Materials Management

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Presentation Transcript

POM 370 : 

POM 370 Materials Management 1

Materials Management : 

Materials Management 2 Importance Component of cost of goods sold (COGS) Labor component of COGS declining Significant increase in cost of materials Direct Indirect (overhead)

Materials Management : 

Materials Management 3 Suppliers Customers Enterprise Purchasing Orders Raw-material Storage Receiving Transformation Processes In-process Storage Distribution Finished-goods Storage

Inventory : 

Inventory 4 One of the most expensive assets of many companies representing as much as 50% of total invested capital Operations managers must balance inventory investment and customer service

Inventory : 

Inventory What is inventory? Stock of materials Stored Capacity Examples: 5

Inventory : 

Inventory 6 Functions of inventory: To meet anticipated customer demand To decouple suppliers – production – distribution To take advantage of quantity discounts To hedge against inflation & price increases To protect against delivery variations To avoid production disruptions through use of Work-In-Process (WIP)

Inventory : 

Inventory 7 Negative aspects of inventory: Large inventories hide operational problems Financial cost in carrying excess inventories Risk of damage to goods held in inventory Risk of product obsolescence

Inventory : 

Inventory 8 Types of Inventory: Raw material Purchased but not processed Work-in-process Undergone some change but not completed A function of cycle time for a product Maintenance/repair/operating (MRO) Necessary to keep machinery and processes productive Finished goods Completed product awaiting shipment

Inventory : 

Inventory 9 Examples: Raw material Iron ore – steel mill Flour – bakery Work-in-process Radiator – auto manufacturer Draft contract – attorney

Inventory : 

Inventory 10 Examples: Maintenance / repair / operating supplies (MRO) Lubricating oil – machine shop Soap and shampoo – hotel Finished goods Candy bar – confectioner Policy – insurance company

Inventory : 

Inventory 11 Vendors Customers Transformation Process Raw Materials Work in process Finished goods

Water Tank Analogy : 

Water Tank Analogy 12

ABC Analysis : 

ABC Analysis How inventory items can be classified How accurate inventory records can be maintained 13

ABC Analysis : 

ABC Analysis Divides inventory into three classes based on annual dollar volume Class A - high annual dollar volume Class B - medium annual dollar volume Class C - low annual dollar volume Used to establish policies that focus on the few critical parts and not the many trivial ones 14

ABC Analysis : 

ABC Analysis 15

ABC Analysis : 

ABC Analysis 16

ABC Analysis : 

ABC Analysis 17

ABC Analysis : 

ABC Analysis 18

ABC Analysis : 

ABC Analysis 19 Other criteria than annual dollar volume may be used Key accounts Anticipated engineering changes Delivery problems Quality problems High unit cost

ABC Analysis : 

ABC Analysis 20 Policies employed may include More emphasis on supplier development for A items Tighter physical inventory control for A items More care in forecasting A items

Cycle Counting : 

Cycle Counting Items are counted and records updated on a periodic basis Often used with ABC analysis to determine cycle 21

Cycle Counting : 

Cycle Counting Has several advantages Eliminates shutdowns and interruptions Eliminates annual inventory adjustment Trained personnel audit inventory accuracy Allows causes of errors to be identified and corrected Maintains accurate inventory records 22

Cycle Counting : 

Cycle Counting 23 5,000 items in inventory, 500 A items, 1,750 B items, 2,750 C items Policy is to count A items every month (20 working days), B items every quarter (60 days), and C items every six months (120 days)

Control of Service Inventories : 

Control of Service Inventories 24 Can be a critical component of profitability Losses may come from shrinkage or pilferage Applicable techniques include Good personnel selection, training, and discipline Tight control on incoming shipments Effective control on all goods leaving facility

Control of Service Inventories : 

Control of Service Inventories Shrinkage Unaccounted retail inventory between receipt and sale Due to damage, theft and sloppy paperwork Theft also known as pilferage Accounts for 1% to 3% of sales 25

Control of Service Inventories : 

Control of Service Inventories Controls Good personnel selection, training, and discipline Tight control of incoming shipments Effective control of all goods leaving the facility 26

Types of Demand : 

Types of Demand Independent demand - the demand for item is independent of the demand for any other item in inventory Refrigerator – goods Hamburger – services 27

Types of Demand : 

Types of Demand Dependent demand - the demand for item is dependent upon the demand for some other item in the inventory Ice maker – goods Ketchup – services 28

Materials Costs : 

Materials Costs Holding costs - associated with holding or “carrying” inventory over time Setup costs - associated with costs of placing order and receiving goods Out-of-stock costs - cost of back order and cost of lost sales 29

Holding Costs : 

Holding Costs Obsolescence Insurance Extra staffing Cost of money (opportunity costs) Pilferage Damage Warehousing 30

Holding Costs : 

Holding Costs 31

Setup Cost : 

Setup Cost Supplies Forms Order processing Clerical support 32

Independent Demand Models : 

Independent Demand Models Fixed order-quantity models Economic order quantity (EOQ) Production order quantity (POQ) Quantity discount Probabilistic models Fixed order-period models 33

EOQ Model : 

EOQ Model EOQ assumptions: Known and constant demand Known and constant lead time Instantaneous receipt of material No quantity discounts Only order (setup) cost and holding cost No stockouts 34

EOQ Model : 

EOQ Model 35

EOQ Model : 

EOQ Model 36

EOQ Model : 

EOQ Model 37 Q = Number of pieces per order Q* = Optimal number of pieces per order (EOQ) D = Annual demand in units for the Inventory item S = Setup or ordering cost for each order H = Holding or carrying cost per unit per year Annual setup cost = (Number of orders placed per year) x (Setup or order cost per order)

EOQ Model : 

EOQ Model 38 Q = Number of pieces per order Q* = Optimal number of pieces per order (EOQ) D = Annual demand in units for the Inventory item S = Setup or ordering cost for each order H = Holding or carrying cost per unit per year Annual holding cost = (Average inventory level) x (Holding cost per unit per year)

EOQ Model : 

EOQ Model 39 Q = Number of pieces per order Q* = Optimal number of pieces per order (EOQ) D = Annual demand in units for the Inventory item S = Setup or ordering cost for each order H = Holding or carrying cost per unit per year Optimal order quantity is found when annual setup cost equals annual holding cost Solving for Q*

EOQ Model - Example : 

EOQ Model - Example 40

EOQ Model - Example : 

EOQ Model - Example 41

EOQ Model - Example : 

EOQ Model - Example 42

EOQ Model - Example : 

EOQ Model - Example 43

POQ Model : 

POQ Model Answers how much to order and when to order Allows partial receipt of material Other EOQ assumptions apply Suited for production environment Material produced, used immediately Provides production lot size Lower holding cost than EOQ model 44

Quantity Discount Model : 

Quantity Discount Model Answers how much to order & when to order Allows quantity discounts Reduced price when item is purchased in larger quantities Other EOQ assumptions apply Trade-off is between lower price & increased holding cost 45

Probabilistic Model : 

Probabilistic Model Answer how much & when to order Allow demand to vary Follows normal distribution Other EOQ assumptions apply Consider service level & safety stock Service level = 1 - Probability of stockout Higher service level means more safety stock 46

Fixed Period Model : 

Fixed Period Model Answers how much to order Orders placed at fixed intervals Inventory brought up to target amount Amount ordered varies No continuous inventory count Possibility of stockout between intervals Useful when vendors visit routinely Example: Paul Mitchell representative calls on salon every two weeks 47