Group: PERON A+ PERSON B +PERSON C 1- Introduction 2- Literature a. Definition of operation management b. Definition of operation strategy and why it is important c. Components of operations strategy 3- Case study a. b. Overviews of corporate strategy of GASCO Discussion of operation strategy of GASCO b1. Overviews of OS of GASCO b2. Comparison with competitors' OS 4- Conclusion GOOD LUCK Supply Chain Inventory Management Chapter 9 Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 01 What is a Inventory Management? Inventory Management The planning and controlling of inventories in order to meet the competitive priorities of the organization. Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 02 Inventory and Supply Chains Inventory A stock of materials used to satisfy customer demand or to support the production of services or goods. Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 03 Inventory and Supply Chains Input flow of materials Inventory level Scrap flow Output flow of materials Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 04 Pressures for Small Inventories Inventory holding cost Cost of capital Storage and handling costs Taxes Insurance Shrinkage - Pilferage - Obsolescence - Deterioration Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 05 Pressures for Large Inventories Customer service Ordering cost Setup cost Labor and equipment utilization Transportation cost Payments to suppliers Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 06 Types of Inventory Raw materials Work-in-process Finished goods Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 07 Types of Inventory Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 08 Types of Inventory Cycle Inventory Safety Stock Inventory Anticipation Inventory Pipeline Inventory Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 09 Cycle Inventory Lot sizing principles 1. The lot size, Q, varies directly with the elapsed time (or cycle) between orders. 2. The longer the time between orders for a given item, the greater the cycle inventory must be. Q+0 Q Average cycle inventory = = 2 2 Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 10 Pipeline Inventory Average demand during lead time = DL Average demand per period = d Number of periods in the item's lead time = L Pipeline inventory = DL = dL Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 11 Example 9.1 A plant makes monthly shipments of electric drills to a wholesaler in average lot sizes of 280 drills. The wholesaler's average demand is 70 drills a week, and the lead time from the plant is 3 weeks. The wholesaler must pay for the inventory from the moment the plant makes a shipment. If the wholesaler is willing to increase its purchase quantity to 350 units, the plant will give priority to the wholesaler and guarantee a lead time of only 2 weeks. What is the effect on the wholesaler's cycle and pipeline inventories? Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 12 Example 9.1 The wholesaler's current cycle and pipeline inventories are Q Cycle inventory = = 140 drills 2 (70 drills/week)(3 weeks) = 210 drills Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 13 Inventory Reduction Tactics Cycle inventory - Reduce the lot size - Reduce ordering and setup costs and allow Q to be reduced - Increase repeatability to eliminate the need for changeover Safety stock inventory - - - - - Place orders closer to the time when they must be received Improve demand forecasts Cut lead times Reduce supply chain uncertainty Rely more on equipment and labor buffers Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 14 Inventory Reduction Tactics Anticipation inventory - - - - Match demand rate with production rates Add new products with different demand cycles Provide off-season promotional campaigns Offer seasonal pricing plans Pipeline inventory - Reduce lead times - Find more responsive suppliers and select new carriers - Change Q in those cases where the lead time depends on the lot size Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 15 What is an ABC Analysis? 100 ABC Analysis Class C Class B 90 The planning and controlling of inventories in order to meet the competitive priorities of the organization. Percentage of dollar value 80 Class A 70 60 50 40 30 20 10 0 10 20 30 40 50 60 70 Percentage of SKUs Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 80 90 100 09- 16 Economic Order Quantity The lot size, Q, that minimizes total annual inventory holding and ordering costs Five assumptions - Demand rate is constant and known with certainty. - No constraints are placed on the size of each lot. - The only two relevant costs are the inventory holding cost and the fixed cost per lot for ordering or setup. - Decisions for one item can be made independently of decisions for other items. - The lead time is constant and known with certainty. Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 17 Economic Order Quantity Don't use the EOQ - Make-to-order strategy - Order size is constrained Modify the EOQ - Quantity discounts - Replenishment not instantaneous Use the EOQ - Make-to-stock - Carrying and setup costs are known and relatively stable Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 18 Calculating EOQ On-hand inventory (units) Receive order Inventory depletion (demand rate) Q Average cycle inventory Q 2 1 cycle Time Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 19 Calculating EOQ Annual holding cost Annual holding cost = (Average cycle inventory) (Unit holding cost) Annual ordering cost Annual ordering cost =(Number of orders/Year) (Ordering or setup costs) Total annual cycle inventory cost Total costs = Annual holding cost + Annual ordering or setup cost Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 20 Annual cost (dollars) Calculating EOQ Total cost Holding cost Ordering cost Lot Size (Q) Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 21 Calculating EOQ Total annual cycle-inventory cost C= Q (H) 2 + D (S) Q where C = total annual cycle-inventory cost Q = lot size H = holding cost per unit per year D = annual demand S = ordering or setup costs per lot Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 22 Example 9.2 A museum of natural history opened a gift shop which operates 52 weeks per year. Top-selling SKU is a bird feeder. Sales are 18 units per week, the supplier charges $60 per unit. Ordering cost is $45. Annual holding cost is 25 percent of a feeder's value. Management chose a 390-unit lot size. What is the annual cycle-inventory cost of the current policy of using a 390-unit lot size? Would a lot size of 468 be better? Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 23 Example 9.2 We begin by computing the annual demand and holding cost as D= (18 units/week)(52 weeks/year) = 936 units H= 0.25($60/unit) = $15 The total annual cycle-inventory cost for the current policy is Q D 390 936 C = 2 (H) + Q (S) = 2 ($15) + 390 ($45) = $2,925 + $108 = $3,033 The total annual cycle-inventory cost for the alternative lot size is 936 468 C= 2 ($15) + 468 ($45) = $3,510 + $90 = $3,600 Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 24 Example 9.2 Current cost Annual cost (dollars) 3000 - Q D Total = 2 (H) + (S) cost Q 2000 - Holding cost = Q (H) 2 1000 - Lowest cost D Ordering cost = Q (S) 0- | | | | | | | | 50 100 150 200 250 300 350 400 Best Q (EOQ) Lot Size (Q) Current Q Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 25 Calculating EOQ The EOQ formula: EOQ = 2DS H Time Between Orders (TBO): TBOEOQ = EOQ (12 months/year) D Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 26 Example 9.3 For the bird feeders in Example 9.1, calculate the EOQ and its total annual cycle-inventory cost. How frequently will orders be placed if the EOQ is used? Using the formulas for EOQ and annual cost, we get EOQ = 2DS = H 2(936)(45) = 74.94 or 75 units 15 Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 27 Example 9.3 Below shows that the total annual cost is much less than the $3,033 cost of the current policy of placing 390-unit orders. Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 28 Example 9.3 When the EOQ is used, the TBO can be expressed in various ways for the same time period. TBOEOQ = EOQ 75 = D 936 TBOEOQ = EOQ D (12 months/year) TBOEOQ = EOQ D (52 weeks/year) TBOEOQ = EOQ D (365 days/year) = 0.080 year 75 = (12) = 0.96 month 936 = 75 (52) = 4.17 weeks 936 75 = (365) = 29.25 days 936 Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 29 Application 9.1 Suppose that you are reviewing the inventory policies on an $80 item stocked at a hardware store. The current policy is to replenish inventory by ordering in lots of 360 units. Additional information is: D = 60 units per week, or 3,120 units per year S = $30 per order H = 25% of selling price, or $20 per unit per year What is the EOQ? EOQ = 2DS H = 2(3,120)(30) = 97 units 20 Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 30 Application 9.1 What is the total annual cost of the current policy (Q = 360), and how does it compare with the cost with using the EOQ? Current Policy EOQ Policy Q = 360 units Q = 97 units C = (360/2)(20) + (3,120/360)(30) C = (97/2)(20) + (3,120/97) (30) C = 3,600 + 260 C = 970 + 965 C = $3,860 C = $1,935 Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 9- 31 Application 9.1 What is the time between orders (TBO) for the current policy and the EOQ policy, expressed in weeks? TBO360 = 360 (52 weeks per year) = 6 weeks 3,120 TBOEOQ = 97 (52 weeks per year) = 1.6 weeks 3,120 Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 9- 32 Managerial Insights SENSITIVITY ANALYSIS OF THE EOQ Parameter EOQ Parameter EOQ Change Change Demand Order/ Setup Costs Holding Costs 2DS H 2DS H 2DS H Comments Increase in lot size is in proportion to the square root of D. Weeks of supply decreases and inventory turnover increases because the lot size decreases. Larger lots are justified when holding costs decrease. Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 9- 33 Inventory Control Systems Two important questions: - How much? - When? Nature of demand - Independent demand - Dependent demand Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 34 Inventory Control Systems Continuous review (Q) system - Reorder point system (ROP) and fixed order quantity system - For independent demand items - Tracks inventory position (IP) - Includes scheduled receipts (SR), on-hand inventory (OH), and back orders (BO) Inventory position = On-hand inventory + Scheduled receipts - Backorders IP = OH + SR - BO Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 35 Selecting the Reorder Point IP On-hand inventory Order received IP Order received Q Order received Q OH OH IP Order received Q OH R Order placed Order placed L TBO Order placed L TBO L Time TBO Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 36 Application 9.2 The on-hand inventory is only 10 units, and the reorder point R is 100. There are no backorders and one open order for 200 units. Should a new order be placed? IP = OH + SR - BO = 10 + 200 - 0 = 210 R = 100 Decision: Place NO new order Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 37 Example 9.4 Demand for chicken soup at a supermarket is always 25 cases a day and the lead time is always 4 days. The shelves were just restocked with chicken soup, leaving an on-hand inventory of only 10 cases. No backorders currently exist, but there is one open order in the pipeline for 200 cases. What is the inventory position? Should a new order be placed? R = Total demand during lead time = (25)(4) = 100 cases IP = OH + SR - BO = 10 + 200 - 0 = 210 cases Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 38 nt Continuous Review Systems Selecting the reorder point with variable demand and constant lead time = Average demand during lead time + Safety stock = dL + safety stock where d = average demand per week (or day or months) L = constant lead time in weeks (or days or months) Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 39 Continuous Review Systems IP Order received On-hand inventory Order received IP IP Order received Order received Q Q Q R Order placed Order placed Order placed 0 L1 TBO1 L2 TBO2 L3 Time TBO3 Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 40 Reorder Point Choose an appropriate service-level policy Select service level or cycle service level Protection interval Determine the demand during lead time probability distribution Determine the safety stock and reorder point levels Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 41 Demand During Lead Time Specify mean and standard deviation - Standard deviation of demand during lead time dLT = d2L = d L Safety stock and reorder point Safety stock = zdLT where z = number of standard deviations needed to achieve the cycle-service level dLT = stand deviation of demand during lead time Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 42 Demand During Lead Time t = 15 t = 15 t = 15 + = + 75 75 75 Demand for week 1 Demand for week 2 Demand for week 3 t = 25.98 225 Demand for 3-week lead time Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 43 Demand During Lead Time Cycle-service level = 85% Probability of stockout (1.0 - 0.85 = 0.15) Average demand during lead time R zdLT Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 44 Example 9.5 Let us return to the bird feeder in Example 9.3. The EOQ is 75 units. Suppose that the average demand is 18 units per week with a standard deviation of 5 units. The lead time is constant at two weeks. Determine the safety stock and reorder point if management wants a 90 percent cycle-service level. order point Safety stock = zdLT = 1.28(7.07) = 9.05 or 9 units = d L + Safety stock = 2(18) + 9 = 45 units Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 45 Application 9.3 Suppose that the demand during lead time is normally distributed with an average of 85 and dLT = 40. Find the safety stock, and reorder point R, for a 95 percent cycle-service level . Safety stock = zdLT = 1.645(40) = 65.8 or 66 units R = Average demand during lead time + Safety stock R = 85 + 66 = 151 units Find the safety stock, and reorder point R, for an 85 percent cycle-service level. Safety stock = zdLT = 1.04(40) = 41.6 or 42 units R = Average demand during lead time + Safety stock R = 85 + 42 = 127 units Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 46 Reorder Point for Variable Demand and Variable Lead Time Often the case that both are variable The equations are more complicated Safety stock = zdLT R = (Average weekly demand Average lead time) + Safety stock = d L + Safety stock Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 47 Example 9.6 The Office Supply Shop estimates that the average demand for a popular ball-point pen is 12,000 pens per week with a standard deviation of 3,000 pens. The current inventory policy calls for replenishment orders of 156,000 pens. The average lead time from the distributor is 5 weeks, with a standard deviation of 2 weeks. If management wants a 95 percent cycle-service level, what should the reorder point be? Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 48 Example 9.6 (5)(3,000)2 + (12,000)2(2)2 = 24,919.87 pens y stock = zdLT = (1.65)(24,919.87) = 41,117.79 or 41,118 pens (12,000)(5) + 41,118 = 101,118 pens Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 49 Application 9.4 Grey Wolf lodge is a popular 500-room hotel in the North Woods. Managers need to keep close tabs on all of the room service items, including a special pine-scented bar soap. The daily demand for the soap is 275 bars, with a standard deviation of 30 bars. Ordering cost is $10 and the inventory holding cost is $0.30/bar/year. The lead time from the supplier is 5 days, with a standard deviation of 1 day. The lodge is open 365 days a year. What should the reorder point be for the bar of soap if management wants to have a 99 percent cycle-service? Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 50 T Application 9.4 d = 275 bars L = 5 days d = 30 bars LT = 1 day 283.06 bars = (2.33)(283.06) = 659.53 or 660 bars = (275)(5) + 660 = 2,035 bars Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 51 Continuous Review Systems Two-Bin system - Visual system - An empty first bin signals the need to place an order Calculating total systems costs Total cost = Annual cycle inventory holding cost + Annual ordering cost + Annual safety stock holding cost Q D C = 2 (H) + (S) + (H) (Safety stock) Q Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 52 Application 9.5 The Discount Appliance Store uses a continuous review system (Q system). One of the company's items has the following characteristics: Demand = 10 units/week (assume 52 weeks per year) Ordering or setup cost (S) = $45/order Holding cost (H) = $12/unit/year Lead time (L) = 3 weeks (constant) Standard deviation in weekly demand = 8 units Cycle-service level = 70% Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 53 Application 9.5 What is the EOQ for this item? D = 10/wk 52 wks/yr = 520 units EOQ = 2DS H 2(520)(45) = = 62 units 12 What is the desired safety stock? dLT = d L = 8 3 = 14 units Safety stock = zdLT = 0.525(14) = 8 units Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 54 Application 9.5 What is the desired reorder point R? R = Average demand during lead time + Safety stock R= 3(10) + 8 = 38 units What is the total annual cost? C= 62 520 ($12) + ($45) + 8($12) = $845.42 2 62 Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 55 Application 9.5 Suppose that the current policy is Q = 80 and R = 150. What will be the changes in average cycle inventory and safety stock if your EOQ and R values are implemented? Reducing Q from 80 to 62 Cycle inventory reduction = 40 - 31 = 9 units Safety stock reduction = 120 - 8 = 112 units Reducing R from 150 to 38 Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 56 Periodic Review System (P) Fixed interval reorder system or periodic reorder system Four of the original EOQ assumptions maintained - No constraints are placed on lot size - Holding and ordering costs - Independent demand - Lead times are certain Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 57 Periodic Review System (P) On-hand inventory T IP Q1 IP Order received OH Order received Q2 IP Q3 Order received OH IP1 IP3 Order placed Order placed IP2 L L P L Time P Protection interval Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 58 Example 9.7 A distribution center has a backorder for five 46-inch LCD TV sets. No inventory is currently on hand, and now is the time to review. How many should be reordered if T = 400 and no receipts are scheduled? IP = OH + SR - BO = 0 + 0 - 5 = -5 sets T - IP = 400 - (-5) = 405 sets That is, 405 sets must be ordered to bring the inventory position up to T sets. Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 59 Application 9.6 The on-hand inventory is 10 units, and T is 400. There are no back orders, but one scheduled receipt of 200 units. Now is the time to review. How much should be reordered? IP = OH + SR - BO = 10 + 200 - 0 = 210 T - IP = 400 - 210 = 190 The decision is to order 190 units Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 60 Periodic Review System Selecting the time between reviews P Selecting T when demand is variable and lead time is constant - IP covers demand over a protection interval of P + L - The average demand during the protection interval is d(P + L), or T = d (P + L) + safety stock for protection interval Safety stock = zP + L , where P + L = d P L Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 61 Example 9.8 Again, let us return to the bird feeder example. Recall that demand for the bird feeder is normally distributed with a mean of 18 units per week and a standard deviation in weekly demand of 5 units. The lead time is 2 weeks, and the business operates 52 weeks per year. The Q system called for an EOQ of 75 units and a safety stock of 9 units for a cycleservice level of 90 percent. What is the equivalent P system? Answers are to be rounded to the nearest integer. Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 62 Example 9.8 We first define D and then P. Here, P is the time between reviews, expressed in weeks because the data are expressed as demand per week: D = (18 units/week)(52 weeks/year) = 936 units EOQ 75 (52) = 4.2 or 4 weeks P = D (52) = 936 Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 63 Example 9.8 We now find the standard deviation of demand over the protection interval (P + L) = 6: P+L =d P+L =5 6 =12.25 units For a 90 percent cycle-service level z = 1.28: Safety stock = zP + L = 1.28(12.25) = 15.68 or 16 units We now solve for T: T = Average demand during the protection interval + Safety stock = d(P + L) + safety stock = (18 units/week)(6 weeks) + 16 units = 124 units Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 64 Periodic Review System Use simulation when both demand and lead time are variable Suitable to single-bin systems Total costs for the P system are the sum of the same three cost elements as in the Q system Order quantity and safety stock are calculated differently dP D C = 2 (H) + dP (S) + HzP + L Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 65 Application 9.7 Return to Discount Appliance Store (Application 9.5), but now use the P system for the item. Previous information: Demand = 10 units/wk (assume 52 weeks per year) = 520 EOQ = 62 units (with reorder point system) Lead time (L) = 3 weeks Standard deviation in weekly demand = 8 units z = 0.525 (for cycle-service level of 70%) Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 66 Application 9.7 Reorder interval P, if you make the average lot size using the Periodic Review System approximate the EOQ. P = (EOQ/D)(52) = (62/520)(52) = 6.2 or 6 weeks Safety stock Safety stock = d P+L 0.5258 6 3 12.6 or 13units Target inventory T = d(P + L) + safety stock for protection interval T = 10(6 + 3) + 13 = 103 units Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 67 Application 9.7 Total cost C= (H) + (S) + HzP + L 10(6) 520 = ($12) + ($45) + (13)($12) = $906.00 2 10(6) Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 68 Comparative Advantages Primary advantages of P systems - Convenient - Orders can be combined - Only need to know IP when review is made Primary advantages of Q systems - Review frequency may be individualized - Fixed lot sizes can result in quantity discounts - Lower safety stocks Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 69 Hybrid systems Optional replenishment systems - Optimal review, min-max, or (s,S) system, like the P system - Reviews IP at fixed time intervals and places a variablesized order to cover expected needs - Ensures that a reasonable large order is placed Base-stock system - Replenishment order is issued each time a withdrawal is made - Order quantities vary to keep the inventory position at R - Minimizes cycle inventory, but increases ordering costs - Appropriate for expensive items Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 70 Solved Problem 1 A distribution center experiences an average weekly demand of 50 units for one of its items. The product is valued at $650 per unit. Average inbound shipments from the factory warehouse average 350 units. Average lead time (including ordering delays and transit time) is 2 weeks. The distribution center operates 52 weeks per year; it carries a 1-week supply of inventory as safety stock and no anticipation inventory. What is the value of the average aggregate inventory being held by the distribution center? Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 71 Solved Problem 1 Type of Inventory Cycle Safety stock Anticipation Pipeline Calculation of Average Inventory Q 2 = 350 = 175 units 2 1-week supply = 50 units None dL = (50 units/week)(2 weeks) = 100 units Average aggregate inventory = 325 units Value of aggregate inventory = $650(325) = $211,250 Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 72 Solved Problem 2 Booker's Book Bindery divides SKUs into three classes, according to their dollar usage. Calculate the usage values of the following SKUs and determine which is most likely to be classified as class A. SKU Number Description Quantity Used per Year 500 Unit Value ($) 3.00 1 Boxes 2 Cardboard (square feet) 18,000 0.02 3 Cover stock 10,000 0.75 4 Glue (gallons) 75 40.00 5 Inside covers 20,000 0.05 6 Reinforcing tape (meters) 3,000 0.15 7 Signatures 150,000 0.45 Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 73 Solved Problem 2 SKU Number Description 1 Boxes 2 Quantity Used per Year Unit Value ($) Annual Dollar Usage ($) 500 3.00 = 1,500 Cardboard (square feet) 18,000 0.02 = 360 3 Cover stock 10,000 0.75 = 7,500 4 Glue (gallons) 75 40.00 = 3,000 5 Inside covers 20,000 0.05 = 1,000 6 Reinforcing tape (meters) 3,000 0.15 = 450 7 Signatures 150,000 0.45 = 67,500 Total 81,310 Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 74 Solved Problem 2 Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 75 Solved Problem 2 Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 76 Solved Problem 3 Nelson's Hardware Store stocks a 19.2 volt cordless drill that is a popular seller. Annual demand is 5,000 units, the ordering cost is $15, and the inventory holding cost is $4/unit/year. a. What is the economic order quantity? b. What is the total annual cost for this inventory item? a. The order quantity is EOQ = 2DS H = = 2(5,000)($15) $4 37,500 = 193.65 or 194 drills b. The total annual cost is Q D C = 2 (H) + Q (S) = 5,000 194 ($4) + 194 ($15) = $774.60 2 Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 77 Solved Problem 4 A regional distributor purchases discontinued appliances from various suppliers and then sells them on demand to retailers in the region. The distributor operates 5 days per week, 52 weeks per year. Only when it is open for business can orders be received. Management wants to reevaluate its current inventory policy, which calls for order quantities of 440 counter-top mixers. The following data are estimated for the mixer: Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 78 Solved Problem 4 a. What order quantity Q, and reorder point, R, should be used? b. What is the total annual cost of the system? c. If on-hand inventory is 40 units, one open order for 440 mixers is pending, and no backorders exist, should a new order be placed? Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 79 Solved Problem 4 a. Annual demand is D = (5 days/week)(52 weeks/year)(100 mixers/day) = 26,000 mixers/year The order quantity is EOQ = 2DS = H = 2(26,000)($35) $9.40 193,167 = 440.02 or 440 mixers Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 80 Solved Problem 4 The standard deviation of the demand during lead time distribution is dLT = d L = 30 3 = 51.96 A 92 percent cycle-service level corresponds to z = 1.41 Safety stock = zdLT = 1.41(51.96 mixers) = 73.26 or 73 mixers 100(3) = 300 mixers Reorder point (R) = Average demand during lead time + Safety stock = 300 mixers + 73 mixers = 373 mixers With a continuous review system, Q = 440 and R = 373 Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 81 Solved Problem 4 b. The total annual cost for the Q systems is Q D C = 2 (H) + Q (S) + (H)(Safety stock) 26,000 440 C = 2 ($9.40) + 440 ($35) + ($9.40)(73) = $4,822.38 c. Inventory position = On-hand inventory + Scheduled receipts - Backorders IP = OH + SR - BO = 40 + 440 - 0 = 480 mixers Because IP (480) exceeds R (373), do not place a new order Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 82 Solved Problem 5 Suppose that a periodic review (P) system is used at the distributor in Solved Problem 4, but otherwise the data are the same. a. Calculate the P (in workdays, rounded to the nearest day) that gives approximately the same number of orders per year as the EOQ. b. What is the target inventory level, T? Compare the P system to the Q system in Solved Problem 4. c. What is the total annual cost of the P system? d. It is time to review the item. On-hand inventory is 40 mixers; receipt of 440 mixers is scheduled, and no backorders exist. How much should be reordered? Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 83 Solved Problem 5 a. The time between orders is EOQ P= D 440 (260) = 4.4 or 4 days (260 days/year) = 26,000 Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 84 Solved Problem 5 b. The OM Solver data below shows that T = 812 and safety stock = (1.41)(79.37) = 111.91 or about 112 mixers. The corresponding Q system for the counter-top mixer requires less safety stock. Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 85 Solved Problem 5 c. The total annual cost of the P system is C= (H) + (S) + (H)(Safety stock) 100(4) 26,000 C= ($9.40) + 100(4) ($35) + ($9.40)(1.41)(79.37) 2 = $5,207.80 d. Inventory position is the amount on hand plus scheduled receipts minus backorders, or IP = OH + SR - BO = 40 + 440 - 0 = 480 mixers The order quantity is the target inventory level minus the inventory position, or Q = T - IP = 812 mixers - 480 mixers = 332 mixers An order for 332 mixers should be placed. Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 86 Solved Problem 6 Grey Wolf Lodge is a popular 500-room hotel in the North Woods. Managers need to keep close tabs on all room service items, including a special pine-scented bar soap. The daily demand for the soap is 275 bars, with a standard deviation of 30 bars. Ordering cost is $10 and the inventory holding cost is $0.30/bar/year. The lead time from the supplier is 5 days, with a standard deviation of 1 day. The lodge is open 365 days a year. a. What is the economic order quantity for the bar of soap? b. What should the reorder point be for the bar of soap if management wants to have a 99 percent cycle-service level? c. What is the total annual cost for the bar of soap, assuming a Q system will be used? Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 87 Solved Problem 6 a. We have D = (275)(365) = 100,375 bars of soap; S = $10; and H = $0.30. The EOQ for the bar of soap is EOQ = 2DS H = = 2(100,375)($10) $0.30 6,691,666.7 = 2,586.83 or 2,587 bars Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 88 Solved Problem 6 dLT = Ld + d 2 2 2 LT = (5)(30)2 + (275)2(1)2 = 283.06 bars Safety stock = zdLT = (2.33)(283.06) = 659.53 or 660 bars stock = (275)(5) + 660 = 2,035 bars Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 89 Solved Problem 6 c. The total annual cost for the Q system is Q D C = 2 (H) + (S) + (H)(Safety stock) Q 2,587 100,375 C= ($0.30) + ($10) + ($0.30)(660) = $974.05 2 2,587 Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09- 90 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 09 - 91 Gasco Company Introduction Abu Dhabi Gas Industries, GASCO, was first born out of the late Sheikh Zayed Bin Sultan Al Nahyan's vision for the utilization of the United Arab Emirates' vast gas resources. The company was incorporated in 1978 as a joint venture between ADNOC, Shell, Total and Partex. Our first plant became fully operational in 1981. To respond to the ever-increasing demand for energy and the growing interest in Natural Gas as an economically attractive and environmentally benign fuel, we have invested US$ 10 Billion in projects to expand our processing capacity to 8 Billion Standard Cubic Feet per day during 2013. From our modest beginnings in the 1980s, we have grown into one of the largest gas processing companies in the world, now operating six mega plants. Growth plans are set and the time is right to deliver on them. By 2017, the end of our current planning cycle, our processing capacity will have grown by over 25% and our manpower to more than 6,400 employees. This is a crucial evolutionary stage for us - one of alignment and integration. Operations managementrefers to the administration of business practices to create the highest level of efficiency possible within an organization. Operations management is concerned with converting materials and labor into goods and services as efficiently as possible to maximize the profit of an organization. Operations management teams design the method of conversion of inputs (materials, labor, proprietary information, etc.) into outputs (goods, services, value-added products, etc.) that is most beneficial to the organization. Operations management teams attempt to balance costs with revenue to achieve the highest net operating profit possible. Operations Management deals with the design and management of products, processes, services and supply chains. It considers the acquisition, development, and utilization of resources that firms need to deliver the goods and services their clients want. The Operation Management ranges from strategic to tactical and operational levels. Representative strategic issues include determining the size and location of manufacturing plants, deciding the structure of service or telecommunications networks, and designing technology supply chains. Tactical issues include plant layout and structure, project management methods, and equipment selection and replacement. Operational issues include production scheduling and control, inventory management, quality control and inspection, traffic and materials handling, and equipment maintenance policies. Operations strategyCompanies and organizations making products and delivering, be it for profit or not for profit rely on a handful of processes to get their products manufactured properly and delivered on time. Each of the process acts as an operation for the company. To the company this is essential. That is why managers find operations management more appealing. We begin this section by looking at what operations actually are. Operations strategy is to provide an overall direction that serves the framework for carrying out all the organization's functions. Operations strategy is to provide an overall direction that serves the framework for carrying out all the organization's functions.Operations strategy is very important, because it's the tool that helps to define the methods of producing goods or a service offered to the customer. Strategy in a business organization is essentially about how the organization seeks to survive and prosper within its environment over the long-term. The decisions and actions taken within its operations have a direct impact on the basis on which an organization is able to do this. The way in which an organization secures, deploys and utilizes its resources will determine the extent to which it can successfully pursuespecific performance objectives. There are five operations performance objectives: 1 Cost: The ability to produce at low cost. 2 Quality: The ability to produce in accordance with specification and without error. 3 Speed: The ability to do things quickly in response to customer demands and thereby offer short lead times between when a customer orders a product or service and when they receive it. 4 Dependability: The ability to deliver products and services in accordance with promises made to customers (e.g. in a quotation or other published information). 5 Flexibility: The ability to change operations. Flexibility can comprise up to four aspects: i. The ability to change the volume of production. ii. The ability to change the time taken to produce. iii. The ability to change the mix of different products or services produced. iv. The ability to innovate and introduce new products and services. Components of operations strategy:1. Designing of the production system: -The designing of the production system involves the selection of the type of product design, processing system, inventory plan for finished goods, etc. The product design has two varieties. (* Customized product design * Standard product design) There are two types of production systems. They are product focused and process focused. Product-focused system is adopted where there is mass production by using a group of machines. For example, products like automobiles, computers, etc. 2. Facilities for production and services: - Certain specialization in production allows the firm to provide the customers with products of lower cost, faster delivery, on-time delivery, high product quality, and flexibility. 3. Product or Service design and development: -(* Generating the idea * Creating the feasibility reports * Designing the prototype and testing * Preparing a production model * Evaluating the economies of scale for production * Testing the product in the market * Obtaining feedback * Creating the final design and starting the production) 4. Technology selection and process development: - A product selected for production will be analyses for the process and the applicable technology for optimal production. There are many challenges faced by the operations managers in this decision as the alternatives are many. The techno-economic analysis for each alternative will help to decide the required technology. 5. Allocation of resources: - The production units face continuous problems of allocating the scarce resources like capital, machines, equipment, materials, manpower, services, etc. Allocation at the right time to the right place of production indicates the efficiency of the production planners. Optimal use of resources will enable economical production. Minimizing waste, optimal utilization of resources, and the best quality product demand a sound operations strategy. 6. Facility, capacity, and layout planning: -The location, layout, and facilities creation for the production are the key decision areas for the operations manager. These are critical for achieving the competitiveness. The decision also influences the future expansion of the plant. While evaluating the alternatives, the operations manager will consider the availability of raw materials, access to market, etc. Enormous capital requirement is required and the planning is always long range. Here, the production process adopted and the technology pursued dictates the volume, quality, and cost of production. The four-stage model of the strategic role of operations: Stage 1Internally Neutral: the operations function is internally focused and reactive. They are viewed as a 'necessary evil'. The best that the organization hopes for is that operations 'don't screw up'. Stage 2Externally Neutral: The operations function tries to be as good as the competition, or to achieve parity with industry norms. Such an organization is likely to benchmark its operations against its competitors, and adopt best practice in its industry so that it does not hold the organization back. Stage 3Internally supportive: The operations function seeks to provide credible support for the organization's business strategy. An operations strategy will be developed which will be derived from, and support, the business strategy. The organization's operations are likely to be amongst the best in its industry. Stage 4Externally Supportive: The operations function provides the basis of competitive advantage for the organization, by setting the standard in their industry. The operations function is likely to aim to be world class by seeking to emulate best practice wherever it is to be found. Operations will be seen as the means of exceeding customer expectations by delighting the customer. Operations will be managed proactively to drive the business strategy of the organization. GASCO Operation Management: GASCO is an ADNOC Operating Company engaged in the extraction of Natural Gas Liquids (NGL) from associated and non-associated gas. They play a strategic role in the UAE's hydrocarbon chain and are a vital enabler of industrial and economic progress. Other industries in this highly integrated chain include on and off shore oil production, petrochemicals, refining, fertilizers, water and electricity agencies and infrastructure industries such as steel, cement and aluminum smelting. From our modest beginnings we have grown to be a major contributor to the UAE's and Abu Dhabi's rapidly growing and diversifying economy. As we deliver on our responsibility as the major supplier of gas and related products, we literally keep the wheels of the Abu Dhabi economy going. Beyond gas processing itself, our operation are a vital enabler of oil production. The pressure levels inside oil and condensate reservoirs need to be maintained within specified limits to ensure continued oil production. For this, gas is compressed and reinjected into the reservoirs. The gas feed for our plants is classified into associated and non-associated, or natural, gas. Associated gas is a by-product of oil production whereas non-associated gas comes from the gas and condensate reservoirs. Both forms of feed gases are delivered to GASCO by ADCO and ADMA / ADGAS. GASCO a joint venture GASCO was established in 1978 as a joint venture between Abu Dhabi National Oil Company (ADNOC), Shell, Total and Partex: Growth in feed gas Corporate strategy of GASCO: Strong and well developed leaders to navigate and master future complexities. Correct and simple processes to ensure a high level of integrity, reliability and performance. Strong corporate culture to enhance our identity in a changing environment. Successful planning to ensure they have the right people in the right positions. Operation strategy of GASCO: The Pipeline Network: Our 2,150 km pipeline network is used to distribute sales Gas and other products to customers throughout Abu Dhabi. Within the next two years, the network will further extend by over 800 km to enable the delivery of gas to both existing and new customers in Abu Dhabi. Shipping: Propane, Butane, granulated Sulphur and Paraffinic Naphtha are exported to many countries via our shareholders from our Ruwais shipping facilities. Our export markets include, China, France, India, Japan, Korea, Taiwan, Turkey, Malaysia, Yemen and USA. GASCO and competitors: Provides the clients and customers with turnkey solutions and services through the global network and proper strategic planning. ADMA Company: Oil and gas production comes from two major oil fields, Umm Shaif and Lower Zakum, from which crude oil is transferred to Das Island for processing, storage and export. In 1962, the first crude shipment, which came from Umm Shaif, was exported from Abu Dhabi through Das Island to the international markets. The implementation of a total quality management (TQM) culture, with its implicit orientation towards the customer, is a complex matter and requires a long-term approach. Consequently, the firms that try to change from a bureaucratic culture to one oriented towards quality will have to design an appropriate strategy in order to succeed. This type of modification can only be achieved through an evolutionary process and not a reactionary or a revolutionary one, since we are dealing with individual and collective behaviors that can obtain customer satisfaction through continuous improvement. In this respect, we present the case of a transformation towards a TQM culture in the Division of Alicante (Alicante is a province in the East of Spain) of Telefonica Group (a Spanish telecommunications company which, in 1999, provided jobs for over 100000 people and had profits of more than 1780 million euros). Thus, we are going to study the stages the Division went through in the process and the problems they had to face, finally reflecting the results obtained after implementing a strategy that was formulated to achieve this purpose in the long run. The conclusion, the competitive advantage attained by GASCO is solely dependent on the Technological engineering, Innovation and Technical capabilities of the human resources. Also, the distribution of business without boundaries, and the most distribution in GASCO by shipping such as Propane, Butane, granulated Sulphur and Paraffinic Naphtha are exported to many countries via our shareholders from our Ruwais shipping facilities. The export markets include, China, France, India, Japan, Korea, Taiwan, Turkey, Malaysia, Yemen and USA. CASE STUDY Chasing the Little White Ball New Internationalist issue 263 - January 1995 Condensed Version of Article Golf courses are sprouting like mushrooms after spring rain across East and South-East Asia.MaleeTraisawasdichai finds that fairways make good business but bad neighbors. 'My wife was a caddie. She is dead.' So spoke 27-year-old Pong Kheungkham, father of a little boy and a poor farmer from Baan Thung Yang - a small village in Chiang Rai Province, Thailand. Janpeng, his wife, was two months pregnant when she miscarried on the 17th hole at the Santiburi Private Community. A month later she was dead. Perhaps it was because she had carried the heavy bag over such a long course or because of daily exposure to the chemical pesticides used to keep the greens - but the cause of Janpeng's death was never clearly established. Her story shows how rich golfers' litist passion is satisfied at the expense of the poor. Golf constitutes an arrogant 'power sport' for the privileged few. Around Asia the advent of the golf course means disruption of ecology and the human community. Japan, Asia's most golf-crazy country, has at least 2,016 golf courses covering 2,227.7 square kilometers of land. The area exceeds that of Tokyo.1 In Thailand - the centre of 'golf mania' in South-East Asia - 200 golf courses have depleted the country's limited water supply that is vital for rice farmers. In Malaysia over 160 golf courses have swallowed up tracts of rainforest. In Indonesia 91 golf courses have bitten a big chunk out of traditional farming wetlands and nature reserves, in one case expelling nearly 1,000 families. China, Burma and Indochina are the new frontier of the corporate golf industry. A 'golf-resortplus-casino' package is being introduced to Burma, Laos and Cambodia. In Laos, Thai developer SompotPiyaoui's plans for the KonPhapheng Resort Development include two casinos and two courses, a 1,200-room hotel, an international airport and a power station. 'Setting up a resort complex in the middle of the KhonPhapheng Fall, which is ecologically sensitive and the habitat of unique fauna like the Irrawaddy dolphins, is in itself unacceptable. It is a black and white issue. It's like you were going to poison the Mekong River right into Cambodia and Vietnam.' Cheap land, weak regulations and feeble local opposition in South-East Asia - particularly Indochina - are a strong draw for Japanese developers. Back home in Japan strong local opposition has managed to halt the construction of 720 golf courses since 1988. For Asia's poorest countries golf resorts provide a lure to draw easy money from wealthy tourists, expatriates and the local nouveaux riches. How many 'golf dollars' stay in the host country is also a matter of debate. 'When a tourist starts his journey he buys a Nikon camera and then flies with Japan Airlines,' says Thai anti-golf activist ChyantPholpoke. 'Arriving in, say, the Philippines for golfing, he takes a Toyota limousine and checks in at a Japanese-owned hotel. He goes up to his room in a Hitachi lift where he takes a drink from a Toshiba fridge, turns on a Sharp air conditioner and a National TV.' Golf is the sport of the powerful and influential. In Indonesia half the existing golf courses are owned by President Suharto and his family 3. The US armed forces have 300 golf courses, maintained at a cost of $60 million a year to the American taxpayers.' According to Thai Lieutenant General SananKajornglam: 'Most generals have to play golf because it's a highsociety game. Golf is expensive. If you are known to be good at golf and you play with the right clans, then let your superiors win, you can curry favour and get promoted.' Thai farmers are not so sure. In 1994 Thailand experienced its worst-ever drought year. The Royal Irrigation Department (RID) discovered 13 golf courses illegally diverting water from irrigation canals. The Government, however, prohibited farmers from growing a second rice crop while golf courses went on pumping water from the reservoirs. An average course in Thailand consumes 6,500 cubic meters of water per day - enough to satisfy the domestic needs of 60,000 rural villagers. SuradejVongsinlang - a water-resource engineer who quit his golf-course job - is candid about water-theft tactics: 'Some golf courses near rivers dump rocks and sand into the river to make the water level rise, so it will flow into their golf course.' Caddies and course workers also fall victim to pesticide poisoning. Caddies interviewed at Santiburi golf course in Chiang Rai said they all suffered skin disease, dizziness and kidney problems after just a year's work. Dead birds are found almost every morning after greenkeepers have sprayed pesticide at night. In the US a Golf Course Superintendent Association's study confirmed that: 'Among golf-course superintendents there is more lung cancer, more brain cancer, more cancers of the large intestine and prostate. Especially lung cancer.' The image of Thai women is often used to sell the country to tourists - golf tourism is no different. One promotion leaflet entitled 'Thailand Paradise Golf Plus' pulls few punches: 'The splendour of the courses and club houses is unrivalled in Europe. And the service offered by the caddies, who are young, friendly, knowledgeable - and usually female - is unparalleled in the world.' A receptionist at the Santiburi golf course revealed: 'I have been approached by golfers many times to go out. Once a Malaysian pro told me if I went with him he would give me all the money he won from the game. But I managed to refuse his offer gently.' It remains to be seen whether the 'nature-loving' golfer can be convinced. MaleeTraisawasdichai is a journalist with the Nation in Bangkok. 1GAG'M Newsletter, May 1994. 23Far Eastern Economic Review, 5 May 1994