment opportunity exists
 Items ordered for a specific time period
 used 2 satisfy demand during that period
 little / no use at the end of that period
 EOQ, EOI, EPQ not suitable

 Items with a limited useful life
 short life cycle (perishability)
 abbreviated demand life (demand cessation)
 Demand
 non continuous,
 changeable,
 short-lived
112
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 Demand categories
 exist at infrequent interval
 eg. spare part for maintenance
 exist at frequent interval
 but uncertain & short-lived
 perishable items, eg. fresh fish
 obsolescent items, eg. Newspapers, chrismast trees

 Items ordered (procured/produced)
 at the beginning of the period
 no opportunity for a second order
 D>O  opportunity profit loss
 D<O  overstock  excess stock
 discarded eg. newspapers
 sold at reduced priced
 stored until the next season
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 SO problems
 Known demand & lead time
 Known demand, variable lead time
 Variable demand, known lead time
 Variable demand & lead time
Known demand & lead time

 Rarely occur in practice
 No problem
 Order quantity matches the demand
 Order time matches lead time
114
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Known demand, variable lead time

 Known demand –
 order size known
 Variable LT
 ensure order received prior to demand
 no idle production time / lost sales

 No stockout tolerated
 order placed prior to the max LT
 LT distribution known
 LT selected
 a high service level SL
 probability of arrival prior to demand
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 Self Supply Source
 Variable LT – uncertainty in
 Scheduling
 Production process
 PERT analysis
 SL policy on LT

Christmas trees
Po=0.85  L = ?
Po=0.85L=14 ng
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Variable demand, known lead time

 Known lead time  Order time
 Variable demand  Order size ?
 Demand distribution – available
 Decision making under risk
 Optimum expected values
 Min expected costs
 Max expected profits
Variable demand, known lead time

 List methods
 Benefit / Profit / Marginal Analysis
 Cost Analysis
117
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List methods
 Objective functions
E (Qi )   P( M j ) F Qi M j 
n
j 0
 Qi , i = 1 m : Lot size
 Mj , j = 1 n : Demand
 F(Qi , Mj ): Profit / Loss
 P(M): Demand distribution
List methods
Profit analysis
 Profit functions
Qi J  M j  Qi A , Qi  M j

F Qi M j   
M j J  Q j  M j l , Qi  M j

 A: stockout cost per unit
 J: unit profit / benefit
 l: unit loss from disposition
 Optimum lot size
 
Q  : E Q   Max E Qi 
118
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List methods
Profit analysis
Chrismast tree for sale:
P = 2$/u,
P1 =6$/u
A = 2$/u,
l = 1$/u
J = 4$/u
List methods
Profit analysis
119
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List methods
Cost analysis
 Cost function
Qi P  Qi  M j l , Qi  M j

F Qi M j   
Qi P  M j  Qi A , Qi  M j

 P: unit cost
 Optimum lot size
 
Q  : E Q   Min E Qi 
List methods
Cost analysis
Compressors as spare parts
for refrigerating system in a supermarket
P = 100$/u
A = 1000$/u
V = 0$/u
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List methods - Cost analysis

P = 100$/u, A = 1000$/u, V = 0$/u
Profit analysis
 Expected revenue
 P1: unit selling price
 V: unit salvage value
Q Q
ER  P1[Q   (Q  M ) f ( M )dM ]  V  (Q  M ) f ( M )dM

0 0
Q
ER  P1Q  (V  P1 )  (Q  M ) f ( M )dM
0
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Profit analysis
 Expected cost
 P: unit purchase cost
 C: ordering cost per order
 A: unit stockout cost

EC  PQ  C  A M  Q  f M dM
Q
Profit analysis
EP  ER  EC
Q 
 P1Q  V  P1  Q  M  f M dM  PQ  C  A M  Q  f M dM
0 Q
 

 P1Q  V  P1  Q  M  P1  V  A M  Q  f M dM  PQ  C
Q
 P1  V  P1  P1  V  APM  Q   P  0
dEP
dQ
P V
PM  Q   PS  
ML

P1  A  V MP  ML  A
122
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Profit analysis
Chrismast tree for sale:
P = 2$/u,
P1 =6$/u
A = 0$/u,
V = 1$/u
Profit analysis
ML = P –V
= 2-1
=1
MP = P1 – P
= 6 –2
=4
A =0
P(S) =0.2
 Q* =50
123
1/8/2024
Cost analysis
 Internal use with no generation of revenue.
 Min expected costs
 Order cost
 Purchase cost
 Stock-out cost
 Salvage value
Cost analysis
 C: order cost per order / setup
 P: unit purchase cost
 A: unit stock-out cost
 V: unit salvage value
 Q
EC  C  PQ  A M  Q  f M dM  V  Q  M  f M dM
Q 0
 

 C  PQ   A  V  M  Q  f M dM  V M  Q
Q
124
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Cost analysis
 Q
EC  C  PQ  A M  Q  f M dM  V  Q  M  f M dM
Q 0
 

 C  PQ   A  V  M  Q  f M dM  V M  Q
Q
 P   A  V PM  Q   V  0
dEC
dQ
P V
P M  Q   P S  
A V
Cost analysis
Compressors as spare parts
for refrigerating system in a supermarket
P = 100$/u,
A = 1000$/u,
V = 0$/u
125
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Cost analysis
 P(S)=0.1
 Q=2
Variable demand & lead time

 Problems more complicated
 No product used during lead time
 delivery delay  lost demand
 MIL
 LT distribution & SL  order time
 Demand distribution & optimum EV
 order size
126
1/8/2024
IM 06
MATERIAL REQUIREMENT
PLANNING
Nguyễn Như Phong
01/2024
MATERIAL REQUIREMENT
PLANNING
 MRP
 MRPII
 ERP
127
1/8/2024
MRP
 Material Requirement Planning
 MRP inputs
 MRP outputs
 MRP computations
 MRP systems
Material Requirement Planning

 Dependent demand
 Depend on higher level / parent items
 RMs, parts, subassemblies
 Lumpy demand
 not random
 discontinuous, irregular
 JIT demand
 calculated from independent demand
128
1/8/2024
Material Requirement Planning

 MRP
 plan the requirement for dependent demand items
 release production/purchase orders
 regulate the flow of RM, WIP
 meet the production schedule 4 FG.
 ensure the availability of materials
 for planned production & customer delivery
 maintain minimum levels of DD items
MRP inputs
129
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MPS
 Receive information of forecasts & COs
 Indicate products to produce & when needed
 Production plan
 all end items
 how much of each item
 when it is wanted
PSR
 Show how product produced
 BOM
 Structured list
 describe the sequence of manufacturing steps
 Levels
 represent the way placed in manufacturing process
130
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PSR
PSR
131
1/8/2024
PSR
ISR
 Q: Lot size
 L: Lead time
 OH: On hand
 SS: Safety stock
 AL: Allocated
 S: on-order
 LC: Level code
 IT: Items
132
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MRP outputs
MRP computations
 MRP items planning
 MRP full planning
133
1/8/2024
MRP items planning
MRP items planning

 G: Gross Requirement
 S: Scheduled on hand
 H: Projected on hand
 N: Net Requirement
 P: Planned Order Receipts
 R: Planned Order Releases
134
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MRP items planning
MRP items planning
 N (t ), N (t )  Q

P(t )  Q, Q  N (t )  0
0, N (t )  0

135
1/8/2024
MRP items planning

L=2
MRP items planning

L=2
136
1/8/2024
MRP items planning

L=2
MRP
full planning
137
1/8/2024
MRP full planning
MRP full planning
138
1/8/2024
MRP full planning
MRP full planning
139
1/8/2024
MRP full planning
MRP full planning
140
1/8/2024
MRP full planning
MRP full planning
141
1/8/2024
MRP full planning
MRP full planning
142
1/8/2024
MRP systems
 Regenerative Systems
 The entire MRP recalculated periodically
 based on the latest MPS
 low-frequency re-planning
 Net Change Systems
 the requirement change
 calculated for only those components affected
 partial explosion
 high-frequency re-planning
MRPII
 MRPII
 Demand Management DM
 Production Planning PP
 Resource Requirement Planning RRP
 Master Production Scheduling MPS
 Rough Cut Capacity Planning RCCP
 Material Requirement Planning MRP
 Capacity Requirement Planning CRP
 Shop Floor Control SFC
 Vendor Requirement Planning VRP
143
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MRPII
DM
 Recognizing & managing all of the demands
 Areas
 Advertising,
 promotions,
 pricing, adding, deleting prod.
 Forecasting anticipated business
144
1/8/2024
PP
 Evaluate anticipated sales & planned production
 in terms of prod families (5-10)
 PP – rate of output by prod family
 Responsibility of GM
 Aggregate planning process
 Aimed at keeping balance bw supply & demand
 Meet C needs w. a min of time, energy & effort.
RRP
 Resource acquisition plans
 Long period of time 2 acquire.
 Establishing, measuring, adjusting
 limits / level of long range capacity.
 Based on PP
 Driven by higher level plans eg. BP
 TM approval
145
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MPS
 Which prod produced, how many, when
 Statement of production by item, date, quantity
 Constrained by production plans
 Make schedule valid & realistic
 Consideration capacity, material, vendor limitations
 Mana decisions
 The disaggregated version of PP
RCCP
 Reasonability test of PP &/ MPS
 at intermediate levels of detail
 Rough & ready but simple & quick 2 use
 2 ingredients
 Critical resources
 Bottleneck factory processes
 Truly dictate overall throughput
 Plan not achievable changed before proceeding.
 Load profiles
 Identify the loads placed on CR
146
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MRP
 Inventory control & production planning systems
 Scheduling the production of all items
 beneath the end item level
 Release when necessary of
 WO,
 PO,
 issues rescheduling notices
CRP
 Consider planned orders from MRP
 Together w. work already in process
 To evaluate the availability of resources –
 equipment &/
 manpower
 In the correct time periods 2 execute the plan
 In a more detailed fashion
147
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SFC
 Plant scheduling & control
 Plans passed the validity test
 Material plans
 communicated to the supplier
 Material & capa plans
 communicated to the factory / plant
 Plant scheduling
 executing the factory plan
VRP
 Supplier scheduling & control
 Supplier selection,
 Contract negotiation
 Material availability determined
 Purchasing
 Procurement of outside capa WC
 Planned & scheduled well
 to min the final C overall cost
148
1/8/2024
ERP
 ERP
 ERP Integration
 ERP technologies
ERP
 A method
 for effective planning & control
 of all resources
149
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ERP
 Systems
 Integrating all information & actions required
 fully support a company & its SC
 Integration
 across the entire manufacturing comp.
 out through the SC to
 customers
 suppliers
ERP
 An accounting oriented IS
 identifying & planning
 the enterprise resources needed
 to take, make, ship & account for COs
150
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ERP Integration
1. Executive Integration
2. Customer Integration
3. Supplier Integration
4. Engineering Integration
5. Manufacturing Integration
6. Support Service Integration
ERP Integration
Owners
ExI
Suppliers SI MI CI Customers
EnI
SSI
FA HR Environmental
Bank Employees Gov.
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Executive Integration
 Strategic Planning
 Business Planning
 Sales & Operation Planning
Customer Integration
 Marketing
 Sales
 Forecasting
 Customer Order
 Demand Management
 Logistics
 Field Service
 CRM
152
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Manufacturing Integration
 Manufacturing Planning
 Manufacturing Execution
 Advanced Planning & Scheduling
 Inventory
 Quality
 Maintenance
Manufacturing Planning
 Material & Capacity Planning
 Material Planning
 MPS
 MRP
 Capacity Planning
 RCCP
 CRP
153
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Supplier Integration
 Purchasing
 Purchasing management
 Supplier Scheduling & Control
 Purchasing integration
 Supplier integration
 Optimum performance
 SCM
 The Extended Enterprise
Engineering Integration
 Product Design Integration
 Product Phase Out Integration
 Product Data Management
 Project Management Integration
154
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Support Services Integration

 Accounting
 Costing
 Human Resources
 Environment
 Work Flow
ERP Technologies
 Baan ERP
 OpenERP
 Oracle ERP
 SAP ERP
 …
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IM 07
IN PROCESS
INVENTORY PLANNING
Nguyễn Như Phong
01/2024
IN PROCESS
INVENTORY PLANNING
 WIP
 MLT
 BWC – IOC – CRT
 JIT
 Repetitive manufacturing
 Kanban systems
 Lean Production
 VSM
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WIP
 Items in partial state of completion
 further processing steps required
 dependent demand
 Account for a substantial part of total I investment
 as much as 50% of the entire investment
 cost accumulation
WIP
 Depend on
 Production processes
 Continuous / Intermittent processes / Project
 Scheduling methods
 Forward / backward
 Loading methods
 Finite / infinite
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WIP
 Continuous processes
 Flow shop - MTS
 Low WIP
 Intermittent processes
 Job shop – MTO
 High WIP
 Projects
 Unit, single, fixed location products
WIP
 Forward scheduling
 Procurement start as soon as requirement known
 Delivery requested as soon as possible
 Frequently cause a buildup of WIP
 Backward scheduling
 The last operation scheduled first from the DD.
 Tend to keep WIP relatively low
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WIP
 Infinite loading methods
 Ignore WC capacity limitation
 Assume sufficient capacity
 Not consider product competing
 Finite loading methods
 Consider capacity limitation & product competing
 Not overload a facility beyond its limit
 Priority restructured
 Products moved into a different time period
WIP
 Stocked WIP
 Stored at a stock-point 2 reduce MLT
 Allow leveling of production
 Use economic lot sizes
 Queue WIP
 Random arrivals to compete 4 the use of same WC
 Queues planned / unplanned.
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WIP
 WIP penalties
 Long MLT
 Complex & costly production control systems
 High material movement costs
 High floor space requirement
 Quality problems
MLT
 Setup time
 Process time
 Wait time
 Move time
 Queue time
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MLT
 Setup time
 Materials, machines prepare 4 operations
 Process time
 Productive operations performed
 Often small fraction of MLT
 Wait time
 Materials waiting 2 be moved 2 the next location
MLT
 Move time
 Transportation from storage/WC to storage/WC
 Queue time
 Materials wait because the other being processed
 May be the greatest proportion (ie. 90%)
 Usually larger than the combination of the others
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MLT
 VAT – PT
 NVAT
 ST
 WT
 MT
 QT
MLT
 NVAT due to
 Waiting 4 WC availability
 Waiting 2 be moved, inspected
 Job priority
 Shortages of materials, tools, info
 Machine breakdown
 Absenteeism
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MLT
 Assumed material & labor costs controlled
 Reduce MLT
 Reduce WIP
 Reduce inventory cost
 Increase SL
MLT
 MLT managed
 Scheduling
 Capacity planning
 Reduce MLT
 Product & process design
 Reduce NVAT – MT, QT, ST, WT
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MLT
 Product & process design
 Reduce the no. levels in product structure
 Operations overlapping, splitting
 Orders splitting
 No storage, no WIP, eg. Work cell
MLT
 Reduce MT
 Layout planning
 Reduce QT
 Reduce back-log
 Priorities
 Planning – order dispatching
 Scheduling – finite loading
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MLT
 Reduce ST
 QCO
 SMED
 Reduce WT
 Reduce inspected time
 Reduce shortages of materials, tools, info
 Reduce absenteeism
 Reduce machine breakdown, eg. TPM
BWC
 Throughput capacity determine the factory output
 Never sit idle
 The queue in front
 never allowed 2 disappear,
 but not build excessively
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BWC
 Operating to capacity
 Capacity expansion
 to increase the facility capacity.
 NBWC
 low utilization
 output rates governed by the BWC output rate
 Not to use each center to its capacity
 but to balance the flow rate
IOC
 A method of monitoring queue time
 in standard hour at a WC
 to reduce LT,
 to regulate the utilization of WC capacity.
 Inputs, outputs, queue (back-log)
 planned
 monitored
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IOC
 Inputs
 The flow of work entering the WC
 Controlled by the outputs of feeding WCs
 Outputs controlled by
 increasing/decreasing capacity utilization
 Eg. overtime, under-time, shifting workers, …
 Back-logs
 depend on inputs & outputs.
IOC
 BWC
 Planned output rate = capacity
 NBWC
 Planned output rate = planned input rate
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IOC
B11 =240
IOC
 PI & AI
 ICD: ICDt = ICDt-1 + AIt - PIt
 PO & AO
 OCD: OCDt = OCDt-1 + AOt - POt
 PB :
 PBt = PBt-1 + PIt - POt
 AB: ABt = ABt-1 + AIt - AOt
 BD: BD = AB - PB
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IOC
 Capacity control
 Back-log control
 LT control
IOC
 Out-of-control
 Back-log exceed upper limits
 Output below lower limits
 Possible causes
 equipment failure, inefficient processing,
 inadequate /excessive inputs
 Corrective actions
 Decreasing/ Increasing inputs
 Increasing output
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CRT – Critical Ratio Technique

 MRPS
 establish & update due dates for SOs
 A dynamic priority rules for SOs
 facilitate the constant updating of priorities
 used in conjunction with MRPS

 CR = DT / ST = (DD - TD) / ND
 DT : demand time
 ST : supply time
 DD : demand date
 TD : today’s date
 ND : days needed 2 complete the job
 CR determine the critical level of the order
 CR > 1  ahead of schedule
 CR = 1  on schedule
 CR < 1  behind schedule
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TD = 43
JIT – Just In Time

 An organizational philosophy strives 4 perfection
 Continuous improvement
 eliminate waste & uncertainty
 Eg. zero inventory , stockless production
 A production strategy
 not just an inventory control technique
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JIT
JIC JIT
Defects acceptable no
Efficient lots large small (1)
Efficient production fast balanced
Inventory Asset, smooth production Liability, undesirable
Safety stock needed waste
Queue Necessary Eliminated
Suppliers Adversaries Partners
Supply sources Many  safe Few  control
Maintenance Breakdown Preventive
Better LT Long Short
ST Given Reduce
WF Specialized Multi-functioal
Management By edict By consensus
JIT
 Inventory hides problems – impediment 2 flow
 Machine breakdown
 Poor quality
 Substandard RM
 Worn tools
 Worker absences / tardiness
 Late delivery of parts
 Unavailable MHE, inspectors, setup persons
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JIT
 JIT goals
 Reduce lot sizes
 High quality
 Reliable people, machines
 Inventory minimized
 Production plan level & stable
 Storage reduced
JIT
 To achieve the goals
 Shorten STs
 Multi-functional employees
 Zero defects
 Quality controlled at the source
 Preventive maintenance
 Machines grouped to product families
 Suppliers reliable, deliver frequently in small lots
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JIT
 Avoid interrupted work flow
 Shorten STs
 Quality controlled at the source
 Preventive maintenance
 Eliminate material handling & stocking
 Machines grouped to product families
 Reduce space bw. Operations
 Eliminate stocking points
JIT
 Synchronize production
 Cross-train operators
 Load plants uniformly
 Schedule only what needed
 Eliminate queues
 Arrange frequent vendor deliveries
 Pull scheduling
 Only made what used
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JIT
 Suppliers
 Fewer but better
 Long term partnership
 Quality at the source
 Incoming inspections eliminated
 Local 2 reduce LTs
 Frequent delivery directly 2 the point of use
Repetitive manufacturing
 JIT well suited to RM
 discrete units
 manufactured by a continuous process.
 JIT concepts
 Uniform plant loading
 GT
 QC at the source
 Minimized STs
 Kanban PC systems
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Kanban systems
Kanban systems
 Downstream operations come 2 withdraw parts from UOs

 Make only the exact quantity indicated on the K
 Demand placed on UOs by means of cards / signals
 Only active parts allowed at the workplace w. specific locations
 Authorization 2 produce by card/signal only
 Quality at source
 The no. Ks reduced as problems decrease
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Kanban systems
Kanban systems
N = DL(1+a) / Q
L = ST+PT+QT+MT
D: demand (u/d)
L : LT (d)
a : safety factor, (0 <= a <= 1)
Q: lot size
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Kanban systems
D = 100 u/d, a = 0.1,
Q = 25 u/c, T = 8 h/d,
ST = 28 m, PT=4 m/u,
QT = 170 m, MT = 2 m/c
 L = ( 28 +4*25+170+2)/ 480 = 0.625 (d)

 N = [100 * 0.625 * (1+0.1)] / 25 = 2.75  3
Lean Production
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Lean Production
 5 lean principles
1. Value
2. Value stream
3. Flow
4. Pull
5. Perfection
Lean Production
 Fast
 removing NVA wastes
 to reduce the time line
 Flexible
 a batch size of one
 Flow
 keep-it-moving operation
 bring waste 2 the surface
179
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VSM
 VSM
 a process
 for planning and linking lean initiatives
 through systematic data capture and analysis
 VSM
 Not just a management tool
 A proven process 4 planning the improvements
 allow company 2 become lean.
VSM
1. Commit to lean
2. Choose the VS
3. Learn about Lean
4. Map the CS
5. Determine Lean Metrics
6. Map the FS
7. Create Kaizen Plans
8. Implement Kaizen Plan
180
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CSM
FSM
Hợp đồng
Phòng đấu thầu Phòng dự án Dự báo hàng tuần
SUPPLIER Kế hoạch xếp hàng Tiến độ (daily) A&B TOWER

(weekly)
Đơn hàng
22 K / ngày
weekly weekly Tray = 6
Production
Weekly control
daily
daily
OXOX
5S 5S
QCO 5S QCO B
AM B XẾP HÀNG
Nhôm B
Cắt/CNC/Sukô Ráp khung/ ráp kính
nguyên liệu 5S
TPM Stand S
CT = 685s CT = 2640s
work S
C/O < 20 phút C/O = 5 phút S
Availa T= 25200s Availa T= 25200s
Uptime = 95,2% Uptime = 98,8%
2ca 2ca
Lead time = 13.1
7 ngày 4.1 ngày 2ngày ngày
685s 2640s Pro time = 3325 s
181
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IM 08
DISTRIBUTION
INVENTORY PLANNING
Nguyễn Như Phong
01/2024
DISTRIBUTION
INVENTORY PLANNING
 Distribution Inventory Planning
 Pull Distribution Systems
 Push Distribution Systems
 Time- Phased Order Point
 Distribution Requirement Planning
 Fair Shares Allocations
 Lot Sizing & Safety Stock
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Distribution Inventory Planning

 Customers & products geographically disperse
 The target market increase in geographic expanse
 more locations added
 along with more levels (echelons)
 Distribution - movement & storage of FGs
 from the production site to the customer
 add place & time value, not form value

 Distribution Inventory
 FGs held anywhere in the distribution system
 Distribution centers may perform
 finishing, final assembly,
 packaging, repair service, …
 Distribution objectives
 The required CSL
 The least total cost
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 Distribution network
 Distribution centers
 The stratification & hierarchical structure
 Echelon, layer, level
 Multi-echelon
 The top echelon – MDC/CDC
 The lowest echelon – LCC
 The middle echelon – RCC

 Distribution problems
 Distribution network
 Distribution strategy
 DC inventory planning
 Distribution strategies
 Pull distribution
 Push distribution
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 Materials &/ capacity
 readily available
with few limitation on flexibility & supply
 Pull systems
 in short supply
 allocation made centrally
 to optimize aggregate performance
 Push systems
Pull Distribution Systems

 Each DC pulls inventory to itself
 decide what needed
 order the requirement from its source
 Each DC
 draw stock from its parent DC
 act independently of others
 perform its own planning
 usually maintain an individual safety stock
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 Traditional pull systems
 FOSS, 2-bin, FOIS
 independent replenishment
 continuous demand
 require some form of forecasting,
 not use time phasing
 lack visibility beyond the immediate order

 react to demand without anticipating it.
 parent DCs not know of order until received
 communication flow 1 way
 from the bottom to the top
 up to the parent level
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 based on average demand
 erratic demand coming from local centers
 drastic stock depletion, large SS at supply DCs
 Most appropriate
 where materials &/ capacity readily available

 Modern pull systems
 The timing of requirement
 more economical to keep minimal inventory in stock
 Demand at LDC
 independent, continuous
 forecasted - time phasing
 Demand at RDC, MDC
 dependent, discontinuous
 calculated more effectively than forecasted
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Push Distribution Systems

 MDC pushes inventory to LDCs
 determine the needs of each location
 send the requirements / orders through the network
 Replenishment allocation
 centrally planned by MDC
 The total stock status
 used to determine location stock replenishment

 Forecast requirement for all LDC
 summed by periods
 available inventory allocated
 Lot sizes determined centrally
 fair share allocations
 current balances at each location
 Communication flow in both direction.
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 Most appropriate
 where materials &/ capacity limited / inflexible
 Soft push - LDC
 have customers service & marketing responsibility
 Soft push
 Forecast developed at LDC
 MDC plans orders reviewed by LDC
 LDC can accept, alter, cancel orders
Time-Phased Order Point

 FOSS
 blindly keep a certain amount of inventory
 on hand at all times
 even though may not required
 never look beyond the next order
 react to rather than anticipate demand
 limited capabilities
 for coping with time varying demand
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 Time phasing
 the scheduling of I. requirements & replenishments
 by need date over a specified time horizon
 the management of stock flows, not stock levels
 transform the replenishment decision
 from a quality to a time dimension
 bottlenecks & shortages
 become apparent before rather than after the fact

 TPOP
 visibility to replenishment orders
 beyond the LT period
 when to place orders
 predict what may change in the future
 rather than react to what actually happened.
 responsive to time-varying demand
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1/8/2024

 TPOP applies the MRP logic
 NRt= Min [ 0 , (GRt + SS ) – ( SRt+ POH t-1) ]
 POCt = Q , NRt > 0
 POHt = POHt-1 + SRt + POC t - GRt
 POLt = POCt+ L

F = 30 u/w, Q = 100 , SS = 10 , LT = 2w , SL = 80
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Distribution Requirement Planning

 Advanced pull systems
 Time-phase replenishment requirements
 established at LDC
 anticipate future demand
 not just react to it
 Plan FG requirement
 through distribution network

 The application of MRP logic to distribution Is
 BOD – Bill of distribution – the network
 TPOP logic
 determine network replenishment requirements
 an implosion process from LDC to MDC
 rely on forecast at LDC
 demand
 independent at LDCs, dependent at RDCs, MDC
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DC SS Q LT Notes
A 30 120 1 LDC
B 10 100 1 LDC
C 5 70 2 LDC
D 0 400 3 MDC

T 0 1 2 3 4 5 6 7 8
A
GR 30 30 30 30 30 30 30 30
SR
POH 70 40 130 100 70 40 130 100 70
NR 20 20
POC 120 120
POL 120 120
B
GR 20 20 20 40 20 20 20 50
SR
POH 50 30 10 90 50 30 10 90 40
NR 20 20
POC 100 100
POL 100 100
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T 0 1 2 3 4 5 6 7 8
C
GR 40 15 20 30 10 5 30 10
SR 70
POH 15 45 30 10 50 40 35 5 65
NR 25 10
POC 70 70
POL 70 70
D
GR 120 170 0 0 120 170 0 0
SR
POH 300 180 10 10 10 290 120 120 120
NR 110
POC 400
POL 400
Distribution & Manufacturing

Integration
 Produce & distribute products
 Manufacturing & distribution
 united through the master production schedule
 into 1 comprehensive plan
 DRP  MPS  MRP
 DRP drive MPS, MPS drive MRP
194
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Distribution & Manufacturing

Integration
 DRP & MRP
 control over material flow
 from RM suppliers all the way to customers
 DRP manages FG in distribution
 MRP manages RMs, WIPs for production
Distribution Resource Planning

DRPII
 A system
 deal with entire distribution function
 project inventory & resource requirements
 useful for operational & financial planning
 Function as a DSS
 Computer based
 Overall performance
 determined by the human inteface
195
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Distribution Resource Planning

DRPII
 Manage the entire distribution function
 inventory, transportation, warehousing, personnel.
 Improve the integration
 between manufacturing & distribution
 Provide forward/future visibility
 for scheduling operations
 priorities kept valid
Fair Shares Allocations Systems

FSAS
 DRP –
 advanced pull system
 modified to make it a push system
 based on fare shares allocation
 FSAS
 Push systems
 Time-phased systems
 anticipate demand
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Fair Shares Allocations Systems

FSAS
 DRP –
 advanced pull system
 modified to make it a push system
 based on fare shares allocation
 FSAS
 Push systems
 Time-phased systems
 anticipate demand
FSAS
 Lot sizing done by a central location
 not each individual local center
 Push material
 from the factory or central supply facility
 Have accurate & timely info.
 on the stock at all locations & in transit.
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FSAS
 Allocate on hand inventory according to
 aggregate net requirement
 inventory status
 fair share of what available
 Every location
 allocated the same time supply of available stock
 has the same time supply stock
DRP & FSAS

Factors DRP FSAS
Forecasts Local Local
Replenishments Time phased Time phased
System Advanced pull Push
Lot sizing Localized Centralized

(destination) (source)
Shipping quantity POR FSA
Visibility POR NR
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FSAS
1 MDC ( D ) , 3 LDC (A, B, C) , OHD = 126,
Demand (u/w)
DC OH 1 2 3 4 5 DU(u/d)
A 10 20 20 20 20 20 4
B 30 50 50 50 50 50 10
C 14 30 30 30 30 30 6
Total 54 100 100 100 100 100 20
FSAS
System Inventory: SI = 126 + 54 = 180
Supply time: ST = 180 / 20 = 9 (ng)
Allocated lot size: Qi = DUi * ST – OHi
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Lot Sizing
 Distribution lot sizing influenced by
 Frequency of shipment
 EOQ
 Container sizes
 Total weigh & cube
 Infrequent shipment (eg. monthly)
 Q – time supply (eg. 2-month supply)
 Frequent shipment – EOQ
Lot Sizing
 Transportation cost usually the largest
 Q usually based on transportation efficiency
 Shipping quantities sometimes economical
 from materials handling & storage standpoint
 eg. Container size, freight weight & volume
 Pipeline inventory can be large - trade off bw
 Inventory investment
 Speed of order processing & transportation
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Safety Stock
 SS
 not duplicated at each echelon, decentralized
 held at upper echelon
 backup to the stock at lower echelon
 low SL at lower echelon
Safety Stock
 Requirement forecasted at low level
 SS kept primary at LDCs
 RDC, MDC
 dependent / derived demand
 SS cover demand variation during LT
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Safety Stock
 High cost, low demand – SS at MDC
 Low cost, high demand – SS at LDC
 Only demand uncertain
 SS held at location closest to the demand
 Only supply uncertain
 SS held at location closest to the supply
Safety Stock
 In time phased systems
 shift from SS to the proper scheduling of orders
 Shipping schedule
 control over lead time
 placing bounds on replenishment LT
 affect SS requirements for LT demand variation
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IM 09
INVENTORY CONTROL
Nguyễn Như Phong
01/2024
1/8/2024 Nguyen Nhu Phong 405
INVENTORY CONTROL
 Inventory Control
 Types of Control Systems
 Selective Inventory Control
 Inventory System Development
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INVENTORY CONTROL
 Inventory –
 vary widely in number & nature of materials held
 Manufacturing –
 raw materials, WIP, finished goods, supply
 Retail / whole sales finished goods
 in distribution sys.
INVENTORY CONTROL
 Inventory management – management of diversity
 Over 10,000 items in inventory
 Items differ in
 cost, weight,
 shape, volume,
 color
 packaging,
 store, transportation
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INVENTORY CONTROL
 Aggregate inventory
 Strategic contribution to the org. goals
 How effectively it serves
 The servant to other functional requirements:
 finance,
 marketing,
 production
INVENTORY CONTROL
 Inventory
 results fr M policies & procedure
 derived fr
 External expectations
 Internal constraints
 Links in the logistical chain
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INVENTORY CONTROL
 External expectations
 Prod demand
 Material supply
 Internal constraints
 Available capabilities, capacities
 Finance resources
 Links in the logistical chain
 Not independent
 Local optimization – not globally efficient
INVENTORY CONTROL
 For control purpose
 The large no. physical units
 Classified into smaller no. relatively homogeneous
categories
 Similar procedures to each category
 Types of inventory control systems
 Impact on almost all other org. activities
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INVENTORY CONTROL
 UM responsibility to
 Select the control system
 Establish aggregate inventory levels
INVENTORY CONTROL
 Operating system
 How routine/non routine situations
 treated via predetermined rules & procedures
 Self control – only require attention on exception
 Adjustment made as
 Ensure that sufficient goods & materials available
 Identify excess & fast – slow – moving items
 Provide accurate, concise, timely reports 2 management
 Expend the least amount of resources
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INVENTORY CONTROL
 6 areas vital in the sys development & maintenance
 Demand forecasts & errors treatment
 Inventory models: EOQ, EOI, EPQ, DRP, MRP
 Inventory costs
 Record & account for items
 Receipt, handling, storage, issue of items
 Info procedure to report exception
Types of Control Systems

 Various common types w special hybrids
 To
 End items
 Materials & components to produce end item
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 Quantity based
 Time based
 Production based
 Distribution based
 Quantity based
 FOSS
 Check continually with each demand
 to determine if order placed
 Quantity based
 Perpetual Inventory Systems
 Two Bin Inventory Systems
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 Time based
 FOIS
 Stock count & order placed
 on designed reviewed dates
 Time based
 Periodic Inventory Systems
 Optional replenishment Inventory Systems
 derived order quantity systems
 for production environment
 Order stock only to meet manu requirements
 MRP Inventory Systems
 JIT Inventory Systems
 TOC Inventory Systems
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 time phased sys
 for replenishment of items in a distribution network
 Predict distribution requirements
 schedule orders to meet them
 DRP Inventory Systems
Perpetual Inventory Systems

 Keep a running record of the amount of stock
 Units issued fr stock
 The withdrawal logged
 I–B
 I > B  no action
 IBQ
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 Disadvantage
 Perpetual auditing of the inventory in stock
 Prevent amalgamation of several items into 1 order
 High freight cost
 Supplier discount forfeited
 Further weakness if
 B, Q, S not restudied / changed for years
 Delays encountered in posting transactions
 Error / mistake made in posting transactions
 Positive side – close control

 Efficient & meaningful order size
 S needed only 4 L
 Relative insensitive 2 forecast & parameter changes
 Inventory check related 2 usage,
 less attention 2 slow moving items
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Two Bin Inventory Systems

 FOSS
 operate wo perpetual record keeping
 Inventory stored in 2 bins
 Q – B  B1
 B  B2

 FOSS
 Stock taken first fr. B1 then B2
 B1 depleted  order released
 Records need not be maintained of each withdrawal
 Signal 4 a replenishment order – visual observation
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 One bin sys
 Orders triggered by some attention - getting device
 Physical mark,
 partition placed in front / on top of B quantity
 Suit best 4 items of
 Low value of fairly consistent use
 Short lead times
 Eg. Office supply, nuts, bolts, …
Periodic Inventory Systems

 Fixed time interval T
 Stock reviewed & Count of the goods on hand I
 Replenishment order: Q = E – I
 Vary fr period to period
 Reflect changes in the demad rate
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 Physical count at the review day
 Transaction Record / Sales slips available
 Accuracy info sys required
 Automatic data processing equipment
 Perpetual I records
 Return of sale items
 Error in transaction accouting
 Lost items
 Stock shrinkage

 Coordination of replenishment
 produced on the same equipment
 Purchased from the same supplier
 Shipped in the same transportation mode
 Supplied fr the same central source
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 Benefits 4 joint orders
 A reduction in ordering cost
 Supplier discounts
 Significant decrease in shipping costs
 Safety stock requirement

 Protection against the fluctuations of L&T demand
 Larger S
Optional replenishment
Inventory Systems
 A hybrid of perpetual & periodic systems
 Stock levels reviewed at regular intervals T
 Order placement
 I > B: no action
 I < B: Q = E – I
 Control values
 set in a rather arbitrary fashion in practical applications
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Optional replenishment
Inventory Systems
 Placing an order – expensive
 Oder placed in efficient quantities
 Reduce order costs
DRP Inventory Systems

 Handling stock
 replenishment in a multiechelon distribution environment.
 Timed phased logic
 to product in a distribution network
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DRP Inventory Systems
 Implosion process
 from the lowest levels to the central DC
 All demand dependent except the level of prod leaving
 Forecast at the lowest level
 to derive inventory demand at higher levels
 GR
 At all LDCs developed fr forecasts in a TPOP format
 At parent centers accumulated fr PORs of local centers
SOQ
 Not really an IS
 Items
 Ordered infrequently / only once
 Unique – special attention
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SOQ
 Demand
 Nonrepetitive & infrequent intervals
 Promotional, fad, seasonal items ordered by retail outlets
 Spare parts 4 maintenance
 Project materials
 Uncertain, short lived
 Perisable items, eg. Fresh fish, flower
 Obsolescent – Chrismast tree, newspapers, periodicals
SOQ
 Lot size
 Marginal analysis
 Cost analysis
 Calculation from
 specific project requirement
 management judgments
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MRP Inventory Systems

 EOQ, EOI
 Continuous & independent demand
 Sold by retailers, wholesalers, distributors
 MRP
 Discrete, dependent demand
 Not available at all times
 Timed phased when needed
 Reduced holding costs
 Elaborate scheduling sys
 Components of products
 Time phasing
 Known future requirements
 Forecast & C demand
 Capacity feasible MPS
 Sufficient time to react –
 Lead time for
 material orders,
 fabrication,
 subassembly,
 assembly
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 MRP
 Backward scheduling
 From finished prod 2 raw materials
 through all level of subassembly & fabrication
 Goal – plan inventory when needed
JIT Inventory Systems

 JIT - Repetitive manufacturing
 Control raw materials & WIP levels
 for dependent demand items
 Logistically link wcs
 Even flow of materials similar to assembly lines
 Drive all queue toward 0
 Ideal lot size of 1
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JIT Inventory Systems

 Precondition to be feasible
 Uniform plan loading
 GT
 QC at the source
 Min ST
 Kanban
 Local suppliers
TOC Inventory Systems

 Synchronous manufacturing
 Continual improvement
 Focus on operational constraints
 Constraints
 Anything prevent achieving higher performance
 Identified & managed effectively
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 TOC
 Finite schedule all activities / resources
 to the requirement of most binding constraints
 Nonconstraint resources
 subjugated to constraints requirements
 to attaint optimization of the constraints
 I time buffers located at constraints
 to ensure 100% utilization

 TOC
 Transfer lot sizes < process lot sizes to
 overlap operations
 synchronize the prod flow rate
 Improvement strategy
 Continually increase throughput
 While reducing inventory & operating expensive
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Selective Inventory Control
 Material management
 Even millions of individual transactions each year
 Concentrate on significant matters
 Inventory control –
 isolate those items requiring precise control
 Uneconomical 2 apply detailed IC analysis 2 all items
 Small percentage of inventory items
 account for most of the total I value
 Purchase a large supply of low cost items
 maintain little control over them
 Small quantities of expensive items purchased
 tight control over them
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 ABC analysis
 Divide Is into 3 classes according to I volume
 I value = annual demand * unit cost
 A class –
 B class –
 C class –
 A inventory levels reduced

 significant reduction in I investment

 A class –
 high value items:
 75 – 80% total inventory,
 15 – 20% I items
 Greatest attention
 Eg. EOQ w. order-placed review
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 B class –
 lesser value items:
 20 – 25% I items
 EOQ w semiannual year review

 C class –
 low value items:
 60 – 65% I items
 Least attention
 No special calculations
 One year supply w periodic review once a year
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Class Control Record Lot sizes Review S size
degree type frequency
A Tight Accurate & Low Continuous Small

complete
B Moderate Good Medium Occasional Moderate
C loose Simple large infrequent Large

 ABC analysis
 To establish appropriate control levels over each item
 Useful 4 any type of independent demand IS
 Periodic sys
 High volume – short review
 Low volume – much longer review
 A ordered weekly
 B ordered biweekly
 C ordered quarterly / semiannually
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 EOQ automatically adjust the lot size
 to an ABC configuration
 Low R – small Q
 Low P – large Q
 C
 Low P – large Q
 Low R & high P
 order 1 for 1 basis /
 only when known demand occurs

ABC analysis
 Artificial strata
 Each org own peculiarities
 More than 3 classifications
 Same principle
 High value – most attention
 Low value – least attention
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ABC analysis
 Factors other than financial one
 Difficult procurement
 Likelyhood of theft
 Difficult forecasting
 Short shelf life
 Large storage space
 Operational criticality

ABC analysis
 Not for dependent demand item

 MRP, JIT
 Equal operational importance
 for continuity of the production function
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Item R P RP Rank
*1000 $ $
G1 40 .07 2800 5
G2 195 .11 21450 1
G3 4 .1 400 9
M1 100 .05 5000 3
M2 2 .14 280 10
M3 240 .07 16800 2
M4 16 .08 1280 6
P1 80 .06 4800 4
P2 10 .07 700 7
P3 5 .07 450 8
53960

Item RP Cumulative Cumulative Class
$ $ %
G2 21450 21450 39.8 A
M3 16800 38250 70.9 A
M1 5000 43250 80.2 B
P1 4800 48050 89 B
G1 2800 50850 94.2 B
M4 1280 52130 96.6 C
P2 700 52830 97.9 C
P3 450 53280 98.7 C
G3 400 53680 99.5 C
M2 280 53960 100 C
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Class Items $ / group % of % of $

items
A G2, M3 38250 20 70.9
B M1, P1, G1 12600 30 23.4
C M4, P2, P3, G3, M2 3110 50 5.7
Inventory System Development

 TM decision implement & redesign an IS
 Operational personnel – the ultimate fate of an ICS
 The affected department
 included in the IS design
 to avoid resistance 2 change & implementation difficulties
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 Many approach 2 design an IS

 Material Management must serve
 The goal of the org
 The service objective of other department

 Forecast 4 all end items produced / used by the org
 ABC analysis – what sys preferable
 EOQ, EPQ – perpetual /2 bin IS
 EOI – conglomerate orders
 SOQ – single order
 MRP – support scheduled production operation
 Inventory decision rules established for all items from
 Various models
 Understanding of the peculiarities of the org
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 Item ordered
 Ext suppliers
 Purchase requisitions
 transmitted to purchasing department

 Contract for the items
 Int supplier
 Production requisitions
 transmitted to production control department

 Schedule the production of the item

 Ordered items received
 Quality accepted
 Put into inventory
 Central control
 All of the transition
 papers generation for accountability & control
 Indicate status of any item
 Data base 4 forecasting models
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MR Sales Orders Opinions
Forecasting Models
End Item Forecasts
EOQ EPQ EOI SOQ TPOP MPS JIT TOC
DRP MRP
Inventory Decision Rules
Item Orders Inventary Status Data
Transfer
ExIn Supplies Receipt Inventory
 The IS ultimate success

 Turning I theory into workable detailed procedure
 Collection & processing of vast quantities of data
 Design of forms & procedures
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 Foundation of ICS
 Input data & control records
 Current & accurate
 IC based on accuracy of records of inflows & outflows
 Accurate & up-to-date records
 effective & efficient IS
 IS design
 Sufficient flexibility
 Grow, expansion, int change
 Wo upsetting the operational sys
 Cope w exceptional items / event
 Integrated into the other organizational systems
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IM 10
INVENTORY IMPROVEMENT
Nguyễn Như Phong
01/2024
INVENTORY IMPROVEMENT
 Inventory System Improvement

 Inventory Measurement
 Inventory reduction
 Lead time reduction
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Inventory System Improvement
 Standardize stock items

 Reduce lead times
 Reduce cycle times
 Use fewer suppliers
 Inform suppliers of expected annual demand

 Contract w suppliers for min annual purchases
 Buy on consignment
 Consider transportation costs
 Order economical quantities
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 Control access to storage areas

 Obtain better forecasts
 Dispose of excess stock
 Improve record accuracy
 Improve capacity planning

 Minimize setup times
 Simplify prod structures
 Consider multi-shift operation
 Focus on continuous improvement
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 The quickest & most effective way

 to reduce inventory
 Better priority planning & control of operation

 Inadequate organizational structure
 Inventory control –
 purchasing / prod control department
 Material manager - Consolidate
 purchasing, inventory control, production control
 into a single operating units
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 Inadequate organizational structure
 Decisions effect on inventory investment
 Add new product
 Purchase foreign components
 Add distribution points
 Serious problem creation
 Uncontrolled production proliferation
 Error in transaction documentation
 Outdated BOM

 Computerization hold the key solution
 The no. items in inventory growing
 The no $ invest growing faster
 Execute the multitude of straight forward procedure
 in a very short time
 Essential tool of materials mana
 Not eliminate the need of good mana
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Inventory Measurement
 The overall level of inventory & techniques
 Look at the forest & not each tree
 4 common ways to measure aggregate inventory
 Aggregate inventory value
 Inventory to sales ratio
 Days of supply
 I turnover
Aggregate inventory value

 The total value of inventory at cost
 Set $ limits / budgets on the amount
 invested in each general class of materials
 Very simple & easy to use
 Neglect
 the dynamic nature of inventory
 financial interaction
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Inventory to sales ratio
 Ratio of aggregate inventory value to annual sales

ITS = AGI / AS
 Dynamic relation bw inventory & sales
 Can vary substantially
 due to cost &/ selling price changes
 Distorted & less meaningful
 if profit margins change
Days of supply
 Days of supply
DOS = TIV / SPD
 TIV - The total value of inventory at cost
 SPD - the sales per day at cost
 Dynamic but confounded
 if the cost of sales not maintained & controlled
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Inventory turnover
 The cycle of using & replacing materials

IT = COGS / AVI
 COGS - Annual Sales At Cost
 AVI - Average Inventory
 No. turnovers of the investment
 in inventory
 for a given time period (year)
Inventory turnover
 High turnover
 Reduce the inventory investment
 Save holding cost
 Frequent stock out
 Dynamic nature but easily become distorted
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Inventory Measurement
 Measurement techniques
 Common financial measure of $
 Other dimensions:
 composition,
 flexibility,
 contribution 2 org. objectives
INVENTORY REDUCTION
 Attention of top mana
 Cash flow
 Return on assets
 Inventory
 Substantial asset
 Goal – reduce inventory to improve performance
 Aggregate inventory
 Continuous changing
 Snapshot taken at a point in time
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Inventory reduction
 Analysis of the I composition
 Financial composition by type
 Reduction strategies
 Begin w largest investment I type
 Focus on other types in descending order
Inventory reduction
 No perfect I control system 2 all situation
 Temporal distortion expected occasionally
 Aggregate financial data
 Org. performance
 Disaggregate for use
 in analyzing inventory imbalances at the operating level
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Raw materials & supplies - Finished goods

Inventory reduction
 Productive / active I
 Anticipated demand within the foreseeable future
 An asset
 Reduction – little impact on profits & taxes
 Raw materials & supplies inventory
 Working stock
 Safety stock
 Finished goods inventory Working & safety stocks

 Working stock,
 Safety stock
 Seasonal stock

Inventory reduction
 Nonproductive / passive I
 No reasonable expectation of a use / C requirement
 within the foreseeable future
 An operational liability
 Reduction –
 impact on profit & taxes,
 increase in cash flow
 Excess & surplus stocks
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Inventory reduction
 Initial way to reduce I & generate cash
 identify & dispose all nonproductive I
 Surplus items
 No known future requirements
 Sold / salvaged

Inventory reduction
 Excess stock
 Future demand
 but exceed what should be available
 Holding cost for extended periods of time
 financial burden
 Sell / salvage a fraction of stock levels
 Periodic review
 to identify surplus / excess items
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Inventory reduction
 Productive I reduction
 Safety stock, lot size, lead time – change
 Safety stock lowered
 Lot size lowered
 Lead time reduced

Inventory reduction
 Safety stock lowered

 Decreasing service level,
 improving Q control,
 shortening LT
 Seasonal stock as safety stock
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Inventory reduction
 Lot size lowered

 Increasing holding cost fraction F
 reducing setup / order costs
 Lead time reduced
 Point of use delivery
 Synchronize operations
 Improve communication networks

Inventory reduction
 F – M policy variable to control stock level
 High F
 Make I more expensive – less of I
 More orders
 Increase the exposure to stock-outs
 Low F
 Make I less expensive – more of I
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Inventory reduction
 F – M policy variable to control stock level
 Reaction to a change in F – varied & sluggish
 Fast effect for items replenished frequently
 Slow-moving items –
 no effect until items ordered

Inventory reduction
 Tendency for product lines & models
 to proliferate over time
 Simplification & standardization
 reduce the no. end items.
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Inventory reduction
 Products
 Slight differentiation, small market segment –
 eliminated
 Smallest profit margin – discontinued
 Modular prod with optional features:
 MTS  MTO  ATO
 Only carry the more popular config.
 Unique items provided on a special order basis
In process inventory reduction

 WIP determined by
 The amount of work released to the shop
 The output rate
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 WIP inventory profile

 Backlog – unreleased orders
 WIP
 Nonproductive – orders
 In transit, temporary storage

 Waiting to be worked, being inspected
 Productive – orders being worked
 To reduce WIP
 Reduced the no. orders released 2 the shop
 Decrease the throughput time / LT
 Increase the capacity of critical WCs
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 Input considerations
 Keeping backlog off the shop floor
 Releasing an order at the latest possible moment
 Shorter the scheduling period, lower the WIP
 Decrease in handling, congestion, conflict
 The majority of WIP

 represented by work waiting in queues
 Queuing time – 80-90% MCT
 Queues shortened – WIP & LT reduced
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 Growing WIP & excessive LT
 symptoms of poor capacity planning
 Bottleneck WCs
 Dictate output
 Loaded 2 capacity w little idle time
 Queue in front, complete utilization
 Non bottleneck WCs
 Not loaded 2 capacity
 Utilization rate dictated by BWC
 Overloaded conditions at critical WCs resolved through

 Alternate routing
 Schedule revision
 Overtime
 Reduced setup times
 reduction of lot sizes & LTs
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 Reduction of WIP
 ultimately predicated on a decrease in MCT
 The flow ideally never stopped,
 as smoothly & rapidly as possible
 All encumbrances to the flow,
 all redundant activities eliminated
 Non value added operation minimized
 Improvement strategies
 shortening, straightening, smoothing material flows
Lead time reduction

 Time based competition
 Business strategy –
 redefine the significant of org activities
 Flexible internal envi.
 increase throughput by eliminating dwell time
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Lead time reduction

 Waste
 Anything not at value / consume more time than necessary
 Initial target 4 elimination / reduction
 LT reduction in supply-production-distribution chain
 Enemies
 Down time,
 Non synchronized activities
 Queues,
 Nonintegrated local optimization
 Adversarial functional interactions
Lead time reduction

 Ability 2 deliver prod faster than competitors
 Concurrent engineering
 Time reduction in the entire concept 2 C process
 Multidiscipline project team
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Lead time reduction

 Mana of time
 Analysis of the status quo
 The flow of materials & info investigated
 The mirror image of
 managing Q, cost, innovation, productivity
 PFC review
 non value added, time consuming activities
Lead time reduction

 Mana of time
 Time wasted because of
 Serialization of independent activities
 Non synchronization of dependent activities –
 poor scheduling
 Production of part rejected / reworked
 unaccepted Q
 Inefficient work flow
 poor layout
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Lead time reduction
 The ultimate goal of a comprehensive LT reduction

 Not merely to cut the amount of total LT
 But to increase the speed of throughput
Conclusion
 Inventory
 Not considered a measure of wealth any more
 Viewed as a current asset – more than earn its keep
 More cost than benefit  operational liability
 Derived & in support of org. objectives
 Influence the performance of all the functional areas
 No single IS universally superior
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Conclusion
 Broad based aggregate program include
 Org. goals
 Material mana
 Aggregate materials needs
 Appropriate material control models
 Forecasting models
 Model parameter inputs
 Model testing & implementation
 Variable reporting
 Materials mana system
 Productivity improvement
 Immediate & direct impact on net cash flow
The Inventory Function

CONSTRAINTS OUTPUTS
Management policies
INPUTS REPEAT ORDER SYS.S
Working capital
OPERATION PLANNING • Perpetual, 2 bin
Space
Forecast • Periodic, Optional Repl.
Plant capacity
Demand rate • MRP, JIT, TOC
Production rate • DRP

INVENTORY PLANNING
Stock on hand & CONTROL SINGLE ORDER SYS.S
Backorders DECISION RULES

COSTS
Lead times What to order?
Purchase
Prod structures When to order?
Order / setup
How much?
Holding
From whom?
Stock out
259

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1/8/2024

January 24 Nguyen Nhu Phong 1

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LO.01: Know basic knowledge of Inventory Management

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Nguyen Nhu Phong

 Main class: (15 + 6) * 2 = 21 * 2

Nguyen Nhu Phong

Nguyen Nhu Phong

Nguyen Nhu Phong

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 Full class time participation

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Nguyễn Như Phong

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Department Function Inventory goal Inventory inclination

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Inventory problem classifications

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Inventory problem classifications

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Inventory problem classifications

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Inventory cost accumulation profile

Throughput Time FG Shipment

Inventory Flow Cycle

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Engineering Procurement Fabrication Assembly Delivery

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1. ACS of JO Truck Scheduling and Inventory Management for Multiple Warehouses. 18

My IM Case Studies in www.isem.edu.vn

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Continuous demand inventory planning

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Continuous demand inventory planning

Continuous demand inventory planning

Fixed order size systems - FOSS

Fixed order size systems

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Economic Order Quantity - EOQ

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Economic Order Quantity - EOQ

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Economic Order Quantity - EOQ

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