Ex 6

Capacity

Unit holding cost:

$60/ period

6000

Overtime

1200

Sub-contract

4000

6000

Period

Demand
Final Plan
Regular
OT
SC
End Inventory
Regular
OT
SC
Holding
Total

$1150
$1250

Total

**1200 x $1150 = $1,380,000

++800 x $60 = $48,000

15

Calculate

OH = 50, LT = 0

IL, IP

IL = -20, LT = 0

OH, IP

(50 + 0)

OH =0, IP =-20
(-20 + 0)

OH = 100, LT = 3 days. We ordered 75

units yesterday from supplier .

IL, IP

IL = - 40, LT = 5 days, 80 units ordered

yesterday , 50 units ordered 3 days ago.

OH, IP

Lot
#of Ordering Average Holding AnnualInventory
size Q orders cost inventory cost
cost(AIC)*

Objective: To determineorder quantity (lot size) to minimize

annual inventory cost.
Assumptions of basic EOQ Model

IL = 50, IP = 50
(50 - 0)

D =12,000units / year, S =$140,C =$15 /unit

annualholdingcost: 24% ofC: H = 15*24%= $3.6 per unit
per year

Developed in 1915 by Harris. Very simple, robust.

Used by thousands of companies around the world.

IP >= IL

Given

Frequencyof orderingversus holding cost

1 The EOQ Model Economic Order Quantity

Time between placing and receiving order.

Physical stock
IL = OH Quantity on backorder
IP = IL + Quantity in transit

Lets consider different situations

$1000

Exam ple1.1

cont.
LT
OH
IL
IP

IL =100 (100+ 0)
IP =175
(100 + 75)

OH =0
IP =90

S.(D/Q)

Q/2

400 30.0

4200.0

200.0

720.0

4920.0

800 15.0

2100.0

400.0

1440.0

3540.0

1200 10.0

D/Q

1400.0

600.0

2160.0

3560.0

1050.0

800.0

2880.0

3930.0

1 Annual demand is known, occurs at uniform

rate.
2 Ordering cost S is fixed for every order.
3 Holding cost H charged on average inventory
4 Lot size Q fixed, delivered in one lot
5 No shortages permitted.

D: [ Q / T ].
S: [ $ ]
H: [ $ / (Q*T) ]
Q: [ Q ]
IL>=0

Smallerlot size means :

6 Lead-time (LT) does not vary

LT: [ T ]

7 One item, no quantity discount is offered

(- 40+80+50)
18

C:

Ex 1 .3: Va riationsof basicEO Qm odel

Ex. 1.4 cont.

( y ou c a n ta lw a y so rd erth e ex a c tn u m b e y
r ou w a n t)

D =12000 units / year

Policy: [0, 1000]

P o licy[ 0 ,1 0 0 0 ]

1. Atleast1500perlot?
Policy[0,1500]

1 0 0 00

8 00 0
7 00 0
A n n u al C o s ts

Policy[0,1000]

6 00 0
5 00 0

loweraverageinventory
, lower holdingcost
22

! "#$%&'($)*+', '- '.$*/ , , 0/ 1*', ($, &234*%25&6

Q*

8)*>*? *@
*A*B

LT = 1! months

C D$&0E*%25&*D*'5*='F$9<*', %033$9*=23*$/ %G*5$&0E6

D)*>*H*B

Policy: [1500, 1000]

I J 219', K*%25&*J *%G/ 3K$9*2, */ ($3/ K$*', ($, &234

J )*>*H*@
*L? MAN*B

Order when IP = demand during lead time =D * LT

O P3290%&'2, *12&*5'.$*? *'5*='F$9

? )*>*? *B

D * LT =

4 00 0

12000 [units / year]

* 1! [months] =1500units
12 [months /year]

LT = 3 months ?

2 00 0

Q R2*5G23&/K$5*E$3- '&&$96*

Policy: [Demand in LT, Q*]

S P3290%&'2, *3/ &$*LEN*'5*0, '=23- 6**

E)*>*? *@
*A*B

1 00 0

1800

900

1650

750

1350

1500

600

1200

1050

300

450

150

L o S izt e ( Q)

AIC(900)=3486.67
AIC(1050)
=3490

morefrequentordering,higherorderingcost

7 8$- / , 9*'5*: , 2; , <*2%%035*/ &*0, '=23- *3/ &$6

3 00 0

3. Sold in boxes
(150 per box).
150,300,450,600,750, 900,1050,1200,
900, 966.1,1050,

7.5

Needfastermethodto determineorderquantity!

9 00 0

2. Atleast750perlot?

1600

H.(Q/2) S.(D/Q).+ H.(Q/2)

2 E P Qm o d e l

FromE x.1.2:D =12000units/ year, S =$140, H =3.6$ / unit / year

Q0 = 9 6 6 .1

20

Purchase price per unit

Inventory

Definitions

Unit cost

5000 6000 8000

9000 9000 11000
48000
5000 6000 8800 11200 6000 11000
5000 6000 6000
6000
0 6000
1200
1200
0 1200
1600
4000 6000 3800
0
0 800
3000
0
0
5000* 6000 6000 6000
0 6000
Costs in
0
0 1380** 1380
0 1380 thousand
dollars
0
0 2000+ 5000 7500 4750
0
0
180
0
0
48++
5000 6000 9428 12560 7500 12130
52,618

*5000 x $1000 = $5,000,000

+1600 x $1250 = 2,000,000

Lead time
On Hand Inventory
Inventory Level
Inventory Position

Capacity in P5

Regular

T8U*050/ 114*9$, 2&$5*/ , , 0/ 1*9$- / , 96

D * LT =3000units
((12,000/12)

* 3)

V5/ K$*W/ &$*)*0*'5*&G$*9/ '14*9$- / , 9*X*8*@

*Y*9/ 45*', */ *4$/ 36

Ordering Policy:
[ IP =3000, Q =1000 ]

Policy[0,900]
28

P3290%&'2, *3/ &$)*E '5*&G$*E3290%&'2, *E$3*9/ 46

30

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16

7 N ew svendorM od el(fundam entalconcepts):

! "#$%&'($)*+, - *. / 01*20'&3*&, *"21*&, *maximizeexpectedprofit4
5 6'078$*9$:', ; <
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20

Ex 7.4 Fall 2002 test. M656%$6": "N02O$%&'P"Q) ('": "

:%
9%
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72,$@
%
<%
9%
XC/ =
72,$%
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Highly disciplined process that helps us focus on developing and

deliv
elive
erin
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g near-r perfect
perfect prod
products
ucts a
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nd se
services.
rvices.

I 1J "2' %
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Philosophy and set of

methods to eliminate defects
in products and processes

S eeks to reduce variation

! "#$%
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to having such a small
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the process mean.

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34

R C h aP r lto: tsf a m r pa lnevg ae l u e s

35

A. / $%
/ 0. 0&'B+ 75. <1+ 1/ $9'@1:%
/ 1?'C 1#&051?'D/ #;>E1?'B+ 75. <1?'
A. / $5. ;'F@C DBA'- >- ;1G

m s a m op sfl ei zsn e a c h
d i s t r i bo uRf itisno on to r m a l .

K eyconcepts:
C riticalto quality:#$$5%
60$1&'+ . &$'%
+ 7. 5$#/ $'$. '$" 1'- 0&$. + 158

E s t i mf oacrt oe ns ltri mo :li t s

Defect
9':#%
;%
/ * '$. '21;%
<15'= " #$'$" 1'- 0&$. + 15'= #/ $&8
Processc apability
9'= " #$'>. 05'75. - 1&&'- #/ '21;%
<158

U C=LD4R

Variation9'= " #$'- 0&$. + 15'&11&'#/ 2':11;&8

C =L R

Stableoperations
9'1/ &05%
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$>8

L C =L D3 R

W h ic hc h a rtd e te ctss h iftin p r o ce ssm ea n ?

Using X bar and R charts simultaneously

R c h a r t t: iar l c o n t o rl lim it s

1 .0 9 3

5*) "6,+0
7 ,'/#,81/,$+

3 .21 7

9 00.

2 .69 8
2 .17 9

D4

!"#$%&''() &*+(,'(
'- ,./,+0(1"2*#34

4 .25 5

53

11

1 39

15

17

19

24

5
0 0

10

0 0 0.076 0.136 0.184 0.223

3 . 2 62 8.5 72 4.2 82 2.1

1 5 2 .0 01 4. 9 214. 8 614. 8 11 6. 7 7 7
15

16

17

18

19 20

0 . 2 5 60 . 2 80 4.3 00 8.3 20 9.3 408.3 60 4.3 709. 3 902. 4 00 4. 4 1 4

1

7 3

11

13

15

17

Trial
Rev. 1

UCL
37.36
36.20

LCL
Eliminate
26.98 2,8,9,12,14
28.30 4,15,17

UCL
19.04
14.48

LCL Eliminate
2,3,16
0
0
7

Rev. 2

36.79

28.72

14.81

---

3
0

1 1 12 13 14

0-.0.10
03

1 .66 0
1

n
D3

X b a r c ha tr: t r i a cl o n tr o l li m it s

3 .73 6

!"

F/ / %
72,$-

Methodology:

19

UC L

Detec tsshift

x-Chart

1 . 7 4 41 . 7 11 6.6 91 2.6 71 1.6 512.6 31 6.6 211. 6 018. 5 91 6. 4538 6

LCL

UC L

---

Doesnot
detectshift

R-chart

48

Final Control Limits

LCL

56

Pla nt A

Per oi d
GR
SR
OH
PR
POR
GR
C
LT = 2 S R
FOQ 1 0 0 O H
2 ,W3 T P R
SS= 5 0 P O R
GR
O
LT = 2 S R
POQ 3 O H
1T PR
SS= 3 0 P O R
T
LT = 1
L4 L

SS= 5 0

1
2
60 60
90 80
20 50 70
0
0
0 60
0 180
300
360 360 480
0
0
0 200
0 60
160
10 10 110
0
0
0 90

3
80

4
10

5
80

6
10

50
60
10
230

50
10
80
400

50
80
10
130

50
10
70
340

250
0
200
10

50
200
300
80

120
200
300
10

80
300
100
70

100 110 100 30

0 90 0
0
0
0 110 0

9 Plant B Per io d 0 1 2 3 4 5 6 7 8 9 1 0
A
GR
1 10 4 15 11 0 7 0 5 98 0 70 2 403 90 0 0
50
LT = 2 S R
3 00
5 0 5 0 5 0 FOQ 3 0 0 O H 1 5 0 3 4 0 2 2 5 4 1 5 3 1 0 2 3 0 1 6 0 2 2 0 4 3 0 4 3 0 4 3 0
3 00 0 3 0 0 6 0 0 9 0 0 0 3 0 0 6 0 0 0 0
7 0 6 0 5 0 2 B , 2 CP ,R
4G, 1 M
60 50 0
SS= 1 5 0 P O R
3 00 6 00 900 0 300600 0 0 0 0
260 150 0
GR
3 00 6 65 900 13 5 300600 0 0 0 0
X
S
R
7 00
1 2 0 7 0 7 0 LT = 1
P O Q 2 O H 300 7 00 9 50 50 35 0 50 50 50 50 50 50
300 100 0
P
R
0 9 15 0 43 5 0 600 0 0 0 0
1 ,A1 M
0
0
0 SS= 5 0 P O R
9 15 0 435 0 600 0 0 0 0 0
60 50 0
GR
1 8 3 0 0 1 9 8 0 0 1 2 0 03 6 0 0 0 0 0
F
2000
LT = 1 S R
80 30 30
FOQ 5 0 0 O H 1 5 0 01 6 7 01 6 7 0 6 9 0 6 9 0 9 9 0 6 3 0 6 3 0 6 3 0 6 3 0 6 3 0
110 0
0 2 ,X3 Y P R
0 0 1000 0 1500 0 0 0 0 0
0
0
0 SS= 5 0 0 P O R
0 1000 0 1500 0 0 0 0 0 0
7
70

8
60

Chase Strategy: Produce quantity equal to aggregate demand for each period in order to keep inventory level zero. Level Strategy: Produce quantity equal to the average requirement over the planning horizon. Requirement also
means demand. Basic Plan represents production quantity. Functions of Inventory: Meet anticipated customer demand, 2)month production requirements for seasonal demand (level strategy)3)Decouple operations (buffer against
equipment failure, delivery disruptions etc.)4.Protect against variability in demand and lead time (protect against shortages). 5.Allow for economic purchase / production 6.Hedge against price increase. 7.To permit operations (pipeline
inventory, work in process) 8.Take advantage of quantity discounts. The objective of eoq discounts is to minimize annual total cost = annual purchase cost + annual ordering cost + annual holding cost = c * D + S * D/Q + H * Q/2L4Lminimizes inventory
investment, maximizes the number of orders placed. FOQ and POQ places less orders, but higher inventory.Continuous review system - (Q) system tracks inventory of an item each time a withdrawal is made to determine whether it is time to reorder. (From practical
point of view, this may be done every morning, each shift, etc). When inventory position falls below a specified value (called reorder point: ROP), an order is placed. Assumptions: we will order a fixed quantity (Q). Lead time is fixed. Shortages are made up by
backordering. Demand may vary from day to day Shortages can occur occasionally while we wait for an order to arrive. Definitions of Quality Conformance to requirements. Performance - main characteristics of product/service Special
Features - extra characteristics Aesthetics - appearance, feel, smell, taste Reliability - consistency of performance. Durability - useful life of the product/service Conformance to design specifications Serviceability - service after sale, ease of
repair Perceived Quality - indirect evaluation of quality (e.g. reputation) Control Chart: Statistical tool, showing whether a process is in control or not.Taking samples of a process and detect possibility of process being out of control. Major
Causes are often broken down into six major areas: Materials Machine/Equipment Methods/Work Methods Man/People Measurement Mother Nature (Environment)Cause and Effect Diagram (also: Ishikawa or fishbone
diagram) Demonstrates relationship between effects and the categories of their causes. Used to organize a search for causes of a problem. Pareto Chart :A Pareto Chart is a Histogram + a cumulative line, used to identify most important
causes of problems. Check SheetsBasic forms that help standardize data collection,used to create,historam as pareto charts. Run Chart Can be used to identify when equipment or processes are not behaving according to specifications.