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Master of Science in Automotive Engineering Plants and Manufacturing Systems B 10. Inventory Management Instructor:

Master of Science in Automotive Engineering

Plants and Manufacturing Systems B

10. Inventory Management

Instructor:

Anna Corinna Cagliano

anna.cagliano@polito.it

A.Y. 2018-2019

Outline

Inventory Costs

Inventory Management Models

Basics of Material Requirement Planning (MRP)

Outline

Inventory Costs

Inventory Management Models

Basics of Material Requirement Planning (MRP)

Inventory Costs

Procurement cost

Purchasing cost (human resources, etc.) Transportation cost

Storage cost (inventory carrying)

Capital interest

Material handling and store HR

Investment amortizations (building facility, MHE equipment, etc.)

Maintenance

Shrinkage

ABC Classification

Cumulative percent economic value
Cumulative percent economic value

ABC Classification

A items

Few items (10 15%) account for the greatest portion of inventory value (70 – 80%) A items ask for rigorous inventory management

C items

Large number of items (65%75%) have little value on total (5 – 10%)

Less rigorous policy

B items

Might be associated with either A or C groups as far as inventory management is concerned.

5

Outline

Inventory Costs Inventory Management Models Basics of Material Requirement Planning (MRP)

Why to Hold Inventory ?

To reduce demand uncertainty

Safety stock (stock of flexibility)

Seasonal stock (stock of capacity)

To separate different operations phases

way to allow sourcing, making and delivery to work at different rates

allows the different phases to be “asynchronous” and it absorbs upstream variations.

What Should be Decided

Replenishment policy, i.e. how much and when to order

Impacts on:

Stock carrying costs

Setup/order emission costs

Stock out / downstream service costs

Constraints:

Production capacity and flexibility of upstream production level

Physical space limit of warehouses.

Control level, i.e. the detail and the frequency of control of the stock level of each item

Impacts on:

Cost of control

Constraints:

Availability of resources to perform the controls (people,

computers,

).

8

Inventory Management Look Back Approach

A target inventory level is set without looking ahead at the demand.

The time and the quantity to order are decided only based on the current level of stock.

This inventory management approach is basically to simply react to demand.

Inventory Management Look Back Approach

The look back approach should be used when it is hard to look ahead the demand:

Demand is constant in time, or:

It is impossible to foresee demand with enough accuracy, or:

The upstream phase is highly flexible.

Inventory Management Look Back Objectives

The main objectives of the look back approach are to minimize costs and to maximize the service level for the downstream phases.

These objectives can be expressed as the minimization of a total cost function composed by:

Stock carrying costs

Execution costs (order / setup)

Costs of control

Costs of poor service level at downstream phases (stock out costs).

11

Inventory Management Look Back. Types of Models

According to the type of control

Continuous control

Discrete control: time intervals

According to the order placing time

Fixed interval

Variable interval

According to the ordered quantity

Fixed quantity

Variable quantity

According to the type of reorder

Independent entries: each item is reordered independently from the others

Joint entries: orders for the different items are coordinated.

12

Economic Order Quantity (EOQ) Model

Characteristics

Variable period of order placing

Fixed quantity ordered

Continuous control

Independent entries reorder

Objectives

Identify the quantity Q [units] to reorder that minimizes the total cost, as summation of

ordering cost

purchasing/production cost

stock carrying cost

The EOQ Model

Inventory

level

Re-order

Point

R

Safety Stock (SS)

Order

placed

Assume infinite stock

replenishment rate

Economic Order Quantity Q INVENTORY Time Material arrived Lead Time
Economic
Order Quantity
Q
INVENTORY
Time
Material
arrived
Lead Time

L

Quantity Q INVENTORY Time Material arrived Lead Time L Re-order Point = demand in the LT

Re-order Point = demand in the LT + Safety Stock = R = d x L + SS

14

EOQ – Notation & Assumptions

Total demand over a total # of periods

Demand per period

Constant setup/ordering unit cost

Unit selling price/production cost

Unit cost of holding inventory (carrying unit cost) H [€/(unit*period)]

Order lead time

Average daily consumption

Infinite stock replenishment rate

Infinite capacity of warehouse

Shipping costs included in the ordering cost

In one year we buy exactly the total quantity of products demanded by customers

D tot [units] D [units/period] S [€] SP [€/unit]

L [days] d = D / days r [unit/day]

EOQ – Steady Demand

In this example Safety Stock = 0

Inventory

level

200 150 100 50 0 1234 Time
200
150
100
50
0
1234
Time

Q (EOQ)

Average stock = (Q / 2) + Safety Stock

Number of orders issued = annual demand / Q

EOQ Cost Components

Cost of stock carrying

Cm H

q

2

*# periods

Cost of order placement Cs (or setup cost)

Cs S

Dtot

q

Cost of purchasing C a (or cost of production)

Ca SP * Dtot

EOQ Equation

Total cost H

q

2

*#

periods

Total cost per period H

q

2

S

D tot

S

q

D

q

SP

*

D

SP

*

D

tot

d q D ( H   S   SP * D ) 
d
q
D
( H 
S 
SP
*
D
)
0
dq
2
q
H
SD
SD
2 SD
tot
 0 
Q
2
or Q
2
2
q
H
H
 #
periods
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EOQ – Production Lead Time

If the time needed to produce (lead time) is long (some days or weeks) the production flows into warehouse not all at once.

In the meantime demand is consuming the stock.

Inventory level profile

Inv.

level

200

150

100

50

0

stock. Inventory level profile Inv. level 200 150 100 50 0 1234 time 2 x D

1234 time

2 x D x S
2 x D x S
2 x D x S
2 x D x S
2 x D x S
2 x D x S

2 x D x S

2 x D x S
2 x D x S

H x (1-d/r)

EOQ’ =

where d = consumption rate r = production rate = stock replenishment rate

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Reorder Point Definition

INVENTORY LEVEL

Reorder Point Definition INVENTORY LEVEL REORDER POINT SAFETY STOCK TIME PRODUCTION OR PURCHASING LT REORDERS
Reorder Point Definition INVENTORY LEVEL REORDER POINT SAFETY STOCK TIME PRODUCTION OR PURCHASING LT REORDERS

REORDER POINT SAFETY STOCK

TIME

PRODUCTION OR PURCHASING LT

POINT SAFETY STOCK TIME PRODUCTION OR PURCHASING LT REORDERS Reorder point = demand during LT +

REORDERS

SAFETY STOCK TIME PRODUCTION OR PURCHASING LT REORDERS Reorder point = demand during LT + Safety

Reorder point = demand during LT + Safety Stock = = R = d x L + Safety Stock

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Safety Stock

Safety stocks are used to prevent from stockout

The level of safety stocks depends on:

Variation of downstream consumption (demand) with respect to the forecast

Desired service level (to what extent stock outs should be avoided during the order lead time)

Order lead time duration

Order lead time reliability

Safety Stock

a b d
a
b d
Safety Stock a b d Inventory level time Normal distribution of the demand and the order

Inventory

level

time

Normal distribution of the demand and the order lead time

L 1 L 2 L
L 1
L 2
L

Lead time

R

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Safety Stock (Probabilistic D, Deterministic L)

Data:

R

d

L

k

reorder point in units

average daily demand

lead time expressed in days (deterministic)

function of the expected service level (probability of not facing stockouts during the lead time)

L std dev of demand during lead time

SS k

L

Standard Deviation of Demand During the Lead Time

Given the standard deviation of daily demand d , the standard deviation during lead time L can be calculated as

L

demand  d , the standard deviation during lead time L can be calculated as 

L 

demand  d , the standard deviation during lead time L can be calculated as 

d

Calculating k

Probability no stockout during order lead time

k
k

Z

Probability stockout during order lead time

z

k

Probability

F(z)

no stockout

probabilità

Probability

stockout

shortage

0,00

0,5000

50,00%

0,25

0,5987

40,13%

0,50

0,6915

30,85%

0,75

0,7734

22,66%

1,00

0,8413

15,87%

1,25

0,8944

10,56%

1,50

0,9332

6,68%

1,75

0,9599

4,01%

z

k

Probability

F(z)

no stockout

probabilità

Probability

stockout

shortage

2,00

0,9772

2,28%

2,25

0,9878

1,22%

2,50

0,9938

0,62%

2,75

0,9970

0,30%

3,00

0,9987

0,13%

3,25

0,9994

0,06%

3,50

0,9998

0,02%

3,75

0,9999

0,01%

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Safety Stock (Probabilistic D, Probabilistic L)

2 2 SS  k *  2 L  d L d
2
2
SS
k
*
2 L

d
L d

k function of service level

d standard dev. of demand

L average value of lead time

L standard dev. of lead time

d average value of demand

Standard deviation of demand during the order lead time

26

Fixed Time Period Model

Characteristics

Discontinuous control

Fixed time between reviews (T)

Variable ordered quantity

Independent or combined entries reorder

Objective

Identifying the quantity to reorder at each review that allows the availability of each product to achieve a predefined service level, called objective level (OL)

Hypotheses

The same as EOQ

Fixed Time Period Model

INVENTORY LEVEL

L Material

L Material

OL

SS

arrives arrives Order Order INVENTORY
arrives
arrives
Order
Order
INVENTORY

TIME

T

T

Fixed Time Period Model

At fixed time intervals of T days inventory level is reviewed and availability is calculated. Availability is:

I = current inventory level + Orders placed but not yet arrived

An order q is issued equal to the difference between objective level OL and availability:

q = OL I [units]

The objective level OL is defined in order to cover the demand in the time window T+L (where L is supplier’s

LT):

OL (T L ) d SS

[units]

Fixed Time Period Model

Safety stock is calculated in the same way as in the EOQ model. However, the component derived from demand variability must prevent from stockouts that can happen during the time window (T+L).

SS k  

T

L

d

2

2

L

2

k (L T)  d

L d 2 2 L 2  k  (L  T)   d 

T+L = Standard deviation of the demand during the time period (T+L)

Fixed Q vs. Fixed T Models

fixed quantity

fixed time

‐ ‐ low average stock level (continuous control) easy joint (combined entries) re ‐orders planning
‐ ‐ low average stock level (continuous control) easy joint (combined entries) re ‐orders planning
‐ ‐ low average stock level (continuous control) easy joint (combined entries) re ‐orders planning
low average stock level
(continuous control)
easy joint (combined entries)
re ‐orders planning
Minimization of relevant costs
(OPTIMIZATION)
easy control of availiability
level (periodic control)
difficult joint (combined
entries) re ‐orders planning
higher average stock level
(periodic control)
many replenishment orders
(also to the same supplier)
“heavy” control of availiability
level (continuous control)

31

Outline

Inventory Costs Inventory Management Models Basics of Material Requirement Planning (MRP)

Material Requirement Planning

Inventory Management. Look ahead criterion .

Based on the production plan for a given finished product ( Master Production Schedule MPS), calculates for each part in the BOM of the product:

The quantity that needs to be purchased/produced.

When the associated purchasing/production order needs to be issued.

Material Requirement Planning

The following quantities are also taken into account:

The available inventory level for each part The already scheduled deliveries for each part (units that have been ordered but not yet received).

The MRP procedure we will see is run over a time horizon ( planning time horizon ) constituted by a number of time periods (e.g. weeks).

The MRP procedure is run before the planning time horizon starts.

34

Notation & Assumptions

Demand : the quantity of a part that is needed at the end of each period of the planning time horizon.

Scheduled Deliveries : units that are scheduled to be received at the beginning of each time period.

Initial Inventory on Hand : the inventory level of one part at the beginning of the planning time horizon.

Inventory on Hand: the available inventory at the end of each time period of the planning time horizon.

Planned Order: how many units of a given part need to be ordered.

Planned Order Released : when the associated order is issued (orders are issued at the end of a time period).

MRP Procedure

Sum

the time period requirements of a part in order to produce all those finished products/sub assemblies having that part in their BOMs.

Split

the total part requirement per time period obtained above according to chosen lot sizing policy.

Shift in Time (backward)

the lot sized requirements according to the order lead time for each part.

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MRP Procedure

It 's easier to do than to say….

Example 1

Master Production Schedule for P1:

P1

P2

P3 (2)

50 units at the end of week 5

60 units at the end of week 7

Initial inventory on hand:

P1: 10 units

P2: 20 units

Scheduled deliveries: 20 units of P2 at the beginning of week 3

Order Lead Time & Lot sizing policy:

P1: 1 week. The order can have any size.

P2: 2 weeks. The order can have any size.

MRP Record for P1

MRP Record for P1 Initial Inventory on Hand P1; LT=1 week; Lot- sizing: any order size

Initial Inventory on Hand

P1; LT=1 week; Lot- sizing: any order size

Time period [week]

 

1

2

3

4

5

6

7

Demand Scheduled Deliveries Inventory on Hand Planned Order Planned Order Released

         

50

 

60

10

10

10

10

10

0

0

0

40

60

40

60

MRP Record for P2

P2; LT=2 weeks; Lot- sizing: any order size

Initial Inventory on Hand

Time period [week]

 

1

2

3

4

5

6

7

Demand Scheduled Deliveries Inventory on Hand Planned Order Planned Order Released

       

40

 

60

 

20

20

20

20

40

0

0

0

0

60

60

MRP Record for P3

P3; LT=3 weeks; Lot- sizing: 150 units or multiples

Initial Inventory on Hand

Time period [week]

 

1

2

3

4

5

6

7

Demand Scheduled Deliveries Inventory on Hand Planned Order Planned Order Released

       

120

     

0

0

0

0

30

30

30

30

150

150

MRP Record for P3

What would happen if the order lead time for P3 was 4 weeks?

P3; LT=4 weeks; Lot- sizing: 150 units or multiples

Initial Inventory on Hand

Time period [week]

 

1

2

3

4

5

6

7

Demand Scheduled Deliveries Inventory on Hand Planned Order Planned Order Released

       

120

     

0

 

0

0

0

30

30

30

30

 

150

150

   
 
 

I would need to place the order before the planning time horizon starts (not possible!!)

42

MRP Record for P3

The delivery of the 120 units of P3 is delayed of 1 week

P3; LT=4 weeks; Lot- sizing: 150 units or multiples

Initial Inventory on Hand

Time period [week]

 

1

2

3

4

5

6

7

Demand Scheduled Deliveries Inventory on Hand Planned Order Planned Order Released

         

120

   

0

0

0

0

0

30

30

30

150

150

The production of P2 and P1 will be delayed as well

Example 2

MASTER PRODUCTION SCHEDULE

Time period [week]

1

2

3

4

5

6

7

8

Wheelbarrow Demand

40

   

60

 

60

 

50

Demand 40     60   60   50 Note: the container is not considered in
Demand 40     60   60   50 Note: the container is not considered in

Note: the container is not considered in the BOM for this exercise

Order

Lead

Time

Initial

Inventory

on Hand

Lot-sizing

[units/order]

Scheduled

Deliveries

Part

2 weeks

100

300 in week 2

Handles 300

Wheel sub- assembly (*)

200

3 weeks

220

Wheel

400

1 week

50

44

(*) in week 5 90 wheel sub-assemblies are also required to produce

another product

Example 2

HANDLES LT = 2 weeks

Lot-sizing = 300 units/order

WHEEL SUB-ASS LT = 3 weeks

Lot-sizing = 200 units/order

Time period [week]

IIH

     

12345678

       

Demand Scheduled Deliveries Inventory on Hand Planned Order Planned Order Released

 

80

   

120

 

120

 

100

300

100

20

320

320

200

200

80

80

280

300

300

Time period [week]

IIH

     

12345678

       

Demand Scheduled Deliveries Inventory on Hand Planned Order Planned Order Released

 

40

   

60

90

60

 

50

220

180

180

180

120

30

170

170

120

200

200

WHEEL LT = 1 week

Time period [week]

IIH

     

12345678

       

Demand Scheduled Deliveries Inventory on Hand Planned Order Planned Order Released

     

200

         

Lot-sizing = 400 units/order

50

50

50

250

250

250

250

250

250

400

 

400

45

MRP Limitations

assumes infinite

production capacity. The order lead times are assumed pre defined and fixed. They do not depend on the workload. The MRP procedure requires a large amount of data, a careful control, and a timely update of information.

The

MRP procedure