Unformatted text preview: METHOD OF AVOIDING CARRYING STOCK
Independent demand situations and the use of fixed order quantity and periodic review systems
In planning, and controlling inventories forecasting is based on whether demand for items in
inventories is independent or dependent
Dependent items are usually subassemblies or components parts that will be used in the
production of final or finished products. Demand (i.e. usage) of subassemblies and components
parts is derived from the numbers of finished product to be produced. And example is demand
for wheels for new cars. If each car is to have four wheels, then the total number of wheels
require for a production run is simply a function of the number of cars that are to be produced in
that run. For instance; if 500 cars are to be produce in a run, then the numbers of wheels required
is 500 x 4 = 2000 wheels.
Independent demand items are the finished goods or other end items that are sold to someone.
There is usually no way to determine precisely how many of these items will be demanded
during any given time period because demand typically includes an element of randomness.
Forecasting plays an important role in stocking decision, whereas stock requirements for
dependent demand items are determined by reference to the production plan.
EOQ, Perpetual inventory, and Two- bin system etc, all deals with dependent demand.
Inventories are used to satisfy demand requirements, so it is essential to have reliable estimates
of the amount and timing of demand it is important to know how long it will take for orders to be
delivered. Managers need to know the extent to which demand and lead time might vary; the
greater the potential variability, the greater the need for additional stock to reduce the risk of
shortage between deliveries. Thus there is crucial link between forecasting and inventory
MRP and MRP11 MRP
Material Requirements planning is a computer-based information system designed to handle
ordering and scheduling dependent demand inventories. (E.g. raw materials, components parts,
and subassemblies). A production plan for a specified number of finished products is translated
into requirements for component parts and raw materials working backward from the due date,
using lead times and other information to determined when and how much to order. Thus MRP is
designed to answer the questions: what is needed? How much is needed? And when it is needed?
To implement MRP you need: The master schedule: master schedule also refers to as mater production schedule, states which
end items are to be produced, when they are needed, and what quantities. Bill-of-Materials file: BOM contains a listing of all the assemblies, subassemblies, parts, and
raw materials that are needed to produce one unit of a finished product. Thus each finished
product has its own bill of materials. Inventory Record file: This is used to store information on the status of each item by time
period. This includes gross requirements, scheduled receipts, and expected amount on hand. It
also includes other details for each items, such as supplier, lead-time, and lot-size, changes due to
stock receipts and cancelled order, withdrawals and similar events are also recorded in this file. Hardware and Software: Computers and appropriate software program to handle computations
and maintained records.
Advantages of MRP Low level of in-process inventories The ability to keep tract of material requirements The ability to evaluate capacity requirements generated by a given mater scheduled. A means of allocating production time.
Disadvantages of MRP Need to maintained accurate record in master record and BOM. Inaccuracy can lead to
unpleasant surprises, ranging from missing parts, ordering two many of some items or too few of
others and failure to stay on schedule. It is very tedious and costly to implement.
Manufacturing Resource Planning. It represents an effort to expand the scope of production
resources planning, and to involve other functional areas of the firm in the planning process
especially marketing and finance. In too many instances, production, marketing, and finance
operate without complete knowledge or regards for what other areas of the firm are doing. For
the firm need to focus on a common set of goals. This is the major purpose of MRP2, to integrate
The rationale for having these functional areas work together is the increased likelihood of
developing a plan that works and with which everyone can live by. Again, because each of the
functional areas is involved in formulating the plan, they will have reasonably knowledge of the
plan and more reason to work towards achieving it.
This is MRP2 comes into play, generally material requirements and schedules. Next,
management must make more detailed capacity requirements planning to determine whether
these more specific capacity requirements can be met.
Note that, MPR2 is not a replacement of MRP nor is it an improved version of MRP.
Distribution Requirement Planning is a system for inventory management and distribution
planning. It is especially useful in multi-echelon warehouse system. (factory and regional warehouse) It extends the concepts of material requirements planning to multi-echelon
warehouse inventory, starting with demand at the end of the channel and working that back
through the warehouse system to obtain time phased replenishment, schedules for moving
inventories through the warehouse network. DRP is used to plan and coordinate transportation,
warehousing location, workers, equipment, and financial flows.
The Just in Time System is a manufacturing practice developed by the Japanese in order to
minimize holdings of stock. Suppliers deliver materials needed for production at the exact
moment they are required. Goods are produced only as they are needed for the next phase of
production. Stock is frequently delivered therefore there is a zero inventory situation. The firm
only produces something when there is actual customer demand for it (First sell it, then make it).
The Just in Time system only work when there is high employee flexibility and commitment and
a well coordinated production system to ensure quality and continuous improvements to
minimize bottlenecks. The Just in Time system has a much less risk of their stock becoming obsolete or going bad
(losing its quality). The firm keeps a small inventory hence using less space required, lower maintenance costs
and capital requirements. As a result of the ‘First sell it, then make it’ method of operation the right quantities are
produced at the right time. There is increased workforce participation as a result of their employment flexibility and
commitment. The continuous emphasis on improvement and problem solving results in higher quality, good
customer service and reduced costs.
Kanban Method Kanban is a Japanese word meaning “signal” or “visible record”. In a pull system workflow is
dictated by “next-step demand”. A system can communicate such demand by using a kanban
card. When a worker needs material or works from the preceding station, he/she uses a kanban
card. The kanban card is an authorization to move or work on parts. In kanban system no part
can be worked or move without one of the card.
It worked like this. Each container is affixed with a card. When a process or work station needs
to replenish its supply of parts, a worker goes to the area where these parts are stored and
withdraws one container of parts. Each container holds a predetermined quantity. The worker
removes the kanban card from the container and posts it in a designated spot where it will be
clearly visible. The worker moves the container to the work station. The posted kanban card is
then picked up by a stock person who replenished the stock with another containerm and so on
down the line.
The number of kanban card need for a given production level can be calculated using this
N = DT (1+X)/C
Where: N = Total number of containers (1 card per container)
D= Planned usage rate of a center
T= Average waiting time
X= Policy variable set by management
C= Capacity of a standard container (should not be less than 10%
Note that D & T must use the same units (e.g. minutes or days)
Advantages Kanban system is very simple to implement Kanban usually have very small lot size. It handles changes very easily. Kanban has short lead time, and high quality output, and simplifies teamwork. Kanban is two-bin types of inventory management. Suppliers are replenished as soon as
inventories reach predetermined level.
Increased competition and rising business costs are forcing companies to rethink the way they
coordinate and manage vendor and customer relationships. Rather than work independently,
these firms are creating networks dedicated to maximizing value at all points in the supply chain
—in effect, creating a “value stream”. Increasingly at the leading companies, these efforts are
based on “lean principles.”
Lean Manufacturing to Lean Supply Chain
A concept first used by automobile manufacturers to enhance their operational efficiencies, lean
focuses on driving non-value added activities from a company’s operations, while streamlining
its value-added activities. Lean centers on eliminating waste and speeding up business processes.
In the supply chain context, it encompasses the procedures that precede and follow the actual,
physical manufacturing process.
Lean works particularly well in the supply chain, where redundancy and waste can hamper the
overall productivity of all partners. That waste can seriously hinder profitability. In fact, the
Yankee Group says U.S. companies hold more than $117 billion in excess inventory and lose $83
billion annually because of “disconnected and uncoordinated supply chains.”
Extending lean throughout the entire enterprise—from product concept, through manufacturing
and out into the customer’s hands—requires the participation of all nodes along the value chain. Companies that have transitioned lean from the manufacturing floor to the supply chain
emphasize quality, preventative maintenance and continuous improvement. The end result is a
company that can truly leverage its supply partners’ strengths and create value through a single,
Eliminate poor demand visibility, long order cycles, high product costs, and low margins,
improve responsiveness, reduce waste and variability, and improve flow and cycle times, and
lower IT management costs.
MAKE OR BUY
Are we outsourcing enough? What functions can we move to China? Are we doing business with
It is likely that a procurement manager somewhere is being asked these questions right now.
Executives have noticed their peers increasingly relying on outsourcing.
While outsourcing may seem new, it really is just a new focus on the classic make or buy
procurement decision. You need to ensure that such decisions are made intelligently and not just
based on the outsourcing trend.
When dealing with a make vs. buy decision, there are four numbers you need to know:
1. Your volume
2. The fixed costs associated with making (e.g., the tooling that must be bought)
3. The per-unit direct costs of making
4. The per-unit landed cost from a supplier
So, you plug these numbers into a couple of formulas:
CTB = V * LC and CTM = FC + (PUDC * V) Where,
CTB = Cost To Buy
V = Volume
LC = Supplier’s Per Unit Landed Cost
CTM = Cost To Make
FC = Fixed Costs (of making)
PUDC = Per Unit Direct Cost (of making)
If CTM exceeds CTB, then it is more financially desirable to buy. If CTB exceeds CTM, the
opposite is true.
Make/buy decisions aren’t just about numbers, though.
Questions you absolutely must consider include:
• Is this the organization’s core competency?
• Could we be harmed by disclosing proprietary information?
• What will be the impact on quality or delivery?
• What additional risks would we be facing?
• How irreversible is the decision?
Make v. Buy
Considerations when outsourcing to reduce cost
The decision to outsource a part or assembly is often based on lack of internal resources, refocus
of core competencies, or cost reduction. The focus of this article is on outsourcing with the objective of lower cost. If you are attempting to outsource a part or assembly that is produced inhouse based on lower cost, you must perform a thorough analysis. In many cases, cost can only
be reduced if the supplier is going to use a more efficient process or significantly less expensive
labor. You must be careful in comparing costs. Because standard cost includes fixed costs,
comparing standard cost with the prices being quoted is not an “apples to apples” comparison.
Unless you are going to eliminate some fixed costs, the only real cost reduction is the variable
cost. If the supplier cannot produce the part for a price lower than your variable cost, you are not
saving your company money.
If you are in the process of outsourcing a part or assembly in an effort to reduce cost, you should
be searching for a supplier that can produce the part using a more efficient method than you (or a
much lower labor rate) are currently using. This might allow them to produce the part faster
and/or at a lower labor cost than you can produce the part. Even after they add in their overhead
and profit, it is possible that the supplier can produce the part for less cost than you can in house.
OPTIMIZING STOCK TURNOVER
How hard is the money you have invested working for you? You’ve probably been asked that
question several times by stock brokers or “investment counselors.” No, I’m not going to try to
sell you mutual funds. This article isn’t about how you are managing your personal investments.
Instead, we are going to look at the performance of your company’s largest asset: inventory.
The Concept of Inventory Turnover
Say you sell N10,000 worth of a product (at cost) each year. Total revenue received from sales of
the product is N12,500. If we bought the entire N10,000 worth of the product on January 1st, at
the end of the year we would have made a N2,500 gross profit on an investment of N10,000.
But do we have to buy the entire N10,000 worth of the product at one time? What if we bought
N5,000 worth of the product on January 1st. Then, just before running out of stock, we bought an
additional N5,000 worth of the product with part of the revenues received from selling the first
shipment. At the end of the year we’ve still sold N10,000 worth of the product, still made N2,500
gross profit, but on an investment of about N5,000. Could we make the same gross profit on an even smaller investment? What if we were to buy
N2,500 dollars worth of material. Sell most of it. Buy another N2,500 dollars worth of the
product. Sell most of that shipment and then repeat the process two more times before the end of
the year. The annual gross profit of N2,500 is now generated with an investment of about
Which investment option is better? Selling N10,000 worth of a product (and making N2,500
gross profit) with an investment of N10,000, N5,000 or N2,500? The best option is N2,500.
Investing N2,500 (rather than N10,000) frees up N7,500 that can be used for other purposes…
such as stocking other products that have the potential of generating additional profits.
What Is Capital Goods buying
In the economic realm, “capital goods” is a specialized term which refers to real objects owned
by individuals, organizations, or governments to be used in the production of other goods or
commodities. Capital goods include factories, machinery, tools, equipment, and various
buildings which are used to produce other products for consumption. Capital goods also refer to
any material used or consumed to manufacture other goods and services.
Capital goods are generally man-made, and do not include natural resources such as land or
minerals, or “human capital”–the intellectual and physical skills and labor provided by human
Capital goods are important to businesses, because they use capital goods to help their business
make functional goods for the buying public or to provide consumers with a valuable service. As
a result, capital goods are sometimes referred to as “producers’ goods” or “means of production.”
Goods with the following features are capital:
• It can be used in the production of other goods (this is what makes it a factor of production). • It was produced, in contrast to “land,” which refers to naturally occurring resources such as
geographical locations and minerals.
• It is not used up immediately in the process of production unlike raw materials or intermediate
goods. (The significant exception to this is depreciation allowance, which like intermediate
goods, is treated as a business expense.)
Capital Equipment: Lease vs. Buy
The major factors that must be taken into consideration when you are deciding to lease or buy a
piece of capital equipment.
What are the major factors that must be taken into consideration when you are deciding to lease
or buy a piece of capital equipment? Leasing offers a great alternative in preserving customers’ cash flow, as it does not require a
large cash outlay. A minimal down payment consisting of a first and last payment is usually
required in advance, and the monthly payments remain the same for the duration of the lease. Lenders in this industry understand the equipment and its use, which in turn generates fast and
easy approvals. Many accountants advise their customers to lease, as it can offer distinct tax benefits and
preserve their bank credit lines. Leasing rates are competitive and comparable to bank financing. Plus, electronic documents
can be generated the same day as the approval so you can watch a machine demo, apply for
credit, have documents signed and receive a purchase order all in the same day. Owning a piece of equipment does not necessarily translate into making profits. The use of a
piece of machinery to make a product is what makes a company income. Leasing provides an
easy, affordable method of using equipment that allows a monthly payment without obtaining a
bank loan or worrying about budget justification. Leasing also keeps your other lines of credit open and total system financing, including delivery and installation, can be spread over the lease
term. When acquiring new equipment, leasing provides advantages such as:
1. Conservation of cash: Leasing doesn’t require the cash outlay of a purchase.
2. Longer terms and lower payments — Lease terms can be flexible up to 84 months.
3. Periodic equipment updates — Reduce obsolescence risks with life cycle management.
4. Manageable upfront costs — Little or no down payment.
5. Purchase options — At lease end, purchase at agreed upon price or return the equipment.
6. 100 percent financing — “Soft costs” such as installation, etc., can be added.
7. Tax advantages — As an expense, lease payments may reduce tax liability.
8. Simplified documentation — Minimal paperwork.
9. Customized lease options and payment plans — Alternatives to meet your cash-flow needs.
10. Time value of money benefits — Acquire equipment with today’s cheaper dollars.
Significant factors to consider when choosing to lease or buy equipment are:
1. Your cash — Hold or spend it; leasing preserves capital for other uses whether they are known
or those that are unforeseen.
2. Cost level — Instead of a large upfront dollar outlay when purchasing equipment, leasing
minimizes it. Another way of asking that question is: “Do I have enough extra capital to spend
today for something that will make me money (pay back) in months and years to come?”
3. Equipment value — There is little financial benefit for leasing, when acquiring equipment
under $5,000, due to fees ranging from $150 to $400 and higher rates for lower dollar lease
amounts. LIFE CYCLE COSTING
Life cycle costs (LCC) are all costs from project inception to disposal of equipment. LCC applies
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