OMIS 430 Exam 3

Material requirements planning (MRP)

A computer-based information system that deals with dependent demand and translates master schedule requirements for end items into time-phased requirements for subassemblies, components, and raw materials.

Bill of Materials (BOM)

A listing of all of the assemblies, subassemblies, parts, and raw materials needed to produce one unit of a product

An MRP is not

A static document

Inventory

A stock or store of goods

Point-of-sale (POS) systems

A system that electronically records actual sales Such demand information is very useful for enhancing forecasting and inventory management

Effective Inventory Management Requires

A system to keep track of inventory A reliable forecast of demand Knowledge of lead time and lead time variability Reasonable estimates of costs A classification system for inventory items

Fixed Order Quantity (FOQ) Models

AKA... Economic Order Quantity, EOQ, and Q-model Event triggered Relies on continuous review Order is placed when remaining inventory drops to a predetermined order point, R. This is a perpetual system, which requires the constant updating of inventory records. Favors more expensive items because average inventory is lower. More appropriate for important items because of closer monitoring, which results in quicker response to potential stockouts. Requires more effort to maintain due to logging of every addition and withdrawal to inventory.

Fixed Order Interval (FOI) Models

AKA... periodic system, periodic review system, fixed-order interval system, and P-model. Time triggered Inventory is checked (counted) only at review period, T. Larger average inventory to protect against stockouts during the review period.

Net Requirements:

Actual amount needed in each time period.

Yield management

An approach to maximizing revenue by using a strategy of variable pricing; prices are set relative to capacity availability During periods of low demand, price discounts are offered During periods of peak demand, higher prices are charged Users of yield management include Airlines, restaurants, hotels, restaurants

A-B-C approach

Classifying inventory according to some measure of importance, and allocating control efforts accordingly

Holding (carrying) costs

Cost to carry an item in inventory for a length of time, usually a year

Ordering costs

Costs of ordering and receiving inventory

Shortage costs

Costs resulting when demand exceeds the supply of inventory; often unrealized profit per unit

Dependent demand

Demand for items that are subassemblies or component parts to be used in the production of finished goods. Dependent demand tends to be sporadic or "lumpy"

Inventory Management Functions

Establish a system for tracking items in inventory Make decisions about When to order and How much to order

Manufacturing resources planning (MRP II)

Expanded approach to production resource planning, involving other areas of the firm in the planning process and enabling capacity requirements planning

Projected Available:

Expected inventory on hand at the beginning of each time period.

backflushing

Exploding an end item's BOM to determine the quantities of the components that were used to make the item

Types of Time Fences

Frozen No schedule changes allowed within this window Moderately Firm Specific changes allowed within product groups as long as parts are available Flexible Significant variation allowed as long as overall capacity requirements remain at the same levels

Aggregate Planning in Services

Hospitals: Aggregate planning used to allocate funds, staff, and supplies to meet the demands of patients for their medical services Airlines: Aggregate planning in this environment is complex due to the number of factors involved Capacity decisions must take into account the percentage of seats to be allocated to various fare classes in order to maximize profit or yield Restaurants: Aggregate planning in high-volume businesses is directed toward smoothing the service rate, determining workforce size, and managing demand to match a fixed capacity Can use inventory; however, it is perishable

Economic order quantity (EOQ) models

Identify the optimal order quantity by minimizing the sum of annual costs that vary with order size and frequency can lead to minimum costs if usage of item is fairly uniform. This may be the case for some lower-level items that are common to different 'parents' and less appropriate for 'lumpy demand' items because inventory remnants often result.

Safety Stock:

In theory, MRP systems should not require safety stock. Variably many necessitate the strategic use of safety stock.

Inventory Records File

Includes information on the status of each item by time period, called time bucks

Aggregate Planning

Intermediate-range capacity planning that typically covers a time horizon of 3 to 18 months Useful for organizations that experience seasonal, or other variations in demand

Sales and operation planning

Intermediate-range planning decisions to balance supply and demand, integrating financial and operations planning Since the plan affects functions throughout the organization, it is typically prepared with inputs from sales, finance, and operations

Independent demand items

Items that are ready to be sold or used

Inventory management concerns

Level of customer service- Having the right goods available in the right quantity in the right place at the right time Costs of ordering and carrying inventories Independent Demand

Strategies to counter variation:

Maintain a certain amount of excess capacity to handle increases in demand Wait as long as possible before committing to a certain level of supply capacity

Level capacity strategy:

Maintaining a steady rate of regular-time output while meeting variations in demand by a combination of options: inventories, overtime, part-time workers, subcontracting, and back orders Advantages Stable output rates and workforce Disadvantages Greater inventory costs Increased overtime and idle time Resource utilizations vary over time

MRP Inputs

Master Schedule, Bill of Material, Inventory records

Chase demand strategy:

Matching capacity to demand; the planned output for a period is set at the expected demand for that period. Advantages Investment in inventory is low Labor utilization is high Disadvantages The cost of adjusting output rates and/or workforce levels

Single-Period Model

Model for ordering perishables and other items with limited useful lives One time purchasing decision (Example: vendor selling t-shirts at a football game) Seeks to balance the costs of inventory overstock and under stock

Scheduled receipts:

Open orders scheduled to arrive

Secondary MRP Reports

Performance-control reports: Evaluation of system operation, including deviations from plans and cost information, e.g., missed deliveries and stockouts Planning reports: Data useful for assessing future material requirements. e.g., purchase commitments Exception reports: Data on any major discrepancies encountered. E.g., late and overdue orders, excessive scrap rates, requirements for nonexistent parts

Inventory Counting Systems

Periodic System Perpetual Inventory System

ICS: Periodic System

Physical count of items in inventory made at periodic intervals

Primary MRP Reports

Planned orders: A schedule indicating the amount and timing of future orders Order releases: Authorizing the execution of planned orders Changes: Revisions of the dates or quantities, or the cancellation of orders

Quantity discount

Price reduction for larger orders offered to customers to induce them to buy in large quantities

Aggregate Planning Strategies

Proactive-Alter demand to match capacity Reactive-Alter capacity to match demand Mixed-Some of each

Planned-order Receipts:

Quantity expected to be received at the beginning of the period offset by lead time.

FOI Disadvantages:

Requires a larger safety stock Increases carrying cost Costs of periodic reviews

Aggregate Planning Inputs

Resources, demand forecast, policies, cost

Low-level coding

Restructuring the bill of material so that multiple occurrences of a component all coincide with the lowest level at which the component occurs

Safety Time:

Scheduling orders for arrival or completions sufficiently ahead of their need that the probability of shortage is eliminated or significantly reduced.

Time fences

Series of time intervals during which order changes are allowed or restricted The nearest is most restrictive The farthest is least restrictive

Goal of aggregate planning

Specify the optimal combination of production rate (units completed per unit of time) workforce level (number of workers) inventory on hand (inventory carried from previous period)

ICS: Perpetual Inventory System

System that keeps track of removals from inventory continuously, thus monitoring current levels of each item

MRP processing

Takes the end item requirements specified by the master schedule and "explodes" them into time-phased requirements for assemblies, parts, and raw materials offset by lead times

Purchase cost

The amount paid to buy the inventory

Setup costs

The costs involved in preparing equipment for a job Analogous to ordering costs

Lot-for-Lot (L4L) ordering

The order or run size is set equal to the demand for that period Minimizes investment in inventory It results in variable order quantities A new setup is required for each run

Service level

The probability that demand will not exceed supply during lead time

Pegging

The process of identifying the parent items that have generated a given set of material requirements for an item

Determinants of the reorder point

The rate of demand The lead time The extent of demand and/or lead time variability The degree of stockout risk acceptable to management

Master schedule:

The result of disaggregating an aggregate plan Shows quantity and timing of specific end items for a scheduled horizon cover a period that is at least equivalent to the cumulative lead time

Cumulative lead time

The sum of the lead times that sequential phases of a process require, from ordering of parts or raw materials to completion of final assembly.

FOI Advantages

Tight control of inventory items Items from same supplier may yield savings in: Ordering Packing Shipping costs May be practical when inventories cannot be closely monitored

Lead time

Time interval between ordering and receiving the order

Inventory Functions

To meet anticipated customer demand To smooth production requirements To decouple operations To protect against stockouts To take advantage of order cycles To hedge against price increases To permit operations To take advantage of quantity discounts

Gross Requirements:

Total expected demand

Two-bin system

Two containers of inventory; reorder when the first is empty

Fixed Period Ordering:

provides coverage for some predetermined number of periods.

The total cost curve reaches its minimum where

the carrying and ordering costs are equal.