Operations Management Final Exam
Work-in-process inventory (WIP)
The material and components used within the process to complete a product Ex: body frames of cars that will eventually become cars
Inventory
The number of flow units with a process. Found in all stages of a process
Inventory Turns
The number of times the average inventory flows through a process in a designated interval of time
Service Level
The percent of time of being able to meet customer demand with stock
Inventory Management
The practice of regulating the quantity, location and type of inventory in a process. The goal is to have the right product in the right place at the right time
Holding Cost Percentage
The ratio of the cost to hold an item in inventory during a designated period time relative to the cost to purchase the item
Stockout Consequence
The result of not having the item ready for the customer can either result in the customer coming back later, just losing the sale, or potentially permanently losing the customer
Salvage Value
The value that can be obtained per unit for inventory left over at the end of the selling season
Inventory Holding Cost
There are different reasons why it is costly to maintain an inventory. opportunity cost of capital, inventory storage cost, obsolesce cost, and spoilage and shrinkage costs
Idle Time
Time not producing or setting up things
Min-Max System
When on hand inventory falls below a predetermined minimum level, order enough to fill up maximum level
Target Capacity Equation
(Batch Size)/(Total Setup Time) + (Batch Size x Processing Time)
Setup Costs (per unit of time)
(set up cost)/length of order cycle = (K x R)/Q
Roles of Inventory
-Balance supply and demand of WIP -Balance supply and demand of finished goods -Enabling economies of buying -Enable geographic specialization
Inventory Turns and Day of Supply
-Day of Supply = Flow Time = T -Turns = R/I -Annual Turns = Annual Costs of Goods sold/ inventory -Days of Supply = 365 x inventory/annual costs of goods sold
Why have inventory?
-Flow time: it takes time to move something from one place to another -Seasonality: predictable periods of high and low demand -Batching: Fixed ordering costs -Buffers: to deal with variability in a process -Uncertain demand: unpredictable variations in demand -Pricing: Quantity discounts -Inflation: holding stock against anticipated increases in price
Disadvantages of Inventory
-Item cost, ordering cost, holding cost. -difficult to control -hides production and quality problems
Objectives of Inventory Management
-Provide acceptable level of customer service -Buffer mismatches between supply and demand -Allow cost efficient operations -Minimize inventory investment
Overage Cost
-The cost of ordering one more unit than what you would have ordered if you knew the demand -In other words, suppose you have left over inventory (i.e. you over ordered) Co is the the increase in profit you would have enjoyed had you ordered one fewer unit -For the Hammar 3/2 Co = Cost - salvage cost = c - v
Choosing the Batch Size
-The goal is to find a batch size that minimizes inventory without constraining the flow through a process. Where target capacity is the minimum of the demand rate and the maximum of the flow rate of a system. -The just right batch size finds a smart trade off between capacity and inventory Batch Size = (Target Capacity x Total Setup Time)/(1 - (target capacity x processing time))
Utilization in a Process with Setups
-a process with setup times cannot always be producing, there will be downtime each time a process requires a step -another instance in which production experiences a nonproductive time is idle time Without setups: Utilization = (Flow Rate)/(Capacity) With setup steps: (Flow Rate)/(Output rate when producing) Output Rate when Producing: (1/Processing Time)
Quantity Discount Procedure
-calculate the EOQ at the lowest price -determine whether the EOQ is feasible at this price -if yes, stop; if no, continue -check the feasibility at the next highest price -continue until you find a feasible EOQ -calculate the total costs (including total item costs) for the feasible EOQ model -calculate the total cost of buying at the minimum quantity required to for each of the cheaper unit prices -compare the total cost of each option & choose the lowest cost alternative
Inventory Management Capabilities for effectiveness
-forecasting -product and demand tracking -analytic skills -product transportation and handling assests
Newsvendor Assumptions
-one production or procurement opportunity -stochasitic demand D during selling season -fixed cost per unit ordered/made (c) -fixed price per unit sold during regular selling season (s) -left over inventory sold for a fixed salvage value (v)
Ideal Conditions for EOQ
1.) demand rate is uniform and constant at R units per year 2.) lead time is zero (instant delivery) 3.) unit purchase cost is unaffected by order size 4.) annual cost to place orders is proportional to the number of orders need 5.) annual inventory holding cost is proportional to the average inventory level during the year
ABC Classification
A = extremely important B = moderately important C = relatively important this is a method for determining level of control and frequency of review of inventory items
Batch
A collection of units
Obsolesce Cost
The cost associated with losing value over because of either technological change or shits in fashion
Inventory Storage Cost
The cost to properly store, maintain, and insure inventory
Opportunity Cost of Capital
The income not earned on the amount
ABC Classification Percentages
A items: typically 20% of the items accounting for 80% of the inventory value of the Q system B items: typically an additional 30% of the items accounting for the 15% of the inventory value use Q-P C items: typically the remaining 50% of the items accounting for only 5% of the inventory use P
Production Cycle
A repeating sequence of produced units. For example, say a milling machine is set up to make steer supports, then produces 90 steer supports then does a set up to make ribs and makes 90 ribs. That would be the production cycle because it is a repeating sequence Composed of: setup time, production time, and idle time
Setup
A set of activities that are required to produce units but for which the time to complete these activities does not depend directly on the number of units produced The key feature of a setup is that it invovles a fixed amount of time that is not directly related to the amount actually produced Ex: cleaning the pan after baking cookies so you can bake more
Changeover Time/Switchover Time
A setup time to change production from one type of 'product' to another. Switchover time is almost the exact same thing it just instead refers to the change from one type of 'part' to another type Ex: 60 mins time in-between rib production and steer production
Production Smoothing Strategy
A strategy for scheduling production such that the rate of output remains relatively stable over time and even though demand varies predictably over the same period
Batch Production
A type of production in which units are produced into batches.
Capacity of a Process with Setups
An ideal process operates at a fast and consistent pace. Unfortunately, not all resources can work that way. When a process has a setup time its not easy to predict the capacity of a resource. Capacity = (units produced)/(total time to produce units) Capacity = (Batch Size)/(Total set up time + (Production time x batch size))
Inventory Holding Cost Percentage Equation
Annual holding costs percentage/annual turns
Quantity Discounts
As consumers we often experience quantity discounts like "buy three, get one free." Businesses also are offered quantity discounts. For example, a supplier might offer a retailer "8% off a full truckload"
Quantity Discount Assumptions and Equation
Assumptions are same as the EOQ Equation is: TCqd = ((R/Q) x K) + ((Q/2) x h) + PR
Inventory in a Process with Setups
Capacity and ultilization both rise as batch size gets larger, with that being said you do not always want to produce with large batch sizes Think of the sink and faucet example. If your pouring to much into the system at once then everything will be backed up. If you put to little into the system then everything will be behind. You need to find the correct medium because inventory build up is costly and increases flow time through a process
Spoilage or Shrinkage Costs
Costs associated with theft or product deteoration over time
Underage Cost
Cu = underage cost -The cost of ordering one fewer unit then what you would have ordered had you known demand -in other words, suppose you had lost sales (i.e. under ordered) -Cu is the increase in profit you would have enjoyed had you ordered one more unit -For the Hammar 3/2 Cu = price - cost = p - c
Reduce Variety or Reduce Steps
Ford Example- any color as long as its black SMED - single minute exchange of die. The goal is to reduce the set up time to a single digit number Internal Steps- tasks that can only be done while the machine is not production External Steps- Activities that can be done while production Setup Time can be reduced if all external steps are done outside of setup See if you can change internal steps to external steps (raising pressure of a gauge before and not during)
Data Analysis
How can we most efficiently move store items? you need skills to make good decisions regarding quantities and placement of inventory
Forecasting
How much is needed and where? Ex: you wont wait for your local store to restock diapers if you need them you will go somewhere else. You must be able to reasonably predict what amount should be ready
Raw Material Inventory
Inventory that is used as the inputs to a process and has not undergone any transformation in the process. Ex: sheets of metal for cars before they are pressed into the car
Parameters for EOQ Problems
K: ordering or setup cost R: flow rate (demand) h: holding cost; same as flow rate (both typically annual) Q: represents a particular order quantity
Inventory Calculation
Maximum inventory = Batch size x (1- flow rate x processing time) Average inventory all you do is just divide the maximum inventory by 2
Stockout
Occurs when a customer demands an item that is not available in inventory
Lot-to-Lot
Order exactly what is need for the next period
Fixed Order Quantity
Order predetermine amount each time an order is placed
Quantity Constraints
Pallets can cause you to have too much inventory at once and can force you to have specialized equipment to move them Sometimes a case is better because it smaller and easier to move
Derivation of EOQ
Q*= sqrt(2KR/h) looking at the equation we can confirm that Q8 increases if the order cost, K, increases; in that case, it makes sense to order a larger quantity to reduce the number of orders placed per unit of time
Finished goods inventory
Ready for sale to the customer Ex: compeleted car
Effect of Batching
Remember Little's Law I=R x T what happens when our batch size (I) increases so as to maximize capacity? -Throughput (R) remains constant -Thus if I increases, Flow time must also increase The firm is less responsive To increase process capacity it is better to focus on set-up time reduction rather than increasing the batch size
Days-Of-Supply
The average amount of time (in days) it takes for a unit to flow through the system
Storage and Material Handling
a firm cannot be effective at inventory management without the assests needed to physically move inventory quickly, safely, and cost-effectively
Holding Costs
inventory costs (per unit of time) = 1/2 order quantity x height (1/2Q x h)
Order n periods
order enough to supply demand for the next n periods
Economic Order Quantity
the most economical number of units to order when an order is placed or when a production run is started
Data Tracking
where are items, are they in good condition, how much is ready at the moment
