Introduction to Inventory

 What is inventory?
 Inventory is an asset that is owned by a business that
has the express purpose of being sold to a customer.


 Financially, inventory usually represent 20% to 60% of

total assets to manufacturing companies.
Inventory Strategies/Models
 1. Push Inventory Model :
 Depends on forecasting.
 Most significant Problem is unpredictability of
customer demand.

 2. Pull Inventory Model:

 Also called Just –in– time or JIT.
 Effective when every link in the company’s supply
chain operate according to this model.

 Some businesses use a hybrid push-pull method.

Inventory Management

 Inventory Management is responsible for planning

and controlling inventory from the raw material
stage to the customer.

 The objective of inventory management is to

provide uninterrupted production , sales, and/or
customer service at the minimum cost.
Inventory At Each Level

Aggregate Production Planning - Concerned with

overall inventory.

Master Production Scheduling – Concerned with end

items.

Material Requirements Planning – Concerned with

raw material, parts and components.
Operations Planning
Operations planning is usually hierarchical &
can be divided into three broad categories:
⚫ Long-range- Aggregate Production Plan (APP)
involves the construction of facilities & major
equipment purchase

⚫ Intermediate - Shows the quantity & timing of end

items (i.e., master production schedule- MPS)

⚫ Short-range - detailed planning process for components

& parts to support the master production schedule (i.e.,
materials requirement planning- MRP)

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 Aggregate Production Planning
Some key questions that must be answered to develop an effective planning
strategy:

❑ The quantities of each product group that must be produced in each

period.

❑ The desired inventory levels.

❑ The resources of equipment, labor, and material needed in each period.

❑ The availability of the resources needed.

❑ For example, if a company manufactures children’s bicycles, tricycles,

and scooters in various models, each with many options, the production
plan will show major product groups, or families: bicycles, tricycles, and
scooters.
MPS - master production schedule
 The master production schedule (MPS) is a plan for the production of
individual end items. It breaks down the production plan to show, for
each period, the quantity of each end item to be made.

 For Example, it might show that 200 Model A23 scooters are to be
built each week. Inputs to the MPS are the production plan, the
forecast for individual end items, sales orders, inventories, and
existing capacity.

 The level of detail for the MPS is higher than for the production plan.
Whereas the production plan was based upon families of products
(tricycles), the master production schedule is developed for individual
end items (each model of tricycle). The planning horizon usually
extends from 3 to 18 months but primarily depends on the purchasing
and manufacturing lead times.
Master Production Schedule (MPS)
 MPS is a plan for the production of individual end items.
 It breaks down the production plan to show, for each
period, the quantity of each end item to be made.
 It forms the link between production planning and actual
production.
 It form the basis for calculate the capacity and resources
needed.
 The MPS drives the material requirement plan.
 The primary priority plan for manufacturing.
 The level of detail is higher than the production plan.
Materials Requirements Planning
 (MPS) concern with the end items, or major
components.

 These items are made or assembled from

components that must be available in the right
quantities and at the right time to meet the MPS
requirements.

 If any component is missing, the product cannot be

built and shipped on time.

 Material requirements planning (MRP) is the

system used to avoid missing parts.
MRP - material requirements plan
 The material requirements plan (MRP) is a plan for the production and
purchase of the components used in making the items in the master
production schedule. It shows the quantities needed and when
manufacturing intends to make or use them.
 Purchasing and production activity control use the MRP to decide the
purchase or manufacture of specific items.
 The level of detail is high. The material requirements plan establishes
when the components and parts are needed to make each end item.
 The planning horizon is at least as long as the combined purchase and
manufacturing lead times. As with the master production schedule, it
usually extends from 3 to 18 months.
Production Planning Questions

 What are we going to make?

 What does it take to make it?
 What do we already have?
 What do we need to get?
Capacity
 The maximum or optimum amount that can be produced by using
available resources.

 Industrial capacity which signifies the amount of work that can be

done. Examples are;
 Cars can be assembled within a day.
 How many units can be produced per day.
 Capacity is the capability of manufacturing to produce goods and
services.
 Eventually it depends on the resources of the company—the
machinery, labor, and financial resources, and the availability of
material from suppliers. In the short run, capacity is the quantity
of work that labor and equipment can perform in a given period.
Aggregate Production Plan
Objectives set by the strategic business plan, Production
management is concerned with the Following;

⚫ The quantities of each product group that must be produced in

each period.
⚫ Maintain the desired inventory level.
⚫ In each period, need and availability of resources i.e.
⚫ Equipment,
⚫ Labor
⚫ Material
 Types of Production Plan/ Manufacturing
Strategy

Generally firms make the following production

plans;

• Make –to- Stock production plan

• Make –to- Order production plan

• Engineer –to- Order Production Plan

• Assemble -to- Order Production Plan

Make To Stock Production Plan
 Make-to-stock means that the supplier
manufactures the goods and sells from
finished goods inventory. Delivery lead time
is shortest. The customer has little direct
involvement in the product design.
 Conditions:
 Demand is fairly constant and predictable.
 Product has a long shelf life.
 Very close customer-vendor relationship.
 Make To Order Production Plan
 Make-to-order means that the manufacturer does not start
to make the product until a customer’s order is received.
The final product is usually made from standard items but
may include custom-designed components as well.

 Delivery lead time is reduced because there is little design

time required and inventory is held as raw material. .

 Conditions:
 Goods are produced to customer specification.
 The customer is willing to wait while the order is being made.
 The product is expensive to make and to store.
Engineer to Order
Conditions:

Engineer-to-order means that the customer’s

specifications require unique engineering
design or significant customization. Usually the
customer is highly involved in the product
design. Inventory will not normally be
purchased until needed by manufacturing.
Delivery lead time is long because it includes
not only purchase lead time but design lead
time as well.
Assemble to Order

 Assemble-to-order means that the product is made

from standard components that the manufacturer
can inventory and assemble according to a customer
order.

 Delivery lead time is reduced further because there

is no design time needed and inventory is held
ready for assembly. Customer involvement in the
design of the product is limited to selecting the
component part options needed.
Basic Strategies Use to Develop a
Production Plan
• Chase : Vary production quantities to meet the demand forecast.
❖ Often used when inventory cannot be used or when
resources are flexible and inexpensive to change.

• Level: Establish average demand level and set production rate to

that
level.
❖ Often used when resources difficult or very expensive to
change.

• Hybrid: Use a combination of some chase and some level.

⮚ Subcontracting: Meeting any additional demand through

subcontracting.
❖ Cost avoided associated with excess capacity.
Example - Basic Strategies

Period 1 2 3 4 5 6 Total

Forecast (Demand) 130 140 160 170 165 135 900

Chase 130 140 160 170 165 135 900

Production
Level 150 150 150 150 150 150 900
Strategies

Hybrid 140 140 140 160 160 160 900

 For Example
No. of
Units

Demand

Time
 Chase Production
No. of
Chase
Units
Production

Demand

Time
 Level Production
No. of
Units

Level
Production

Demand

Time
 Level Production
No. of
Units USE
Inventory
Level Production

CREATE Inventory

Demand
 Hybrid Production
No. of
Units

Hybrid
Demand