OPM 101 Ch 7-8

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OPM 101 Ch 7-8
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OPM 101 Ch 7-8
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  1. Firms hold inventory for which reasons?
    • 1. To meet the future demand for goods because goods cannot be instantly produced.
    • 2. To take advantage of economies of scale (Costco shoppers). Less $ to order in large quantities plus save on Transportation and ordering costs.
    • 3. Helps the firm respond to fluctuations in demand. Holding inventories helps firms to produce at a constant level of output, fulfilling demand from inventory when demand is high and building up inventory during lower demand periods (assuming high demand period follows)
    • 4. To hedge against inflation
    • 5. to Buffer parts of the internal production process from mismatches in capacity or to buffer the supply chain from upstream or downstream processes.
  2. Roles of Inventories in the US Economy GDP (not on test)
    • 1. business spending (inventory accumulation)
    • 2. Inventory increase either because demand will be high, or inventories low
    • 3. Beginning of recession, inventory will climb (involuntarily) due to reduced demand.
    • 4. End of recession, inventory firms meet demand by selling from inventories, resulting in negative inventory investment.
    • 5. As economy recovers, inventory builds back up again.
    • 6. % of GDP historically range from 13-17% but began to decline to 10% in 1990
  3. What are the two inventory classifications?
    • ABC analysis
    • Cycle Counting
  4. What is the inventory classification ABC Analysis?
    • ABC analysis: managers focus on the most valuable inventory items. Not necessary to monitor all inventory. Divides inventory into three classes:     
    •      A 20/80 items acct for 20% of the items and 80% of total inventory     
    •      B 30/15 items acct for 30% of the items and 15% of the dollar value of total inventory      
    •      C 50/5 items acct for 50% of the items and 5% of the dollar value of total inventory

    3 pieces if info needed to calculate: SKU (Identification of the item), an estimate of annual demand, items cost.
  5. Steps in Calculating ABC Analysis?
    • 1. multiply the annual demand by the cost per unit to get the annual dollar volume (repeat for all rows)
    •      1200 units x $150 = $180000 (annual $ value)
    • 2. calculate the "total % of annual dollar volume per classification (ABC)
    •       180000+600000/964300 (total dollar value) = total % of annual dollar volume per classification
  6. What is cycle counting?
    • Inventory is counted on a cyclical basis to rectify the physical inventory with the inventory records. A is counted more frequently then B or C.
    • Never shut down.
  7. Steps in Cycle Counting?
    • 1. determine the number of A, B, C items  
    •      A: 10% x 5000 = 500
    •      B: 35% x 5000 = 1750
    •      C: 55% x 5000 = 2750
    • 2. Divide the number of items to be counted by the number of days in the counting cycle. A is counted monthly so the counting cycle is 20 days. B is quarterly which is 60 days, C is bi-annually which is 120 days.
    •       A: 500/20 = 25
    •       B: 1750/60 = 29.1 or 30
    •       C: 2750/120 = 22.9 or 23
    • Every day, 25 A items are counted and compared to the inventory records, every quarter 30 of the B and biannually 23 of the C.
  8. What is dependent vs. independent demand? (Independent focused on in class)
    • Inventory models assume that an item is either dependent on the demand for another item, or it is independent of the demand for another item.
    • EX: a bicycle seat depends on the demand for bicycles. Bicycles do not depend on the demand for the components.
    • Ex: Lego window, wheels, tires are dependent. Car itself independent.
  9. What are two inventory models for INDEPENDENT DEMAND?
    • 1. Continuous vs. Periodic Inventory Systems: Continuously monitored inventory, computer systems and bar coding is used. When inventory is reduced the system orders more. Periodic review systems do not continuously tract inventory and is update on time intervals. At the end of an interval an inventory count is taken and an order is placed to bring inventory back up to "Target" levels"
    • 2. Inventory Costs: (mom & pop store)Holding costs include the cost of physically containing the inventory, the investment costs, labor and material handling costs, opportunity costs, insurance, and pilferage and obsolescence. Carrying costs can vary and depend on the type of industry, type of product, interest rates, and location. A reasonable rage for annual carrying cost is 15-40% of the items cost. Carrying costs: spoilage, obsolesce, depreciation, taxes, insurance, pilferage, opportunity cost, taxes, insurance.
    • Ordering costs include purchasing and order processing cost, the costs of supplies and clerical support, storage and possibly inspection. Manufactured order includes the cost of setting up machinery to make the item.
  10. The basic economic order quantity (EOQ) Model (Continuous Review System)
    • Vertical axis = inventory level
    • Horizontal axis = time
    • One triangle = inventory cycle
    • Beginning at time 0, inventor is at its max level at Q. The level falls at a constant rate of demand until inventory is depleted. Cycle repeats. Same inventory is ordered each cycle because demand is constant. The length of the cycle is the same.
  11. What is the basic EOQ model assumptions?
    • 1. Demand is known and constant
    • 2. Lead time is known and constant
    • 3. Receipt of inventory is instantaneous
    • 4. Shortages do not occur
    • 5. Quantity discounts are not possible.
  12. Total Annual Inventory Costs variables?
    • D = Annual demand
    • K = Cost of placing an order
    • H = Annual carrying cost per item
    • Q = Order quantity
    • EOQ = Economic order quantity (minimizes total cost)
  13. Total annual ordering costs equation?
    • Total annual ordering costs are equal to the number of orders placed per year multiplied by the cost of placing an order:
    • = (D/Q)K where D/Q represents the number of orders placed per year.

    • K = cost to place 1 order
    • D = annual demand
    • D/Q = # orders placed per year
    • Q/2 = average inventory level
  14. Total annual carrying costs equation?
    • Total annual carrying costs are equal to the average inventory level multiplied by the annual carrying cost per unit.
    • = Q/2(H) where Q/2 represents the average inventory on hand.
  15. Expression for total annual inventory cost (TAIC)?
    is created by adding ordering and carrying costs

    • TAIC = D/Q(K) + Q/2(H)
    •     (annual order $)  + (annual carrying cost)

    represents the total cost curve.
  16. How to determine the economic order quantity, one of two methods can be used: (maximum order quantity it can go)
    **"Time units" on D & H must match!
    • Derivative of TAIC with respect to Q, set it to ), and solve for Q.

    Recognize that the min point on the total cost

    curve occurs where the total annual ordering costs are equal to the total annual carrying costs. Set these two quantities equal to each other and solve for Q.
  17. Expression for the quantity that minimizes total annual cost is the economic order quantity:

    Optimal order quantity
  18. Reorder Point
    • The level of inventory that triggers a new order is called the reorder point.

    ROP = demand per time period x lead time  

    • For example, if demand is two units per day and the lead time is 3 days, then the reorder point is:                  
    •      2 units/day X 3 days = 6 units  

    • Similarly, if demand is eight cases per week and the lead time is 1 week, then the reorder point is:                  
    •       8 cases/week x 1 week = 8 cases  

    It is important to note that the time period for demand and the lead time are the same.
  19. Safety stock
    • Safety stock is inventory that is used to protect against running out of cycle inventory.  Safety stock is also sometimes referred to as buffer stock because it provides a “buffer” against uncertainty when demand is no longer constant.
  20. Computing reorder points
    ROP = demand per time period x lead time
  21. Distribution of "lead time demand"
  22. ROP when demand is variable:


    • d lt = average lead time demand
    • s lt = standard deviation of lead time demand
    • z = standard normal random variable
    • zs lt = safety stock
  23. Periodic Review Systems definition
    • In a periodic review system, the order is already predetermined.
    • Someone must decide when orders are placed (once a week, 10 days).
    • How much to order?
    • Quantity can vary from one week to the next depending on how much inventory is on hand.
  24. Periodic Inventory level equation
    • Q = Target inventory level – inventory on hand

    The challenge in the periodic review model is to establish an appropriate target inventory level.  When an order is placed, it must be sufficient to carry the firm through the period r + L, the “review period” plus the lead time.
  25. Factors Affect Product Availability
    • ¢Cost of overstocking a product
    • ¢Cost of under-stocking a product
  26. Service level senarios
    • ¢The service level, SL = Pr(demand < inventory on hand)
    • ¢Expected decrease in profit from failing to order a unit that could have been sold: (1-SL)*(C under)
    • ¢Expected decrease in profit from ordering a unit that could NOT have been sold: SL*Cover
    • ¢The optimal service level is one where these expected costs are balanced:   SL = C under/(C under + Cover)
  27. Managerial Levers
    • ¢Increase salvage value—Sell to outlets, e.g.
    • ¢Decrease margin lost in stockout —Arrange for backup sourcing
    • ¢Reduce demand uncertainty!
    •     —Improved forecasting
    •     —Quick response
    •     —Postponement—
    •     Tailored sourcing
  28. Tailored Sourcing
    • ¢Combination of supply sources—
    •     Lower cost, doesn’t handle uncertainty well
    •     —Higher cost, but can handle uncertainty¢
    • Volume based (Bennetton retailers place 65% of orders 7 months before season)
    • ¢Product based (Levi Strauss produced standard jeans at efficient source, custom jeans at “flexible” source)
  29. Single period inventory model
    The Newsvendor Problem
    • How much inventory should they order if they can place only one order?
    • If too few items are ordered, then sales are lost. 
    • If too many items are ordered, the leftover items may be sold at a loss or in the case of produce, simply thrown away. 
    • The manager must balance these tradeoffs in their decision.
  30. What is the difference between cycle inventory and safety inventory?
    Cycle Inventory is counted on a cyclical basis to rectify the physical inventory with the inventory records. A is counted more frequently then B or C.Never shut down. Safety stock is inventory that is used to protect against running out of cycle inventory.  Safety stock is also sometimes referred to as buffer stock because it provides a “buffer” against uncertainty when demand is no longer constant.
  31. What types of costs are represented by carrying (holding) cost?  Ordering cost?
    • Carrying costs: spoilage, obsolesce, depreciation, taxes, insurance, pilferage, opportunity cost, taxes, insurance.
    • Ordering costs include purchasing and order processing cost, the costs of supplies and clerical support, storage and possibly inspection. Manufactured order includes the cost of setting up machinery to make the item.
  32. Describe the difference between a continuous review system and a periodic review system.
    Continuously monitored inventory, computer systems and bar coding is used. When inventory is reduced the system orders more. Periodic review systems do not continuously tract inventory and is update on time intervals. At the end of an interval an inventory count is taken and an order is placed to bring inventory back up to "Target" levels"
  33. What is the difference between “dependent” demand and “independent” demand?
    inventory is either dependent on the demand for another item, or it is independent of the demand for another item. A bicycle seat depends on the demand for bicycles
  34. What are some of the reasons that firms hold inventory?
    • 1. meet future demand
    • 2. economies of scale
    • 3. respond to fluctuations in demand
    • 4. hedge against inflation
    • 5. buffer from mismatches in capacity
  35. How does ABC analysis help a firm to manage inventory?
    managers focus on the most valuable inventory items. Not necessary to manage all inventory. 3 classes: A = 20/80, B: 30/15, C:50/5
  36. What are the basic decisions addressed by inventory models?
    Inventory models assume that an item is either dependent on the demand for another item, or it is independent of the demand for another item.
  37. ABC Analysis
    Divides inventory into different categories based on annual dollar volume. Categories may also be based on customer demand, sales, or other criteria.
  38. Cycle Counting
    A method used to reconcile physical inventory with the inventory records
  39. Dependent demand
    An item whose demand is a function of a "parent" item. Demand is based on the use of it's parents.
  40. Independent demand
    An item whose demand depends on external customers and must usually be forcast
  41. Continuous Review system
    Inventory records are updated on a regular basis so that the inventory position is know at any point in time.
  42. Periodic Review system
    inventory is checked and updated in predetermined time intervals
  43. Cycle inventory
    Inventory that is replenished on a cyclical basis.
  44. Continuous
    1. Continuous vs. Periodic Inventory Systems: Continuously monitored inventory, computer systems and bar coding is used. When inventory is reduced the system orders more. Periodic review systems do not continuously tract inventory and is update on time intervals. At the end of an interval an inventory count is taken and an order is placed to bring inventory back up to "Target" levels"
  45. inventory
    MRO maintenance repair operations (spare parts), WIP, goods in transit
  46. Project management
    • Clear end point, require a team.
    • Require planning, scheduling and controlling.
    • Goals are set, teams organized and "deliverables" defined.
    • Project activites scheduled, due dates and milestones established and resources defined
    • It must be controlled, monitoring budgets, costs and quality, and adjusting plans and resources as necessary to meet budget and time constraints.
  47. Project planning
    • informal and formal communication methods and tools
    • complex projects involve tools and software to monitor and control project
    • Project manager is the key to ensure these phases are successfully implemented
  48. Project manager
    • communicate, communicate, communicate
    • oversees all tasks, resources and people
    • balance between seeing the big picture and micromanaging the project.
    • negotiates contracts, supplies arrive ontime, unexpected events, motivates and rewards, manages budgets, ensures project quality, meets clients needs and expectations, maintains records and proper documentation, and keeps everyone focused on projects success.
    • Use work breakdown structure, project scheduling, resource management, and time-cost tradeoffs
  49. Work Breakdown structure (WBS)
    • method used to breakdown a project into manageable tasks
    • Objective: identify "work packages" that will constitute the different tasks of a project.
    • 2 forms: hierarchical diagram or an indented list of tasks broken into levels.
  50. WBS Indented diagram
    • Level 1 is ALWAYS the project
    • Level 2 lists the major project tasks
    • Level 3 subtasks
    • Level 4 work packages
  51. WBS in Hierarchical Form
    • Each major task is broken down into smaller tasks until it becomes a manageable "work package".
    • Work Packages represented by letters
  52. Graphical representation of projects
    Gantt charts and network diagrams
  53. Gantt Charts
    • Represents each task with a shaded bar.
    • Length of bar shows duration
  54. Network diagrams
    AKA activity-on-the-nodes (AON) diagram
    • Each activity is represented by a circle, called a node
    • Arrows indicate which activities follow other activities
    • Time to complete activity #'d in node
  55. The critical path method
    • *longest path in the network ADEFH 26 hours
    • 1 hour "slack" associated with BDEFH and 2 hour slack associated with CDEFH
    • Close eye on those paths
  56. Computing earliest and latest starts and finishes.
    •  compute the earliest and latest starts and finishes for each activity for the project
    • 1. make a "forward pass" through the network to determine the earliest starts (ES) and the earliest finishes (EF)
    • 2. Make a "backward pass" through the network to determine the latest starts (LS) and earliest finishes (LF) for each task.
  57. Steps in critical path method "Forward Pass"
    • 1. Set the ES for the first activity or activities equal to 0.
    • 2. Compute the EF for this activity or activities.  EF = ES + activity duration.
    • 3. For subsequent activities, consider the immediate predecessor(s). If an activity has only one immediate predecessor, its ES equals the EF of the predecessor.  If an activity has more than one immediate predecessor, its ES = maximum (EF of all immediate predecessors).
    • 4. Repeat step 3 until the ES and EF for all activities are computed.
  58. Steps in critical path method "Backward Pass"
    • 1. Set the LF for the last activity or activities in the project equal to the EF for the project. 2. Compute the LS for this activity or activities.  LS = LF - activity duration.
    • 3. If an activity is an immediate predecessor to a single activity, its LF equals the LS of the activity that follows it.  If an activity is an immediate predecessor to more than one activity, its LF = minimum (LS of all immediate following activities).
    • 4. Repeat step 3 until the LS and LF for all activities are computed.
  59. Slack
    • When ES is the same as EF there is no slack
    • Critical path the longest path in network
    • Slack represents additional time over and above original estimate(delaying project)
    • Critical activities can never have slack.
    • **Computed as the difference between the late start and the early start (same as difference between the late finish and the early finish.
  60. Resource load profile
    • tool for helping schedule resources and their corresponding tasks
    • Takes in account the duration times, precedence, and resources required for each task
  61. Project crashing
    • investing resources to shorten the duration of a project is called crashing.
    • The cost associated with shortening a project is called crashing cost.
  62. Crashing Schedule
    • 1. The first row contains the crashing schedule.  First crash activity D, 1 week, then crash G, 1 week and, if desired, crash G, an additional week. 
    • 2. The second row contains labels to keep track of the duration of each path in the network. 
    • 3. The third and fourth rows keep track of the duration of each path.  The “No Crashing” column shows the duration of each path with no crashing. 
    • 4. The longest path, the critical path, denotes the project duration.  Each subsequent column reduces the project duration by 1 time period. (Note that after G is crashed 1 week, that path B-E-G become critical.  There are now 2 critical paths in the network and to reduce project duration, activities on both paths must be crashed.)
    • 5. The fifth row keeps track of the cost to crash each activity.
    • 6. The sixth row keeps track of the cumulative crashing cost.
  63. Computing crash costs
  64. Normal and crash costs
  65. Crashing schedule
    • The duration of the project (and corresponding critical path) are shown in bold italics.
    • The critical path is path A-D-G.  However, after crashing A for 1 week, the project now has two critical paths: A-D-G and B-D-G.  Therefore, in order to reduce the project duration, activities on BOTH paths must be crashed
  66. Discuss the advantages and disadvantages of a Gantt chart compared to a network diagram
  67. What is the significance of the critical path?
    Can keep a close eye on critical paths so the project keeps on time
  68. Work breakdown structure
    divides project into categories in order to identify tasks and resources
  69. Gantt Chart
    Shows activity times and relationships to overall project
  70. network diagram
    shows precedence relationships between activities in a project
  71. critical path
    longest path in the network; identifies critical activities
  72. critical activity
    if delayed, will cause project to be late
  73. slack
    the additional amount of time that can be consumed by an activity without delaying the project
  74. resource load profile
    a diagram that shows the amount of resources required by a project over time.
  75. The goal of the basic EOQ model is to:
    minimize the sum of ordering and holding costs
  76. Which of the items listed below would not generally be considered a reason for holding inventories?
    minimize carrying cost
  77. In the basic EOQ model, if lead time increases from 2 to 4 days, the EOQ will:
    remainthe same
  78. Safety stock is typically determined by
    setting the level of safety based on a service level.

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