Inventory Management and Aggregate Planning

  

I’m working on a management discussion question and need support to help me learn.

Telecomm Systems is a small organization that wants to expand their reach to become an international organization. They offer satellite internet and mobile phone services. Their processes for decision making are long and time consuming as they rely on paper reports every time they need to evaluate something. Before expanding their service internationally, they have decided to implement an ERP system. 
Thinking about Telecomm Systems address the following:

Explain three benefits the organization will achieve by using ERP.
Identify three disadvantages the organization might face while implementing ERP.
Determine how the use of ERP will impact planning and scheduling in the organization. 
Analyze how ERP will help the organization manage supply and demand internationally.Chapter 11
Aggregate Planning
and Master
Scheduling
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No
reproduction or distribution without the prior written consent of McGraw-Hill
Education
11-1
Chapter 11: Learning Objectives
You should be able to:
LO 11.1
LO 11.2
LO 11.3
LO 11.4
LO 11.5
LO 11.6
LO 11.7
Explain what aggregate planning is and how it is useful
Identify the variables decision makers have to work with in
aggregate planning
Describe some of the strategies that can be used for meeting
uneven demand
Describe some of the graphical and quantitative techniques
planners use
Prepare aggregate plans and compute their costs
Describe the master scheduling process and explain its
importance
Disaggregate an aggregate plan
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education
11-2
Aggregate Planning
⚫Aggregate planning
⚫Intermediate-range capacity planning that typically
covers a time horizon of 2 to 18 months
⚫Useful for organizations that experience seasonal, or
other variations in demand
⚫Goal:
⚫Achieve a production plan that will effectively utilize the
organization’s resources to satisfy demand
LO 11.1
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
11-3
The Planning Sequence
LO 11.1
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
11-4
Why Use Aggregate Planning
⚫Why do organizations need to do aggregate
planning?
⚫Planning
⚫It takes time to implement plans
⚫Strategic
⚫Aggregation is important because it is not possible to predict
with accuracy the timing and volume of demand for individual
items
⚫It is connected to the budgeting process
⚫It can help synchronize flow throughout the supply chain; it affects
costs, equipment utilization; employment levels; and customer
satisfaction
LO 11.1
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
11-5
Aggregation
⚫The plan must be in units of measurement that can
be understood by the firm’s non-operations
personnel
⚫ Aggregate units of output per month
⚫ Dollar value of total monthly output
⚫ Total output by factory
⚫ Measures that relate to capacity such as labor hours
LO 11.1
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
11-6
Dealing with Variation
⚫Most organizations use rolling 3, 6, 9, and 12
month forecasts
⚫Forecasts are updated periodically, rather than relying
on a once-a-year forecast
⚫This allows planners to take into account any changes
in either expected demand or expected supply and to
develop revised plans
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education
11-7
Dealing with Variation (cont.)
⚫Strategies to counter variation:
⚫Maintain a certain amount of excess capacity to handle increases
in demand
⚫Maintain a degree of flexibility in dealing with changes
⚫Hiring temporary workers
⚫Using overtime
⚫Wait as long as possible before committing to a certain level of
supply capacity
⚫Schedule products or services with known demands first
⚫Wait to schedule other products until their demands become
less uncertain
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education
11-8
Overview of Aggregate Planning
Forecast of
aggregate
demand for
the
intermediate
range
Develop a
general plan to
meet demand
requirements
Update the
aggregate plan
periodically
(e.g., monthly)
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education
11-9
Demand and Supply
⚫Aggregate planners are concerned with the
⚫Demand quantity
⚫If demand exceeds capacity, attempt to achieve balance by
altering capacity, demand, or both
⚫Timing of demand
⚫Even if demand and capacity are approximately equal, planners
still often have to deal with uneven demand within the
planning period
LO 11.2
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
11-10
Aggregate Planning Inputs
⚫Resources
⚫Workforce/production rates
⚫Facilities and equipment
⚫Demand forecast
⚫Policies
⚫Workforce changes
⚫Subcontracting
⚫Overtime
⚫Inventory levels/changes
⚫Back orders
LO 11.2
⚫Costs
⚫Inventory carrying
⚫Back orders
⚫Hiring/firing
⚫Overtime
⚫Inventory changes
⚫Subcontracting
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
11-11
Aggregate Planning Outputs
⚫Total cost of a plan
⚫Projected levels of
⚫Inventory
⚫Output
⚫Employment
⚫Subcontracting
⚫Backordering
LO 11.2
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
11-12
Aggregate Planning Strategies
⚫Proactive
⚫Alter demand to match capacity
⚫Reactive
⚫Alter capacity to match demand
⚫Mixed
⚫Some of each
LO 11.2
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
11-13
Demand Options
⚫ Pricing
⚫ Used to shift demand from peak to
off-peak periods
⚫ Price elasticity is important
⚫ Promotion
⚫ Advertising and other forms of
promotion
⚫ Back orders
⚫ Orders are taken in one period and
deliveries promised for a later
period
⚫ New demand
LO 11.2
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
11-14
Supply Options
⚫Hire and layoff workers
⚫Overtime/slack time
⚫Part-time workers
⚫Inventories
⚫Subcontracting
LO 11.2
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
11-15
Prominent Aggregate Planning Strategies
Maintain a level workforce
2. Maintain a steady output rate
3. Match demand period by period
4. Use a combination of decision variables
1.
LO 11.3
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
11-16
Aggregate Planning Pure Strategies
⚫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
⚫Chase demand strategy:
⚫Matching capacity to demand; the planned output for a
period is set at the expected demand for that period
LO 11.3
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
11-17
Chase Approach
⚫Capacities are adjusted to match demand
requirements over the planning horizon
⚫Advantages
⚫Investment in inventory is low
⚫Labor utilization in high
⚫Disadvantages
⚫The cost of adjusting output rates and/or workforce levels
LO 11.3
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
11-18
Level Approach
⚫Capacities are kept constant over the planning
horizon
⚫Advantages
⚫Stable output rates and workforce
⚫Disadvantages
⚫Greater inventory costs
⚫Increased overtime and idle time
⚫Resource utilizations vary over time
LO 11.3
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
11-19
Techniques for Aggregate Planning
⚫General procedure:
1. Determine demand for each period
2. Determine capacities for each period
3. Identify company or departmental policies that are pertinent
4. Determine unit costs
5. Develop alternative plans and costs
6. Select the plan that best satisfies objectives. Otherwise return to
step 5.
LO 11.4
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
11-20
Trial-and-Error Techniques
⚫Trial-and-error approaches consist of developing simple
table or graphs that enable planners to visually compare
projected demand requirements with existing capacity
⚫Alternatives are compared based on their total costs
⚫Disadvantage of such an approach is that it does not
necessarily result in an optimal aggregate plan
LO 11.4
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
11-21
Cumulative Graph
LO 11.4
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
11-22
Mathematical Techniques
⚫Linear programming models
⚫Simulation models
⚫Computerized models that can be tested under
different scenarios to identify acceptable solutions to
problems
LO 11.4
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
11-23
Aggregate Planning Example
Period
1
2
3
4
5
6
Total
Forecast
200
200
300
400
500
200
1,800
Costs
Output
Regular time = $2 per skateboard
Overtime
= $3 per skateboard
Subcontract = $6 per skateboard
Inventory
= $1 per skateboard per period on average
inventory
Back orders
= $5 per skateboard per period
Planners for a company that makes several models of skateboards are about to
prepare an aggregate plan that will cover six periods.
They want to evaluate a plan that calls for a steady rate of regular-time output,
mainly using inventory to absorb the uneven demand but allowing some backlog.
Overtime and subcontracting are not used because they want steady output.
They intend to start with zero inventory on hand in the first period.
LO 11.5
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
11-24
Aggregate Planning Example (cont.)
Period
1
2
3
4
5
6
Total
Forecast
200
200
300
400
500
200
1,800
Regular time
300
300
300
300
300
300
1,800
Overtime
—
—
—
—
—
—
Subcontract
—
—
—
—
—
—
100
100
0
(100)
(200)
100
Beginning
0
100
200
200
100
0
Ending
100
200
200
100
0
0
Average
50
150
200
150
50
0
600
0
0
0
0
100
0
100
Output
Inventory
Output 2 Forecast
0
Inventory
Backlog
LO 11.5
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
11-25
Aggregate Planning Example (cont.)
Period
1
2
3
4
5
6
Total
Regular time
$600
$600
$600
$600
$600
$600
$3,600
Overtime
—
—
—
—
—
—
Subcontract
—
—
—
—
—
—
Hire/Layoff
—
—
—
—
—
—
Inventory
$50
$150
$200
$150
$50
$0
$600
Backlog
$0
$0
$0
$0
$500
$0
$500
$650
$750
$800
$750
$1,150
$600
$4,700
Costs
Output
Total
LO 11.5
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
11-26
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
LO 11.6
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
11-27
Aggregate Planning in Services (cont.)
⚫The resulting plan in services is a time-phased projection
of service staff requirements
⚫Aggregate planning in manufacturing and services is
similar, but there are some key differences related to:
1.
2.
3.
4.
LO 11.6
Demand for service can be difficult to predict
Capacity availability can be difficult to predict
Labor flexibility can be an advantage in services
Services occur when they are rendered
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
11-28
Yield Management
⚫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
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education
11-29
Disaggregation
Aggregate
Plan
Disaggregation
Master
Schedule
LO 11.7
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
11-30
Disaggregating the Aggregate Plan
⚫Master schedule:
⚫The result of disaggregating an aggregate plan
⚫Shows quantity and timing of specific end items for a
scheduled horizon
LO 11.7
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
11-31
Master Scheduling
⚫The heart of production planning and control
⚫It determines the quantity needed to meet demand from all
sources
⚫It interfaces with
⚫Marketing
⚫Capacity planning
⚫Production planning
⚫Distribution planning
⚫Provides senior management with the ability to determine
whether the business plan and its strategic objectives will be
achieved
LO 11.7
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
11-32
Time Fences
Period
1
2
“frozen”
(firm or
fixed)
LO 11.7
3
4
5
“slushy”
somewhat
firm
6
7
8
9
“liquid”
(open)
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
11-33
The Master Scheduling Process
Inputs
Outputs
Beginning inventory
Forecast
Customer orders
LO 11.7
Projected inventory
Master
Scheduling
Master production schedule
Uncommitted inventory
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
11-34
The Master Scheduling Process (cont)
⚫The master production schedule (MPS) is one of the
primary outputs of the master scheduling process
⚫Once a tentative MPS has been developed, it must be validated
⚫Rough cut capacity planning (RCCP) is a tool used in
the validation process
⚫Approximate balancing of capacity and demand to test the
feasibility of a master schedule
⚫Involves checking the capacities of production and warehouse
facilities, labor, and vendors to ensure no gross deficiencies exist
that will render the MPS unworkable
LO 11.7
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
11-35
MPS – Forecasts and Customer Orders
LO 11.8
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
11-36
MPS – Projected On Hand
LO 11.8
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
11-37
Determining MPS and Projected On
Hand
LO 11.8
Week
Inventor
y from
Previous
Week
Requirements
Inventory
before MPS
1
64
33
31
31
2
31
30
1
1
3
1
30
-29
4
41
30
11
5
11
40
-29
6
41
40
1
7
1
40
-39
+
70
=
31
8
31
40
-9
+
70
=
61
(70)
MPS
+
70
Projected
Inventory
=
41
11
+
70
=
41
1
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
11-38
Adding MPS and Projected On Hand to the MPS
LO 11.8
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
11-39
Available-to-Promise
LO 11.8
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
11-40
Chapter 12
MRP and ERP
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No
reproduction or distribution without the prior written consent of McGraw-Hill
Education
12-41
Chapter 12: Learning Objectives
You should be able to:
LO 12.1
LO 12.2
LO 12.3
LO 12.4
LO 12.5
LO 12.6
LO 12.7
LO 12.8
Describe the conditions under which MRP is most appropriate
Describe the inputs, outputs, and nature of MRP processing
Explain how requirements in a master production schedule are
translated into material requirements for lower-level items
Discuss the benefits and requirements of MRP
Describe some of the difficulties users have encountered with MRP
Describe MRP II and its benefits
Explain how an MRP system is useful in capacity requirements
planning
Describe ERP, what it provides, and its hidden costs
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education
12-42
Dependent vs. Independent Demand
LO 12.1
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
12-43
MRP
⚫Material requirements planning
(MRP):
⚫A computer-based information system that translates
master schedule requirements for end items into timephased requirements for subassemblies, components,
and raw materials
⚫The MRP is designed to answer three questions:
What is needed?
2. How much is needed?
3. When is it needed?
1.
LO 12.2
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
12-44
Overview of MRP
LO 12.2
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
12-45
MRP Inputs: Master Schedule
⚫Master schedule:
⚫One of three primary inputs in MRP; states which end items are to
be produced, when these are needed, and in what quantities
⚫Managers like to plan far enough into the future so they have
reasonable estimates of upcoming demands
⚫The master schedule should 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
the final assembly
LO 12.2
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
12-46
Cumulative Lead Time
LO 12.2
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
12-47
MRP Inputs: Bill of 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
⚫Product structure tree
⚫A visual depiction of the requirements in a bill of materials,
where all components are listed by levels
LO 12.2
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
12-48
Assembly Diagram and
Product Structure Tree
LO 12.2
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
12-49
Low-Level Coding
⚫Low-level coding
⚫Restructuring the bill of materials so that multiple
occurrences of a component all coincide with the
lowest level at which the component occurs
X
Level 0
Level 1
LO 12.2
B(2)
Level 2
D(3)
Level 3
E(4)
C
F(2)
E
E(2)
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
12-50
MRP Inputs: Inventory Records
⚫Inventory records
⚫Includes information on the status of each item by time period,
called time buckets
⚫Information about
⚫Gross requirements
⚫Scheduled receipts
⚫Expected amount on hand
⚫Other details for each item such as
⚫Supplier
⚫Lead time
⚫Lot size policy
⚫Changes due to stock receipts and withdrawals
⚫Canceled orders and similar events
LO 12.2
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
12-51
Assembly Time Chart
LO 12.2
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
12-52
MRP Outputs: Primary
⚫Primary Outputs
⚫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
LO 12.2
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
12-53
MRP Outputs: Secondary
⚫Secondary Outputs
⚫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
LO 12.2
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
12-54
MRP Processing
⚫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
LO 12.3
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
12-55
MRP Record
Week Number
1
2
3
4
5
6
Gross Requirements
Scheduled Receipts
Projected on hand
Net requirements
Planned-order-receipt
Planned-order release
Gross requirements
• Total expected demand
Scheduled receipts
• Open orders scheduled to arrive
Projected Available
• Expected inventory on hand at the beginning of each time
period
LO 12.2
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
12-56
MRP Record (cont.)
Week Number
1
2
3
4
5
6
Gross Requirements
Scheduled Receipts
Projected on hand
Net requirements
Planned-order-receipt
Planned-order release
Net requirements
• Actual amount needed in each time period
Planned-order receipts
• Quantity expected to received at the beginning of the period
offset by lead time
Planned-order releases
• Planned amount to order in each time period
LO 12.2
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
12-57
MRP: Development
⚫The MRP is based on the product structure tree diagram
⚫Requirements are determined level by level, beginning
with the end item and working down the tree
⚫The timing and quantity of each “parent” becomes the basis for
determining the timing and quantity of the “children” items
directly below it
⚫The “children” items then become the “parent” items for the next
level, and so on
LO 12.3
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
12-58
Example MRP
Shutter
Frames (2)
LO 12.3
Wood
sections
(4)
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
12-59
Example MRP (cont.)
LO 12.3
12-60
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
Using the MRP
⚫Pegging
⚫The process of identifying the parent items that have
generated a given set of material requirements for an
item
LO 12.3
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
12-61
Updating the System
⚫An MRP is not a static document
⚫As time passes
⚫Some orders get completed
⚫Other orders are nearing completion
⚫New orders will have been entered
⚫Existing orders will have been altered
⚫Quantity changes
⚫Delays
⚫Missed deliveries
LO 12.3
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
12-62
Updating the System (cont.)
⚫Two basic systems
⚫Regenerative system
⚫Approach that updates MRP records periodically
⚫Essentially a batch system that compiles all changes that occur
within the time interval and periodically updates the system
⚫A revised production plan is developed in the same way the
original plan was developed
⚫Net-change system
⚫Approach that updates MRP records continuously
⚫The production plan is modified to reflect changes as they
occur
⚫Only the changes are exploded through the system
LO 12.3
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
12-63
Other MRP Considerations: Safety Stock
⚫Safety Stock
⚫Theoretically, MRP systems should not require safety stock
⚫Variability may necessitate the strategic use of safety stock
⚫A bottleneck process or one with varying scrap rates may cause
shortages in downstream operations
⚫Shortages may occur if orders are late or fabrication or
assembly times are longer than expected
⚫When lead times are variable, the concept of safety time is
often used
⚫Safety time
⚫Scheduling orders for arrival or completions sufficiently ahead of
their need so that the probability of shortage is eliminated or
significantly reduced
LO 12.3
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
12-64
Other MRP Considerations: Lot Sizing
Rules
⚫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
⚫Economic Order Quantity (EOQ)
⚫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’
⚫Less appropriate for ‘lumpy demand’ items because inventory remnants often
result
⚫Fixed Period Ordering
⚫Provides coverage for some predetermined number of periods
LO 12.3
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
12-65
MRP Benefits
⚫Enables managers to easily
⚫ Determine the quantities of each component for a given order size
⚫ To know when to release orders for each component
⚫ To be alerted when items need attention
⚫Additional benefits
⚫ Low levels of in-process inventories
⚫ The ability to track material requirements
⚫ The ability to evaluate capacity requirements
⚫ A means of allocating production time
⚫ The ability to easily determine inventory usage via backflushing
⚫Exploding an end item’s BOM to determine the quantities of the
components that were used to make the item
LO 12.4
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
12-66
MRP Requirements
⚫To implement an effective MRP system requires:
⚫A computer and the necessary software to handle computations
and maintain records
⚫Accurate and up-to-date
⚫Master schedules
⚫Bills of materials
⚫Inventory records
⚫Integrity of data files
LO 12.4
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
12-67
MRP Difficulties
⚫Consequence of inaccurate data
⚫Missing parts
⚫Ordering incorrect numbers of items
⚫Inability to stay on schedule
⚫Other problems
⚫Assumptions of constant lead times
⚫Products being produced differently from the BOM
⚫Failure to alter a BOM when customizing a product
⚫Inaccurate forecasts
LO 12.5
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
12-68
MRP II
⚫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
⚫Most MRP II systems have the capability of performing simulation to
answer a variety of “what if” questions so they can gain a better
appreciation of available options and their consequences
LO 12.6
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
12-69
MRP II: Overview
LO 12.6
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
12-70
Closed Loop MRP
⚫When MRP II systems began to include feedback loops,
they were referred to as Closed Loop MRP
⚫Closed Loop MRP
⚫Systems evaluate a proposed material plan relative to available
capacity
⚫If a proposed plan is not feasible, it must be revised
⚫This evaluation is referred to as capacity requirements planning
LO 12.6
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
12-71
Capacity Requirements Planning
⚫Capacity requirements planning (CRP)
⚫The process of determining short-range capacity requirements.
⚫Inputs to capacity requirement planning
⚫Planned-order releases for the MRP
⚫Current shop loading
⚫Routing information
⚫Job time
⚫Key outputs
⚫Load reports for each work center
LO 12.7
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
12-72
Using MRP to Assist in CRP
LO 12.7
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
12-73
Load Reports
⚫Load reports
⚫Department or work center reports that compare
known and expected future capacity requirements with
projected capacity availability
LO 12.7
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
12-74
Enterprise Resource Planning
⚫Enterprise resource planning (ERP)
⚫ERP was the next step in an evolution that began with MRP and
evolved into MRPII
⚫ERP, like MRP II, typically has an MRP core
⚫ERP provides a system to capture and make data available in real
time to decision makers and other users throughout an
organization
⚫ERP systems are composed of a collection of integrated modules
LO 12.8
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
12-75
Overview of ERP Software Modules
Module
Brief Description
Accounting/Finance
A central component of most ERP systems. It provides a range of financial
reports, including general ledger, accounts payable, accounts receivable, payroll,
income statements, ad balance sheets
Marketing
Supports lead generation, target marketing, direct mail, and sales
Human Resources
Maintains a complete data base of employee information such as date of hire,
salary, contact information, performance evaluations, and other pertinent
information
Purchasing
Facilitates vendor selection, price negotiation, making purchasing decisions, and
bill payment
Production Planning
Integrates information on forecasts, orders, production capacity, on-hand
inventory quantities, bills of material, work in process, schedules, and production
lead times
Inventory Management
Identifies inventory requirements, inventory availability, replenishment rules, and
inventory tracking
Distribution
Contains information on third-party shippers, shipping and delivery schedules,
delivery tracking
Sales
Information on orders, invoices, order tracking, and shipping
Supply Chain Management
Facilitates supplier and customer management, supply chain visibility, and event
management
LO 12.8
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
12-76
ERP Project Organization
⚫The ‘big bang’
⚫ Companies cast off all of their legacy systems at once and implement a
single ERP system across the entire company
⚫ The most ambitious and difficult implementation approach
⚫Franchising strategy
⚫ Independent ERP systems are installed in each business unit of the
enterprise while linking common processes across the enterprise
⚫ Suits large or diverse companies that do not share many common
processes across business units
⚫Slam dunk
⚫ ERP dictates the process design where the focus is on a few key processes
⚫ More appropriate for smaller companies expecting to grow into ERP
LO 12.8
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
12-77
ERP Considerations
⚫How can ERP improve a company’s business
performance?
⚫How long will an ERP implementation project take?
⚫How will ERP affect current business processes?
⚫What is the ERP total cost of ownership?
⚫What are the hidden costs of ERP ownership?
LO 12.8
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
12-78
Chapter 13
Inventory
Management
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No
reproduction or distribution without the prior written consent of McGraw-Hill
Education
12-79
Chapter 13: Learning Objectives
You should be able to:
LO 13.1
LO 13.2
LO 13.3
LO 13.4
LO 13.5
LO 13.6
LO 13.7
LO 13.8
LO 13.9
LO 13.10
LO 13.11
LO 13.12
LO 13.12
Define the term inventory
List the different types of inventory
Describe the main functions of inventory
Discuss the main requirements for effective management
Explain periodic and perpetual review systems
Describe the costs that are relevant for inventory management
Describe the A-B-C approach and explain how it is useful
Describe the basic EOQ model and its assumptions and solve typical
problems
Describe the economic production quantity model and solve typical
problems
Describe the quantity discount model and solve typical problems
Describe reorder point models and solve typical problems
Describe situations in which the fixed-order interval model is appropriate
and solve typical problems
Describe situations in which the single-period model is appropriate, and
solve typical problems
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education
12-80
Inventory
⚫Inventory
⚫A stock or store of goods
⚫Independent demand items
⚫Items that are ready to be sold or used
Inventories are a vital part of business: (1) necessary for
operations and (2) contribute to customer satisfaction
A “typical” firm has roughly 30% of its current
assets and as much as 90% of its working capital
invested in inventory
LO 13.1
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
12-81
Types of Inventory
⚫Raw materials and purchased parts
⚫Work-in-process (WIP)
⚫Finished goods inventories or merchandise
⚫Tools and supplies
⚫Maintenance and repairs (MRO) inventory
⚫Goods-in-transit to warehouses or customers (pipeline
inventory)
LO 13.2
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
12-82
Inventory Functions
⚫Inventories serve a number of functions such as:
1.
To meet anticipated customer demand
2. To smooth production requirements
3. To decouple operations
4. To protect against stockouts
5. To take advantage of order cycles
6. To hedge against price increases
7. To permit operations
8. To take advantage of quantity discounts
LO 13.3
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
12-83
Objectives of Inventory Control
⚫Inventory management has two main concerns:
1. Level of customer service
⚫Having the right goods available in the right quantity in the
right place at the right time
2. Costs of ordering and carrying inventories
⚫The overall objective of inventory management is to achieve
satisfactory levels of customer service while keeping
inventory costs within reasonable bounds
1. Measures of performance
2. Customer satisfaction
⚫Number and quantity of backorders
⚫Customer complaints
3. Inventory turnover
LO 13.3
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
12-84
Effective Inventory Management
⚫Requires:
1.
A system keep track of inventory
2. A reliable forecast of demand
3. Knowledge of lead time and lead time variability
4. Reasonable estimates of
⚫ Holding costs
⚫ Ordering costs
⚫ Shortage costs
5. A classification system for inventory items
LO 13.4
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
12-85
Inventory Counting Systems
⚫Periodic system
⚫Physical count of items in inventory made at
periodic intervals
⚫Perpetual inventory system
⚫System that keeps track of removals from inventory
continuously, thus monitoring current levels of each
item
⚫An order is placed when inventory drops to a
predetermined minimum level
⚫Two-bin system
⚫Two containers of inventory; reorder when the first is empty
LO 13.5
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
12-86
Inventory Counting Technologies
⚫Universal product code (UPC)
⚫Bar code printed on a label that has information about
the item to which it is attached
⚫Radio frequency identification (RFID) tags
⚫A technology that uses radio waves to identify objects,
such as goods, in supply chains
LO 13.5
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
12-87
Inventory Costs
⚫Purchase cost
⚫The amount paid to buy the inventory
⚫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
⚫Setup costs
⚫The costs involved in preparing equipment for a job
⚫Analogous to ordering costs
⚫Shortage costs
⚫Costs resulting when demand exceeds the supply of
inventory; often unrealized profit per unit
LO 13.6
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
12-88
ABC Classification System
⚫A-B-C approach
⚫ Classifying inventory according to some measure of importance, and
allocating control efforts accordingly
⚫ A items (very important)
⚫10 to 20 percent of the number of items in inventory and about 60 to
70 percent of the annual dollar value
⚫ B items (moderately important)
⚫ C items (least important)
⚫50 to 60 percent of the number
of items in inventory but only
about 10 to 15 percent of the
annual dollar value
LO 13.7
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
12-89
Cycle Counting
⚫Cycle counting
⚫A physical count of items in inventory
⚫Cycle counting management
⚫How much accuracy is needed?
⚫A items: ± 0.2 percent
⚫B items: ± 1 percent
⚫C items: ± 5 percent
⚫When should cycle counting be performed?
⚫Who should do it?
LO 13.7
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
12-90
How Much to Order: EOQ Models
⚫Economic order quantity models identify the optimal
order quantity by minimizing the sum of annual costs
that vary with order size and frequency
1.
2.
3.
LO 13.8
The basic economic order quantity model
The economic production quantity model
The quantity discount model
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
12-91
Basic EOQ Model
⚫The basic EOQ model is used to find a fixed order
quantity that will minimize total annual inventory
costs
⚫Assumptions:
1.
2.
3.
4.
5.
6.
LO 13.8
Only one product is involved
Annual demand requirements are known
Demand is even throughout the year
Lead time does not vary
Each order is received in a single delivery
There are no quantity discounts
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
12-92
The Inventory Cycle
Profile of Inventory Level Over Time
Q
Usage
rate
Quantity
on hand
Reorder
point
Receive
order
Place
order
Receive
order
Place
order
Receive
order
Ti
m
e
Lead
time
LO 13.8
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
12-93
Total Annual Cost
LO 13.8
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
12-94
Annual Cost
Goal: Total Cost Minimization
The Total-Cost Curve Is U-Shaped
Holding Costs
Ordering Costs
QO (optimal order quantity)
LO 13.8
Order Quantity
(Q)
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
12-95
Deriving EOQ
⚫Using calculus, we take the derivative of the total cost
function and set the derivative (slope) equal to zero and
solve for Q.
⚫The total cost curve reaches its minimum where the
carrying and ordering costs are equal.
LO 13.8
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
12-96
Economic Production Quantity (EPQ)
⚫The batch mode is widely used in production. In certain
instances, the capacity to produce a part exceeds its usage
(demand rate).
⚫Assumptions
LO 13.9
1.
Only one item is involved
2.
Annual demand requirements are known
3.
Usage rate is constant
4.
Usage occurs continually, but production occurs periodically
5.
The production rate is constant
6.
Lead time does not vary
7.
There are no quantity discounts
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
12-97
EPQ: Inventory Profile
Q
Production
and usage
Usage
only
Production
and usage
Usage
only
Production
and usage
Qp
Cumulative
production
Imax
Amount
on hand
Tim
e
LO 13.9
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
12-98
EPQ – Total Cost
LO 13.9
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
12-99
EPQ
LO 13.9
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
12-100
Quantity Discount Model
⚫Quantity discount
⚫Price reduction for larger orders offered to customers
to induce them to buy in large quantities
LO
13.10
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
12-101
Quantity Discounts
Adding PD does not change EOQ
LO
13.10
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
12-102
Quantity Discounts (cont.)
The total-cost curve
with quantity discounts
is composed of a
portion of the total-cost
curve for each price
LO
13.10
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
12-103
When to Reorder
⚫Reorder point
⚫When the quantity on hand of an item drops to this amount, the
item is reordered.
⚫Determinants of the reorder point
1.
The rate of demand
2. The lead time
3. The extent of demand and/or lead time variability
4. The degree of stockout risk acceptable to management
LO
13.11
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
12-104
Reorder Point: Under Certainty
LO
13.11
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
12-105
Reorder Point: Under Uncertainty
⚫Demand or lead time uncertainty creates the possibility
that demand will be greater than available supply
⚫To reduce the likelihood of a stockout, it becomes
necessary to carry safety stock
⚫Safety stock
⚫Stock that is held in excess of expected demand due to variable
demand and/or lead time
LO
13.11
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
12-106
Safety Stock
LO
13.11
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
12-107
Safety Stock?
⚫As the amount of safety stock carried increases, the
risk of stockout decreases.
⚫This improves customer service level
⚫Service level
⚫The probability that demand will not exceed supply during lead
time
⚫Service level = 100% – stockout risk
LO
13.11
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
12-108
How Much Safety Stock?
⚫The amount of safety stock that is appropriate for a
given situation depends upon:
The average demand rate and average lead time
2. Demand and lead time variability
3. The desired service level
1.
LO
13.11
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
12-109
Reorder Point
The ROP based
on a normal
distribution of lead
time demand
LO
13.11
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
12-110
Reorder Point: Demand Uncertainty
Note: If only demand is variable, then
LO
13.11
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
12-111
Reorder Point: Lead Time Uncertainty
Note: If only lead time is variable, then
LO
13.11
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
12-112
How Much to Order: FOI
⚫Fixed-order-interval (FOI) model
⚫Orders are placed at fixed time intervals
⚫Reasons for using the FOI model
⚫Supplier’s policy may encourage its use
⚫Grouping orders from the same supplier can produce savings in
shipping costs
⚫Some circumstances do not lend themselves to continuously
monitoring inventory position
LO
13.12
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
12-113
Fixed-Quantity vs.
Fixed-Interval Ordering
Fixed
Quantity
Fixed
Interval
LO
13.12
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
12-114
FOI Model
LO
13.12
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education
12-115
Single-Period Model
⚫Single-period model
⚫Model for ordering of perishables and other items with limited
useful lives
⚫Shortage cost
⚫Generally, the unrealized profit per unit
⚫Cshortage = Cs = Revenue per unit – Cost per unit
⚫Excess cost
⚫Different between purchase cost and salvage value of items left
over at the end of the period
⚫Cexcess = Ce = Cost per unit – Salvage value per unit
LO
13.13
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
12-116
Single-Period Model (cont.)
⚫The goal of the single-period model is to identify the
order quantity that will minimize the long-run excess and
shortage costs
⚫Two categories of problem:
⚫Demand can be characterized by a continuous distribution
⚫Demand can be characterized by a discrete distribution
LO
13.13
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
12-117
Stocking Levels
Ce
Cs
Service level
Quantity
So
Balance Point
LO
13.13
So =Optimum
Stocking Quantity
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
12-118

Purchase answer to see full
attachment