Inventory Management

Answers to Questions
1 What are the assumptions of the basic EOQ model, and to what extent do they limit the usefulness of the model?
Demand is known with certainty and is constant over time

No shortages are allowed Lead time for the receipt of orders is constant Order quantity is received all at once

2 Explain the ABC inventory classification system and indicate its advantages. Items are classified on the basis of their usage in monetary terms. Based on this criterion, items are classified into three categories as follows: A : high consumption value items; B : moderate consumption value items; & C : low consumption value items; In general, about 5 to 15 percent of all inventory items will account for 70 to 80 percent of the total dollar value of inventory. Each level of inventory requires different levels of inventory control. That is, the higher the value of inventory, the higher the control. Such a system generally requires less record-keeping and focuses managerial attention on the most important inventory items.

3 Distinguish between a fixed-order quantity system and fixed time period system and give an example of each. In a fixed-order-quantity system, an order is placed for the same constant amount whenever the inventory on hand decreases to a certain level, here reorder level(demand during lead time) is fixed, more useful if quantity discounts are offered by the supplier. Whereas in a fixed-time-period system, an order is placed for a variable amount after an established passage of time. 4 Describe the major cost categories used in inventory analysis and their functional relationship to each other. The categories are ordering cost, carrying cost, and shortage costs. As the order size increases, ordering costs and shortage costs decrease while carrying costs increase.

5 Discuss customer service level for an inventory system within the context of quality management. The customer service level is the ability to meet internal or external demand at a Specified level of efficiency. High quality service is often perceived as always being able to meet demand, which normally requires high inventory levels and can be costly, or efficient management of the inventory system such that demand is met most of the time. 6 How is the reorder point and lead time related in inventory analysis? In a continuous inventory system, the reorder point is the inventory level at which a new order is placed, and lead time is the time required to receive an order after it has been placed. 8 Describe how the production quantity model differs from the basic EOQ model. In a production quantity model (noninstantaneous receipt model), the order quantity is received gradually over time and the inventory level is depleted at the same time it is being replenished, whereas in the basic EOQ model orders are received all at once.
9. Distinguish between in-process inventory, safety stock inventory, and seasonal inventory. In-process inventory consists of those items of materials components and partially completed units that are currently in the production process. Safety-stock inventory is set so that inventory is maintained to satisfy some maximum level of demand. It could be stated that safety stock is that level of inventory between the minimum expected demand and the desired level of demand satisfaction. Seasonal inventory is that inventory accumulated to meet some periodic increase in demand.

10. Discuss the nature of the costs that affect inventory size. The optimum inventory size is one that minimizes the combined total of holding cost, ordering (or setup) cost, shortage cost, and purchase cost. 11. Under which conditions would a plant manager elect to use a fixed-order quantity model as opposed to a fixed-time period model? What are the disadvantages of using a fixed-time period ordering system? Fixed-order quantity modelswhen holding costs are high (usually expensive items or high deprecation rates), or when items are ordered from different sources. Fixed-time period modelswhen holding costs are low (i.e., associated with low-cost items, low-cost storage), or when several items are ordered from the same source (saves on order placement and delivery charges). The main disadvantage of a fixed-time period inventory system is that inventory levels must be higher to offer the same protection against stockout as a fixed-order quantity system. It also requires a periodic count and closer surveillance than a fixed-order quantity system. A fixed-order quantity system can operate with a perpetual count (keeping a running log of every time a unit is withdrawn or replaced) or through a simple two-bin or flag arrangement wherein a reorder is placed when the safety stock is reached. This latter method requires very little attention. 12. Discuss the general procedure for determining the order quantity when price breaks are involved. Would there be any differences in procedure if holding cost were a fixed percentage of prices rather than a constant amount? In computing inventory size for the case where item cost varies with quantity ordered, if holding costs are constant, then only one EOQ is calculated. Then, the total cost for the feasible EOQ and all break-points above are calculated. The lowest total cost is the best order size. If holding cost is a fixed percentage of the price, then the problem is worked from the largest quantity (lowest price) to the smallest (highest price). Successively lower prices in the EOQ formula until the EOQ is a feasiblei.e., the EOQ falls into the same ranges as the price used in the equation. At this point it is only necessary to compute the total cost with this EOQ, and with the price breakpoints above (at lower prices). Again, the lowest total cost is the best order size. 13. What two basic questions must be answered by an inventory-control decision rule? Any inventory control model or rule must establish (1) when items should be ordered, and (2) how many should be ordered.

14. Which type of inventory system would you use in the following situations? a. Supplying your kitchen with fresh food. b. Obtaining a daily newspaper. c. Buying gas for your car. To which of these items do you impute the highest stockout cost? (a) Supplying kitchen with foodboth a periodic model and order quantity. Generally, a household will shop once weekly for the majority of items (periodic), then pick up items such as bread and milk as the supply runs low (fixed quantity with reorder point). (b) Obtaining a daily newspapera daily newspaper is obviously a periodic model. One does not usually wait until he has finished one daily paper before buying the next days paper. (c) Buying gas for your cargenerally, this is a hybrid type model wherein a reorder point is signaled when the gas indicator is low, then the tank is filled. Many people, however, have a fixed quantity purchase when the reorder point is reached, such as put in 10 gallons or $10.00 worth. Still others (drawing upon our own experience) use a periodic ordering system on their wifes car, such as taking it out and filling it every Sunday. The highest stockout cost for most well-fed, well-read individuals would be running out of gas in your car. The cost could range from practically zero if one runs out in front of a gas stationto being late for an appointment or causing an accident on the highway. 15. Why is it desirable to classify items into groups, as the ABC classification does? Using a classification scheme such as this one allows a greater portion of time to be spent in controlling specific groups or classes or items. For the ABC grouping, greater control is afforded those items which comprise the greatest dollar volume in usage. The result of this classification is a reduction in the overall inventory size and, therefore, decreased costs for the same level of satisfying inventory demands. 16. What kind of policy or procedure would you recommend to improve the inventory operation in a department store? What advantages and disadvantages does your system have vis--vis the department store inventory operation described in this chapter? A wide variety of alternative methods for inventory control are available for retail stores. The most notable recent innovation is the introduction of an electronic cash register, which, in addition to tabulating specific cash receipt categories as in conventional cash registers, will also update inventory levels. Future usage will extend to checking credit, and verifying credit cards through direct linkage to a computer data file.

Chapter 16 (Russell & Taylor) Lean Production Systems

1. Explain the concept of total productive maintenance (TPM) Total productive maintenance takes a broader view of preventive maintenance. It is concerned with maximizing the productive potential of every machine over its lifespan. Breakdown maintenance Repairs to make failed machine operational Preventive maintenance System of periodic inspection and maintenance to keep machines operating TPM combines preventive maintenance and total quality concepts TPM Requirements Design products that can be easily produced on existing machines Design machines for easier operation, changeover, maintenance Train and retrain workers to operate machines Purchase machines that maximize productive potential Design preventive maintenance plan spanning life of machine

2. What is lean production ? List basic elements of Lean production. Doing more with less inventory, fewer workers, less space Just-in-time (JIT) smoothing the flow of material to arrive just as it is needed JIT and Lean Production are used interchangeably Muda (waste, anything other than that which adds value to product or service ) Basic Elements 1. Flexible resources 2. Cellular layouts 3. Pull system 4. Kanbans 5. Small lots

6. 7. 8. 9. 10.

Quick setups Uniform production levels Quality at the source Total productive maintenance Supplier networks

Benefits of Lean Production Reduced inventory Improved quality Lower costs Reduced space requirements Shorter lead time Increased productivity Greater flexibility Better relations with suppliers Simplified scheduling and control activities Increased capacity Better use of human resources More product variety

3 What does a cellular layout contribute to lean production? Cellular layouts, because of their manageable size, work flow, and flexibility, facilitate the pull production element of lean production. They also make problems more visible, improve quality, reduce transit times, and encourage worker ideas and input. Work centers in lean systems must be closely linked together. The cellular concept facilitates and forms that linkage. 4. Describe how the following kanbans operate: a. Production and withdrawal systems b.Kanban squares c. Signal kanbans d.Material kanbans e. Supplier kanbans a. A withdrawal kanban is a request for more input from the preceding workstation. It authorizes the movement of material from one workstation to the next and it starts off attached to an empty container. If the feeding workstation that receives a withdrawal kanban has a full container of material available, it exchanges the kanbans and containers. That is, it takes the production kanban that is attached to the full container and places it on the empty container. Similarly, the withdrawal kanban that originally accompanied the empty container is attached to the full container and sent immediately to the next process. A production kanban is a work order. It signals a workstation to begin producing enough of the item requested to fill the empty container to which the production kanban is attached. b. A kanban square is a marked area that will hold a certain amount of output items (usually one or two). If the kanban square following a workers process is empty, the worker knows it is time to begin production again. c. A signal kanban closely resembles the reorder point system. A triangular marker, or signal, is placed at a certain level of inventory. When the marker is reached (a visual reorder point), it is removed from the stack of goods and placed on an order post, thereby generating a replenishment order for the item. d. A material kanban is a square-shaped kanban often used in conjunction with a signal kanban in cases where it is necessary to order the material for a process in advance of the initiation of the process. e. Supplier kanbans are used outside the factory to order material from vendors. The supplier delivers the order directly to its point of use in the factory and then picks up an empty container (with supplier kanban attached) to fill and return later. 5. What role does the equipment operator play in TPM? Equipment operators maintain their own machines with daily care, periodic inspections, and preventive repair. They compile and interpret maintenance and operating data on their machines, identify signs of deterioration prior to failure, and scrupulously clean equipment, tools, and workspaces. 6. Give examples of visual control. How does visual control affect quality? Visual control enhances quality by making problems visible, making workers aware of their environment and making it easier to do things right the first time. Kanbans, andons, process control charts, and machines or stockpoints painted different colors are examples of visual control in manufacturing. The red area on the speedometer of your car that indicates legal speed is an example of visual control in day-to-day activities. 7. How did lean production evolve into a system of continuous improvement? Reducing inventory was the first step in eliminating waste in early lean systems. With no inventory to guard against poor quality, late deliveries, and machine breakdowns, companies implementing lean production are forced to improve their quality systems, supplier relationships, and preventive maintenance systems. In addition the pull system itself encourages continuous improvement. Inventory is held only to satisfy demand during lead time (i.e., until a replacement order arrives). To reduce inventory further, one must reduce lead time or the components of lead time, such as processing time, transit time, setup time, and inspection time. Thus, lean production touches every area of operations. 8. What is poka-yoke? Give an example. Poka-yoke goes further than visual control by preventing defects or mistakes from occurring. For example, a car that sounds an alarm when you withdraw the key from the ignition without placing the gear in park is audio control. A car that will not let you take the key out of the ignition until the gear is in park is a poke-yoke.

9. Why is uniform production important to lean ? How is it achieved? Uniform production is essential for a pull system (pull system is a production system in which items are manufactured only when called for by the users of those items). It allows component production to be balanced and work to flow smoothly from one workstation to the next. Uniform production is achieved through accurate forecasts of final demand, frozen master schedules, and mixed-model sequencing of the final assembly line. 10. How was the concept of kanban developed from the two-bin inventory system? In the two-bin system, two bins are maintained for each item. The first (and usually larger bin) contains the order quantity minus the reorder point; the second bin contains the reorder point quantity. At the bottom of the first bin is an order card that describes the item and specifies the supplier and the quantity that is to be ordered. When the first bin is empty, the card is removed and sent to the purchasing department to order a new supply of the item. While the order is being filled, the quantity in the second bin is used. If everything goes as planned, when the second bin is empty, the new order will arrive and both bins will be filled again. The kanban system eliminates the first bin, places the order card, or kanban, at the top of the second bin, and continually orders enough inventory to fill the second bin. As the system progresses, a full bin of material arrives just as the current bin is being emptied. 11. What is lean consumption? Give an example Lean consumption proposes that you use only what you need. This is consistent with company cost-saving initiatives, but not with corporate sales and growth strategies. An example of lean consumption is water-saving devices, or inventory policies do not purchase in bulk.

12. What are some typical benefits from implementing lean? Typical benefits from implementing lean production include: lower costs, reduced space requirements, shorter lead time, increased productivity, greater flexibility, better relations with suppliers, simplified scheduling and control activities, increased capacity, better use of human resources, continuous improvement of operations, more product variety, increased customer satisfaction, higher profits, and increased market share. 13. In what type of environment is lean production most successful? Lean production is most successful in stable, repetitive environments with flexible resources. 14. How are suppliers affected by lean production ? Suppliers must deliver fewer orders more frequently. Quality expectations are higher. Partnerships with producers mean longer-term contracts and competition based on more than price. 15. Differentiate between a push and a pull production system. In a push system, a schedule is prepared in advance for a series of workstations and each workstation pushes the work they have completed to the next station. With the pull system, workers go back to previous stations and take only those parts or materials they need and can process immediately. 16. What are the advantages of small-lot sizes ? By producing small amounts at a time, processes can be physically moved closer together and transport between stations can be simplified. Quality problems are easier to detect, and workers show less tendency to let poor quality pass (as they might in a system that is producing huge amounts of an item anyway). Lower inventory levels make processes more dependent on each other, revealing errors and bottlenecks that may otherwise go undetected. 17. what is the purpose of lean production? The purpose of lean production is to eliminate waste and continually improve operations. 18. Why are flexible resources essential to lean production? Flexible resources are important because there is no excess inventory to guard against variations in demand or supply. Multifunctional workers, general-purpose machines, and a flexible control system enable lean factories to adapt to changes in demand and supply rather than compensate for them with just-in-case inventory.

19. How are lean production and quality related? What is lean Six Sigma ? In lean systems, there is no extra inventory to buffer against defective units, so maintaining high quality levels is important. In one sense, then, quality is a pre-requisite of lean production. On the other hand, the small-lot production characteristic of lean production encourages quality because workers can observe quality problems easier; when problems are detected, they can be traced to their source and remedied without reworking too many units. So in another sense, lean production facilitates quality. Lean six sigma combines leans principles for eliminating waste with six sigmas reduction of variability. 20. What are the advantages of mixed-model sequencing? In mixed-model sequencing, daily production is arranged in the same ratio as monthly demand, and jobs are distributed as evenly as possible across the days schedule. Thus, at least some quantity of every item is produced daily; and the company will always have some quantity of an item available to respond to variations in demand. The mix of assembly also steadies component production, reduces inventory levels, and supports the pull system of production. 21. How are the kanban system and the reorder point system similar? How are they different? In a reorder point system, a certain quantity, Q, is ordered whenever the stock on hand falls below a reorder point. The reorder point is determined so that demand can be met while an order for new material is being processed. Thus, the reorder point corresponds to demand during lead time. A kanban is a visual reorder point. When the kanban arrives with an empty container, a new order needs to be placed. The kanban system and reorder point system are different in that the quantity ordered and the reorder point are equivalent in the kanban system. (In terms of the two-bin system, that means the first bin is eliminated.) With kanbans, an order for new material is always outstanding. 22. Explain the principles of SMED. What does SMED try to achieve? SMED stands for single minute exchange of dies. Its objective is to reduce setup time to under 10 minutes (hence the name single digit). The ideal achievement would be push-button setups or eliminating the need for setups altogether. The principles of SMED are: 1. separate internal setup from external setup; find out which setup activities can be performed in advance, and which must be performed at the machine while it is idle, 2. convert internal setup to external setup; perform as many preparatory tasks as you can while the machine is otherwise occupied, 3. streamline all aspects of setup; use time and motion studies to improve the setup process, 4. perform setup activities in parallel or eliminate them altogether; explore the need for setups; have teams of workers perform setups; practice setup procedures.

Chapter 15 (Russell & Taylor) Resource Planning

Answers to Questions
1. Discuss several assumptions of MRP and how they are being relaxed with new technology? MRP systems assume material is the most constraining resource, leadtimes are fixed, and every movement and transaction must be reported. These assumptions can be relaxed with ERP systems. Companies constrained by a particular process may reconcile capacity issues first and use bills of labor or bills of resources instead of bills of material. ERP processors today are able to handle variable lead-times, incorporate JIT concepts with MRP, and utilize more sophisticated scheduling systems with less data requirements. 2. What are the objectives, inputs, and outputs of an MRP system? The objective of an MRP system is to ensure the availability of material while maintaining the lowest possible level of inventory. The major inputs to MRP are: the master schedule, the product structure record, and the item master file. The output from MRP can take the form of work orders, purchase orders, and various reports, such as planned order reports or action reports.

3. How does MRP differ from ERP? Find a description of an MRP module from a software vendor. MRP systems focus on an individual plants operation; ERP systems manage the resources of an entire enterprise. For example, an MRP system is concerned with customer demand, production schedules, inventory levels, and available capacity at work centers within a plant. An ERP system is concerned with customer demand and available capacity at its plants worldwide, and production schedules and inventory levels along its supply chain as well as throughout the company. Support for multiple languages and currencies, foreign taxes and accounting rules, integrated logistics, and electronic commerce are also common. ERP systems typically contain production-oriented MRP modules as well as modules for business planning, customer service, financial management, and accounting. 4. Explain how MRP could be applied to (a) the surgery suite of a hospital, (b) scheduling university classes, (c) a chain of restaurants, and (d) hotel renovations. (a) requirements for labor, equipment, surgical tools and supplies can be exploded from a bill of resources established for each type of surgery; (b) classes can be scheduled based on a bill of courses for students in a particular major; (c) food purchases can be exploded from a bill of menu offerings; (d) hotel renovations can be scheduled from a bill of materials by style of room. 5. Describe a production environment in which MRP would be useful. Describe a production environment in which MRP would not be useful? MRP is useful for dependent and discrete demand items, complex products, job shop production, and assemble-to-order environments. MRP is not needed for very simple products with few components and no variability in output. 6. Explain with an example the difference between dependent and independent demand. The demand for cars is independent. The demand for tires is dependent. If a manufacturer makes 100 cars and four tires are needed for each car, he or she would need 400 tires. 7. What is the purpose of phantom bills, K-bills, and modular bills of material? Phantom bills are used for transient subassemblies. K-bills group small parts together under one part number. Modular bills are used to simplify forecasting and planning. 8. What are the inputs to capacity requirement planning? Discuss several alternatives for leveling the load on a facility. The inputs to CRP are the planned order releases from the MRP schedule, a routing file, and an open orders file. Overloads can be leveled by producing the items in earlier time periods, producing them in later time periods, using overtime or subcontracting, or hiring more workers. Underloads can be leveled by pulling work forward, becoming a subcontractor, cutting worker hours, or

laying off workers. 9. Describe cycle counting. How does it improve inventory performance? Cycle counting selects some items of inventory to count each day. Discrepancies are reconciled immediately instead of at the end of the year. The system is geared toward keeping tight control on some items and looser control on others. 10. What are the capabilities of customer relationship management (CRM) software? How does ERP & CRM relate? Customer relationship management software plans and executes business processes that involve customer interaction, such as marketing, sales, fulfillment and service. CRM uses ERP to quote and schedule delivery dates, process customer orders, report order status, and establish after-sales service. 11. What are the capabilities of supply chain management software ? How do ERP and SCM relate ? Supply chain management software handles all interactions with suppliers along the supply chain including supplier certification, e-procurement, order fulfillment and network design. SCM uses ERPs data base and works with ERP in demand planning and collaborative production planning. The distinction between ERP and SCM software is becoming increasingly blurred. 12. Describe the MRP process, including netting, explosion, lot sizing and time phasing. Netting is subtracting out whats on hand from the demand requirements. Explosion is the determination of lower-level requirements by multiplying the quantity per assembly by the parent requirements. Time phasing is the subtracting of lead time from a due date to get a start date (i.e., order release date). The MRP process consists of exploding down a bill of material, netting out inventory, and offsetting for lead times to determine order quantities and release dates.