Inventory Management And Mrp Erp

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Material for session Six of the Operations Management Course at the MBA IV at HIBA in Damascus

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Inventory Management And Mrp Erp

  1. 1. Operations Management Session 6 – Inventory Management & MRP / ERP
  2. 2. Outline <ul><li>Global Company Profile: Amazon.com </li></ul><ul><li>Functions of Inventory </li></ul><ul><ul><li>Types of Inventory </li></ul></ul><ul><li>Inventory Management </li></ul><ul><ul><li>ABC Analysis </li></ul></ul><ul><ul><li>Record Accuracy </li></ul></ul><ul><ul><li>Cycle Counting </li></ul></ul><ul><ul><li>Control of Service Inventories </li></ul></ul>
  3. 3. Outline – Continued <ul><li>Inventory Models </li></ul><ul><ul><li>Independent vs. Dependent Demand </li></ul></ul><ul><ul><li>Holding, Ordering, and Setup Costs </li></ul></ul>
  4. 4. Outline – Continued <ul><li>Inventory Models for Independent Demand </li></ul><ul><ul><li>The Basic Economic Order Quantity (EOQ) Model </li></ul></ul><ul><ul><li>Minimizing Costs </li></ul></ul><ul><ul><li>Reorder Points </li></ul></ul><ul><ul><li>Production Order Quantity Model </li></ul></ul><ul><ul><li>Quantity Discount Models </li></ul></ul>
  5. 5. Outline – Continued <ul><li>Probabilistic Models and Safety Stock </li></ul><ul><ul><li>Other Probabilistic Models </li></ul></ul><ul><li>Fixed-Period (P) Systems </li></ul>
  6. 6. Learning Objectives <ul><li>When you complete this chapter you should be able to: </li></ul><ul><li>Understand an ABC analysis </li></ul><ul><li>Explain cycle counting </li></ul><ul><li>Explain the EOQ model for independent inventory demand </li></ul><ul><li>Understand service levels and probabilistic inventory models </li></ul>
  7. 7. Amazon.com <ul><li>Amazon.com started as a “virtual” retailer – no inventory, no warehouses, no overhead; just computers taking orders to be filled by others </li></ul><ul><li>Growth has forced Amazon.com to become a world leader in warehousing and inventory management </li></ul>
  8. 8. Amazon.com <ul><li>Each order is assigned by computer to the closest distribution center that has the product(s) </li></ul><ul><li>A “flow meister” at each distribution center assigns work crews </li></ul><ul><li>Lights indicate products that are to be picked and the light is reset </li></ul><ul><li>Items are placed in crates on a conveyor. Bar code scanners scan each item 15 times to virtually eliminate errors. </li></ul>
  9. 9. Amazon.com <ul><li>Crates arrive at central point where items are boxed and labeled with new bar code </li></ul><ul><li>Gift wrapping is done by hand at 30 packages per hour </li></ul><ul><li>Completed boxes are packed, taped, weighed and labeled before leaving warehouse in a truck </li></ul><ul><li>Order arrives at customer within a week </li></ul>
  10. 10. Inventory <ul><li>One of the most expensive assets of many companies representing as much as 50% of total invested capital </li></ul><ul><li>Operations managers must balance inventory investment and customer service </li></ul>
  11. 11. Functions of Inventory <ul><li>To decouple or separate various parts of the production process </li></ul><ul><li>To decouple the firm from fluctuations in demand and provide a stock of goods that will provide a selection for customers </li></ul><ul><li>To take advantage of quantity discounts </li></ul><ul><li>To hedge against inflation </li></ul>
  12. 12. 4 Main Types of Inventory <ul><li>Raw material </li></ul><ul><ul><li>Purchased but not processed </li></ul></ul><ul><li>Work-in-process </li></ul><ul><ul><li>Undergone some change but not completed </li></ul></ul><ul><ul><li>A function of cycle time for a product </li></ul></ul><ul><li>Maintenance/repair/operating (MRO) </li></ul><ul><ul><li>Necessary to keep machinery and processes productive </li></ul></ul><ul><li>Finished goods </li></ul><ul><ul><li>Completed product awaiting shipment </li></ul></ul>
  13. 13. The Material Flow Cycle Figure 12.1 Input Wait for Wait to Move Wait in queue Setup Run Output inspection be moved time for operator time time Cycle time 95% 5%
  14. 14. Inventory Management <ul><li>How inventory items can be classified </li></ul><ul><li>How accurate inventory records can be maintained </li></ul>
  15. 15. ABC (Or Pareto) Analysis <ul><li>Divides inventory into three classes based on annual dollar volume </li></ul><ul><ul><li>Class A - high annual dollar volume </li></ul></ul><ul><ul><li>Class B - medium annual dollar volume </li></ul></ul><ul><ul><li>Class C - low annual dollar volume </li></ul></ul><ul><li>Used to establish policies that focus on the few critical parts and not the many trivial ones </li></ul>
  16. 16. Control of Service Inventories <ul><li>Can be a critical component of profitability </li></ul><ul><li>Losses may come from shrinkage or pilferage </li></ul><ul><li>Applicable techniques include </li></ul><ul><ul><li>Good personnel selection, training, and discipline </li></ul></ul><ul><ul><li>Tight control on incoming shipments </li></ul></ul><ul><ul><li>Effective control on all goods leaving facility </li></ul></ul>
  17. 17. Independent Versus Dependent Demand <ul><li>Independent demand - the demand for item is independent of the demand for any other item in inventory </li></ul><ul><li>Dependent demand - the demand for item is dependent upon the demand for some other item in the inventory </li></ul>
  18. 18. Holding, Ordering, and Setup Costs <ul><li>Holding costs - the costs of holding or “carrying” inventory over time </li></ul><ul><li>Ordering costs - the costs of placing an order and receiving goods </li></ul><ul><li>Setup costs - cost to prepare a machine or process for manufacturing an order </li></ul>
  19. 19. Inventory Models for Independent Demand <ul><li>Basic economic order quantity </li></ul><ul><li>Production order quantity </li></ul><ul><li>Quantity discount model </li></ul>Need to determine when and how much to order
  20. 20. Basic EOQ Model <ul><li>Demand is known, constant, and independent </li></ul><ul><li>Lead time is known and constant </li></ul><ul><li>Receipt of inventory is instantaneous and complete </li></ul><ul><li>Quantity discounts are not possible </li></ul><ul><li>Only variable costs are setup and holding </li></ul><ul><li>Stockouts can be completely avoided </li></ul>Important assumptions
  21. 21. Inventory Usage Over Time Figure 12.3 Order quantity = Q (maximum inventory level) Usage rate Average inventory on hand Q 2 Minimum inventory Inventory level Time 0
  22. 22. Minimizing Costs Objective is to minimize total costs Table 11.5 Annual cost Order quantity Curve for total cost of holding and setup Holding cost curve Setup (or order) cost curve Minimum total cost Optimal order quantity (Q*)
  23. 23. Reorder Points <ul><li>EOQ answers the “how much” question </li></ul><ul><li>The reorder point (ROP) tells when to order </li></ul>= d x L ROP = Lead time for a new order in days Demand per day d = D Number of working days in a year
  24. 24. Reorder Point Curve Figure 12.5 Q* ROP (units) Inventory level (units) Time (days) Lead time = L Slope = units/day = d
  25. 25. Production Order Quantity Model <ul><li>Used when inventory builds up over a period of time after an order is placed </li></ul><ul><li>Used when units are produced and sold simultaneously </li></ul>
  26. 26. Production Order Quantity Model Figure 12.6 Inventory level Time Demand part of cycle with no production Part of inventory cycle during which production (and usage) is taking place t Maximum inventory
  27. 27. Probabilistic Models and Safety Stock <ul><li>Used when demand is not constant or certain </li></ul><ul><li>Use safety stock to achieve a desired service level and avoid stockouts </li></ul>ROP = d x L + ss Annual stockout costs = the sum of the units short x the probability x the stockout cost/unit x the number of orders per year
  28. 28. Probabilistic Demand Figure 12.8 Safety stock 16.5 units ROP  Place order Inventory level Time 0 Minimum demand during lead time Maximum demand during lead time Mean demand during lead time Normal distribution probability of demand during lead time Expected demand during lead time (350 kits) ROP = 350 + safety stock of 16.5 = 366.5 Receive order Lead time
  29. 29. Probabilistic Demand Safety stock Probability of no stockout 95% of the time Mean demand 350 ROP = ? kits Quantity Number of standard deviations 0 z Risk of a stockout (5% of area of normal curve)
  30. 30. Fixed-Period (P) Systems <ul><li>Orders placed at the end of a fixed period </li></ul><ul><li>Inventory counted only at end of period </li></ul><ul><li>Order brings inventory up to target level </li></ul><ul><li>Only relevant costs are ordering and holding </li></ul><ul><li>Lead times are known and constant </li></ul><ul><li>Items are independent from one another </li></ul>
  31. 31. Fixed-Period (P) Systems Figure 12.9 On-hand inventory Time Q 1 Q 2 Target quantity (T) P Q 3 Q 4 P P
  32. 32. Fixed-Period Systems <ul><li>Inventory is only counted at each review period </li></ul><ul><li>May be scheduled at convenient times </li></ul><ul><li>Appropriate in routine situations </li></ul><ul><li>May result in stockouts between periods </li></ul><ul><li>May require increased safety stock </li></ul>
  33. 33. Operations Management Material Requirements Planning (MRP) and ERP
  34. 34. Outline <ul><li>Global Company Profile: Wheeled Coach </li></ul><ul><li>Dependent Demand </li></ul><ul><li>Dependent Inventory Model Requirements </li></ul><ul><ul><li>Master Production Schedule </li></ul></ul><ul><ul><li>Bills of Material </li></ul></ul><ul><ul><li>Accurate Inventory Records </li></ul></ul><ul><ul><li>Purchase Orders Outstanding </li></ul></ul><ul><ul><li>Lead Times for Components </li></ul></ul>
  35. 35. Outline – Continued <ul><li>MRP Structure </li></ul><ul><li>MRP Management </li></ul><ul><ul><li>MRP Dynamics </li></ul></ul><ul><ul><li>MRP and JIT </li></ul></ul><ul><li>MRP In Services </li></ul><ul><ul><li>Distribution Resource Planning (DRP) </li></ul></ul>
  36. 36. Outline – Continued <ul><li>Enterprise Resource Planning (ERP) </li></ul><ul><ul><li>Advantages and Disadvantages of ERP Systems </li></ul></ul><ul><ul><li>ERP in the Service Sector </li></ul></ul>
  37. 37. Learning Objectives <ul><li>When you complete this chapter you should be able to: </li></ul><ul><li>Develop a product structure </li></ul><ul><li>Build a gross requirements plan </li></ul><ul><li>Build a net requirements plan </li></ul><ul><li>Determine lot sizes for lot-for-lot, EOQ, and PPB </li></ul>
  38. 38. Learning Objectives <ul><li>When you complete this chapter you should be able to: </li></ul><ul><li>Describe MRP II </li></ul><ul><li>Describe closed-loop MRP </li></ul><ul><li>Describe ERP </li></ul>
  39. 39. Wheeled Coach <ul><li>Largest manufacturer of ambulances in the world </li></ul><ul><li>International competitor </li></ul><ul><li>12 major ambulance designs </li></ul><ul><ul><li>18,000 different inventory items </li></ul></ul><ul><ul><li>6,000 manufactured parts </li></ul></ul><ul><ul><li>12,000 purchased parts </li></ul></ul>
  40. 40. Wheeled Coach <ul><li>Four Key Tasks </li></ul><ul><ul><li>Material plan must meet both the requirements of the master schedule and the capabilities of the production facility </li></ul></ul><ul><ul><li>Plan must be executed as designed </li></ul></ul><ul><ul><li>Minimize inventory investment </li></ul></ul><ul><ul><li>Maintain excellent record integrity </li></ul></ul>
  41. 41. Benefits of MRP <ul><li>Better response to customer orders </li></ul><ul><li>Faster response to market changes </li></ul><ul><li>Improved utilization of facilities and labor </li></ul><ul><li>Reduced inventory levels </li></ul>
  42. 42. Dependent Demand <ul><li>The demand for one item is related to the demand for another item </li></ul><ul><li>Given a quantity for the end item, the demand for all parts and components can be calculated </li></ul><ul><li>In general, used whenever a schedule can be established for an item </li></ul><ul><li>MRP is the common technique </li></ul>
  43. 43. Dependent Demand <ul><ul><li>Master production schedule </li></ul></ul><ul><ul><li>Specifications or bill of material </li></ul></ul><ul><ul><li>Inventory availability </li></ul></ul><ul><ul><li>Purchase orders outstanding </li></ul></ul><ul><ul><li>Lead times </li></ul></ul>Effective use of dependent demand inventory models requires the following
  44. 44. Master Production Schedule (MPS) <ul><li>Specifies what is to be made and when </li></ul><ul><li>Must be in accordance with the aggregate production plan </li></ul><ul><li>Inputs from financial plans, customer demand, engineering, supplier performance </li></ul><ul><li>As the process moves from planning to execution, each step must be tested for feasibility </li></ul><ul><li>The MPS is the result of the production planning process </li></ul>
  45. 45. Master Production Schedule (MPS) <ul><li>MPS is established in terms of specific products </li></ul><ul><li>Schedule must be followed for a reasonable length of time </li></ul><ul><li>The MPS is quite often fixed or frozen in the near term part of the plan </li></ul><ul><li>The MPS is a rolling schedule </li></ul><ul><li>The MPS is a statement of what is to be produced, not a forecast of demand </li></ul>
  46. 46. The Planning Process Figure 14.1 Change production plan? Master production schedule Management Return on investment Capital Engineering Design completion Aggregate production plan Procurement Supplier performance Human resources Manpower planning Production Capacity Inventory Marketing Customer demand Finance Cash flow
  47. 47. The Planning Process Figure 14.1 Is capacity plan being met? Is execution meeting the plan? Change master production schedule? Change capacity? Change requirements? No Execute material plans Execute capacity plans Yes Realistic? Capacity requirements plan Material requirements plan Master production schedule
  48. 48. Aggregate Production Plan Figure 14.2 Months January February Aggregate Production Plan 1,500 1,200 (Shows the total quantity of amplifiers) Weeks 1 2 3 4 5 6 7 8 Master Production Schedule (Shows the specific type and quantity of amplifier to be produced 240-watt amplifier 100 100 100 100 150-watt amplifier 500 500 450 450 75-watt amplifier 300 100
  49. 49. Master Production Schedule (MPS) <ul><li>A customer order in a job shop (make-to-order) company </li></ul><ul><li>Modules in a repetitive (assemble-to-order or forecast) company </li></ul><ul><li>An end item in a continuous (stock-to-forecast) company </li></ul>Can be expressed in any of the following terms:
  50. 50. Bills of Material <ul><li>List of components, ingredients, and materials needed to make product </li></ul><ul><li>Provides product structure </li></ul><ul><ul><li>Items above given level are called parents </li></ul></ul><ul><ul><li>Items below given level are called children </li></ul></ul>
  51. 51. BOM Example B (2) Std. 12” Speaker kit C (3) Std. 12” Speaker kit w/ amp-booster 1 E (2) E (2) F (2) Packing box and installation kit of wire, bolts, and screws Std. 12” Speaker booster assembly 2 D (2) 12” Speaker D (2) 12” Speaker G (1) Amp-booster 3 Product structure for “Awesome” (A) A Level 0
  52. 52. Lead Times <ul><li>The time required to purchase, produce, or assemble an item </li></ul><ul><ul><li>For production – the sum of the order, wait, move, setup, store, and run times </li></ul></ul><ul><ul><li>For purchased items – the time between the recognition of a need and the availability of the item for production </li></ul></ul>
  53. 53. Time-Phased Product Structure Figure 14.4 | | | | | | | | 1 2 3 4 5 6 7 8 Time in weeks F 2 weeks 3 weeks 1 week A 2 weeks 1 week D E 2 weeks D G 1 week 1 week 2 weeks to produce B C E Start production of D Must have D and E completed here so production can begin on B
  54. 54. MRP Structure Figure 14.5 Output Reports MRP by period report MRP by date report Planned order report Purchase advice Exception reports Order early or late or not needed Order quantity too small or too large Data Files Purchasing data BOM Lead times (Item master file) Inventory data Master production schedule Material requirement planning programs (computer and software)
  55. 55. MRP Management <ul><li>MRP is a dynamic system </li></ul><ul><li>Facilitates replanning when changes occur </li></ul><ul><li>System nervousness can result from too many changes </li></ul><ul><li>Time fences put limits on replanning </li></ul><ul><li>Pegging links each item to its parent allowing effective analysis of changes </li></ul>
  56. 56. MRP in Services <ul><li>Some services or service items are directly linked to demand for other services </li></ul><ul><li>These can be treated as dependent demand services or items </li></ul><ul><ul><li>Restaurants </li></ul></ul><ul><ul><li>Hospitals </li></ul></ul><ul><ul><li>Hotels </li></ul></ul>
  57. 57. MRP in Services (a) PRODUCT STRUCTURE TREE Figure 14.10 Uncooked linguini #30004 Sauce #30006 Veal #30005 Chef; Work Center #1 Helper one; Work Center #2 Asst. Chef; Work Center #3 Cooked linguini #20002 Spinach #20004 Prepared veal and sauce #20003 Veal picante #10001
  58. 58. MRP in Services (b) BILL OF MATERIALS Part Number Description Quantity Unit of Measure Unit cost 10001 Veal picante 1 Serving — 20002 Cooked linguini 1 Serving — 20003 Prepared veal and sauce 1 Serving — 20004 Spinach 0.1 Bag 0.94 30004 Uncooked linguini 0.5 Pound — 30005 Veal 1 Serving 2.15 30006 Sauce 1 Serving 0.80
  59. 59. MRP in Services (c) BILL OF LABOR FOR VEAL PICANTE Labor Hours Work Center Operation Labor Type Setup Time Run Time 1 Assemble dish Chef .0069 .0041 2 Cook linguini Helper one .0005 .0022 3 Cook veal and sauce Assistant Chef .0125 .0500
  60. 60. Distribution Resource Planning (DRP) Using dependent demand techniques through the supply chain <ul><li>Expected demand or sales forecasts become gross requirements </li></ul><ul><li>Minimum levels of inventory to meet customer service levels </li></ul><ul><li>Accurate lead times </li></ul><ul><li>Definition of the distribution structure </li></ul>
  61. 61. Enterprise Resource Planning (ERP) <ul><li>An extension of the MRP system to tie in customers and suppliers </li></ul><ul><ul><li>Allows automation and integration of many business processes </li></ul></ul><ul><ul><li>Shares common data bases and business practices </li></ul></ul><ul><ul><li>Produces information in real time </li></ul></ul><ul><li>Coordinates business from supplier evaluation to customer invoicing </li></ul>
  62. 62. Enterprise Resource Planning (ERP) <ul><li>ERP modules include </li></ul><ul><ul><li>Basic MRP </li></ul></ul><ul><ul><li>Finance </li></ul></ul><ul><ul><li>Human resources </li></ul></ul><ul><ul><li>Supply chain management (SCM) </li></ul></ul><ul><ul><li>Customer relationship management (CRM) </li></ul></ul>
  63. 63. ERP and MRP Figure 14.11
  64. 64. Advantages of ERP Systems <ul><li>Provides integration of the supply chain, production, and administration </li></ul><ul><li>Creates commonality of databases </li></ul><ul><li>Can incorporate improved best processes </li></ul><ul><li>Increases communication and collaboration between business units and sites </li></ul><ul><li>Has an off-the-shelf software database </li></ul><ul><li>May provide a strategic advantage </li></ul>
  65. 65. Disadvantages of ERP Systems <ul><li>Is very expensive to purchase and even more so to customize </li></ul><ul><li>Implementation may require major changes in the company and its processes </li></ul><ul><li>Is so complex that many companies cannot adjust to it </li></ul><ul><li>Involves an ongoing, possibly never completed, process for implementation </li></ul><ul><li>Expertise is limited with ongoing staffing problems </li></ul>
  66. 66. SAP’s ERP Modules Figure 14.12 Cash to Cash Covers all financial related activity: Accounts receivable General ledger Cash management Accounts payable Treasury Asset management Dock to Dispatch Covers internal inventory management: Warehousing Forecasting Physical inventory Distribution planning Replenishment planning Material handling Promote to Deliver Covers front-end customer-oriented activities: Marketing Quote and order processing Transportation Documentation and labeling After sales service Warranty and guarantees Procure to Pay Covers sourcing activities: Vendor sourcing Purchase requisitioning Purchase ordering Purchase contracts Inbound logistics Supplier invoicing/ matching Supplier payment/ settlement Supplier performance Design to Manufacture Covers internal production activities: Design Shop floor engineering reporting Production Contract/project engineering management Plant Subcontractor maintenance management Recruit to Hire Covers all HR- and payroll-oriented activity: Time and attendance Payroll Travel and expenses
  67. 67. ERP in the Service Sector <ul><li>ERP systems have been developed for health care, government, retail stores, hotels, and financial services </li></ul><ul><li>Also called efficient consumer response (ECR) systems </li></ul><ul><li>Objective is to tie sales to buying, inventory, logistics, and production </li></ul>

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