CPIM Part 2. Detailed Scheduling &
Planning
Purposes of Inventory - answer Better Customer Service
- To internal and external customers by supporting availability of raw materials,
components, and finished goods
Improve operating efficiency
- Provide buffer inventory between operations to accommodate different output rates
and unexpected interruptions. Called WIP
Allow longer production runs
- Decreases the need for switch overs and the costs of setups and lost productivity
Volume Discounts
- Accommodates buying inventory in larger amounts to take advantage of volume
discounts
Goals of Inventory Management - answerOptimize inventory investment
Support performance objectives related to customer service
Align with organization's sustainability goals
Explain the process of inventory in the supply and value chain - answerSuppliers: Hold
raw materials or components
Manufacturer or Fabricator: Raw materials, WIP, and FG
DC: Packaged goods & parts
Retail Outlet: Packaged Goods
In-Transit or Pipeline: Transfers inventory from each location
What the functions of inventory? - answerBuffer: quantity of materials awaiting further
processing. In theory of constraints, buffer inventory may be raw materials or semi-
finished items that are maintained at the constraint, convergent points (with a constraint
point), divergent points, and shipping points
Anticipation Inventory: Refers to buffer inventory that is accumulated in anticipation of
an increase in demand
,Safety stock: Used to manage fluctuations in supply and demand as a known event --
either consumer demand or demand for materials or components by a succeeding
process in manufacturing
Hedge: Speculates on future demand or savings. Represents inventory for an event that
may or may not happen
Lot size: Uses volume discounts in purchasing.
Describe inventory in the service industry - answerTakes the form of goods that
facilitate the delivery of the service to customers
ABC classification can use various different criteria. List some examples: - answerDollar
usage
Criticality to processes or customers
Potential for stock outs
Quality
Shelf Life
What are some possible impacts of ABC classification: - answerFrequency of counting
Frequency of forecast reviews
Re-engineering of products
Amount of safety stock or safety lead time
Where an item is stored
How it is controlled and replenished
What does aggregate inventory policy focus on? - answerEstablishing the overall ($
value) of inventory desired and implementing controls to achieve this goal
Marketing, operations, and finance will have conflicts related to inventory and various
conventional objectives (how they prioritize the objectives -- inventory supports these).
Explain: - answerCustomer service: Marketing (high) Operations (low) Finance (high)
Production Efficiency: Marketing (low) Operations (high) Finance (high)
Inventory Investment: Marketing (high) Operations (high) Finance (low)
,List the two types of inventory valuation recording intervals and the types of valuation
used: - answerRecording intervals:
- Perpetual
- Periodic
Types of Valuation:
- Actual Costs
- Average costs
- First in, first out (FIFO)
- Last in, last out
- Specific Identification
- Standard costs
- Transfer Pricing
Inventory Turns, Average Age, and Days of Supply are 3 metrics used in aggregate
inventory management. List the formulas for each: - answerInventory Turns: Shows how
quickly inventory investment is converted into revenue
COGS / Average Inventory in $
Average Age: May point to inventory retention that risks obsolescence and loss of value
365 / Inventory Turnover
Days of Supply: Shows how many days existing inventory will last
Inventory OH / Average Daily Usage
Inventory costs are a key factor in determining how an item is purchased or
manufactured. What are the costs that make up total inventory cost. - answerItem Cost:
Unit price plus shipping and taxes
Carrying Cost: Cost of capital (opportunity costs), storage, and risk
Ordering Cost: Administrative tasks, receiving, checking, handling, setup and teardown
Stock out Cost: Lost revenue and damaged perception
What are the assumptions needed for the EOQ method to work? What is the formula? -
answerAssumptions:
- Demand is constant, known demand
- Lot and batch production
- Inventory costs are constant and known
- Replenishment all at once
Formula:
SQRT of [ (2 x Annual Usage in Units x Order Cost) / (Annual Carrying Cost per Unit)]
, Describe itemized inventory policy - answerPlaces constraints on the upper and lower
limit's of an item's inventory amount
Upper limit: aims at controlling costs of inventory investment and carrying costs
Lower limit: aims at preventing stock out costs and far lower cost items, decreasing
ordering costs by discouraging frequent, low-volume orders
However, there are modifiers to the upper and lower limits (limits still take precedence)
Modifiers:
- Supplier lot-size requirements
- Volume price breaks
- Supply for entire period
- Scrap or yield adjustments
To improve efficiency and better manage inventory, operations can aim at increasing
inventories. On the other hand, some techniques to reduce WIP and lead time (while
still efficiently managing inventory) derive from lean manufacturing.
How does lean reduce WIP and lead time? - answerAligning production with actual
demand and creating continuous flow (takt time)
Capping finished goods to demand needs
Improving flexibility of processes and decreasing changeover times
(These are all accomplished using the 4 lean production tools)
4 Lean Production Tools - answer- Value Stream Mapping
A continuous improvement tool that visualizes the flow of the value stream, the process
steps from raw material to finished goods (or delivery of service to the customer)
- Pull System
Improves the efficiency of inventory use by matching demand to supply. The factory
produces only what its customers use. Each work station produces only enough to
supply what the next work station in the process requires
A synchronous pull system controls the velocity of flow through processes by using takt
time
- Reducing Setup/Changeover Time
Time required to convert from production of last good piece of item A to the first good
piece of item B
- Total Productive Maintenance (TPM)
Planning
Purposes of Inventory - answer Better Customer Service
- To internal and external customers by supporting availability of raw materials,
components, and finished goods
Improve operating efficiency
- Provide buffer inventory between operations to accommodate different output rates
and unexpected interruptions. Called WIP
Allow longer production runs
- Decreases the need for switch overs and the costs of setups and lost productivity
Volume Discounts
- Accommodates buying inventory in larger amounts to take advantage of volume
discounts
Goals of Inventory Management - answerOptimize inventory investment
Support performance objectives related to customer service
Align with organization's sustainability goals
Explain the process of inventory in the supply and value chain - answerSuppliers: Hold
raw materials or components
Manufacturer or Fabricator: Raw materials, WIP, and FG
DC: Packaged goods & parts
Retail Outlet: Packaged Goods
In-Transit or Pipeline: Transfers inventory from each location
What the functions of inventory? - answerBuffer: quantity of materials awaiting further
processing. In theory of constraints, buffer inventory may be raw materials or semi-
finished items that are maintained at the constraint, convergent points (with a constraint
point), divergent points, and shipping points
Anticipation Inventory: Refers to buffer inventory that is accumulated in anticipation of
an increase in demand
,Safety stock: Used to manage fluctuations in supply and demand as a known event --
either consumer demand or demand for materials or components by a succeeding
process in manufacturing
Hedge: Speculates on future demand or savings. Represents inventory for an event that
may or may not happen
Lot size: Uses volume discounts in purchasing.
Describe inventory in the service industry - answerTakes the form of goods that
facilitate the delivery of the service to customers
ABC classification can use various different criteria. List some examples: - answerDollar
usage
Criticality to processes or customers
Potential for stock outs
Quality
Shelf Life
What are some possible impacts of ABC classification: - answerFrequency of counting
Frequency of forecast reviews
Re-engineering of products
Amount of safety stock or safety lead time
Where an item is stored
How it is controlled and replenished
What does aggregate inventory policy focus on? - answerEstablishing the overall ($
value) of inventory desired and implementing controls to achieve this goal
Marketing, operations, and finance will have conflicts related to inventory and various
conventional objectives (how they prioritize the objectives -- inventory supports these).
Explain: - answerCustomer service: Marketing (high) Operations (low) Finance (high)
Production Efficiency: Marketing (low) Operations (high) Finance (high)
Inventory Investment: Marketing (high) Operations (high) Finance (low)
,List the two types of inventory valuation recording intervals and the types of valuation
used: - answerRecording intervals:
- Perpetual
- Periodic
Types of Valuation:
- Actual Costs
- Average costs
- First in, first out (FIFO)
- Last in, last out
- Specific Identification
- Standard costs
- Transfer Pricing
Inventory Turns, Average Age, and Days of Supply are 3 metrics used in aggregate
inventory management. List the formulas for each: - answerInventory Turns: Shows how
quickly inventory investment is converted into revenue
COGS / Average Inventory in $
Average Age: May point to inventory retention that risks obsolescence and loss of value
365 / Inventory Turnover
Days of Supply: Shows how many days existing inventory will last
Inventory OH / Average Daily Usage
Inventory costs are a key factor in determining how an item is purchased or
manufactured. What are the costs that make up total inventory cost. - answerItem Cost:
Unit price plus shipping and taxes
Carrying Cost: Cost of capital (opportunity costs), storage, and risk
Ordering Cost: Administrative tasks, receiving, checking, handling, setup and teardown
Stock out Cost: Lost revenue and damaged perception
What are the assumptions needed for the EOQ method to work? What is the formula? -
answerAssumptions:
- Demand is constant, known demand
- Lot and batch production
- Inventory costs are constant and known
- Replenishment all at once
Formula:
SQRT of [ (2 x Annual Usage in Units x Order Cost) / (Annual Carrying Cost per Unit)]
, Describe itemized inventory policy - answerPlaces constraints on the upper and lower
limit's of an item's inventory amount
Upper limit: aims at controlling costs of inventory investment and carrying costs
Lower limit: aims at preventing stock out costs and far lower cost items, decreasing
ordering costs by discouraging frequent, low-volume orders
However, there are modifiers to the upper and lower limits (limits still take precedence)
Modifiers:
- Supplier lot-size requirements
- Volume price breaks
- Supply for entire period
- Scrap or yield adjustments
To improve efficiency and better manage inventory, operations can aim at increasing
inventories. On the other hand, some techniques to reduce WIP and lead time (while
still efficiently managing inventory) derive from lean manufacturing.
How does lean reduce WIP and lead time? - answerAligning production with actual
demand and creating continuous flow (takt time)
Capping finished goods to demand needs
Improving flexibility of processes and decreasing changeover times
(These are all accomplished using the 4 lean production tools)
4 Lean Production Tools - answer- Value Stream Mapping
A continuous improvement tool that visualizes the flow of the value stream, the process
steps from raw material to finished goods (or delivery of service to the customer)
- Pull System
Improves the efficiency of inventory use by matching demand to supply. The factory
produces only what its customers use. Each work station produces only enough to
supply what the next work station in the process requires
A synchronous pull system controls the velocity of flow through processes by using takt
time
- Reducing Setup/Changeover Time
Time required to convert from production of last good piece of item A to the first good
piece of item B
- Total Productive Maintenance (TPM)
