Detailed Scheduling and Planning (Lesson 1)

UUnit nit 22 DDetailed etailed SScheduling cheduling aand nd PPlanning lanning Lesson 1 Order Planning and Inventory Management

Unit 2

Detailed Scheduling and Planning

Unit 2

Detailed Scheduling and Planning

© 2004 e - SCP -The Centre for Excellence in Supply Chain Management No portion of this publication may be reproduced in whole or in part. The Leading Edge Group will not be responsible for any statements, beliefs, or opinions expressed by the authors of this workbook. The views expressed are solely those of the authors and do not necessarily reflect any endorsement by The Leading Edge Training Institute Limited. This publication has been prepared by E-SCP under the guidance of Yvonne Delaney MBA, CFPIM, CPIM. It has not been reviewed nor endorsed by APICS nor the APICS Curricula and Certification Council for use as study material for the APICS CPIM certification examination.

The Leading Edge Training Institute Limited Charter House Cobh Co Cork Ireland

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Detailed Scheduling and Planning Preface............................................................................................................4 Course Description................................................................................................................. 4 Target Audience and Pre -Requisite Knowledge ................................................................. 4 Scheduling Lessons and Review Sessions ............................................................................. 4 Online Examinations .............................................................................................................. 5 Frequently Asked Questions ................................................................................................. 5 Mentoring ................................................................................................................................ 5 Supplementary Reference Materials .................................................................................... 5

Lesson 1 – Order Planning and Inventory Management..................................6 Introduction and Objectives.................................................................................................. 6 Inventory Characteristics ...................................................................................................... 6 Inventory Strategy.................................................................................................................. 7 Classification of Inventory ..................................................................................................... 8 Methods of Order Review.................................................................................................... 12 Material Requirements Planning (MRP) ........................................................................... 13 Factors that Influence Lot Sizes.......................................................................................... 18 Order Quantities and Cost Factors .................................................................................... 19 Techniques for Determining Lot Size ................................................................................. 20 Summary ............................................................................................................................... 24 Further Reading ................................................................................................................... 24 Review ................................................................................................................................... 25 What’s Next? ........................................................................................................................ 26

Appendix.......................................................................................................27 Answers to Review Questions .............................................................................................. 28

Glossary ........................................................................................................30

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Detailed Scheduling and Planning Preface Course Description The aim of this unit is to focus on material and capacity scheduling and planning, explaining planning systems that strike a balance between the three conflicting objectives of manufacturing: maximizing customer service while minimizing inventory investment and production costs. It covers MRP in detail and introduces the material-dominated scheduling planning technique, which applies to process industries and long-established production plants. This unit follows on from the ‘Basics of Supply Chain Management’ unit and can be used as part of your preparation for the American Production and Inventory Control Society (APICS) Certificate in Production and Inventory Management (CPIM). The Detailed Scheduling and Planning unit, which comprises 9 lessons, covers: Order planning and inventory management

Detailed Capacity Planning

Customer service and inventory management

Supplier Relationships

Requirements for material planning

Procurement Planning

Using MRP outputs This document contains the first lesson in the Detailed Scheduling and Planning unit, which is one of five units designed to prepare students to take the APICS CPIM examination. Before completing the Detailed Scheduling and Planning unit, you should complete the Basics of Supply Chain Management unit or gain equivalent knowledge. The five units that cover the CPIM syllabus are: Basics of Supply Chain Management Detailed Scheduling and Planning Master Planning of Resources Execution and Control of Operations Strategic Management of Resources

Target Audience and Pre-Requisite Knowledge This course is intended for anyone involved in the supply chain who wishes to further their understanding of supply chain management and improve their career prospects by gaining a valuable recognized qualification in the area. It assumes that learners have completed the Basics of Supply Chain Management unit and have some knowledge of manufacturing organizations. This unit may be used to prepare for APICS CPIM certification.

Scheduling Lessons and Review Sessions You should set aside a minimum of 2 hours for each lesson. Throughout this self study course you will find review questions and exercises. These are designed to optimize your retention of the material covered by encouraging retrieval of key information. In many cases you will be required to apply that knowledge in a business context.

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The answers are available in the appendix of this self study guide. The ideal time to check your work against these answers is just before you start the next section. There are two advantages to this approach: you can fill in any gaps in your learning and also refresh your memory on the work covered so far before progressing to new content.

Online Examinations At regular intervals during your study you can test your progress and understanding by completing an online examination. The questions provided in the online examination have been carefully designed by a Fellow of the APICS organization to assess your understanding of the material covered. On completion of the examination, you receive feedback of your score.

Frequently Asked Questions A bank of questions frequently asked by students of CPIM is available on the e-scp website. These questions have been answered in detail by APICS experts. If you have difficulty understanding a concept in your self study manuals, the frequently asked questions section should be your first port of call. The question bank is regularly updated to reflect the issues that concern students.

Mentoring You will have access to a highly qualified and experienced Fellow Member of APICS who will respond to queries you may have on the course material contained in these self-study lessons.

Supplementary Reference Materials Throughout the self-study lessons, appropriate further reading may be identified. Summaries containing the key points of some references may be available from the e-scp web site. These summaries and articles should help to broaden your understanding of the concepts covered in the lessons and clarify issues with which you have difficulty.

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Unit 2

Detailed Scheduling and Planning

Unit 2

Detailed Scheduling and Planning Lesson 1 – Order Planning and Inventory Management Introduction and Objectives Inventory is a term used to describe materials stocked by companies that are used in the production and distribution of their products. This lesson examines inventory types and classifications, methods of order review, factors influencing lot sizes, lot sizing techniques, and costs associated with order quantity policies. These issues affect inventory management, planning and control, and specifically, the inputs to Material Requirements Planning (MRP). On completion of this lesson you will be able to: List types of inventory Identify the requirements of each type of inventory Describe the impact of each type of inventory on the planning process Explain order review methodologies Apply order review methodologies to various inventory types and inventory strategies Identify lot-sizing techniques Explain the effects of order-quantity constraints and modifiers in lot-sizing techniques

Inventory Characteristics Inventory includes all raw materials, components, subassemblies, supplies required for production and distribution, and finished goods that are stored by a company. Inventories contribute to the provision of: The right items At the right time In the right place Of the right quantity and quality The ultimate aim of storing inventory is to help meet desired levels of customer service while minimizing costs and maximizing efficiency. Any inventory stored by a company will involve some costs to that company. Inventories: Require capital investment, storage space and insurance Incur taxes, as they are considered an asset to the company May be lost, damaged or stolen May become obsolete In any business, it is important to ensure that optimum inventory levels are identified and supported by careful management of policy, procedures and processes to ensure those optimum levels are met. Inventory levels that are either too high or too low affect cost and profitability as illustrated in the following table: © Copyright Leading Edge Training Institute Limited

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High Inventory Levels

Unit 2

Detailed Scheduling and Planning Insufficient Inventory Levels

Mask inefficient management practices

Increase the risk of production shutdowns

Compensate for poor forecasting

Reduce customer service levels

Hide inaccurate scheduling and clumsy setup and ordering processes

Ultimately lead to lost sales and lost customers

Increase Costs

Reduce flexibility and competitiveness

Lead to increased stockouts

Do not increase profits Influences on Inventory Policy A clear policy on inventory levels and management, consistent with overall business goals and objectives, and with the more specific objectives of marketing, production and finance, is essential. Overall inventory levels will be affected by the capacity planning strategy and operations management strategy. Work-in-Process (WIP) inventories are affected by the type of manufacturing process employed, for example, production line or job shop production Finished goods inventory levels are influenced by distribution structures and methods. Raw materials and component inventory levels are impacted by purchasing and production strategies. Individual inventory items should be examined and controlled by answering the following questions: What must be ordered? What quantity is required? When is the material required? How and where will it be stored?

Inventory Strategy A company’s inventory strategy outlines how inventory investment and customer service levels are balanced. It sets out average inventory levels, reorder quantity policies, and safety stock levels. An effective inventory strategy, which is closely aligned with manufacturing strategies and with supplier strategies, leads to competitive advantage and customer value. The inventory strategy must deal with: Customer Service Level Dependent and independent demand Demand variability and seasonality Lead time fluctuation Requirements of company policy © Copyright Leading Edge Training Institute Limited

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Detailed Scheduling and Planning The inventory strategy should take into account the characteristics of the manufacturing environment, particularly demand variability, cumulative and marketing lead times. It must also account for management policies for the treatment of product groups. Inventory Definition Inventory may be defined in different ways, depending on your viewpoint. Financially, inventories are consid ered as asset. However, from a functional viewpoint inventories can too often become liabilities, costing too much to store, manage, insure, and protect, and always running the risk of becoming obsolete as manufacturing needs change. From a manufacturing point of view, inventory refers to items that support production, such as raw materials, components, WIP inventories, and operating supplies, or other activities needed during production, such as maintenance and repair, and items that support customer service, including finished goods and spare parts. Demand for inventory may be dependent or independent. From a financial point of view, inventory may be thought of as items purchased for resale including finished goods, work in process, and raw materials. Often, the purchase price of an inventory item is usually set as its value, regardless of any value added in terms of direct labor or overheads.

Classification of Inventory Inventory may be found throughout the manufacturing and distribution process. Inventory may be categorized as: Raw material, Work-in-Process (WIP), Finished goods (FG), Maintenance, repair and operating supplies (MRO). Sub-Classifications The above categories can be further broken down using some of the following classifications: Excess inventory

Surplus inventory

Inactive inventory

Obsolete inventory

Consignment inventory

Vendor- managed inventory

Raw Materials Raw materials are any material inputs used in a manufacturing process. These may be true raw materials or the finished goods of other manufacturing companies. For example, the raw materials for a furniture-making company are likely to include various types of wood, nails and screws. These are end products from other manufacturing industries that use the raw materials of trees, iron, and steel.

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Raw materials are at the lowest level of the Bill of Material (BOM) and usually account for the longest part of the cumulative lead time. Raw materials inventories are valued at standard or material cost. This means the value of the inventory is equal to the amount that was paid for that material. The raw materials will be withdrawn from stock to have work performed on them by various classes of labor and equipment during the production process. WIP inventory While materials are moving through the production process, they are referred to as work- inprocess. The amount of work in process varies according to the production process and the company ethos. Work-in-process materials are all items at the middle levels of the BOM. For example, the BOM for a chair may require various lengths of wood from raw materials inventory. However, some BOM requirements will be sub-assemblies where several raw materials have already been transformed into an item needed for the manufacture of the chair, such as the chair base, which might consist of 4 lathe-turned legs held together with glue, screws and braces.

Chair Chair 100 100 Base Base 200 200

Seat Seat 622 622

Back Back 500 500

Legs Legs(4) (4) 201 201

Frame Frame 629 629

Brace Brace 512 512

Braces Braces(2) (2) 203

Seat Seat Pad Pad 631 631

Arms Arms(2) (2) 570 570

Supports Supports(5) (5) 545 545

Finished Goods Finished goods are often called end items. The term refers to any completed product or service part. A finished good is an item that is ready to be sold to a customer, whether that customer is external, or another division of the same company. Usually finished goods are stored at the production facility or in warehouses to reduce delivery times. MRO MRO inventories are required by most companies. Maintenance inventories, such as spare parts for machinery, oil, cleaning, and other materials needed for the maintenance of the production facility are important in that they are needed to support the servicing of machines and therefore availability and capacity requirements. Maintenance and repair items may range from very low cost to several thousand dollars per item. The inventory replenishment techniques required for such inventories are usually visual review, one- for-one replacement, or reorder points. Operating supplies, such as office and cleaning supplies, are usually low cost. Howeve r, there may be a wide variety of required items.

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Detailed Scheduling and Planning

Unit 2

Detailed Scheduling and Planning Inventory Classification and Time Fences Depending on the length of time an item has been held in inventory and the level of demand for that item, it may be classified as operating inventory, excess, surplus, inactive or obsolete.

Inventory Level

Exceeds normal operating inventory but may still be used within the planning horizon

Operating Inventory

Excess Inventory

This has not been used in the previous 12 months and is unlikely to be used in the near future

May be used within 12 months but, in hindsight, should not have been ordered

Surplus Inventory

Inactive Inventory

When there is no demand for the inventory item in the product range, it is obsolete and should be disposed of in some way

Obsolete Inventory

(Demand) Time

Operating Inventory This is simply inventory that will be used up by the production process as planned. It is usually set at a level equivalent to a set number of days’ supply, as determined by management. When the inventory items are expensive, the number of days supply held will be low. Excess Inventory Excess inventory is inventory that exceeds the current operational needs and may be planned or accidental. A company may plan to build excess inventories in anticipation of higher customer demand later in the season, thus allowing a more level production strategy. Lot sizing rules or economic order quantity rules may also lead to some excess inventory. For example, a company manufacturing sun cream has a demand of 10,000 units each week in the months of March and April. However, it produces 13,000 units per week in anticipation of a rise in customer demand from May onwards as the sun holiday season peaks. Excess inventory exceeds what is required but still has a reasonable chance of being used within the planning timeframe. Surplus Inventory Surplus inventories are items where the available levels are far in excess of current demand. This leads to a situation where the supply available will last for longer than the item’s lead time. In such cases, further manufacture of the item can be put off. Some companies differentiate between excess and surplus demand based on aging and demand factors. Inactive Inventory In terms of finance, inactive inventory is an asset. However, in production terms, it may be a liability if there is no likelihood of demand for the item. Inactive inventory does not have a value for manufacturing, materials management, inventory management or customers. It is costly to maintain and is the result of surplus inventory that has not been used in the last year and is not likely to be used. © Copyright Leading Edge Training Institute Limited

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Detailed Scheduling and Planning Obsolete Inventory Obsolete inventory items will never be used or sold at full value as the products the inventory was intended for have been discontinued. Disposal of obsolete inventory will reduce profit margins as it is likely to be sold on at much less than it cost to buy and store. For example, due to a change in building regulations, a company producing electrical sockets and circuit boards, has had to discontinue one of its domestic socket products. While some of the subassemblies for the product can be used in other product lines, the inventory of plastic casing held by the company is now obsolete as it cannot be used in any other product and has no value for resale. This plastic casing is obsolete and must be disposed. The cost to the company will include the cost of purchasing or producing the casing, the cost of storing and managing the inventory, and the cost of disposing of it. Consignment Inventory Consignment inventory is inventory that is available for the customer to use but is still owned by the supplier until used. The supplier or customer periodically checks the level of inventory, the inventory is replenished, and the customer is billed accordingly. Alternatively, the company may pay the supplier on a regular basis according to their usage of the inventory. Vendor-Managed Inventory Although similar to consignment inventory, vendor managed inventory differs in some key respects. It requires that the supplier has a good knowledge of its customer’s demand forecasts and can therefore predict the amount of product the customer may require. The buyer can make information such as demand history available to the supplier through EDI. It can also inform the supplier of activities likely to affect supply such as planned promotions. The supplier assumes the entire role for planning and replenishment. For example, A2 B Distribution is involved in distributing refrigerated goods nationwide. As these goods generally have a short shelf life, maintenance of inventory can be complex. A2B rely on vendor-managed inventory for many of their products. They provide the suppliers with a history of demand for their product along with details of the maximum and minimum amounts of inventory they wish to store. Each supplier is responsible for ensuring that demand can be met from the inventory on hand in the distribution company’s warehouse. 1. Which type of inventory has not been used in the previous year and is unlikely to be used in the near future? A. WIP Review Q

B. Surplus C. Obsolete D. Inactive

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Detailed Scheduling and Planning Methods of Order Review The ordering technique that is chosen for a particular item sho uld be influenced by a strong knowledge base and understanding of inventory concepts, mathematical models and formulae. Order review methodologies use one or more methods to decide on the schedule and quantity of purchase orders or work orders. Types of Order Review Methodologies There are a great many types and combinations of order review methodology ranging from very simple to more complex methods. The methods to be used will depend on the type of inventory to be managed. Some of the more common methodologies include: Material Requirements Planning (MRP) Reorder points Time-Phased Order Points Visual Review Periodic Review Kanban Issues to be Resolved by Order Review Methodologies Whatever choice is made, the methodology chosen must satisfy requirements by calculating the following information: The net demand after accounting for available inventory and scheduled receipts The available balance, taking into account safety stock, allocations, yield, and scrap Quantity needed to order after taking into account order constraints and modifiers Date of order release to ensure sufficient time for procurement and manufacturing Dates of required order arrival to support required dates.

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Detailed Scheduling and Planning Material Requirements Planning (MRP) MRP is a computerized process that calculates entire demand and ordering profiles throughout a given planning horizon. It is useful in that it can accommodate ordering strategies for parts that have variable dependent and independent demand profiles. Dependent demand items are usually components and subassemblies. The demand for these items is dependent solely on the forecast demand for their parent items. For example, in the Bill of Materials (BOM) illustrated below, the demand for part 622 (a seat) is dependent on the demand for its parent item: Chair 100.

Chair Chair 100 100 Base Base 200 200

Seat Seat 622 622

Back Back 500 500

Legs Legs(4) (4) 201 201

Frame Frame 629 629

Brace Brace 512 512

Braces Braces(2) (2) 203

Seat SeatPad Pad 631 631

Arms Arms(2) (2) 570 570

Supports Supports(5) (5) 545 545

As MRP can accommodate both dependent and independent demand, it enables the planner to establish plans and controls as needed, either by item group, or individual item, to ensure the inventory strategy objectives are met. Characteristics of end-item inventories as compared to raw materials: End- item demand is based on forecasts and master schedule Demand is usually lumpy and discontinuous unless scheduled in daily batches. This is more noticeable at the lower bill of material levels than at the higher ones Lower level demand can be calculated rather than forecast, if it is dependent on higher level BOM items 100% service level can be provided for dependent demand items that have sufficient lead time to meet scheduled requirements with no little or no need for safety stock Determining the Reorder Point The reorder point is an inventory level determined by management. When inventory levels fall to or below the reorder point, a requirement for new stock is triggered. To calculate the reorder point (ROP), the demand during lead time (DDLT) and the safety stock (SS) level must be added together. ROP =

DDLT

+

SS

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Detailed Scheduling and Planning Assumptions when using Reorder Point Replenishment order can be released and received before a stockout occurs There is a steady demand (past demand is an adequate indicator of future demand) For example, a bakery producing sliced white loaves for distribution to grocery retail outlets nationwide has determined its reorder point for plain white flour to be 500 Kg. Demand is fairly steady and not particularly influenced by seasonality. The 500 KG level is sufficient to cover 2 days of production. When levels fall to this point another order for flour is issued to the supplier. Orders are generally received within 24 to 48 hours of placing the order. The following graph explains the level of demand and the level of inventory.

1600 1400 1200 1000 800 600 400 200 0

demand inventory level

22

19

16

13

10

7

reorder point

4

1

KGs

Reorder Point

Production Days

During much of the production period, inventory levels carried are far in excess of demand for the inventory item. Inventory levels reach a peak just after a delivery of the inventory item and fall steadily, usually to almost zero before another delivery arrives to replenish stocks, causing a dramatic upturn in inventory levels again. This pattern is repeated, leading to the ‘saw-tooth effect’ when the inventory levels are plotted on a graph as above. The reorder point is established by determining the time taken to replenish the stock. In the example given above, the reorder point is set at 500KG, which leaves enough stock for two days production. This is enough to cover for the expected time for replenishing supplies which is one full day. Where demand is unsteady, using a reorder point can cause difficulties. If demand is greater than expected, a stock-out may occur while awaiting delivery of the item. If demand is less than expected, the material will arrive sooner than required and excess inventory will result. Safety Stock and Reorder Point A more complete reorder point model builds in safety stock to avoid potential stockouts when demand is greater than expected. In the following chart, a slight peak in demand results in a greater than normal drop in inventory levels, using up some of the safety stock. A slight dip in demand later on helps correct the inventory level.

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Detailed Scheduling and Planning 2000 1800 1600 1400

demand

1200

Safety Stock

1000

reorder point

800

inventory level

600 400 200 23

21

19

17

15

13

9

11

7

5

3

1

0

Time-phased Order Point (TPOP) Time-phased order point (TPOP) uses time periods and MRP logic to control and manage the total requirement for an item or group of items. A forecast of demand for each item over the planning horizon is a required input. Dependent demand can also be input. TPOP is useful when demand is lumpy. It combines dependent and independent demand in a time-phased manner. There is no requirement for a steady demand. It is calculated on a period by period basis as with MRP processing and can be used with MRP, provided independent and dependent demand are combined in the gross requirements line. Firstly, the gross requirement for the item must be calculated. Then, TPOP is equal to the demand during the lead time for both dependent and independent demand items, plus the safety stock: TPOP =

DDLT (Dependent)

+ DDLT (independent) + SS

The time-phased order point itself is simply used to determine when one or more orders should be released. It may vary from one order planning period to the next. 2. The gross requirement for an item is 170 on day 1, 200 on day 2 and 230 on day 3. The lead time is 3 days and the company requires a safety stock of 200. What is the TPOP? A. 400 Review Q

B. 600 C. 800 D. 1000

TPOP Example Item

MRP Record Technique : TPOP

1 Gross Requirements

Order Quantity

500

Allocated Qty

0

Safety Stock

125

Low Level

1

Planned Order Receipts

Lead Time

6wks

Planned Order Releases

2

3

4

5

6

7

8

50

50

50

50

50

50

50

50

450

400

350

300

250

200

150

600

Scheduled Receipts

A

Projected Avail.

500

Net Requirements

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Detailed Scheduling and Planning In the MRP record displayed here, the lead time for item A is 6 weeks. The order quantity for the item is 500 units and there is a requirement to maintain 125 units of safety stock. The projected available inventory balance for the item at the beginning of the planning period is 500 units. Using the formula on the previous page, the TPOP will be reached at 425 units (demand during the lead time is 300 units and the safety stock requirement is 125 units). The requirement for the item in this example is relatively steady at 50 units per period. During week 2, the on-hand inventory drops below the TPOP level triggering an order release. This order arrives in week 8 preventing inventory levels falling below the required safety stock level. TPOP and Joint Orders Many companies employ joint ordering or related items. This is a method of replenishment whereby an order for a group of items is released any time one of those items reaches its reorder points. This has the advantage of reducing safety stocks as an order is typically placed before all the items in the group (except for the item that triggered the order) have reached their order points. In some cases there are savings to be made by occasionally omitting some of the items from the joint order. This is because the minor ordering costs associated with the item will be saved as will the carrying costs for that item over that time period. TPOP can provide a straightforward estimate of the benefits and costs of omitting any item from a joint order. For example, if a joint order is usually issued for items X, Y, and Z and the normal time interval between orders is 5 weeks, it makes sense to omit item Z from the joint order in period 1 if a reorder is not needed until after 5 weeks of that order, in this case week 7 (see table below). Item X

Order costs: $15

Item Cost: $35

Min. Lot Size: 25 units

Item Y

Order costs: $10

Item Cost: $50

Min. Lot Size: 25 units

Item Z

Order costs: $10

Item Cost: $30

Min. Lot Size: 25 units

Planned Order Releases Item

Past Due

1

2

3

4

5

6

7

X

0

33

0

0

0

0

0

0

Y

0

25

0

0

0

0

25

0

Z

0

0

0

0

0

0

0

30

Table 1 Planned Order Release Beyond the normal time interval

Similarly, if item Z is required before 5 weeks elapse but requirement for item Y will already have triggered an order in period 3, there is no need to include item Z in the order for period 1. Planned Order Releases Item

Past Due

1

2

3

4

5

6

7

X

0

33

0

0

0

0

0

0

Y

0

25

0

25

0

0

25

0

Z

0

0

0

0

30

0

0

0

Table 2 Requirement for Z falls within normal time interval but is covered by order triggered by item Y

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Detailed Scheduling and Planning Planned Order Releases Item

Past Due

1

2

3

4

5

6

7

X

0

33

0

0

0

0

25

0

Y

0

25

0

0

0

0

25

0

Z

0

0

0

0

25

0

0

0

Table 3 Requirement for Z in period 4 is not covered by other orders

Where the requirement for item Z triggers an order before the normal time interval between orders have elapsed, as in table 3 above, there are three possible options: Order items X, Y, and Z in period 1 and items X, and Y in period 6. Order X, and Y in period 1 and 6, and item Z in period 4 Order X and Y in period 1 and X, Y, and Z in period 4. When taking into account the order costs and item costs, the first option is the least cost option. Visual Review In a visual review system, the inventory reordering is determined by physically checking the amount on hand. This is used for low- value items. Generally a minimum level is established and when inventory levels reach this point an order is made to replenish to a predetermined maximum amount. This is known as Min-Max ordering. For example, Buzz Electronics packs many of its products using polystyrene packing. When inventory levels drop to three full boxes of packing a replenishment order is placed. The maximum quantity is 30 full boxes. Periodic Review Periodic review (fixed-interval order system, or fixed reorder cycle inventory model) relies on placing orders as specified intervals. The order quantity will vary depending on the amount consumed in the previous time period. In the simplest versions the order quantity is equal to the maximum desired inventory level minus the amount on hand at the time the order is placed. This assumes that the maximum desired inventory level will be sufficient to cover demand until the next review. When the replenishment lead time is greater than the review interval, this model becomes more complicated. Kanban Kanban is simply some type of signal that indicates replenishment is required. The signal may be an empty bucket, a card held up by an operator, an empty marked space on the factory floor, or a ticket passed up the production line. The quantity for replacement is usually a fixed order quantity determined from rate-based MRP. Take for example, delivery of milk door to door. Generally, the milkman will replace any empty milk bottles with full bottles.

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Detailed Scheduling and Planning Factors that Influence Lot Sizes Lot sizes should be determined to ensure that a company’s inventory investment and customer service targets are met. This will depend on order quantity constraints and modifiers. Order constraints are used to confine order quantities between maximum and minimum limits. The upper limit will generally specify a number of days supply or a dollar value for the order. The lower limit is set to guard against generating a lot of small orders for inexpensive parts, as this would increase the cost of ordering per item significantly. Order modifiers may be used to fine tune the order qua ntities, for example to take advantage of special offers. Other modifiers include scrap and yield. In certain cases, order modifiers may lead to order quantities that exceed existing constraints. Lower Constraint

Upper Constraint

Acceptable Order Quantity Modifier

Modifier As this exceeds the upper constraint it is acceptable only from an order modifer perspective

Order Constraints Order constraints are generally set by management and are used to help limit inventory investment, ordering, and carrying costs. Constraints are established first and take precedence over modifiers. The following examples explain the use of constraints. Minimum quantity can be used to meet a supplier minimum, or ensure that at least a particular price break level is met The maximum quantity may take into account the amount of available storage or the size of the transport (for example, a truck that can only carry four pallets). Minimum dollar limits may be used to avoid surcharges from suppliers when minimum order value s set by suppliers are not met. For example, if a supplier charges a minimum of $30 per order, regardless of the order size, the minimum dollar limit should be set to $30. Maximum dollar limits may limit inventory investment and days’ supply, or limit certain items to correspond with authorization levels. Minimum days’ supply may be used to prevent multiple orders for the same period as can occur with lot- for- lot orders in a contract environment, or limit the frequency of small orders which can result in large handling and freight costs Maximum days’ supply is used to support inventory turns and targets. It is also used where shelf- life is an issue. For example, a chilled food distributor limits inventory on hand to a maximum of 3 days to ensure that the shelf life is sufficiently long when the products reach the supermarket shelf. Order Modifiers Constraints take precedence over modifiers. Modifiers are used to fine tune an order quantity as in the following situations: © Copyright Leading Edge Training Institute Limited

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A special offer or price break quantity can be ensured on an individual order basis by setting one of the price break quantities as the supplier minimum for that supplier for the duration of the discount period Rounding quantities may be used to meet container multiples or make the numbers more simple to ease the cycle counting process. For example, an order of 98 units may be rounded to 100. Minimum demand quantity recognizes that certain items are subject to large issues. A minimum demand quantity ensures that no small remnants are left prior to receipt of the next order for floor stock and other bulk- issue items An order quantity multiplier (or divisor) is used for process yield or scrap conditions, which must be accounted for in the starting inventory quantity in order to ensure the necessary ending quantity. For example, if it is known that scrap during production will be equivalent to 1%, then 101 units must be ordered where demand indicates a requirement for 100 units.

Order Quantities and Cost Factors Economies of scale are generally the basis of lot size calculations as it is usually cheaper to buy and transport one large quantity than several smaller quantities. The larger the quantity ordered the fewer number of orders required. This leads to the following advantages: For purchasing departments, there may be discounts for large orders and transportation efficiency. For manufacturing, the availability of large lot sizes means longer production runs are possible, saving time on setup and changeovers. However, larger lot sizes mean larger inventories, which will be costly to carry. Cost of Carrying Inventory The cost of carrying an inventory item is usually presented as the cost of carrying an item for a year as a percentage of the total cost of the item .For example, if an item costs $60 but it costs $6 dollars to store and maintain the item for a year, the inventory carrying cost is 10%. This cost is usually determined by the Finance department. The costs of carrying the inventory item will take into account: Storage costs: The company must be able to store the entire order. Additionally, it may be necessary to maintain specific environmental conditions of heat, light, or temperature. For example, chilled foods may cost more to store than ambient products. Counting, transporting and handling: Inventory must be moved into and out of storage and must be cycle-counted, all of which requires manpower and handling. Risk of obsolescence due to changing requirements or spoilage The inventory items may deteriorate in storage, be mishandled or misused, leading to the binning of some of the material. In addition, the manufacturing requirements of the company may change so that the material is no longer needed in the production process. This means it is obsolete and of no value to the company. © Copyright Leading Edge Training Institute Limited

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Unit 2

Detailed Scheduling and Planning

Unit 2

Detailed Scheduling and Planning Insurance and tax Many businesses must pay taxes on inventory as inventories are seen as assets to a company. Insurance, although not a large cost, is required to cover for accidental damage. Insurance premiums increase as inventory levels increase Theft Depending on the nature of the product, theft is always a consideration. Foodstuffs, office supplies, small hand tools etc are desirable and easy targets for petty thieves with access to the storage facility. Opportunity Costs This is often called the cost of capital. Opportunity costs are determined by calculating the rate of return a company could earn from its best investment opportunities then applying this to the amount of money tied up in inventory. It assumes that the money could instead be spent on an alternative investment opportunity. Shelf Life This may be a consideration for foodstuffs and medicines. In some cases, particularly with longer shelf life products such as medicines, resample testing may be employed to possibly extend the shelf life. In addition, as expiry dates on medicines vary from country to country it may be possible to sell products that have expired in one country onto another country. Costs of Placing Orders The cost of placing an order for replenishment of inventory levels will differ depending on whether the order is a purchase order to an external supplier or an internal work order to production. In either case, the cost is generally presented as the cost to place a single order in dollar terms and will include order requisition and release, and other types of preparation associated with the order such as setup/tear down, order placing, inspection, accounting, expediting, follow- up, status checks and order closeout.

Techniques for Determining Lot Size There are many techniques for determining lot sizes, which can be categorized into economic, fixed, period, and demand techniques. These categories are further explained below. Economic Order Quantity The economic order quantity assumes a steady regular annual demand. This is generally calculated by determining the average monthly usage rate and multiplying by 12. The monthly rate must be factored so that short months and long months are equalized. For example, there may only be 18 productive days in December, compared with 22 in March. The optimum order quantity is the point at which the carrying cost is more or less equal to the ordering cost. This is usually the point where the total cost is at a minimum, as can be seen from the graph below. The vertical line represents the point of balance where total cost is at its lowest.

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Unit 2

Detailed Scheduling and Planning Comparing Order and Carrying Costs

Cost

350 300 250 200 150 100

Cost of Carrying Cost of ordering Total cost

50 0 1

3

5

7

9

11

13

15

Order Quantity

The economic order quantity occurs at this point. It may be calculated as follows:

EOQ = A S I C

= = = =

√

2AS IC

Annual usage in units Ordering cost in dollars per order Annual carrying cost rate as a decimal of a percentage Unit cost in dollars

Annual usage is usually calculated by multiplying average monthly usage by 12 Cost per order is usually calculated by Finance for purchased items and by engineering and finance for in- house manufactured items. The cost of the item is usually a standard cost and the annual carrying cost is usually a decimal around the 0.24 range that may be converted into a monthly value. The carrying cost is equal to half the order quantity multiplied by the cost of the item, times the annual cost to carry. The order cost is equal to the annual usage divided by the order quantity times the cost per order. The total cost is the combined carrying and order costs. 3. If the cost of an item is $1, the cost to order it is $20, the amount used annually is estimated as 20,000 units and the carrying cost is 25% (or 0.25), what is the EOQ for that item? A. 1265 Review Q

B. 1789 C. 3578 D. 1,600,000

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Unit 2

Detailed Scheduling and Planning 4. What happens to the EOQ if the carrying cost is reduced to 22%? A. The EOQ is increased correct B. The EOQ remains the same Review Q

C. The EOQ is decreased D. None of the above

Fixed Order Quantity Fixed order quantities are generally set when whipping, handling or line replenishment issues materially affect costs. Suppliers receive consistent orders and order quantities but the frequency of orders varies. In turn, manufacturing receives a consistent flow of materials in standard quantities. The quantity of the fixed order may be determined informally or based on an EOQ. In the following example, a fixed order quantity of 1000 and fixed safety stock of 160 are assumed. Component Part No:

Period

F131 Gross Requirements

1

2

3

4

5

6

7

8

9

260

320

240

520

260

240

370

220

250

480

160

920

400

1140

900

530

300

Scheduled Receipts Projected Available

740

Net Requirements Planned Order Receipts Planned Order Releases

1000

80+160 (SS)

20 (SS)

110

1000

1000

1000

1000

In period 3, the safety stock must be replenished. A further 80 units are needed to meet gross requirements. In period 5, 20 units of safety stock must be replaced. In both cases, the order quantity is 1,000 as this is the fixed amount. Order quantities should be reviewed regularly to ensure changes are taken into account and that the order quantities will contribute to optimum inventory and order levels. Period Order Quantity In period order quantity, the amount of the order is equal to the net requirements for a set number of periods. The number of planning periods included may be established by the planner or determined based on the EOQ equation. There are no remnants, as ma y often occur when EOQs are used. All available inventory is used up within the period. Lot for Lot Lot- for- lot replenishment occurs when orders cover the total requirements for a given period. When using MRP replanning, this period may be a day, a week, or some other specified but reasonably short time frame.

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Companies that order and divide inventory separately for each customer order contract take the lot for lot technique further again. Project and order for order manufacturers may maintain a stock of commonly used raw materials and subassemblies. However, the majority of a customer’s order will be purchased or manufactured for each order as the schedule dictates. To account for the costs of each order and to eliminate or minimize any residuals, items are obtained only for each order. This material is allocated for the particular order when it reaches inventory and is issued against that order number. No explosion process is required as each item on the BOM is a unique order. If an item appears in multiple levels of a BOM, those items may be combined but there is no combining across customer orders. Although the explosion of BOM process is not needed in this approach, MRP is still useful for the ordering process because: It maintains all planning and ordering information in one system The same item may be subject to lot- for- lot ordering for certain types of orders and regular period or other ordering technique for other orders. For example, a business contracting work for military uses the same items in commercial business Residuals may exist due to minimum purchases on other orders or late cancellation of orders. These will be taken into account automatically in MRP before a new order is triggered.

5. Which lot sizing technique sets order quant ity equal to the net requirements for a set number of periods? A. Periodic Review Review Q

B. Lot- for-Lot C. Period Order Quantity D. Kanban

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Unit 2

Detailed Scheduling and Planning

Unit 2

Detailed Scheduling and Planning Summary This lesson covered inventory types and classifications, methods of order review, factors influencing lot sizes, lo t sizing techniques, and costs associated with order quantity policies. At this point, you should be able to: List types of inventory Identify the requirements of each type of inventory Describe the impact of each type of inventory on the planning process Explain order review methodologies Apply order review methodologies to various inventory types and inventory strategies Identify lot-sizing techniques Explain the effects of order-quantity constraints and modifiers in lot-sizing techniques

Further Reading Introduction to Materials Management, JR Tony Arnold, CFPIM, CIRM and Stephen Chapman CFPIM 5th edition, 2004, Prentice Hall APICS Dictionary 10th edition, 2002 Manufacturing Planning and Control Systems, Vollmann, T.E.; W.L. Berry; and D.C. Whybark 5th edition, 2004, McGraw-Hill Production & Inventory Management, Fogarty, Donald W. CFPIM; Blackstone, John H. JR. CFPIM; and Hoffmann, Thomas R. CFPIM 2nd edition, 1991, South-Western Publishing Co., Cincinnati, Ohio

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Unit 2

Detailed Scheduling and Planning Review The following questions are designed to test your recall of the material covered in lesson 1. The answers are available in the appendix of this workbook. 6. Which is the most accurate description of vendor-managed inventory? A. The material inputs used in the manufacturing process, either raw materials or the finished goods of some other manufacturing company B. A method of controlling inventory which relies on the customer making demand information available to the supplier so that the supplier can assume responsibility for planning and replenishment within the limits set by the customer C. Inventory that is available for the customer to use but is owned by the supplier until it is used. D. Materials moving through the production process 7. Which of these order review methodologies involves the use of replenishment signals such as cards or empty bins ? A. TPOP B. MRP C. Kanban D. Reorder Points 8. In which of the following situations might order constraints be set by management? I. The company wants to take advantage of a quantity discount by setting a minimum quantity II. The company wants to avoid supplier surcharges when minimum order levels are not reached III. The company wants to round up order quantities to simplify cycle-counting A. All the above B. I and II C. I and III D. III only 9. The reorder point is equa l to: A. Demand during lead time added to the safety stock requirement B. The net requirements for a set number of time periods C. The order amount at which carrying costs and order costs are optimal D. The total requirements for material over a given time period

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Unit 2

Detailed Scheduling and Planning What’s Next? This lesson covered the role of manufacturing, the characteristics of materials management and the need for supply chain management. You should review your work before progressing to the next lesson which is: Detailed Scheduling and Planning – Lesson 2 - Customer Service and Inventory Management

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Unit 2

Detailed Scheduling and Planning Appendix

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Unit 2

Detailed Scheduling and Planning Answers to Review Questions 1. D Inactive inventory is the result of surplus inventory that has not been used in the last year and is not likely to be used. Obsolete inventory will never by used or sold at full value as it is no longer required in the current product range. WIP inventory is work- in-process inventories that accumulate during production. Surplus inventory occurs when inventory levels are higher than current demand. 2. C The total demand during lead time is 600 units, the safety stock requirement is 200 units, therefore the TPOP is reached at 800 units. 3. B The EOQ is equal to the square root of (2 x the annual usage in units x the ordering cost in dollars per order ) divided by (the annual carrying cost times the unit cost in dollars)

EOQ = A S I C

= = = =

√

2AS IC

Annual usage in units Ordering cost in dollars per order Annual carrying cost rate as a decimal of a percentage Unit cost in dollars

4. A The EOQ is increased to approximately 1,906. 5. C Period Order Quantity lot-sizing technique sets the order amount equal to the net requirements over a set number of periods. Lot- for-Lot replenishment means that order quantities are set to the total requirements for a given period. Kanban is an order review methodology that relies on empty bins or other signals to trigger replenishment. Periodic review is another order review methodology that relies on placing orders at specified intervals. The calculation of the order quantity varies depending on the exact method used. The simpler versions set the order quantity equal to the maximum desired inventory level minus the amount of inventory on hand at the time of placing the order. 6. B Vendor- managed inventory involves a close relationship between supplier and buyer where the supplier is made aware of demand history and buyer forecasts and assumes total responsibility for the planning and replenishment of an inventory item. Consignment inventory is provided for the customer’s use but remains the property of the supplier until it is used. Periodic review of the level of inventory aids in billing and replenishment. WIP inventory is generated during manufacture and raw materials are the initial material inputs (either true raw materials or the © Copyright Leading Edge Training Institute Limited

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finished goods of another manufacturer) used in the manufacturing process. Raw materials are at the lowest level of the BOM. 7. C The Kanban methodology makes use of some type of signal to indicate when replenishment is required. It uses a fixed order quantity. For example, an empty bin passed upstream indicates the requirement for a new bin full of material. 8. B Order constraints are used to help limit inventory investment, ordering and carrying costs. They take precedence over order modifiers and may be used to set minimum quantities to take advantages of quantity price breaks or avoid small order surcharges from suppliers. Order modifiers are usually more moderate in effect and also more temporary. They are used to finetune order quantities. For example, an order modifier might be set to ensure orders are rounded up to the nearest 10 units so that cycle counting is simplified. 9. A The reorder point is a level set by management for an inventory item. When stocks of that item fall to or below the reorder point a requirement for replenishment of that item is triggered. The reorder point is usually set at a level that ensures production can continue during the lead time for the replenishment order without using up safety stock. This is calculated by determining the demand during lead time and adding the required safety stock amount.

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Unit 2

Detailed Scheduling and Planning

Unit 2

Detailed Scheduling and Planning Glossary Term

Definition

Carrying cost

Cost or carrying inventory. This is defined usually as a percentage of the monetary value of the inventory per unit of time (usually a year). Carrying cost depends on the cost of capital invested and on costs of maintaining the inventory, paying tax on it, insuring it, spoilage, storage space, and obsolescence.

Cycle counting

An inventory accuracy audit technique. Each inventory item is allocated a cycle count frequency, usually more frequent for high value or fast moving items. Each item is counted in isolation at regular intervals throughout the year as often as specified for each item. Many items may be counted very working day. Cycle counting is used to identify items in error. This may lead to research, identification, and elimination of the causes of the errors.

Demand

A need for a particular product or component which could come from a customer order, forecast of market requirements, interplant requirement, or a request from a branch warehouse for a service part

Distribution

The activities associated with the movement of material, usually finished goods or service parts from production plant to the customer. Distribution incorporates functions such as transportation, warehousing, inventory control, material handling, order administration, location analysis, packaging, data processing and communications networks.

Economic order quantity (EOQ)

Reducing setup time and inventory to the point where it is economical to produce in batches of one.

Fixed order quantity

À lot sizing technique in MRP or inventory management that will always cause an order to be generated for a fixed quantity or multiples of that fixed quantity, if net requirements for the period are higher than the fixed order quantity.

Independent demand

Demand for an item that does not depend on the order of other items. Demand for finished goods, parts required for destructive testing, and service parts are examples of independent demand.

Inventory

Stocks or items used to support production (raw materials and work- inprocess items), activities that support production (operating supplies, maintenance and repair), and customer service (finished goods and spare parts).

Inventory turns

The number of times that an inventory turns over during a year. This is calculated by dividing the average inventory level into the annual cost of sales. For example, an average inventory of $600,000 divided into an average cost of sales of 1,800,000 means that inventory turned over 3 times during the year.

Lot-for-lot

A lot sizing technique that generates planned orders in quantities equal to the net requirements in each period.

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Order point or reorder point

Unit 2

Detailed Scheduling and Planning A predefined inventory level, which if it is higher than the stock on hand and stock on order combined, will trigger an action to replenish the stock.

Order Qua ntity or The amount of an item that is ordered from a supplier or from the plant or is Lot size issued as a standard quantity to the production process. Periodic review system

This is also called fixed reorder cycle inventory model. It is a form of independent demand item management in which an order has a fixed quantity. The reorder point will be large enough to cover the maximum expected demand during the replenishment lead time.

Safety stock

This is a quantity of stock that is planned for inventory to protect against fluctuations in demand or supply. In the context of master production scheduling, the additional inventory and capacity planned as protection against forecast errors and short term changes in the backlog. Overplanning can be used to create safety stock. Safety stock is also known as buffer or reserve stock.

Service level

A desired measure (usually a percentage) of satisfying demand through inventory or by the current production schedule in time to satisfy the customers’ requested delivery dates and quantities. In a make-to-stock environment, level of service is sometimes the percentage of orders picked complete from stock upon receipt of customer order.

Stockout

A lack of required materials components or finished goods.

Two -bin system

A type of fixed order system in which inventory is carried in tow bins. A replenishment quantity is ordered when the first bin is empty. During the replenishment lead time, material is used from the second bin. When the material is received, the second bin, which contains a quantity to cover demand during the lead time plus some safety stock, is refilled and the excess is put into the working bin. AT this time, stock is drawn from the first bin until it is empty again. The bins may be metaphorical only.

Unit cost

Total labor, material, and overhead cost for one unit of production.

Work-in-process (WIP)

Also known as work in progress, this refers to products that are in a partial stage of completion throughout the plant. This includes all material from raw material that has been released for initial processing up to completely processed material awaiting final inspection and acceptance as finished product.

Inventory

Stocks or items used to support production (raw materials and WIP items), supporting activities (MRO supplies), and customer service (Finished goods and spare parts). Demand for inventory may be dependent or independent. Inventory functions are anticipation, hedge, cycle (lot size), fluctuation (safety, buffer, or reserve), transportation (pipeline), and service parts. In the theory of constraints, inventory refers to items purchased for resale and includes finished goods, WIP and raw materials. In this approach, inventory is always valued at purchase price and includes no value-added costs, whereas traditionally, direct labor and overhead costs were attributed to the items as they went through the production process.

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Unit 2

Detailed Scheduling and Planning Customer service a measurement of delivery of finished goods performance, usually a level or ratio percentage such as the number of items or dollars shipped on schedule during a specified time period, compared to the total that should have been shipped. In a make-to-order environment it may be measured by the number of jobs or dollars shipped in a particular period compared with the total number required. Seasonality

A pattern of demand that repeats from year to year (or other identified season) where some periods have very high demand compared to others

Lead time

The amount of time required to perform an operation. In logistics, it is the time between identifying the need for an order and the receipt of that order. Components of lead time may include order preparation time, queue time, processing time, move time, receiving, and inspection time.

Manufacturing environment

The frame work in which a manufacturing strategy is developed and implemented. It includes external environmental forces, corporate strategy, business unit strategy, product selection, process technology, and management competency. It is often used to refer to whether a company is make-to-stock, make-to-order, or assemble-to-order.

Cumulative lead time

The longest planned length of time needed to complete a particular activity. It may be calculated in MRP by reviewing the lead time for each BOM path below the item. The longest BOM path is equal to the cumulative lead time

Product group

A number of similar products. Generally they are grouped according to the process or materials required to make them

Raw material

Purchased items or extracted materials that are converted via the manufacturing process into components and products.

Work-in-process (WIP)

A product or products in various stages of completion throughout the plant. This includes all material from raw material that has been released for processing, up to completely processed material that is awaiting final inspection and approval as finished goods.

Maintenance, Items used to support operations and maintenance, including for example repair, and maintenance supplies, spare parts, consumables used during manufacturing operating supplies and supporting operations. (MRO) Finished goods or A product sold as a completed item or repair part. This term refers to any end items item that is subject to a customer order or sales forecast Spare parts or service parts

Hese are modules, components or elements that may be used without modification to replace an original part

Anticipation inventory

Additional inventory above the baseline stock to cover projected sales increases, planned sales promotions, seasonality, plant shutdowns and vacations

Hedge inventory

An amount of inventory built up to guard against a particular event that may or may not occur. Hedge inventories are the result of speculation related to potential strikes, price increases, government unrest, or other external events

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Unit 2

Detailed Scheduling and Planning that could severely impair a company’s strategic initiatives. Cycle

The interval of time during which a system or process, periodically returns to similar initial conditions. It is also the interval of time during which an event or set of events is completed

Buffer

A quantity of material waiting for further processing. This may be raw material, partially completed material in stores, or a work backlog that is purposely maintained beside a work center.

Reserve

Material on hand or on order that is assigned to specific future production or customer orders

Service parts

Parts (modules, components or elements) that are planned to be used without modification to replace an original part

Excess inventory

Inventory that exceeds the minimum amount required to achieve a desired throughput rate, or inventory over and above the minimum amount needed to ensure desired due date performance

Inactive inventory Stock that is in excess of consumption within a defined period of time or stocks of items that have not been used within a defined time frame. Obsolete inventory

Inventory that is out of date or no longer required in the manufacturing process, or made worthless due to the appearance of a better or more economical alternative

Consignment

A shipment that is handled by a common carrier or the process of a supplier placing goods at a customer location without receiving payment for the goods until after they are used or sold

Material requirements planning (MRP)

A set of techniques that use bill of material information, inventory data, and the master production shceudle to calculate requirements for materials. MRP recommends replenishment orders and order dates for materials and helps to reschedule open orders when due dates and need dates are not in line. MRP takes the items listed on the MPS and determines the quantity of all componenets and materials required to make those items and the dates by which those materials are required. It explodes the bill of material for each item, takes into account inventory on hand or on order and offsets the net requirements by the lead time for each item.

Time-phased order point (TPOP)

Similar to MRP planning logic for independent demand items, where gross requirements come from a forecast. The TPOP may be used to plan distribution center inventories and repair parts. The TPOP approach uses time periods, allowing for lumpy withdrawal instead of average demand.

Periodic review

A fixed reorder cycle inventory model

Visual review system

A simple inventory control system which involves looking at the amount of inventory on hand before reordering. It is used for low value items

Kanban

A JIT production method that uses standard lot sizes. Material is pulled to the work center according to demand. A Kanban is a card, billboard or sign. When a work station requires material it sends some form of sign, such as an empty container, up the chain.

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Unit 2

Detailed Scheduling and Planning Scheduled receipt An open order with an assigned due date Open order

A manufacturing or purchase order that has been released or an unfilled customer order

Stock

Items in inventory or stored products / service parts ready for sale, as distinguished from stores that hold components and raw materials

Scrap

Material outside specifications for which rework is not possible or practical

Yield

The amount of usable output from a process as compared to its input. This is usually expressed as a percentage of the input.

Constraint

An element or factor that prevents a system from achieving a higher level of performance with respect to its goal. Constraints can be physical, such as a machine center or lack of material, or managerial, as defined in policies or procedures.

Procurement

A fussiness function of planning, purchasing, inventory control, traffic, receiving, incoming inspection, and salvage operations

Opportunity cost

The return on capital that would have resulted had the capital been available for some purpose other than what it has been used for

Shelf life

The amount of time an item may be stored before becoming unusable.

Period order quantity

A lot-sizing technique which equates the lot size to the net requirements for a specified number of periods in the future. The number of periods to order is variable. The order size should equalize the holding costs and ordering costs for the time interval

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