Planning and Scheduling
Inventory
Learning Objectives:
- Identify the various types of inventory, including raw materials, work-in-progress, finished goods, and MRO (Maintenance, Repair, and Operations) inventory.
- Learn about different inventory control systems, such as the Economic Order Quantity (EOQ) model, Just-In-Time (JIT) inventory, and ABC analysis.
- Learn methods for valuing inventory, including FIFO (First-In, First-Out), LIFO (Last-In, First-Out), and weighted average cost.
Inventory refers to the materials in stock. It is also called the idle resource of an enterprise. Inventories represent those items which are either stocked for sale or they are in the process of manufacturing or they are in the form of materials, which are yet to be utilized. The interval between receiving the purchased parts and transforming them into final products varies from industries to industries depending upon the cycle time of manufacture. It is, therefore, necessary to hold inventories of various kinds to act as a buffer between supply and demand for efficient operation of the system. Thus, an effective control on inventory is a must for smooth and efficient running of the production cycle with least interruptions.
Meaning of Inventory Control:
Inventory control is a planned approach of determining what to order, when to order and how much to order and how much to stock so that costs associated with buying and storing are optimal without interrupting production and sales. Inventory control basically deals with two problems:
When should an order be placed? (Order level), and
How much should be ordered? (Order quantity).
These questions are answered by the use of inventory models. The scientific inventory control system strikes the balance between the loss due to non-availability of an item and cost of carrying the stock of an item. Scientific inventory control aims at maintaining optimum level of stock of goods required by the company at minimum cost to the company.
Inventory Model:
Inventory models deal with idle resources like men, machines, money and materials. These models are concerned with two decisions: how much to order (purchase or produce) and when to order so as to minimize the total cost.
Economic Ordering Quantity (EOQ):
For the first decision—how much to order, there are two basic costs are considered namely, inventory carrying costs and the ordering or acquisition costs. As the quantity ordered is increased, the inventory carrying cost increases while the ordering cost decreases. The ’order quantity’ means the quantity produced or procured during one production cycle. Economic order quantity is calculated by balancing the two costs.
Economic Order Quantity (EOQ) is that size of order which minimizes total costs of carrying and cost of ordering. i.e., Minimum Total Cost occurs when Inventory Carrying Cost = Ordering Cost.
Determination of EOQ by Analytic Method:
In order to derive an economic lot size formula following assumptions are made:
Demand is known and uniform.
Let D denotes the total number of units purchase/produced and Q denotes the lot size in each production run.
Shortages are not permitted, i.e., as soon as the level of the inventory reaches zero, the inventory is replenished.
Production or supply of commodity is instantaneous.
Lead-time is zero.
Ordering cost is C\(_o\).
Inventory carrying cost is \[C_c = C \times i\] where C is the unit cost and i is a percentage value of the unit purchasing cost.
For instantaneous replenishment:
with a finite replenishment rate:
where,
A = cost to place one order
D = number of units used per year
h = holding cost per unit per year
R = Replenishment rate
Grendelkhan, CC BY-SA 3.0, via Wikimedia Commons
Solved Example: 9015-01
Fixed period systems are also termed as ______ systems of inventory control.
A. q
B. pq
C. qv
D. p
Correct Answer: D
Solved Example: 9045-01
ABC inventory control focuses on those:
A. Items not readily available.
B. Items which consume less money.
C. Items which have more demand.
D. Items which consume more money.
Correct Answer: D
Solved Example: 9045-02
The demand for a commodity is 100 units per day. Every time an order is placed, a fixed cost of \$400 is incurred. Holding cost is \$0.08 per unit per day. If the lead time is 13 days, then the economic lot size and the recorder point are in units:
A. 800 and 130
B. 840 and 100
C. 890 and 300
D. 1000 and 300
Correct Answer: D
Solved Example: 9045-03
In the classical economic order quantity (EOQ) model, let Q and C denote the optimal order quantity and the corresponding minimum total annual cost (the sum of the inventory holding and ordering costs). If the order quantity is estimated incorrectly as Q'= 2Q, then the corresponding total annual cost C' is:
A. $C'= 1.25C$
B. $C'= 1.5C$
C. $C'= 1.75C$
D. $C'= 2C$
Correct Answer: A
Solved Example: 9045-04
Fixed period systems are also termed as ______ systems of inventory control.
A. q
B. pq
C. qv
D. p
Correct Answer: D
Solved Example: 9045-05
ABC analysis is related to:
A. Controlling the inventory costs money
B. Analysis of process chart
C. Ordering schedule of job
D. Flow of Metals
Correct Answer: A
Solved Example: 9045-06
A company uses 2555 units for an item annually, Delivery lead time is 8 days. The recorder point, in number of units, to order optimum quantity is:
A. 7
B. 60
C. 8
D. 56
Correct Answer: D
Solved Example: 9045-07
A manufacturer can produce 12000 bearings per day. The manufacturer receives an order of 8000 bearings per day from a customer. The cost of holding a bearing in stock is \$0.20 per month. Setup cost per production run is \$500. Assuming 300 working days in a year, the duration of production run should be:
A. 4.5 days
B. 6.8 months
C. 4.5 months
D. 6.8 days
Correct Answer: D
Solved Example: 9045-08
The 'E' in EOQ concept stands for:
A. Economic
B. Early
C. Essential
D. Easy
Correct Answer: A
Solved Example: 9045-09
Setup costs include:
A. Labour cost of setting of machines
B. Cost of processing the work piece
C. Ordering cost of raw material
D. Maintenance cost of machines
Correct Answer: C
Solved Example: 9045-10
Which of the following is a type of indirect inventory?
A. Raw material inventory
B. Anticipation inventory
C. Work in process inventory
D. Finished goods inventory
Correct Answer: B
Solved Example: 9045-11
If A is the total items consumed per year, P is the procurement cost per order, and C is the annual inventory carrying cost per item, then the most economic ordering quantity is given by:
A. $\dfrac{P}{C}$
B. $\dfrac{2AP}{C}$
C. $\sqrt{\dfrac{AP}{C}}$
D. ${\dfrac{AP}{C}}^2$
Correct Answer: C
Solved Example: 9045-12
In A-B-C analysis, which class of items are generally large in number?
A. A
B. B
C. C
D. None of these
Correct Answer: C
Solved Example: 9045-13
In perpetual inventory control, the material is checked as it reaches its:
A. Minimum value
B. Maximum value
C. Average value
D. Middle value
Correct Answer: A
Solved Example: 9045-14
ABC analysis deals with:
A. Analysis of process chart
B. Flow of material
C. Ordering schedule of job
D. Controlling inventory costs money
Correct Answer: D
Aggregate Planning
Learning Objectives:
- Recognize the importance of aggregate planning in aligning production with demand and resource constraints.
- Identify and understand the various types of aggregate planning strategies, including chase demand, level production, and hybrid plans.
- Aggregate planning is the process of developing, analyzing, and maintaining a preliminary, approximate schedule of the overall operations of an organization.
- The aggregate plan generally contains targeted sales forecasts, production levels, inventory levels, and customer backlogs. This schedule is intended to satisfy the demand forecast at a minimum cost.
- The process of determining output levels of product groups over the coming 6 to 18 months on a weekly or monthly basis ; the plan identifies the overall level of outputs in support of the business plan.
- Aggregate planning involves translating long-term forecasted demand into specific production rates and the corresponding labor requirements for the intermediate term.
- Minimize cost / maximize profits
- Maximize customer service
- Minimize inventory investment
- Minimize changes in production rates
- Minimize changes in workforce levels
- Maximize utilization of plant and equipment
- Aggregate Planning Process Determine demand for each period.
- Determine capacities for each period.
- Identify policies that are pertinent Determine units costs for units produced.
- Develop alternative plans and compute costs for each.
Solved Example: 9051-01
The output of an aggregate plan is:
A. Bill of material
B. Demand forecast
C. Overtime
D. Total cost
Correct Answer: B
MRP
Learning Objectives:
- Define Material Requirements Planning (MRP) and its role in production and inventory management.
- Identify and understand the key components of an MRP system, including the Bill of Materials (BOM), Inventory Records, and Master Production Schedule (MPS).
Material Requirements Planning (MRP) is a computer-based technique for determining the quantity and timing for the acquisition of dependent demand items needed to satisfy the master schedule requirements.
By identifying precisely what, how many, and when components are needed, MRP systems are able to reduce inventory costs improve scheduling effectiveness, and respond quickly to market changes.
Following are some of the terms frequently used on (computerized) MRP planning forms. Note, however, that not all programs use the same terms or provide the same detail of information.
Gross or Projected requirements: Projected requirements for raw materials, components, subassemblies, or finished goods by the end of the period shown. Gross requirements come from the master schedule (for end items) or from the combined needs of other items.
Scheduled receipts: Materials already on order from a vendor or in-house shop due to be received at the beginning of the period. MRP form shows quantity and projected time of receipt. (Note: Some MRP forms include planned receipts here too.)
Inventory On hand/available: The quantity of an item expected to be available at the end of the time period in which it is shown. This includes amount available from previous period plus planned-order receipts and scheduled receipts less gross requirements.
Net requirements: Net amount needed in the period. This equals the gross requirements less any projected inventory available from the previous period along with any scheduled receipts.
Planned-order receipt: Materials that will be ordered from a vendor or in-house shop to be received at the beginning of the period, otherwise similar to a scheduled receipt.
Planned-order release: The planned amount to be ordered in the time period adjusted by the lead-time offset so that materials will be received on schedule. Once the orders are actually released, the planned-order releases are deleted from the form and the planned-order receipts they generated are changed to scheduled receipts.
Solved Example: 9052-01
In Materials Requirement Planning, if the inventory holding cost is very high and the setup cost is zero, which one of the following lot-sizing approaches should be used?
A. Economic Order Quantity
B. Lot-for-Lot
C. Base Stock Level
D. Fixed Period Quantity, for two periods
Correct Answer: B
Solved Example: 9052-02
Materials Requirement Planning is driven by:
A. Master Production Schedule
B. Total quality measurement
C. Overall production planning
D. Overall inventory planning
Correct Answer: A
Theory of Constraints
Learning Objectives:
- Learn how to identify constraints or bottlenecks in a system or process.
- Explore the five focusing steps of Theory of Constraints, which include identifying constraints, exploiting constraints, subordinating other processes, elevating constraints, and preventing inertia.
- Understand how Theory of Constraints promotes continuous improvement and problem-solving through its systematic approach.
Bottleneck: is any resource with a capacity equal to or less than the demand placed upon it.
Constraints: is anything that limits a system's performance, relative to the system goal.
The Theory of Constraints is a methodology for identifying the most important limiting factor (i.e., constraint) that stands in the way of achieving a goal and then systematically improving that constraint until it is no longer the limiting factor.
Steps in the Theory of Constraints:- Identify the system constraint: Need to determine the entire process to identify which process limits the throughput.
- Exploit the constraint: Find methods to maximize the utilization of the constraints towards productive throughput.
- Subordinate everything else: Effective utilization of the constraint is the most important issue. Everything else is secondary.
- Elevate the constraint: Find ways to increase the available hours of the constraint, including adding more of it.
- Repeat the same process: Once the constraint is not a constraint anymore, find a new one and repeat these steps.
- Throughput
- Inventory
- Operating Expense
Solved Example: 9175-01
The theory of constraints is a management proposition that:
A. Puts constraints on certain steps in the process to save money.
B. Considers any system to be limited only by the constraints that affect it.
C. Allows constraints to exist to improve tax implications.
D. Removes constraints on certain steps in a process to increase productivity.
Correct Answer: D
Sequencing
Learning Objectives:
- Recognize the role of sequencing in optimizing the order and timing of tasks or jobs.
- Identify and understand the various types of sequencing, including job sequencing, machine sequencing, and task sequencing.
- Learn about priority rules used in job sequencing, such as First-Come-First-Served (FCFS), Shortest Processing Time (SPT), and Earliest Due Date (EDD).
Priority Sequencing Rules
- Priority Rules provide guidelines for the sequence in which jobs should be worked.
- In using this rules, job processing times and due dates are important pieces of information.
- Priority Rules try to minimize completion time, number of jobs in the system, and job lateness, while maximizing facility utilization.
- First come, first served (FCFS)
- Shortest processing time (SPT)
- Earlier due date (EDD)
- Critical Ratio (CR)
Solved Example: 9053-01
Sequencing is a subset of:
A. Routing
B. Scheduling
C. Expediting
D. None of these
Correct Answer: B
Solved Example: 9053-02
The word 'Kanban' is used in:
A. EOQ
B. JIT
C. MRP
D. SCM
Correct Answer: B
Solved Example: 9053-03
Johnson's rule is used for:
A. Sequencing problem
B. Assignment problem
C. Aggregate planning
D. Scheduling
Correct Answer: A