Innovative Inventory and Production Management Techniques
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This document outlines learning objectives and concepts related to innovative inventory and production management techniques. It discusses just-in-time production, target costing, life cycle costing, theory of constraints, and other methods to minimize inventory costs and maximize productivity. Key terms defined include economic order quantity, safety stock, push and pull systems, value chain relationships, and cost accounting changes with JIT adoption.
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Innovative Inventory and Production Management Techniques
- 1. Chapter 16 Innovative Inventory and Production Management Techniques Cost Accounting Traditions and Innovations Barfield, Raiborn, Kinney
- 2. Learning Objectives (1 of 4) • List the most important relationships in the value chain and describe how these relationships can be managed to benefit the company • Explain why inventory management and productivity is so significant • Contrast the push and pull systems of production • Define purchasing and carrying costs and explain why they are important
- 3. Learning Objectives (2 of 4) • Explain how product life cycles affect product costing and profitability • Identify how target costing influences production cost management • Describe the just-in-time philosophy and explain how it affects production • Explain how the traditional cost accounting system changes when a JIT inventory system is adopted
- 4. Learning Objectives (3 of 4) • Explain how design for manufacturability assist in development of new products • Describe flexible manufacturing systems and explain how they relate to computer-integrated manufacturing • Explain how the theory of constraints helps in determining production flow
- 5. Learning Objectives (4 of 4) • (Appendix) Illustrate how the economic order quantity and reorder point are used • (Appendix) Explain why companies carry safety stock; calculate the safety stock level
- 7. Manage and Minimize Inventory • Just-in-time • Flexible manufacturing systems • Computer-integrated manufacturing • Economic order quantity • Economic production run • Order point • Safety stock • Pareto inventory analysis
- 9. Value Chain Improvements • Improved communication of requirements and specifications • Greater clarity in requests for products or services • Improved feedback regarding unsatisfactory products or services • Improvements in planning, controlling, and problem solving • Shared managerial and technical expertise, supervision, and training
- 10. Value Chain Customers and Suppliers may be internal or external
- 11. Inventory Types • Raw material • Work in process • Finished goods • Indirect materials (supplies) • Merchandise inventory Costs • Purchasing/production • Ordering/setup • Carrying/not carrying
- 12. Purchasing and Production Costs PURCHASING PRODUCTION $$$ Quoted price Shipping charges Discounts allowed Direct material Direct labor Traceable overhead Allocated overhead
- 13. Production Systems • Push Systems – Produce in anticipation of customer orders – Store raw material, work in process, and finished goods inventory • Pull – Produce as needed – Minimal storage
- 16. Information Technology • Bar Codes • Vendor-Managed Inventory • Electronic Data Interchange (EDI) • E-Commerce • Procurement Cards
- 17. Purchase/Production Terms • Ordering costs (purchasing) – costs to prepare, receive, pay for an order • Setup costs (production) – direct and indirect costs of preparing equipment for a new production run
- 18. Inventory Terms • Inventory carrying costs – storage, handling, insurance, property taxes, losses from obsolescence or damage • Stockout – inventory is not available for internal or external customers
- 19. T I M E S A L E S Product Life Cycles Development Stage
- 20. Target Costing • Decisions made during the development stage represent 80 to 90 percent of product’s total life-cycle costs • Value Engineering – lower production costs – higher quality – greater flexibility
- 21. Target Costing Traditional Approach 1st Design Product 2nd Compute Cost 3rd Set Sales Price 4th Profit or Loss Target Cost Approach 1st Set Sales Price 2nd Set Profit 3rd Compute Target Cost 4th Design Product After Product Design Before and During Product Design
- 22. Kaizen Costing • Continuous Improvement – reduce product costs – increase product quality – improve production process • Stabilize profit margin as price is reduced over the produce life cycle
- 23. Introduction Stage T I M E S A L E S • Substantial costs including engineering changes, market research, advertising, and promotion • Sales low • Sales price matches similar or substitute goods Introduction Stage
- 24. Engineering Changes • Engineering changes during production are expensive – production documents must be revised/reprinted – workers must relearn tasks – machine setups must be changed – parts may be made obsolete
- 25. Growth Stage • Increased sales • Quality may improve • Prices stable T I M E S A L E S Growth Stage
- 26. Maturity Stage • Sales stabilize or decline slowly • Firms compete on selling price • Costs at lowest level T I M E S A L E S Maturity Stage
- 27. Decline Stage • Waning sales • Dramatic price cuts • Cost per unit increases T I M E S A L E S Decline Stage
- 28. Life Cycle Costing • Profitability viewed over product life • Costs are accumulated over entire life cycle • Useful for industries that face rapid technological or style changes
- 29. Just-in-Time • Eliminate any process or operation that does not add value • Continuous improvement in production/performance efficiency • Reduction in total cost of production/performance while increasing quality
- 30. Traditional Manufacturing • Smooth operating activity – steady use of workforce – continuous machine utilization • Spread overhead over a maximum number of products • Inventory levels high enough to cover up inefficiencies in acquisition and/or production
- 31. JIT and Purchasing • Cost includes quoted cost plus the failure costs of poor quality • Long-term contracts • Reliable delivery – “ready for use” or modular – bar coded • Vendor located to minimize shipping costs and delivery time
- 32. Vendor Certification • Limited number who can provide quality and reliability • Consider – supplier’s operating philosophy – costs – product quality – service
- 33. Product Design • Fewest number of parts • Standardized parts • Quality designed into product • Minimal engineering changes • Recyclability of the product
- 34. Product Processing • Reduce machine setup time – Perform setup while machine is running – Eliminate all unnecessary movements by workers and/or materials – Use setup teams • Continuous quality – Ensure vendor quality at point of purchase – Monitor worker and machine quality
- 35. Product Processing • Standardizing work – standard procedures – without variation – on time – every time It is nearly impossible to improve an unstable process. Dr. W. Edwards Deming
- 38. JIT Plants • Reduce storage • Increase throughput • Develop multiskilled workers • Use autonomation
- 39. JIT Support Systems • Six-sigma method • Internet business model • Supply-chain management • Business-to-business e-commerce – Transactional – Information sharing – Collaborative
- 40. Logistical Support • Open buying on the Internet • Just-in-time training • Focused factory arrangements • Third-party logistics
- 41. JIT and Variances • Variance reporting and analysis minimal • Workers monitor quality and prevent defects • Variances first appear in physical not financial measures • Long-term price agreements minimize direct material price variances • Vendor quality agreements minimize direct material usage variances
- 42. JIT and Variances • Automated JIT systems minimize labor variances • Direct labor and overhead combined into conversion costs • Engineering changes may cause material, labor, overhead, and/or conversion variances
- 43. Costing Methods RIP Inventory AP Conversion Costs Various Accounts RIP Inventory Conversion Costs Finished Goods RIP Inventory Cost of Goods Sold Finished Goods AR Sales Conversion Costs Various Accounts RIP Inventory Finished Goods AP Conversion Costs Cost of Good Sold Finished Goods AR Sales Traditional 1 2 1 3 4 5 3 2 Method 1 Short Production Time
- 44. Costing Methods RIP Inventory AP Conversion Costs Various Accounts RIP Inventory Conversion Costs Finished Goods RIP Inventory Cost of Goods Sold Finished Goods AR Sales RIP Inventory AP Conversion Costs Various Accounts Finished Goods Cost of Goods Sold RIP Inventory Conversion Costs AR Sales Traditional 1 2 1 3 4 5 3 2 Method 2 Shipped When Completed 4
- 45. Costing Methods RIP Inventory AP Conversion Costs Various Accounts RIP Inventory Conversion Costs Finished Goods RIP Inventory Cost of Goods Sold Finished Goods AR Sales Conversion Costs Various Accounts RIP Inventory (minimal) Finished Goods (minimal) Cost of Goods Sold AP Conversion Costs AR Sales Traditional 1 2 1 3 4 5 3 2 Method 3 Ultimate JIT
- 46. Costing Methods RIP Inventory AP Conversion Costs Various Accounts RIP Inventory Conversion Costs Finished Goods RIP Inventory Cost of Goods Sold Finished Goods AR Sales Conversion Costs Various Accounts Cost of Goods Sold AP Conversion Costs RIP Inventory Finished Goods Costs of Goods Sold AR Sales Traditional 1 2 1 3 4 5 3 2 Method 4 Backflush 4
- 47. Nonmanufacturing JIT • Purchasing and delivery • Attitude of management • Worker empowerment – Question established routines • Good human resource management • Continuous improvement • Benchmarking
- 48. Design for Manufacturability • Optimize – customer satisfaction – cost of owning and using the product over its life – cost, time, effort, and ease of producing and delivering the product
- 49. Manufacturing Methods Flexible Manufacturing System (FMS) • network of robots and material conveyance devices monitored and controlled by computers • modular factories • customization • quick, inexpensive production changes Computer-Integrated Manufacturing (CIM) • two or more FMSs connected via host computer and information system
- 50. Theory of Constraints (TOC) Flow of goods through a production process cannot be at a faster rate than the slowest bottleneck in the process. Eliyahu Goldratt
- 51. Theory of Constraints • Constraint - anything that confines or limits a person or machine’s ability to perform a project or function – human constraints – bottlenecks place quality control points before bottlenecks
- 53. Bottleneck
- 54. Economic Order Quantity The least costly number of units to order at a single time EOQ QO C = 2 Q Estimated annual quantity used in units O Estimated cost of placing one order C Estimated cost to carry a unit in stock for a year Used with Push Production
- 55. EPR QS C = 2 Economic Production Run (EPR) The least costly number of units to produce during a single production run Q Estimated annual quantity produced in units S Estimated cost of setting up production run C Estimated cost of carrying a unit in stock for a year
- 56. EOQ and EPR • Order Point – triggers the placement of an order for additional units • Usage – quantity of inventory used or sold each day • Lead Time – days it takes from placement of order to receipt or production of goods • Safety Stock – inventory kept on hand to avoid stockouts
- 57. Pareto Inventory Analysis Inventory A highest value manage using perpetual inventory and JIT C lowest value manage using periodic inventory (two-bin or red-line system) B all other inventory management decides how to control
- 58. Questions • What is the value chain? • What is the difference between push and pull systems of production? • What is the just-in-time philosophy? How does JIT affect production?