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Industrial Management and Engineering Economics

Kinfe F. Weldetnsae
Samara University,
College of Engineering and Technology,
Department of Mechanical Engineering

April 2022
OUTLINE
1 Basics of Management
Introduction to Management
Functions of Management
Manager’s Roles
Exercises
2 Inventory Management
Introduction to Inventory Management
Types of Inventory
Functions of Inventory
Inventory Models
3 Forecasting
Introduction to Forecasting
Kinfe F. Weldetnsae (Samara University, College of Engineering
Industrial
andManagement
Technology,and
Department
Engineering
of Mechanical
Economics Engineering) April 2022 1 / 76
Introduction to Management
What is Management?
A set of activities (including planning and decision making, organising, leading and
control) directed at an organisation’s resources (human, financial, physical and
informational) with the aim of achieving organisational goals in an efficient and
effective manner.
The creation of conditions that allow the effective use of resources (human,
financial, material, equipment, technical and etc.) to achieve a specified goal.
Organizational resources (5M):
Men
Money
Machines
Materials and
Methods
Kinfe F. Weldetnsae (Samara University, College of Engineering
Industrial
andManagement
Technology,and
Department
Engineering
of Mechanical
Economics Engineering) April 2022 2 / 76
Major Premises
Technology and business savvy (know-how) represents a very powerful combination
of great demand in society.
Market environment is rapidly evolving (changing marketplace complexities,
web-based technologies, globalization).
Leaders with understanding of technology and management perspectives are needed.
Engineers with proper management and leadership training have great opportunities
to add value.

Kinfe F. Weldetnsae (Samara University, College of Engineering


Industrial
andManagement
Technology,and
Department
Engineering
of Mechanical
Economics Engineering) April 2022 3 / 76
Management Challenges
Market place changes rapidly (Web-based technologies, globalization, customer
demand) affecting how progressive companies will be organized.
Engineering managers to lead by supervising complex teams, innovating with vision
for the future, designing global products, and organizing supply chains.

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Industrial
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Technology,and
Department
Engineering
of Mechanical
Economics Engineering) April 2022 4 / 76
Management Challenges
Challenges - Inside
Implement projects/programs;
Manage people, technologies, and resources to add value;
Develop new product features to enhance company competitiveness;
Define, control and reduce costs to improve profitability;
Initiate technology projects to sustain company position.
Challenges - Outside
Keep abreast (in touch) of emerging technologies and apply them to strengthen
company’s core competencies;
Apply web-based tools to enhance operations and foster customer relations;
Identify best practices to improve engineering operations and surpass them;
Create supply chain networks to derive speed, quality and cost benefits.
Kinfe F. Weldetnsae (Samara University, College of Engineering
Industrial
andManagement
Technology,and
Department
Engineering
of Mechanical
Economics Engineering) April 2022 5 / 76
Management Challenges
Challenges - Present
Do things right to keep company operating smoothly;
Use Balanced Scorecard to monitor non-financial and financial performance;
Control costs and eliminate wastes to attain profitability in the short-run.
Challenges - Future
Seek e-transformation opportunities to create company profitability in the long-run;
Introduce new generation products timely;
Create vision for the future related to technologies;
Define what should be done for technology-based success in the future.

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Industrial
andManagement
Technology,and
Department
Engineering
of Mechanical
Economics Engineering) April 2022 6 / 76
Management Challenges
Challenges - Local
Utilize resources to best achieve company’s objectives;
Take ethical and lawful actions while taking into account local conditions;
Maintain and nurture local professional networks;
Challenges - Global
Seek e-transformation opportunities to create company profitability in the long-run;
Apply location-based resources to realize global economies of scale and scope for
achieving cost and technology advantages;
Develop global professional networks;
Acquire a global mindset;
Exercise leadership roles in international settings.
Kinfe F. Weldetnsae (Samara University, College of Engineering
Industrial
andManagement
Technology,and
Department
Engineering
of Mechanical
Economics Engineering) April 2022 7 / 76
Management concerns
Challenges - Local
Efficiency: is getting the most output from the least amount of inputs in order to
minimize resource costs.
“Doing things right”
Effectiveness: is completing activities so that organizational goals are attained.
“Doing the right things”

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Industrial
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Engineering
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Economics Engineering) April 2022 8 / 76
Functions of Management

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Industrial
andManagement
Technology,and
Department
Engineering
of Mechanical
Economics Engineering) April 2022 9 / 76
Functions of Management
Planning
Planning is determining the objectives and formulating the methods to achieve
them.
Forecasting, setting objectives, action planning, administering policies, establishing
procedure.
A job well planned is half done.
During planning one needs to ask oneself the following:
What am I trying to accomplish i.e. what is my objective?
What resources do I have?
What are the methods and means to achieve the objectives?
Is this the optimal path or method?

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Industrial
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Department
Engineering
of Mechanical
Economics Engineering) April 2022 10 / 76
Functions of Management
Steps in Planning
1 Determining the goals or objectives for the entire organization.
2 Making assumptions on various elements of the environment.
3 Decide the planning period.
4 Examine alternative courses of actions.
5 Evaluating the alternatives.
6 Make derivative plans.

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Industrial
andManagement
Technology,and
Department
Engineering
of Mechanical
Economics Engineering) April 2022 11 / 76
Functions of Management
Organizing
Selecting organizational structure, delegating, establishing working relationship.
Division of Work
Assign Tasks: Departmentalization.
Link Departments: Hierarchy Development
Decide how much Authority to Designate/ ( Authority, Responsibility and
Delegation).
Decide the Levels at which Decisions are to be made.
Decide how to Achieve Coordination.

Kinfe F. Weldetnsae (Samara University, College of Engineering


Industrial
andManagement
Technology,and
Department
Engineering
of Mechanical
Economics Engineering) April 2022 12 / 76
Functions of Management
Staffing
Selecting and training individuals for specific job functions, and charging them with
the associated responsibilities.
Determining the number of employed personnel in an organization or program, Also
called workforce.

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Industrial
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Technology,and
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Engineering
of Mechanical
Economics Engineering) April 2022 13 / 76
Functions of Management
Directing/Leading
A function that includes motivating employees, directing others, selecting the most
effective communication channel, and resolving conflict.
Ability to command people.
Attracting people to the organization.
Marshaling and allocation of resources
Creating good working conditions

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Industrial
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Technology,and
Department
Engineering
of Mechanical
Economics Engineering) April 2022 14 / 76
Functions of Management
Directing/Leading
Controlling is a three-step process of measuringprogress toward an objective,
evaluating what remainsto be done, and taking the necessary corrective actionto
achieve or exceed the objectives.
Measuring: determining through formal and in formal reports the degree to which
progress toward objectives is being made.
Evaluating: determining cause of and possible ways to act on significant deviations
from planned performance.
Correcting: taking control action to correct an unfavorable trend or to take
advantage of an unusually favorable trend.

Kinfe F. Weldetnsae (Samara University, College of Engineering


Industrial
andManagement
Technology,and
Department
Engineering
of Mechanical
Economics Engineering) April 2022 15 / 76
Functions of Management
Steps in Controlling
1 Establish Standards of Performance.
2 Measure Actual Performance.
3 Compare Performance to Standards.
4 Take Corrective Action.

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Industrial
andManagement
Technology,and
Department
Engineering
of Mechanical
Economics Engineering) April 2022 16 / 76
Levels of Manager’s
1 First-line Managers: often called supervisors stand at the base of the managerial
hierarchy.
2 Middle Managers: heads of various departments and organize human and other
resources to achieve organizational goals.
3 Top Managers: set organizational goals, strategies to implement them and make
decisions.

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Industrial
andManagement
Technology,and
Department
Engineering
of Mechanical
Economics Engineering) April 2022 17 / 76
Managerial Skills
A manager is someone skilled in knowing how toanalyze and improve the ability of
an organization tosurvive and grow in a complex and changing world.
Management knowledge and skills (operational,strategic, financial/accounting,
interpersonalskills/communications, etc.)
Decision making skills/ tools (what-if analysis, riskanalysis, problem solving, root
cause analysis,decision tree, optimization, etc.)
Technical skills
Human skill
Conceptual skills

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Industrial
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Technology,and
Department
Engineering
of Mechanical
Economics Engineering) April 2022 18 / 76
Managerial Skills
Technical Skills
Technical skill involves understanding and demonstrating proficiency in a particular
workplace activity.
A persons’ knowledge and ability to make effective use of any process or technique
constitutes his technical skills.
For e.g. Engineer, accountant, data entry operator, lawyer, doctor etc.

Kinfe F. Weldetnsae (Samara University, College of Engineering


Industrial
andManagement
Technology,and
Department
Engineering
of Mechanical
Economics Engineering) April 2022 19 / 76
Managerial Skills
Human Skills
An individuals’ ability to cooperate with other members of the organization and
work effectively in teams.
Communication.
For e.g. Interpersonal relationships, solving people’s problem and acceptance of
other employees.

Kinfe F. Weldetnsae (Samara University, College of Engineering


Industrial
andManagement
Technology,and
Department
Engineering
of Mechanical
Economics Engineering) April 2022 20 / 76
Managerial Skills
Conceptual Skills
Ability of an individual to analyze complexsituations and to rationally process and
interpretavailable information.
For eg: Idea generation and analytical process ofinformation.

Kinfe F. Weldetnsae (Samara University, College of Engineering


Industrial
andManagement
Technology,and
Department
Engineering
of Mechanical
Economics Engineering) April 2022 21 / 76
Manager’s Roles
Conceptual Skills
Someone who coordinates and oversees the work of other people so that
organizational goals can be accomplished.
Interpersonal role
Informational role
Decision role

Interpersonal role
Figurehead: ethical guidelines and the principles ofbehavior employees are to
follow in dealings withcustomers and suppliers.
Leader: give direct commands and orders to subordinatesand make decisions.
Liaison: coordinate between different departments andestablish alliances between
different organizations.
Kinfe F. Weldetnsae (Samara University, College of Engineering
Industrial
andManagement
Technology,and
Department
Engineering
of Mechanical
Economics Engineering) April 2022 22 / 76
Manager’s Roles
Informational Role
Monitor: evaluate the performance of employees in different functions.
Disseminator: communicate to employees the organization’s vision and purpose.
Spokesperson: give a speech to inform the local community about the
organization’s future intentions.
Decision Role
Entrepreneur: commit organization resources to develop innovative goods and
services.
Disturbance handler: to take corrective action to deal with unexpected problems
facing the organization from the external as well as internal environment.
Resource allocator: allocate existing resources among different functions and
departments.
Negotiator: work with suppliers, distributors and labor unions.
Kinfe F. Weldetnsae (Samara University, College of Engineering
Industrial
andManagement
Technology,and
Department
Engineering
of Mechanical
Economics Engineering) April 2022 23 / 76
Manager’s Roles

Kinfe F. Weldetnsae (Samara University, College of Engineering


Industrial
andManagement
Technology,and
Department
Engineering
of Mechanical
Economics Engineering) April 2022 24 / 76
Basics of Productivity
Productivity is a common measure of how well resourcesare being used or a measure
of the efficient use of resourcesusually expressed as the ratio of output to input.
Productivity, the relative efficiency of economic activity—that is, the amount of
products or services producedcompared to the amount of goods and labor used
toproduce.
Outputs
Productivity = (1)
Inputs

Kinfe F. Weldetnsae (Samara University, College of Engineering


Industrial
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Technology,and
Department
Engineering
of Mechanical
Economics Engineering) April 2022 25 / 76
Basics of Productivity
Quantity (value)ofoutput Quantity (value)ofoutput
Labor Productivity= or
laborhrs shift
Quantity (value)ofoutput
Machine Productivity=
machinehrs
Quantity (value)ofoutput
Energy Productivity=
kwh
Quantity (value)ofoutput
Capital Productivity=
valueofinput

Kinfe F. Weldetnsae (Samara University, College of Engineering


Industrial
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Technology,and
Department
Engineering
of Mechanical
Economics Engineering) April 2022 26 / 76
Measures of Productivity
Output Output Output Output
Partial measures= or or or
labor Machine Energy Capital
Output Output
Multi factor measures= or
labor + Machine Machine + labor + Energy
Goods(Services)Produced
Total measures=
Allinputsusedtoproducethem
NOTE
If we produce only one product, the numerator can be either the total units of
product or total $ value of the product.
If we produce several products, the numerator is the total $ value of all products.
Usually, the numerator is the total $ value of all outputs.The denominator is total $
value of all inputs.
Kinfe F. Weldetnsae (Samara University, College of Engineering
Industrial
andManagement
Technology,and
Department
Engineering
of Mechanical
Economics Engineering) April 2022 27 / 76
Measures of Productivity
Example 1
7040 Units Produced
$1.10
Sold for
unit
Cost of labor : $1,000
Cost of materials: $520
Cost of overhead: $2000
Which productivity measures can be calculated?
What is the multifactor productivity?

Kinfe F. Weldetnsae (Samara University, College of Engineering


Industrial
andManagement
Technology,and
Department
Engineering
of Mechanical
Economics Engineering) April 2022 28 / 76
Measures of Productivity
Solution
Output
MFP=
Laborcost + Materialcost + Overheadcost
7040Units ∗ $1.10 7, 744Units
MFP= =
$(1, 000 + 520 + 2, 000) 3520
MFP=2.20

Kinfe F. Weldetnsae (Samara University, College of Engineering


Industrial
andManagement
Technology,and
Department
Engineering
of Mechanical
Economics Engineering) April 2022 29 / 76
Measures of Productivity
Example 2
5,500 Units Produced
$35
Sold for
unit
500 labor hours are used
$25
Cost of labor:
hrs
Cost of raw material: $5,000
Cost of overhead: 2*labor cost
Which productivity measures can be calculated?
What is the multifactor productivity?

Kinfe F. Weldetnsae (Samara University, College of Engineering


Industrial
andManagement
Technology,and
Department
Engineering
of Mechanical
Economics Engineering) April 2022 30 / 76
Measures of Productivity
Solution
Output
MFP=
Laborcost + Materialcost + Overheadcost
5, 500Units ∗ $35
MFP=
$25 $25
(500hrs ∗ ) + ($5000) + (1000hrs ∗ )
hr hr
MFP=4.52

Kinfe F. Weldetnsae (Samara University, College of Engineering


Industrial
andManagement
Technology,and
Department
Engineering
of Mechanical
Economics Engineering) April 2022 31 / 76
Measures of Productivity
Example 3
Assume that you have just determined that your service employees have used a
total of 2400 hours of labor this week to process 560 insurance forms. Last week
the same crew used only 2000 hours of labor to process 480 forms.
Which productivity measure should be used?
Is productivity increasing or decreasing?

Kinfe F. Weldetnsae (Samara University, College of Engineering


Industrial
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Technology,and
Department
Engineering
of Mechanical
Economics Engineering) April 2022 32 / 76
Measures of Productivity
Answer:
Could be classified as a Partial Measure (labor productivity).
480
Last week’s productivity= = 0.24
2000
560
This week’s productivity = = 0.23.
2400
∴ productivity has decreased slightly.

Kinfe F. Weldetnsae (Samara University, College of Engineering


Industrial
andManagement
Technology,and
Department
Engineering
of Mechanical
Economics Engineering) April 2022 33 / 76
Factors affecting productivity
Standardization Methods
Technology Design of the workspace
Searching for lost or misplaced items Incentive plans that reward productivity
Scrap rates Capacity utilization
Labor turnover, layoffs, new workers Layout
Bottlenecks Scheduling
Equipment breakdowns
Part and material shortages
Inadequate investment in training and
education of the employees

Kinfe F. Weldetnsae (Samara University, College of Engineering


Industrial
andManagement
Technology,and
Department
Engineering
of Mechanical
Economics Engineering) April 2022 34 / 76
Key Steps for Improving Productivity
Develop productivity measures for all operations
Determine critical (bottleneck) operations
Develop methods for productivity improvements
Establish reasonable goals
Get management support (make it clear that management supports and encourages
productivity improvements.)
Measure and publicize improvements

Kinfe F. Weldetnsae (Samara University, College of Engineering


Industrial
andManagement
Technology,and
Department
Engineering
of Mechanical
Economics Engineering) April 2022 35 / 76
Exercises
EX-1

(1) A company that makes shopping carts for supermarkets recently purchased new equipment, which reduced the
labor content needed to produce the carts. Information concerning the old system (before adding the new
equipment) and the new system (after adding the new machines)includes:

old system new system


Output
80 84
hr
Workers 5 4
$Wage
10 10
hr
$Machine
40 50
hr

(A) Compute labor productivity for both the Old System and the New System.
(B) Compute total factor productivity for both the Old System and the New System.
(C) Suppose production with old equipment was 30 units of cart A at a price of $100 per cart, and 50 units of cart B
at a price of $120. Also suppose that production with new equipment is 50 units of cart A, at a price of $100 per
cart, and 30 units of cart B at a price of $120. Compare total-factor productivity for the old and the new systems.
Kinfe F. Weldetnsae (Samara University, College of Engineering
Industrial
andManagement
Technology,and
Department
Engineering
of Mechanical
Economics Engineering) April 2022 36 / 76
Exercises
EX-2

A company has introduced a process improvement that reduces the processing time for each unit and increases
output by 25% with less material but one additional worker. Under the old process, five workers could produce 60
units per hour.Labor costs are $12/hour, and material input was $16/unit. For the new process, material input is
now $10/unit and overhead ischarged at 1.6 times direct labor cost. Finished units sell for $31 each.

Factor Old System New System


Output 60 60(1.25) = 75
number of workers 5 6
$12 $12
Worker cost hr hr
$16 $10
Material unit unit
Overhead 1.6(labor cost) 1.6(labor cost)
Price 31 31

(A) Compute single factor productivity of labor in the old system. (Compute it in four possible ways.)
(B) Compute all factor productivity for both old and new systems.

Kinfe F. Weldetnsae (Samara University, College of Engineering


Industrial
andManagement
Technology,and
Department
Engineering
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Economics Engineering) April 2022 37 / 76
Exercises
EX-3

A milk factory seeks advice from an external consulting company concerning its business and production processes.
The final consulting report describes several steps to increase productivity including implementation of
cutting-edge processing techniques through more powerful filtering systems.

Existing System Proposed System


Workers 12 9
Milk Output/hour 1,000 gallons 1,400 gallons
WageRate
$12 $12
hour
FiltrationCost
$120 $170
hour

(A) Calculate the labor productivity for the existing as well as the proposedsystem.
(B) Find the Total-Factor Productivity for both systems.
(C) Assume that current processing includes 700 gallons of Grade-A milk sold at $2.40/gallon and 300 gallons of
Grade-B milk at $1.90/gallon.Furthermore, assume that under the proposed system, processing will include 600
gallons of Grade-A milk at $2.40/gallon and 400 gallons of Grade-B milk at $1.90/gallon. Compare all-factor
productivity for both the existing and the new system.
(D) Is the proposed system acceptable? Why?
Kinfe F. Weldetnsae (Samara University, College of Engineering
Industrial
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Technology,and
Department
Engineering
of Mechanical
Economics Engineering) April 2022 38 / 76
Introduction to Inventory Management
Inventory:
An inventory is an idle stock of material in store used to facilitate production or to
satisfy customer needs.
Inventory is any stored resource that is used to satisfy a current or future need.

Inventory Management:
Scientific method of finding out how much stock should be maintained in order to
meet the production demands and be able to provide right type of material at right
time,in right quantities and at competitive prices.

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Introduction
Purpose
Inventory Management deals with the following tasks:
Management of material stocks on a quantity and value basis.
Planning, Entry, and Documentation of all Goods Movements.
Carrying out the Physical Inventory (Counting).
All transactions that bring about a change in stock are entered in real time, as are
the stock updates resulting from these changes. item You can obtain an overview
of the current stock situation of any given material at any time. Thus,for
example,applies to stocks that:
Are located in the warehouse.
Have already been ordered, but have not yet been received.
Are located in the warehouse, but have already been reserved for production or a
customer.
Are in quality inspection.
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Introduction
Purpose
Material is procured from external or internal sources on the basis of the
requirements determined by Material Requirements Planning.
The delivery is entered in Inventory Management as a goods receipt.
The material is stored (and managed under Inventory Management) until:
It is delivered to customers (Sales and Distribution),
It is used for internal purposes (for example, for production).

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Industrial
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Types of Inventory
Raw material
Purchased but not processed

Work-in-process
Undergone some change but not completed

Maintenance/repair/operating (MRO)
Replacement parts, tools, and supplies

Finished goods
Completed product awaiting shipment
Goods-in-transit to warehouses or customers

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Industrial
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Types of Inventory

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Functions of Inventory
To meet anticipated demand.
To meet variation in product demand.
To allow flexibility in production scheduling.
To provide a safeguard for variation in raw material delivery time.
To protect against stock-outs.
To take advantage of order cycles or to take advantage of quantity discounts.

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Inventory Counting Systems
A physical count of items in inventory
Periodic/Cycle Counting System: Physical count of items made at periodic
intervals.
Continuous Counting System: System that keeps track of removals from
inventory continuously, thus monitoring current levels of each item.
Universal Bar Code - Bar code printed on a label that has information about the
item to which it is attached.

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Inventory Classification
ABC Classification
A Items:
Typically 5 - 15% of the items accounting for 70 - 80% of the inventory (Vital
few)..

B Items:
Typically an additional 30% of the items accounting for 15% of the inventory value
(moderate).

C Items:
Typically the remaining 50% - 60% of the items accounting for only 5% - 10% of
the inventory value (Trivial many).

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Inventory Classification
ABC Classification

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Inventory Classification
Steps in ABC Analysis
(A) Compute Annual Usage in Dollars for each item and Compute Total Annual Usage.
(B) Compute the percentage of Annual Usage for each item.
(C) Sort the list of items by the percentage of Annual Usage in Dollars, from largest to
smallest.
(D) Calculate the Cumulative Percentage of Annual Usage in Dollarsfor the first item,
first 2 items, first 3 items, etc. For the last item,the cumulative % should be 100%.
Using Cumulative % as aguide, assign the items to A, B, and C categories

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Inventory Classification
ABC Analysis Example

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Inventory Classification
Solution(A)

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Inventory Classification
Solution(B,C, and D)

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Inventory Costs
Holding costs: the costs of holding or “carrying” inventory over time.
Housing costs (including rent or depreciation, operating costs, taxes, insurance)
Material handling costs (equipment lease or depreciation, power, operating cost)
Pilferage,
Space, and obsolescence
Labor cost
Ordering costs: the costs of placing an order and receiving goods, Fixed,
constant dollar amount incurred for each order placed.
Developing and sending purchase orders
Processing and inspecting incoming inventory
Inventory inquiries, Utilities, phone bills, and so on for the purchasing department
Salaries and wages for purchasing department employees
Supplies such as forms and paper for the purchasing department.
Shortage costs: Loss of customer goodwill, back order handling, and lost sales.
Investment costs: borrowing costs, taxes, and insurance on inventory.
Kinfe F. Weldetnsae (Samara University, College of Engineering
Industrial
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Inventory Models
Inventory models deals with determining optimum inventory level that should be
kept to keep the inventory cost to the minimum and customer satisfaction or
service level to the maximum.
When to order?
How much to order?
How much and when to produce?
Level of inventory
Inventory Models
Economic Order Quantity (EOQ)
Economic Production Quantity (EPQ)−→(Gropup assignment for group-1)
Price Discount Models/Price Break Models−→(Gropup assignment for group-2)
prepare maximum 20 pages PDF
and 15 pages of PPT in case there is a presentation
Kinfe F. Weldetnsae (Samara University, College of Engineering
Industrial
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Inventory Model
Economic Order Quantity (EOQ)
An optimizing method used for determining order quantity and reorder points. Part
of continuous review system which tracks on-hand inventory each time a
withdrawal is made.
Assumptions:
Only one product is involved
Annual demand requirement is known and constant.
Lead time does not vary.
Each order is received in a single delivery.
Infinite production capacity

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Inventory Model
EOQ Model

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Inventory Model
EOQ Model Costs

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Inventory Model
EOQ Model Costs

D Q
TCEOQ =( ∗ S) + ( ∗ H)
Q 2
Where
TC Total Annual Cost
D Annual Demand
H Annual Holding Cost
S Ordering or Set up Cost

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Inventory Model
EOQ Model Costs

The optimal or minimum cost occurs


at the intersection point of holding
cost and ordering cost. So using
calculus the Q value at this point can
be computed.
r
2DS
EOQ=
H

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Inventory Model
Inventory Model Terms
Reorder point (R): Level of inventory o hand at which the next order should be
placed.
Cycle Interval (T): the total time between one order receipt period and next
order receipt.
Order frequency (N): total number of orders per year (per full inventory cycle).
Q
Cycle Inventory ( ): Average inventory kept per cycle interval.
2

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Inventory Model
Example-1
Annual Demand = 1,000 units;
Days per year considered in average 365;
1000
Daily demand =
365
Cost to place an order = $10;
Holding cost per unit
per year = $2.50;
Lead time = 7 days;
Cost per unit = $15;

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Inventory Model
Solution
Given the information, what are the EOQ recover point(R),cycle inventory,order
frequency(N), and cycle intervals(T)
r r
2DS 2 ∗ 1000 ∗ 10
Qopt = = =89.4333 Units =Qopt =90 Units
H 2.50
1000units
year 2.74Units Q
d= = and Cycle Inventory= =45 Units
365days Day 2
year
D
R=dL=2.74Units*7Days=19.18 or 20 Units and N= =11.1 Orders
Q
Q
T= = 32.85 days
d
Kinfe F. Weldetnsae (Samara University, College of Engineering
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Inventory Model
Economic Production Quantity (EPQ)
Given the information, what are the EOQ recover point(R),cycle inventory,order
frequency(N), and cycle intervals(T)
An optimizing method used for determining production quantity and reorder points.
Production done in batches or lots.
Capacity to produce a part exceeds the part’s usage or demand rate.
Assumptions of EPQ are similar to EOQ except orders are received incrementally
during production.
Only one item is involved
Annual demand is known
Usage rate d is constant
Usage occurs continually
Production rate p is constant
Lead time does not vary
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Inventory Model
Economic Production Quantity (EPQ)
The Maximum Inventory (Imax) is total production during production phase (Q)
d
minus depletion Q* .
p

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Inventory Model
Economic Production Quantity (EPQ)
The total cost at economic production is the sum of holding and setup costs. At
the optimal point holding cost and set up costs are equal.Hence we can derive EPQ
formula as follows:

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Inventory Model
Economic Production Quantity (EPQ)

D IMax
TCEPQ =( ∗ S)( ∗ H)
Q 2
d
IMax =Q(1- )
p
v
u 2DS
EPQ=u
u
d
H(1 − )
t
p

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Inventory Model
EPQ Example-1
Annual demand = 18,000 units
units
Production rate = 2500
month
Setup cost = $800
$18
Annual holding cost =
unit
Setup time= 5 days
days
No. of operating = 20
month

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Inventory Model
Solution
v
u 2DS 1500
EPQ=u R = d*L= ( )*5 = 375 Units
u
d 20
H(1 − )
t
p Q 2000
T= = = 1.33 months
Imax = 800 units d 1500
Q 12
t1 = = 0.8 month N= = 9 production cycles
p 1.333
TC = holding cost + set up cost =
Imax
t2 = = 0.53 month $14,400
d

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Inventory Model
Price Break (Quantity Discount) Model

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Inventory Model
Price Break (Quantity Discount) Model

Kinfe F. Weldetnsae (Samara University, College of Engineering


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Engineering
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Inventory Model
Price Break (Quantity Discount) Model

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Inventory Model
Price Break (Quantity Discount) Model

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Inventory Model
Reorder Point and Safety Stock

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Inventory Model
Reorder Point and Safety Stock

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Inventory Model
ROP and Safety Stock Example 1

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Inventory Model
ROP and Safety Stock Example 2

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Inventory Model
SCM(Supply Chain Management) and Inventory Locations

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