Production Planning

for Supply Chain

Chapter 11:
Order Point Inventory Control Methods

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 Resource Sales and operations Demand
Planning planning management

Enterprise Resource Planning (ERP) System

Master production
scheduling Front End

Detailed capacity Detailed material

planning planning
Engine
Material and
capacity plans

Shop-floor Supplier Back end

systems systems

Manufacturing Planning and Control System

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 Inventory
 Inventory allows us to anticipate changes in demand

 Inventory could be located anywhere along the supply chain

 raw materials/components
 work in progress/semi-finished
 finished goods in factories, field warehouses, distribution centers, in
transit
 office and factory supplies, spare parts inventories, maintenance
materials

 Some have independent demand and others have dependent

demand (demand created from other component parts, etc)

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 Independent Demand
 Independent demand inventories are influenced by factors outside
of the company decisions, (MTS) often found in distribution
centres and field warehouses.

 Demand has been forecasted for these items through historical

rates and patterns.

 For the most part, independent inventory is the inventory of the

end-products that a customer would receive.

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 Dependent Demand

 Demand for inventory items at the manufacturing stage (raw

materials, components, etc) are all examples of dependent
demand.

 These items are dependent on the Final Assembly Schedule

(FAS) or Master Production Schedule (MPS).

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 Functions of Inventory –
Safety Stock
 Safety Stock provides protection against irregularities or
uncertainties in an item’s demand or supply.

 When demand exceeds the forecast or resupplying that item is

longer than anticipated.

 Safety Stock allows customer demand to be met immediately.

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 Functions of Inventory –
Transit Stock
 Transit stock depends on the time to transport goods from one
location to another.

 This stock along with the inventory in distribution centers, field

warehouses and customer locations are called pipeline
inventories.

 Can be changed by altering transportation methods, switching

to local suppliers.

 Cost and Service are trade offs that need to be considered!

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 Functions of Inventory –
Cycle Stock
 Cycle stock exists whenever orders are made in larger
quantities than needed to satisfy immediate requirements.

 Distribution centre may sell two units of stock on a weekly

basis so they make batch orders to support this.

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 Functions of Inventory –
Anticipation Stock
 Anticipation Stock is needed for products with seasonal
patterns of demand and uniform supply.

 Enough stock to support seasonal peak demand built up and

then depleted when the peak is over.

 Toys, Air Conditioners = examples.

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 Routine Inventory Decisions

 HOW MUCH? – quantity to be ordered.

 WHEN? – timing of placing an order quantity – also known as,

Reorder Point

 Reorder Point = (Demand x Lead Time) + Safety Stock

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 Inventory Costs

 CARRYING COST – for holding inventory.

 ORDERING/SET UP COST – manual or clerical efforts to

prepare an order.

 SHORTAGE COST – running out of stock and resulting impact

on business and customer – harder to measure.

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 Multi-Item Management

 Managing all your inventory items, how do you manage all

of them, which have a higher priority?

 ABC Analysis = the method of categorizing items so the

important will receive management’s attention

 Single Criterion ABC Analysis = separating the inventory

items into three groupings according to their annual cost
volume usage
 (unit cost x annual usage)

 Three Groupings: A, B, C

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 ABC Analysis

 A = items having a high dollar usage

 B = items having an intermediate dollar usage

 C = items having a low dollar usage

 Typical outcome = A items having the most annual spend but

make up the minority of the inventory

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 ABC Analysis

 ABC Analysis is a tool for identifying the items that will make
the largest impact on the firm’s overall inventory cost
performance when improved inventory control procedures are
implemented

 Improvements on inventory decisions on A items will have a

larger effect on the overall inventory costs/performance

 Allows us as managers to focus on what is important and

spend less time on trivial inventory matters.

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ABC Analysis

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 ABC Analysis

 Multiple Criteria ABC Analysis

 Used in combination with cost/usage based analysis.
 Non-cost criteria that is important in inventory management
• lead time
• Obsolescence
• Availability
• Substitutability
• criticality

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Time Based vs Progress Based
Auto Assembly Plant

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 Summary

 Independent vs Dependent demand (each have different types of

inventory)
 Functions of Inventory – Transit Stock, Cycle Stock, Safety Stock,
Anticipation Stock
 Reorder point = (demand x lead time) + Safety Stock
 Inventory Costs – storage, ordering, shortage cost
 Fixed Order Quantity Model = reaching the reorder point or running
out of stock
 Fixed Time Period Model = regular ordering
 ABC Analysis

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