CHAPTER 6 & 7: INVENTORY MANAGEMENT CHAPTER 11: SUPPLY CHAIN

-Type of Inventory: 1. WIP 2. Raw materials 3. Finished Bullwhip Effect Distortion of demand information while
Goods 4. MRO: tools and supplies 5. Goods-in-transit to it passes from one stage to the next across the supply
warehouses or customers (pipeline inventory) chain due to increased variability
Causes: Demand forecast updating, therefore everyone
-Functions of Inventory: 1. Manage Production: To permit will increase their order quantity based on the order
operations (Littles Law); To smooth production demand seen from downstream players
requirements (seasonality); To decouple operations (to Exacerbated by: a. Order Batching b. Price Fluctuation c.
eliminate sources of disruption 2. Meet Demand: To meet Rationing and shortage gaming Phantom order Results
anticipated customer demand; To prevent stock out 3. in greater orders from the retailers to increase chance of
Control Costs: To take advantage of production/order cycle; adequate supply to meet DD
To hedge against price increases; To take advantage of
quantity discount Solutions: 1) Demand Forecast: Information Sharing 2)
Order Batching: Reduce fixed ordering cost and schedule
-Reasons not to hold Inventory: 1. Expenses (costs) 2. deliveries 3) Price Fluctuation: Everyday Low Price (EDLP)
Obsolescence 3. Delayed responsiveness 4. Mask 4) Shortage Gaming: Penalize order cancellations and
underlying problems prioritize retailers
-Trade-off: 1. Too many: Excess cost (Salvage or perish;
Holding costs; Delayed responsiveness; Mask underlying Supply Chain Surplus: Final/End price Total Cost to
problems) 2. Too few: Shortage cost (Lost production idle; produce/deliver product
Lost opportunity backlog & lost sales; Lost customers)
Role of Distribution Centre: Reduction in Transportation
-Effective and efficient inventory management: 1. Assumption of EPQ: Links
Inventory counting system 2. Reliable forecast of dd (POS 1. Only one product is involved 2. Constant Advantages: a. Lower inventory costs b. Ability to offer a
system record actual sales) 3. Knowledge of mean lead timedemand/usage rate 3. Produces in batch and production large product selection
and its variability 4. Classification system of inventory items rate is constant 4. Constant lead time 5. Usage rate Disadvantages: a. Inventory further away from customers
(ABC analysis) 5. Reasonable estimates of excess cost per occurs continually, but production occurs periodically 6. b. High delivery cost and time, less responsive c. Cannot
unit inventory (holding costs or salvage and perish), No quantity discounts customize for regional preferences
shortage cost per unit inventory (lost production,
opportunity, customers), fixed inventory management costs EOQ Misleading? Estimated Results? Supply Chain Coordination: 1) Contracts a. To induce
(order cost) 6. Inventory management model (EOQ & The total cost curve is relatively flat in the vicinity of the performance improvement b. To provide supply chain
quantity discount, EPQ, Newsboy) EOQ, so there is a zone of values of order quantity for parties the incentive to do things they would not otherwise
which the total cost is close to the minimum. The fact A larger pie to be shared by different parties in the supply
-Inventory counting system: that the EOQ calculation involves taking a square root chain
1. Record=Actual inventory: a. Misplaced Inventory b. lessens the impact of estimation errors. Also, errors may
Transaction Errors c. Spoilage d. Theft e. Product quality and cancel each other out. CHAPTER 15: JUST-IN-TIME/LEAN OPERATIONS
yield, defective products e. Information Delay Ultimate goal of JIT: Balanced system that can achieve
Safety Stock: It is inventory held in excess of expected smooth and rapid flow of materials/parts/products to
RFID: Wireless technology to transmit information from demand to reduce risk of stockout presented by match SS to DD
small tags attached to objects in order to automatically variability in either lead time or demand rates Basic elements: 1. Waste reduction (inventory, waiting
identify and track those items. Basic Idea is to assign an ID time, inefficient work methods, overproduction,
to each physical object. The tag contains chip which emits CHAPTER 8: REVENUE MANAGEMENT unnecessary waste, processing waste, product defects) 2.
data encoded in the chip to the reader which converts the Shortage cost (Cs) if D > Q, marginal cost (Ce) if D Q DD driven: make system flexible by reducing setup & lead
radio waves into digital data. time, leading to small lot prod 3. Culture dedicated to
Usefulness of RFID: a. improved in-store inventory accuracy C
excellence and continuous improvement
s
b. Reduce time to read/detect inventories c. Increase sales stock probability /Service ( SL ) /Critical Ratio (CR ) =(
Romantic v Pragmatic JIT )
because of reduced stock-out situtations C +C
Romantic: The goal of JIT iss ZEROe INVENTORY. It is simple
to implement.
-Classification system: Pragmatic: One form of waste is inventory. Inventory exists
ABC: classifying inventory according to some measure of *Always round up to next largest cumulative probability! because of various reasons, EOS, uncertainty, speculation.
importance and allocating control efforts according (priority How it works: 1. Adjust DD 2. Segment customers into JIT seeks to eliminate the underlying problems, first before
system) high & low willingness to pay 3. Limit the no. of sales at removing inventory. Problems: Reduce setup times,
- A very important (10-20% of items + 60-70% of Annual low prices remove uncertainty, improve quality etc. Simple but not
dollar Value) B med. important (between A & C); C least Decisions to be made: 1. Protection level quantity to easy.
important (50-60% of items + 10-15% of dollar value) be reserved for high paying customer 2. Booking limit Ways to
- Other factors: Risk of obsolescence and stock out, total no. of resource minus overbooking Reducing Cycle Stocks: By reducing fixed order/ setup
Distance of supplier, Next biggest dollar usage item, Newsboy assumption: 1. Only one product is involved costs
Correlated to an A item 2. Single period model 3. Demand is random with known Setup Reduction: Separate internal and external setup
probability distribution 4. A single order arrives before Internal Setup: Tasks which can be done only when the
EOQ Model ( objective: meet dd with min.TIC)l: selling season 5. Leftover inventory is salvaged after machine is stopped
Total Cost (over specific time period) selling season External Setup: Tasks which can be done while the
Necessary conditions for RM: machine is still running
Total Cost =PurchaseCost +Setup ( order ) cost+ Holding Cost +Shortage Cost
1. Perishable Resource 2. Well defined market segments Consider changes that make more tasks external
3. Uncertainty, more valuable future DD on that Reducing Safety Stocks: a. By reducing average lead
resource (randomness in future dd, high sales vol. at the time b. Reduce demand variance c. Reduce lead time
TC = P*D + (D/Q)*S + (Q/2)*h + lower price level)
variance
0 Push systems: a. Daily/weekly production plan generated
Definition of Terms: If F(Q) is Normal, then Q = +z where z can be centrally b. Production is pushed through the system, in
D Demand per time period found order to meet forecasted demand
Q Order Quantity If F(Q) is Discrete, use the given cumulative F(Q) Pull systems: a. Demand triggers a request for resupply.
P Purchase cost per unit If F(Q) is Poisson has mean , then find Q* using b. Production is pulled through the system c. Works well
S Setup or order cost for each order Poisson Distribution Function Table for roughly constant demand
h Holding cost per unit per period If D were uniformly distributed between a and b,
H Holding charge (stated as % of unit cost)(h=H.P)
we would have Q=a + (b-a)x SL Common Problems Associated with JIT
P Production/part delivery rate
Implementation Problems: a. Cultural resistance to change
LT Lead time in periods
CHAPTER 10: AGGREGATE PLANNING AND MRP b. Lack of resources c. Lack of top management
B Shortage/Backorder cost per unit per period
Aggregate planning (2-12 months ahead): understanding or commitment
N No. of orders per period
Aggregate planning involves developing a general plan
T Time between orders
for Operational Problems: a. Inability to meet schedule b. Poor
TIC Total Inventory Cost (TC Purchase Cost)
employment, output and inventory levels. The goal is to Quality
develop a c. Lack of vendor support d. Poor Forecasting e. Inaccurate
Assumptions of EOQ Model:
plan which makes most efficient use of resources in the Data
1. A. Only one product is involved b. Ordering in batch from
organization. Planners attempt to determine the best f. Machine Breakdowns g. Performance Measurement
supplier c. Constant demand rate d. Constant lead
way to meet h. Lack of Middle Management Support
time e. Single delivery for each order e. A single flat
for forecasting demand requirements within the
price from the supplier
constraints JIT & Worker Autonomy: a. Repetitive work is highly
imposed by long-term decisions. disliked by workers, because they prefer variations b.
The need for aggregate planning is to begin to translate Decreased variations means less individualization and less
long-term worker motivation
decisions into short term operating plans c. Less inventory implies less tolerance for variation from
Demand and capacity options: mean output rate, hence resulting in higher stress for
1. Proactive strategy (level capacity) alter DD to workers
match capacity (pricing, promotion, backorders)
2. Reactive strategy (chase DD) alter capacity to Limitations of JIT: a. Good for stable demand b. Cant
meet DD (hire/lay-off full-time regular workers, handle large spikes in demand c. Cant handle vastly
overtime/slacktime, part-time workers, subcontracting) different product mixes
Aggregate Planning in Services: 1. Services occur when
they are rendered (cannot build up inventory) 2. Conversion to JIT system:

2 DS Demand for service can be difficult to predict 3. Service 1. Top management must be committed and involved 2.
Q TIC 2 DSh availability can be difficult to predict 4. Advantage of Study ops carefully, determine parts to convert 3.
h labor flexibility
AGGREGATE PLANNING
Obtain support/ cooperation of workers 4. Begin by
reducing setup time while maintaining current
Period 1 2 3 4 5 Total system 5. Gradually convert op., begin from end
Q Forecasts 190 230 260 280 210 117
0
process and work backwards 6. Convert suppliers to
JIT 7. Prepare for obstacles (suppliers, management,
Outputs workers, culture resistance, resources)

Q Regular 210 210 210 210 210 105

Goal of JIT to reach zero inventories. Always
0
Q Q Overtime 10 10 10 10 10 50
possible?