Unit 3 IPOM
SteelTiger4
LC5LC6MGMT640Phase32.pptSmitheford Pharmaceuticals wants to reduce its inventory costs. As a quality manager to Smitheford Pharmaceuticals, explain the meaning of lowering the water level to expose the rocks, on the diagram on this figure, as you would to your management team. How would you keep Smitheford Pharmaceuticals from immediately raising the inventory as soon as an outage occurs? Explain how each rock can cause problems in the production process and how you would help pharmaceuticals to improve processes and reduce inventory.
To do:
Post your response by Saturday and responses to two peers by Tuesday
Understand that one of the most effective methods for exposing system inefficiencies is by lowering inventory.
Inventory hides most system inefficiencies
Problems become more visible when steps are taken to lower inventory
Source:
Fundamentals of Operations Management 4e, by Davis, Chase & Aquilano
The set of policies and controls that monitors levels of inventory and determines:
What levels should be maintained.
When stock should be replenished.
How large orders should be.
Raw Materials
Vendor-supplied items that have not had any labor added by the firm receiving the items.
Finished Goods
Completed products that are still in the possession of the firm that manufactured them.
Work-in-Process (WIP)
Items that have been partially processed but are still incomplete.
Protect against uncertainty
Shortages of raw materials.
Work-in-process variations.
Changes in demand for finished products.
Support a strategic plan
Take advantage of economies of scale
Large quantity purchases reduce the average total unit costs related to fixed ordering, setup costs, and transportation costs.
Holding and Carrying Costs
Storage costs (facility, insurance, taxes, utilities)
Capital costs (opportunity costs)
Obsolescence/shrinkage costs (depreciated value)
Setup or Ordering Costs
Shortage Costs
Purchase Costs
Transportation Costs
Best Practices for managing inventory costs
Example: Excess and Obsolete
Develop reason codes when writing off inventory and categorize each transaction
Report on reason codes for inventory write offs
Create action plans where needed
Hold suppliers accountable
Write-up Performance Improvement Plans (internal or external)
Inventory is a liability, not an asset.
Average amount of inventory relative to annual sales is decreasing.
Firms are focusing on reducing setup and order costs, resulting in smaller economic order quantities.
Firms are working more closely with vendors to reduce product through-put times and, consequently, lead times.
Vendor Managed Inventory
Fastenal Example
https://www.youtube.com/watch?v=npfF4cdFKFo.
Consigned Inventory
Owned by the supplier but in possession of the customer
Customer Owned Inventory
Build and ship within system but maintain physical goods on-hand
Must use ERP system to create correct transactions for this
Best Practices
Document inventory management processes for internal use and financial audit purposes
Include your material flow, information flow, financial flow and communication flow
Validate the financial transactions within your system before running substantial amount of transactions through the system
Inventory write-offs or adjustments are a BIG RED flag for auditors
Inventory Systems
Purpose:
- Provide the organizational structure
and operating policies for Maintaining and Controlling
products to be stocked
Responsible for ordering/receipt of goods
Provide follow up to unanswered questions
Impacts entire Procure to Pay process
PO >> Receipt >> Payment
Focus on Quality Issues that impact production or distribution to customer
Inventory Systems
Two Types:
Fixed-Order-Quantity
Fixed-Time-Period
Fixed-Order-Quantity
It is “event triggered”
an order is initiated when the event of reaching a specified reorder level occurs
Takes place at any time
depends on items demand
- By definition - A system where the order quantity remains constant but the time between orders varies.
- Preferred for important or expensive items because average inventory is lower.
- Provides a quicker response to stockouts
- Is more expensive to maintain due to inventory record-keeping costs.
- Assumptions
- Demand for the product is constant and uniform throughout the period
- Lead time (time from ordering to receipt) is constant
- Price per unit of product is constant
- Inventory holding cost is based on average inventory
- Ordering and setup costs are constant
Fixed-Order-Quantity
- Use safety stock to cover uncertainty in demand.
- Given: service probability which is the probability demand will NOT exceed some amount.
- The safety stock level is set by increasing the reorder point by the amount of safety stock.
Uncertain Demand
Fixed-Time-Period
It is triggered by time
Assumes uncertainty in demand and adds safety stock to cover
- By definition: A system where the time period between orders remains constant but the order quantity varies
- Has larger average inventory to prevent stockouts.
- Useful when purchasing multiple items from one vendor to save on costs.
- The decision to place an order is made at pre-determined time intervals (weekly, monthly)
Things to consider within the inventory system…
1. Demand for the product – must be known, constant, and uniform throughout the order period
2. Lead time - the time from ordering to receipt - is constant
3. Price per unit of product is constant
4. Ordering or setup costs are constant
5. All demands for the product are known with certainty, no back orders or stockouts
6. There is no interaction with other products.
Things to consider within the inventory system…
1. Economic Order Quantity (EOQ) –
- Optimal quantity to order taking into consideration both the cost to carry inventory and the cost to order the item
2. Reorder Point
The point in time by which stock must be ordered to replenish inventory before a stockout occurs.
Note:
Total Annual Cost (TC) = Annual purchase cost + Annual ordering cost + Annual Holding Cost
Or
TC = (Q/2) + (D/Q) * S
Where Q is the quantity to be ordered or EOQ
D is the annual demand in units
And S is the set up or ordering cost
Inventory Accuracy and Cycle Counting
- Inventory accuracy
Do inventory records agree with physical count?
- Cycle Counting
Frequent counts
When? (zero balance, backorder, specified level of activity, level of important item, etc.)
Supply Chain Management - Aggregate Planning and Inventory Control
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Which Items to count? Most important (ABC analysis)
Items that are at an appropriate time
When to count? Low or zero balance
Backorder with positive inventory
After some activity
By Whom? Designated inventory control people
By the people removing or adding to inventory
As the production manager, you need to minimize both ordering and inventory costs. You need to provide a recommendation of the optimal order quantity of raw materials to your plant manager. Your objective is to determine the economic order quantity (EOQ). If the annual demand for Ultamyacin at Smitheford is 400,000 units, then the annual carrying cost rate is 15% of the cost of the unit. The product costs $48/unit to purchase, and the product ordering cost is $28.00.
In your report, discuss information based on the following questions:
What is the basic EOQ?
What is the TC (total cost) at the EOQ?
How much would the TC increase if the order quantity must be 1,000 units?
How is JIT (just-in-time) ordering methodology different from EOQ methodology?
Show all your calculations.
Deliverable length: 750-1000 words
Hint:
TC at 1,000 units - change the value of Q from the EOQ value to 1,000
JIT philosophy - order materials as needed
EOQ philosophy – specifies a certain amount of product on each order
As companies progress in quality improvement, they tend to move from EOQ to JIT.
What is the basic EOQ?
EOQ = sqrt(2*annual demand*ordering cost/holding cost per unit)
Note: holding cost has to be translated to from % to the cost per unit.
This is calculated by the % of holding cost (.15) x purchase price.
What is the TC (total cost) at the EOQ?
Textbook page 382 - 383
Setup costs + annual holding costs
Setup costs = annual demand / order quantity (this is your EOQ for the second bullet)
Annual holding costs = average inventory x holding cost per unit
Note: average inventory is order quantity / 2 (this is your EOQ for the second bullet also)
How much would the TC increase if the order quantity must be 1,000 units?
For the third bullet, you will change your calculated EOQ to 1000 units to calculate the total cost
EOQ & Total Cost
TC = (Q/2) + (D/Q) * S
Q&A
http://nehaashani.articlesbase.com/business-articles/inventory-management-833454.html.
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Supply Chain Management - Aggregate Planning and Inventory Control
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Which Items to count? Most important (ABC analysis)
Items that are at an appropriate time
When to count? Low or zero balance
Backorder with positive inventory
After some activity
By Whom? Designated inventory control people
By the people removing or adding to inventory
http://nehaashani.articlesbase.com/business-articles/inventory-management-833454.html.
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