Inventory Management

1
 Importance of Inventory
• The objective of inventory management is to
strike a balance between inventory
investment and customer service.
• This helps in protecting low cost strategy and
preventing stock outs for a company.
• Examples
• Bank keeping cash as inventory.
• Blood supplies and pharmaceuticals for hospitals.

2
 Purpose of Inventory
• To maintain independence of operations.
• To meet variation in product demand.
• To allow flexibility in production scheduling.
• To provide a safeguard for variation in raw
material delivery time.
• To take advantage of quantity discounts
(economic purchase order size).
• To hedge against inflation and upward price
changes.

3
 Types of Inventory
• To maintain the functions of inventory, firms
maintain four types of inventories:
1) Raw material inventory
2) Work-in-process inventory
3) Maintenance/Repair/Operating (MRO)
supply inventory
4) Finished-goods inventory

4
 Setup time is the time required to prepare a
machine to make a particular item.

The time required to produce a batch of parts is Run

time.
Sum of Setup time and Run time is Operating time.

5
 Managing Inventory
• ABC Analysis
• This is a method of dividing on-hand inventory
into three classifications based on the annual
dollar volume.
• To determine the annual dollar volume for
ABC analysis, we measure the annual demand
of each inventory item and the cost per unit.

6
Managing Inventory (ABC Classification
continued)
Classification Category A Category B Category C

Volume 15% 30% 55%

Cost (dollar 75% to 80% 15% 10% to 5%

volume)

7
Managing Inventory (ABC Classification
continued)
• Silicon Chips, Inc., maker of superfast DRAM
chips, wants to categorize its 10 major
inventory items using ABC analysis.
ABC Calculation
Percentage of Annual Percentage
Item Stock Number of Items Volume Unit Cost Annual Dollar of Dollar
Number Stocked (Units) ($) Volume Volume Class
#102286 1000 90 90000 A
72%
#11526 18% 500 154 77000 A
#12760 1550 17 26350 B
#10867 350 42.86 15001 23% B
#10500 34% 1000 12.5 12500 B
#12572 600 14.17 8502 C
#14075 2000 0.6 1200 C
#01036 100 8.5 850 5% C
#01307 1200 0.42 504 C
#10572 49% 250 0.6 150 C
8
8550 232057 100%
 Angelo Products
• David Alexander has compiled the following
table of six items in inventory at Angelo
Products, along with the unit cost and the
annual demand in units:
• Use the ABC analysis to determine which
item(s) should be carefully controlled using a
quantitative inventory technique and which
item(s) should not be closely controlled?

9
 Angelo Products (Continued)
Identification Code Unit Cost ($) Annual Demand (Units)

XX1 5.84 1200

B66 5.4 1110
3CPO 1.12 896
33CP 74.54 1104
R2D2 2 1110
RMS 2.08 961

Angelo Products
Percentage
Annual of Dollar
Identificati Unit Cost Demand Dollar Volume
on Code ($) (Units) Percentage Volume Classification
XX1 5.84 1200 19% 7008 7% B
B66 5.4 1110 17% 5994 6% B
3CPO 1.12 896 14% 1003.52 1% C
33CP 74.54 1104 17% 82292.16 82% A
R2D2 2 1110 17% 2220 2% C
RMS 2.08 961 15% 1998.88 2% C
10
6381 100516.6
 Important terminology in Inventory
Management
• Record accuracy is a prerequisite to inventory
management, production scheduling, and sales.
This can be maintained by two systems.
• Periodic systems: It requires regular checks of
inventory to determine quantity on hand.
Example: VMI
• Perpetual inventory system: It tracks both
receipts and subtractions from inventory on a
continuing basis using POS.
• Example: CRP
11
 Independent Vs Dependent Demand
• Demand for refrigerators is independent of
toaster ovens demand.
• Demand for a toaster oven components is
dependent on the requirements of toaster
ovens.

12
 Inventory Costs
• Inventory Holding Cost
• Holding costs are the costs associated with
holding or “carrying” inventory over time.
Examples: Costs related to storage facilities,
handling, insurance, pilferage, breakage,
obsolescence, and depreciation.
• Set up (or production change) costs
• The cost to prepare a machine or process for
production. This cost occurs when different
products are produced and specific equipment
setups are arranged in making it.
13
 Inventory Costs (Continued)
• Ordering Cost
• The cost of the ordering process. Ordering
cost includes cost of supplies, forms, order
processing, purchasing, and clerical support,
etc.
• Shortage (Stock-out) Cost
• This cost occurs when the demand of an item
is not met and order is canceled due to
depletion of an item.
14
 Inventory Models for Independent
Demand
• Basic economic order quantity (EOQ) model
(Fixed Order Quantity Model)
• Production order quantity model
• Quantity discount model

15
 EOQ Model
• An inventory control technique that minimizes
the total of ordering and holding costs.
• Assumptions to EOQ model
• Demand for the product is constant and uniform
throughout the period.
• Lead time is constant.
• Price per unit of product is constant.
• Inventory holding cost is based on average inventory.
• Ordering or set up cost are constant.
• All demands for the product will be satisfied (No
backorders and stock outs are allowed)
16
EOQ Model (Continued)

17
 EOQ Model (Continued)
• Minimizing Costs
• The objective of most inventory models is to
minimize total costs. Hence, if we minimize the
sum of ordering and holding costs, we will also be
minimizing total cost. Therefore,
a) We develop an expression for ordering cost.
b) We develop an expression for holding cost.
c) We will differentiate the total cost expression.
d) We will achieve the optimal order quantity.

18
 EOQ Model (Continued)
• Definition of variables for EOQ model:
𝑄 = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠 𝑝𝑒𝑟 𝑜𝑟𝑑𝑒𝑟
𝑄 ∗ = 𝑂𝑝𝑡𝑖𝑚𝑢𝑚 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠 𝑝𝑒𝑟 𝑜𝑟𝑑𝑒𝑟 (𝐸𝑂𝑄)
𝐷 = 𝐴𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑚𝑎𝑛𝑑 𝑖𝑛 𝑢𝑛𝑖𝑡𝑠 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑖𝑡𝑒𝑚
𝑆 = 𝑆𝑒𝑡 𝑢𝑝 𝑜𝑟 𝑜𝑟𝑑𝑒𝑟𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 𝑓𝑜𝑟 𝑒𝑎𝑐ℎ 𝑜𝑟𝑑𝑒𝑟
𝐻 = 𝐻𝑜𝑙𝑑𝑖𝑛𝑔𝑜𝑟 𝑐𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟
𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑚𝑎𝑛𝑑
1. 𝐴𝑛𝑛𝑢𝑎𝑙 𝑜𝑟𝑑𝑒𝑟𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 = ∗ 𝑜𝑟𝑑𝑒𝑟𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑜𝑟𝑑𝑒𝑟
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠 𝑖𝑛 𝑒𝑎𝑐ℎ 𝑜𝑟𝑑𝑒𝑟
𝐷
=
∗𝑆
𝑄
2. 𝐴𝑛𝑛𝑢𝑎𝑙 ℎ𝑜𝑙𝑑𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝐿𝑒𝑣𝑒𝑙 ∗ 𝐻𝑜𝑙𝑑𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟
(0 + 𝑄) 𝑄
= ∗𝐻 = ∗𝐻
2 2
• 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 = 𝐴𝑛𝑛𝑢𝑎𝑙 𝑂𝑟𝑑𝑒𝑟𝑖𝑛𝑔 𝐶𝑜𝑠𝑡 + 𝐴𝑛𝑛𝑢𝑎𝑙 𝐻𝑜𝑙𝑑𝑖𝑛𝑔 𝐶𝑜𝑠𝑡
𝐷 𝑄
𝑇𝐶 = ∗ 𝑆 + ∗ 𝐻
𝑄 2

19
 EOQ Model (Continued)
• 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 = 𝐴𝑛𝑛𝑢𝑎𝑙 𝑂𝑟𝑑𝑒𝑟𝑖𝑛𝑔 𝐶𝑜𝑠𝑡 + 𝐴𝑛𝑛𝑢𝑎𝑙 𝐻𝑜𝑙𝑑𝑖𝑛𝑔 𝐶𝑜𝑠𝑡
𝐷 𝑄
𝑇𝐶 = ∗ 𝑆 + ∗ 𝐻
𝑄 2
𝑑𝑇𝐶 𝐷 𝐻
=− 2∗𝑆+
𝑑𝑄 𝑄 2
𝑑𝑇𝐶
=0
𝑑𝑄
𝐷 𝐻
2
∗𝑆 =
𝑄 2
2𝐷𝑆
𝑄∗ =
𝐻

20
 EOQ Model (Continued)
𝐷𝑒𝑚𝑎𝑛𝑑 𝐷
• 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑟𝑑𝑒𝑟𝑠 = 𝑁 = =
𝑂𝑟𝑑𝑒𝑟 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑄∗
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑤𝑜𝑟𝑘𝑖𝑛𝑔 𝑑𝑎𝑦𝑠 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟
• 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑡𝑖𝑚𝑒 𝑏𝑒𝑡𝑤𝑒𝑒𝑛 𝑜𝑟𝑑𝑒𝑟𝑠 = 𝑇 =
𝑁

21
 Ray’s Satellite Emporium
• Ray’s Satellite Emporium wishes to determine
the best order size for its best-selling satellite
dish (Model TS111). Ray has estimated that
annual demand for this model is 1,000 units.
His cost to carry one unit is $100 per year per
unit, and he has estimated that each order
costs $25 to place. Using the EOQ model, how
many should Ray order each time?
• EOQ (Q*) = 22.3

22
 Sharp Inc., Company
• Sharp, Inc., a company that markets painless hypodermic needles to
hospitals, would like to reduce its inventory cost by determining the
optimal number of hypodermic needles to obtain per order. The
annual demand is 1000 units, the ordering cost is $10 per order;
and holding cost per year is $0.50.
𝐷 = 1000 S = 10 H = 0.50
2 2 ∗ 1000 ∗ 10
𝑄∗ =
0.50
𝑄∗ = 200 units
Sharp has a 250-day working year and wants to find the number of
orders (N) and the expected time between orders (T). (N=5 orders per
year, T=50 days between orders)
What is the total cost? (TC=$100)
If D increases to 1200 units, what is the new Q*? (Q*=219)
23
 Warren Fisher Computer Corporation
• The Warren F. Fisher Computer Corporation
purchases 8000 transistors each year as
components in minicomputers. The unit cost of
each transistor is $10, and the cost of carrying
one transistor in inventory for a year is $3,
Ordering cost is $30 per order.
• What are (a) the optimal order quantity, (b) the
expected number of orders placed each year, and
(c) the expected time between orders? Assume
that Fisher operates on a 200-day working year.

24
 Warren Fisher Computer Corporation
(Continued)
• Solution
• Q* = 400 units
• N = 20 orders
• T = 10 working days
• With 20 orders placed each year, an order for
400 transistors is placed every 10 working
days.

25
 Reorder Points
• Reorder Point (ROP)
• It tells us When to order? ROP is an inventory level (Point) at which action is taken
to replenish the stocked item.
𝑅𝑂𝑃 = 𝐷𝑒𝑚𝑎𝑛𝑑 𝑝𝑒𝑟 𝑑𝑎𝑦 × 𝐿𝑒𝑎𝑑 𝑡𝑖𝑚𝑒 𝑓𝑜𝑟 𝑛𝑒𝑤 𝑜𝑟𝑑𝑒𝑟 𝑖𝑛 𝑑𝑎𝑦𝑠

𝑅𝑂𝑃 = 𝑑 × 𝐿

𝐷
𝑑=
𝑁𝑜. 𝑜𝑓 𝑤𝑜𝑟𝑘𝑖𝑛𝑔 𝑑𝑎𝑦𝑠 𝑖𝑛 𝑎 𝑦𝑒𝑎𝑟

ROP with Safety Stock = 𝑑 × 𝐿 + SS

• Lead time
• In purchasing systems, the time between placing an order and receiving is
termed as lead time.
• In production systems, the wait, move, queue, setup, and run times for each
component produced is termed as lead time.
• Safety Stock (ss)
• Extra stock to allow for uneven demand; a buffer.

26
27
 Meyer’s Stationery Shop
• Annual demand for notebook binders at
Meyer’s Stationery Shop is 10,000 units. Brad
Meyer operates his business 300 days per year
and find that deliveries from his supplier
generally take 5 working days. Calculate the
reorder point for the notebook binders.
L = 5 days
10000
𝑑= = 33.3 𝑢𝑛𝑖𝑡𝑠 𝑝𝑒𝑟 𝑑𝑎𝑦
300
𝑅𝑂𝑃 = 𝑑 × 𝐿 = 33.3 𝑢𝑛𝑖𝑡𝑠 𝑝𝑒𝑟 𝑑𝑎𝑦 5 𝑑𝑎𝑦𝑠 = 166.7 𝑢𝑛𝑖𝑡𝑠
Thus, Brad should reorder when his stock reaches 167 units.

28
 Apple Store
• An Apple Store has a demand (D) for 8000 iPhones per
year. The firm operates a 250-day working year. On
average, delivery of an order takes 3 working days, but
has been known to take as long as 4 days. The store
wants to calculate the reorder point without a safety
stock and then with a one-day safety stock.
𝐷 8000
𝑑= = = 32 𝑢𝑛𝑖𝑡𝑠
𝑁𝑜. 𝑜𝑓 𝑤𝑜𝑟𝑘𝑖𝑛𝑔 𝑑𝑎𝑦𝑠 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟 250
𝑅𝑂𝑃 = 32 ∗ 3 = 96 𝑢𝑛𝑖𝑡𝑠
𝑅𝑂𝑃 𝑤𝑖𝑡ℎ 𝑠𝑎𝑓𝑒𝑡𝑦 𝑠𝑡𝑜𝑐𝑘 = 96 + 1 ∗ 32 = 128 𝑢𝑛𝑖𝑡𝑠
If there are only 200 working days per year, what is the correct
ROP without safety stock and with safety stock. (120, 160)
29
 Problems
• L. Houts Plastics is a large manufacturer of injection-molded plastics in
North Carolina. An Investigation of the company’s manufacturing facility in
Charlotte yields the information presented in the table below. How would
the plant classify these items according to an ABC classification?
L Houts Plastics' Charlotte Inventory Levels

Percentage Dollar % dollar dollar %

Item Code # Avg. Inv. (Units) wise Value ($/unit) Volume volume Vol % sum sum
1289 25 8.33% 35.75 893.75 39.81% A
2347 12 4.00% 30.00 360 16.04% A
2349 22 7.33% 17.50 385 17.15% A 19.67% 73.00%
2363 45 15.00% 3.50 157.5 7.02% B
2394 50 16.67% 4.75 237.5 10.58% B 31.67% 17.60%
2395 30 10.00% 2.00 60 2.67% C
6782 50 16.67% 1.15 57.5 2.56% C
7844 45 15.00% 1.05 47.25 2.10% C
8210 8 2.67% 1.80 14.4 0.64% C
8310 7 2.33% 2.00 14 0.62% C
9111 6 2.00% 3.00 18 0.80% C 48.67% 9.41%
Total 300 2244.9 30
 William Beville’s Computer Training
School
• William Beville’s computer training school, in
Richmond, stocks workbooks with the following
characteristics:
Demand D = 19,500 units/year
Ordering cost S = $25/order
Holding cost H = $4/unit/year
a) Calculate the EOQ for the workbooks. (494 units)
b) What are the annual holding costs for the workbooks?
($988)
c) What are the annual ordering costs? ($988)

31
 Henry Crouch’s law office
• Henry Couch’s law office has traditionally ordered
ink refills 60 units at a time. The firm estimates
that carrying cost is 40% of the $10 unit cost and
that annual demand is about 240 units per year.
Find:
• What should be the ordering cost if the
traditionally ordered quantity is EOQ? (S=$30)
• If the true ordering cost turns out to be much
greater than your answer to (a), what is the
impact on the firm’s ordering policy?
32
 Southeastern Bell
• Southeastern Bell stocks a certain switch connector at its central
warehouse for supplying field service offices. The yearly demand
for these connectors is 15000 units. Southeastern estimates its
annual holding cost for this item to be $25 per unit. The cost to
place and process an order from the supplier is $75. The company
operates 300 days per year, and the lead time to receive an order
from the supplier is 2 working days.
a) Find the economic order quantity? (300 units)
b) Find the annual holding costs? ($3750)
c) Find the annual ordering costs? ($3750)
d) What is the reorder point? (100 units)
If safety stock is supposed to be maintained for 1 day; then
would be the new ROP?

33
 Duncan’s Shop
• Annual demand for the notebook binders at
Duncan’s Stationery Shop is 10,000 units.
Dana Duncan operates her business 300 days
per year and finds that deliveries from her
supplier generally take 5 working days.
a) Calculate the reorder point for the notebook
binders that she stocks? (167 units)
b) Why is this number important to Duncan?

34
Quality Management

35
 Toyota Production System (TPS)
• https://www.youtube.com/watch?v=cUFgFYQ
Z1TY
• https://www.youtube.com/watch?v=Tc9IQLJl4
AU

36
 Quality
The ability of a product or service to meet
customer needs.
Implications of Quality
• Company reputation
• Product liability
• Global implications

37
 Quality Gurus
Walter Shewart
• Developed statistical process control chart theory
with control limits.

Deming
• Proposed PDSA/PDCA cycle for learning and
improvement.
• Stated 14 points to improve quality and productivity.

Juran
• Quality Triology.
• Defined quality as “Fitness for Use”.

38
 Quality Gurus (Cont.)
Feigenbaum
• Emphasized on total quality control.
Crosby
• Argued that “Do it right for the first time” &
“Zero Defects”
• Quality is Free

Karou Ishikawa
• Developed the cause-effect diagram also known
as Ishikawa diagram.
• Developed Quality circle concept in Japan.

Taguchi
Developed taguchi loss function concept combining
cost, target, and variation into one metric. 39
Deming’s Cycle

40
41
Juran’s Quality Triology

42
 Dimensions of Quality
For Products
S. No. Dimension features

1 Performance Main characteristics of the product

2 Aesthetics Appearance, feel, smell, taste.

3 Special Features Extra characteristics

4 Conformance How well a product corresponds to design

specifications.

5 Reliability Consistency of performance

6 Durability The useful life of product

7 Perceived quality Indirect evaluation of quality

8 Serviceability Handling of complaints or repairs.

 Dimensions of Quality (Cont.)
For Services
S. No. Dimension Features

1 Convenience The availability and accessibility of service.

2 Reliability The ability to perform a service dependably,

consistently, and accurately.
3 Responsiveness The willingness of service providers to help
customers in unusual situations and to deal with
problems (OLA ex.)
4 Time The speed with which service is provided

5 Assurance The knowledge exhibited by personnel during

service delivery
6 Courtesy The way customers are treated by employees during
service delivery
7 Tangibles The physical appearance of facilities, equipment,
personnel, and communication materials.
Assessing Service Quality
▪ Actual customer expectations and management
perceptions of those expectations.
▪ Management perceptions of customer expectations and
service-quality specifications.
▪ Service quality and service actually delivered.
▪ Service actually delivered and what is communicated
about the service to customers.
▪ Customers’ expectations of the service provider and their
perceptions of provider delivery.
Determinants of Service Quality
▪ Design
▪ How well the product or service conforms to the design
▪ Ease of use
▪ Service after delivery
Consequences of Poor Quality
▪ Loss of business
▪ Liability
▪ Productivity
▪ Costs
Benefits of Good Quality
▪ Less production or service problems
▪ An enhanced reputation for quality
▪ The ability to command premium prices
▪ An increased market share
▪ Greater customer loyalty
 Quality Costs

• Prevention costs: sum of all the costs to

prevent defects.
• Appraisal costs: costs of the inspection
and testing to ensure that the product or
process is acceptable.
• Internal failure costs: costs for defects
incurred within the system.
• External failure costs: costs for defects
that pass through the system.

47
48
49
 Total Quality Management (TQM)

• Total quality management (TQM): Managing

the entire organization in such a way that it excels
on all dimensions of products and services that are
important to the customer
• Two fundamental operational goals
1. Careful design of the product or service
2. Ensuring that the organization’s systems can
consistently produce the design
• It can only be achieved if the entire organization is
oriented towards this.
– Hence, the term total quality management

50
 Six Sigma
• A philosophy and set of methods companies use to
eliminate defects in their products and processes.
• Seeks to reduce variation in the processes that lead
to product defects.
• The name, “Six Sigma,” refers to the goal of no
more than four defects per million units.
• DPMO is defects per million opportunities.

Number of defects
DPMO =
Number opportunities for errors per unit  Number units

51
 Example: DPMO
• The customer of a mortgage bank expect to have their
mortgage applications processed within 10 days of
filing. This would be called a critical customer
requirement, or CCR, in six sigma terms. Suppose all
defects are counted (loans in a monthly sample taking
more than 10 days to process), and it is determined
that there are 150 loans in the 1000 applications
processed last month that don’t meet the customer
requirements. Hence, Find DPMO?
150
• 𝐷𝑃𝑀𝑂 = ×1000000 = 1,50,000
1000
• or 15%

52
 DMAIC Cycle
• Define - identify customers and their
priorities.
• Measure - determine how to measure the
process and how it is performing.
• Analyze - determine the most likely causes
of defects.
• Improve - identify means to remove the
causes of defects.
• Control - determine how to maintain the
improvements.

53
 Six Sigma Analytical Tools
1. Flowchart - a diagram of the sequence of
operations.
2. Run chart - depict trends in data over time.
3. Pareto chart (Histogram) - help to break down a
problem into components.
4. Check sheet - basic form to standardize data
collection.
5. Cause-and-effect diagram - show relationships
between causes and problems.
6. Opportunity flow diagram - used to separate
value-added from non-value-added.
7. Process control chart - used to assure that
processes are in statistical control.

54
 Flowchart

Flow Chart of Major Steps in a Process

55
Run Chart

56
Pareto Principle

57
Check sheet

58
59
60
61
Cause-and-Effect Diagram
(Fishbone Diagram)

62
Late for
Class

63
 Process Control Chart

Basic features same as a time plot

64
• Quality Circles
https://www.youtube.com/watch?v=COrDprtd4tg

• KAIZEN “Change for the better”

https://www.youtube.com/watch?v=fcBXtwGexNc

• 5S
• Seiri “Sort”
• Seiton “Set in order”
• Seiso “Scrub/shine”
• Seiketsu “Standardize”
• Shitsuki “Sustain”
https://www.youtube.com/watch?v=CcbogALFNX0

• POKA YOKE “Mistake proofing”

https://www.youtube.com/watch?v=hJk7ILvjy_0
 Lean, Kanban, JIT
• https://www.youtube.com/watch?v=ZK6vyFz7
yrM

66
 Problems
• The Hard Rock Hotel in Bali has just collected
the data from 75 complaint calls to the
general manager during the month of
October. The manager wants to prepare an
analysis of the complaints. The data provided
are room service, 54; check-in delays, 12;
hours the pool is open, 4; minibar prices, 3;
and miscellaneous, 2.
• Conduct an analysis using Pareto Principle.

67
 Problems (Cont.)
• Draw a fishbone/Ishikawa diagram for the
following:
• Inaccurate inventory (Warehouse inventory variances)
• Late for work
• Blurry photo

68
69
70
71
Statistical Quality Control

72
 Statistical Quality Control
• The quantitative aspects of quality management.
• Statistical quality control (SQC) is a number of
different techniques designed to evaluate quality
from a conformance view.
• Processes usually exhibit some variation in their
output.
• Assignable variation: variation that is caused
by factors that can be clearly identified and
possibly even managed.
• Common variation: variation that is inherent in
the process itself
– Also know as random variation
73
 Measuring Variation

()
Mean x : the average value of a set of numbers
n
 i =1 x i
x =
n
X i = Observed value

n = Total number of observed values

( )
Standard deviation σ : a measure of the variation in a set of numbers

σ =
n
(
 i =1 x i − x)2

– Also called sigma

– Sigma is calculated in a few different ways,
depending on the underlying theoretical distribution
74
Understanding and Measuring Process
Variation

• When variation is reduced, quality is improved

• It is impossible to have zero variation
• Typical specification statement is 10.00 inches
± 0.02 inch
• Upper specification: the maximum
acceptable value for a characteristic
• Lower specification: the minimum
acceptable value for a characteristic

75
 Genichi Taguchi

• From the customer’s view, there is often

practically no difference between a product just
inside specifications and a product just outside.

• As customers get more demanding, there is

pressure to reduce variability.

76
 Genichi Taguchi

A Traditional View of the Cost of Variability

77
 Genichi Taguchi

Taguchi’s View of the Cost of Variability

78
 The Taguchi Loss Function
 Taguchi measured quality as the variation from the target value
of a design specification, and then translated that variation into
an economic “loss function” that expresses the cost of variation
in monetary terms.
 Taguchi assumes that losses can be approximated by a
quadratic function so that larger deviations from target
correspond to increasingly larger losses.
 Measuring Process Capability

• Capable: the mean and standard deviation of the

process are operating such that the upper and lower
control limits are acceptable relative to the upper
and lower specification limits.
• Specification limits: range of variation that is
considered acceptable by the designer or customer.
• Process limits: range of variation that a process is
able to maintain with a high degree of certainty.

80
 Process Control Limits Exceed
Specification Limits (Not Capable)
Diagram A

81
Exhibit 13.3 Specification Control Limits
Exceed Process Limits (Process Capable)
Diagram B

82
 Process Capability Index (Cpk)

• Ratio of the range of values produced divided by

the range of values allowed.

 x − LSL USL − x 
C pk = min  , 
 3σ 3σ 


• Shows how well the parts being produced fit into

the range specified by the design specifications.
• Cpk larger than one indicates process is capable.
• When the two numbers are not close, indicates
mean has shifted.
83
Process Capability with a Shift in the
Process Mean

84
 Example 1

• Assessing the capability of a process that puts

pressurized grease in an aerosol can
• Design specifications call for an average of 60 psi ±
5
– An upper specification limit of 65 psi and a lower
specification limit of 55 psi
• A sample average 61 psi with a standard deviation
of 2 psi
• What is the capability of the process?
• What is the probability of producing a defect?

85
 Example 1 Solution (1 of 2)

• Step 1: Interpret data

LSL = 55, USL = 65, Mean (x-double bar) = 61

Step 2 : Calculate Cpk

 x − LSL USL − x   61 − 55 65 − 61 
C pk = min
3σ
,
3σ
 = min 
3 (2 )
,
3(2 )  = min1,6667 = 6667
   

– This is not a very good capability index

86
 Example 1 Solution (2 of 2)

• Step 3: Calculate probability of a defect

x−x 55 − 61 65 − 61
Z = , Z55 = = −3, Z65 = =2
σ 2 2
NORMSDIST(− 3) = 0  001349898,1 − NORMSDIST(2) = 0.227501
P(less than 55 or more than 65) = 0.001349898 + 0.0227501  0.024
Approximately 2.4 percent will be defective

87
 Problem
• A process has a mean of 9.20 grams and a
standard deviation of 0.30 gram. The lower
specification limit is 7.50 grams and the upper
specification limit is 10.50 grams. Compute
𝐶𝑝𝑘 =?

88
Supply Chain Management

https://www.youtube.com/watch?v=2xGLGdpGpBU

https://www.youtube.com/watch?v=HxXJ8Q2GCs4

89
 Supply Chain
A supply chain includes the chain of entities
involved in the planning, procurement, and
production and distribution of goods and services.
Realization of the Need for an efficient Supply Chain
1) Increase in the annual wastage due to poor supply
chain coordination e.g. $30 billion in USA in 1999.
2) Dramatic increase in the product variety because of
the faster new products introductions.
3) Change in the market dynamics.
91
 Supply chain components
1) The Inbound supply chain
It pertains mainly to provide raw materials and
components to an organization.
2) In-house supply chain
The in-house component of the supply chain relates to the
physical configuration of the conversion process.
3) Outbound supply chain
It pertains to the distribution of goods and services to the
end customers.
➢ Distribution network design
➢ Logistics management
➢ Channel management
Distribution network design & Route
Planning
It refers to various choices made with respect to the
nature of entities included in Outbound logistics.
Example: A manufacturer of air-conditioners had the
following entities in its distribution network:
o Two factories manufacturing air-conditioners
o Eight branch offices across the country
o 16 sales depots (each branch office controlled two
depots)
o 800 dealers (Each sales depot served about 50)
 Supply Chain Management

Supply chain management describes the

coordination of all supply chain activities, starting
with raw materials and ending with a satisfied
customer.
The objective of the supply chain management is to
coordinate activities within the supply chain to
maximize the supply chain’s competitive advantage
and benefits to the ultimate customer.
 Supply Chain Management: A Process
Orientation

Plan Source Make Deliver

In-house In-bound
1) Supplier In-house Outbound
1) Demand 1) Layout &
development 1) Logistics
management facilities
2) Supply management
2) MPS management
management 2) Warehousing
3) Materials & 2) Materials
3) Joint cost 3) Distribution
Capacity handling
reduction 4) Channel
Planning 3) Co-
4) Target management
4) Distribution ordination with
costing
requirement supply chain
5) Value
planning partners
engineering
6) Import
substitution

Figure: Process view of the supply chain and its relationship to supply chain components
Supply chain structure
The supply chain structure refers to the set of choices made in
assembling the components of a supply chain together which may include the
number of layers that make up a supply chain, the composition of each layer,
the type of information flow across the layers, and the nature of integration
achieved between the layers.
Influence of supply chain structure on supply chain performance
1) The number of layers
2) Delays in the chain
3) Decision making patterns
4) Independence of each member of the supply chain
 Bullwhip Effect
It denotes the increasing severity of distortions in
demand information and ordering patterns as the
information travels from one layer of the supply
chain to the next layer.

97
 Classification of Supply Chains
• Design of supply chains
• Designing efficient supply chains
• Designing responsive supply chains
• Role of IT in supply chain management
• Supply chain risk management
Logistics and Transportation Planning

• Gati Shakti Project

• https://youtu.be/HpE-yIZfVPE

99
 Logistics
• Logistics: the art and science of obtaining,
producing, and distributing material and
product in the proper place and in the proper
quantities.
– Accounts for eight to nine percent of US GDP
• International logistics: managing these
functions when the movement is on a global
scale.

100
Logistics Management
It refers to the set of activities involved in the physical movement
of goods across the supply chain.

Channel Management
It involves the smooth passage of information and material flows
across the supply chain. It requires systems for efficient data
capture and dissemination across the supply chain.
 Types of logistics company
• Third-party logistics company (3PL): an outside
company used to manage all or part of another
company’s logistics functions.
• Fourth-party logistics company (4PL): an operational
model in which a business outsources its entire supply
chain management and logistics to one external service
provider.
• “Unlike a third-party (3PL) provider, which oversees part of supply
chain operations for a business, a 4PL provider is usually the single
point of contact for supply chain management. This provider has a
broader scope of responsibilities that include managing resources,
technology and infrastructure and providing strategic insights and
management”.

102
 Transportation Modes
• Truck: great flexibility
• Ship: high capacity and low cost but slow
• Plane: fast but expensive
• Train: low cost but slow and variable
• Pipeline: highly specialized and limited to liquids,
gases, and solids in slurry form
– No packaging is needed and the costs per mile are
low
• Hand delivery: last step in many supply chains
• Multimodial solutions are the norm

103
Logistics-System Design Matrix: Framework
Describing Logistics Processes

104
 Cross-Docking
• Cross-docking: large shipments are broken
down into small shipments for local delivery in
an area
– Minimizes inventory in the warehouse
• Hub-and-spoke systems: the sole purpose of
the warehouse (the hub) is sorting goods to
consolidation areas, where each area is
designed for shipment to a specific location
– Hubs are located near the geographic center of
the region they are to serve to minimize the
distance a good must travel

105
Measures of Supply Chain Performance
Two types of measures are taken into consideration for computing the
performance of a supply chain:
1) Post- process Indices: it includes the indices which rely on
the past data to assess the performance of the supply chain
function during the relevant period of time.
𝑡𝑜𝑡𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑖𝑛 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 (𝐼𝑁𝑅)
𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑟𝑎𝑡𝑖𝑜 𝑇𝑂 % = ×100
𝑎𝑛𝑛𝑢𝑎𝑙 𝑠𝑎𝑙𝑒𝑠 (𝐼𝑁𝑅)
𝑎𝑛𝑛𝑢𝑎𝑙 𝑠𝑎𝑙𝑒𝑠 (𝐼𝑁𝑅)
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑡𝑢𝑟𝑛𝑠 (𝑁𝐼𝑇) =
𝑡𝑜𝑡𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑖𝑛 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦(𝐼𝑁𝑅)
𝑡𝑜𝑡𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑖𝑛 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 (𝐼𝑁𝑅)
𝑡𝑜𝑡𝑎𝑙 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑑𝑎𝑦𝑠 (𝑇𝐼𝐷) = × 365
𝑎𝑛𝑛𝑢𝑎𝑙 𝑠𝑎𝑙𝑒𝑠 (𝐼𝑁𝑅)
𝑎𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 (𝐼𝑁𝑅)
𝑑𝑎𝑦𝑠 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔(𝐷𝑆𝑂) = ×365
𝑎𝑛𝑛𝑢𝑎𝑙 𝑠𝑎𝑙𝑒𝑠 (𝐼𝑁𝑅)
𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑝𝑎𝑦𝑎𝑏𝑙𝑒 (𝐼𝑁𝑅)
𝑑𝑎𝑦𝑠 𝑜𝑓 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔(𝐷𝑃𝑂) = × 365
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑟𝑎𝑤 𝑚𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝑠 𝑐𝑜𝑛𝑠𝑢𝑚𝑒𝑑(𝐼𝑁𝑅)

Cash-to-cash cycle time (days) = TID + DSO -DPO

 𝑟𝑎𝑤 𝑚𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 (𝐼𝑁𝑅)
𝑅𝑀 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 (𝑑𝑎𝑦𝑠) 𝑅𝑀𝐷 = × 365
𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑟𝑎𝑤 𝑚𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑐𝑜𝑛𝑠𝑢𝑚𝑒𝑑 (𝐼𝑁𝑅)
𝑊𝐼𝑃 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 (𝐼𝑁𝑅)
𝑊𝐼𝑃 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 (𝑑𝑎𝑦𝑠) 𝑊𝐼𝑃𝐷 = × 365
𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛(𝐼𝑁𝑅)
𝐹𝐺 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 (𝐼𝑁𝑅)
𝐹𝐺 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 (𝑑𝑎𝑦𝑠) 𝐹𝐺𝐷 = × 365
𝐴𝑛𝑛𝑢𝑎𝑙 𝑠𝑎𝑙𝑒𝑠 (𝐼𝑁𝑅)

Classroom Problem:
Extract from the annual reports for the years ended March 1999
and March 2000 of an auto-component manufacturer in Tamil
Nadu are presented in the following table. Compute the relevant
post-process indices of the supply chain performance. Are there
any significant inferences that one can make based on the
computation?