MGT530 M10-Discussion Forum: Inventory Management and Aggregate Planning

MRP and ERP

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12-1

You should be able to:
LO 13.1
LO 13.2
LO 13.3
LO 13.4
LO 13.5
LO 13.6
LO 13.7
LO 13.8

Describe the conditions under which MRP is most appropriate
Describe the inputs, outputs, and nature of MRP processing
Explain how requirements in a master production schedule are
translated into material requirements for lower-level items
Discuss the benefits and requirements of MRP
Describe some of the difficulties users have encountered with MRP
Describe MRP II and its benefits
Explain how an MRP system is useful in capacity requirements
planning
Describe ERP, what it provides, and its hidden costs

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13-2

 Material requirements planning (MRP):
 A computer-based information system that translates

master schedule requirements for end items into timephased requirements for subassemblies, components,
and raw materials
 The MRP is designed to answer three questions:
What is needed?
2. How much is needed?
3. When is it needed?
1.

LO 13.2

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13-3

LO 13.2

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13-4

 Master schedule:
 One of three primary inputs in MRP; states which end items are to

be produced, when these are needed, and in what quantities
 Managers like to plan far enough into the future so they have

reasonable estimates of upcoming demands
 The master schedule should cover a period that is at least equivalent

to the cumulative lead time
 Cumulative lead time
 The sum of the lead times that sequential phases of a process

require, from ordering of parts or raw materials to completion of
the final assembly

LO 13.2

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13-5

LO 13.2

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13-6

 Bill of Materials (BOM)
 A listing of all of the assemblies, subassemblies, parts,

and raw materials needed to produce one unit of a
product
 Product structure tree
 A visual depiction of the requirements in a bill of materials,

where all components are listed by levels

LO 13.2

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13-7

LO 13.2

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13-8

 Low-level coding
 Restructuring the bill of materials so that multiple

occurrences of a component all coincide with the lowest
level at which the component occurs
X

Level 0
Level 1

LO 13.2

B(2)

Level 2

D(3)

Level 3

E(4)

C
F(2)
E

E(2)

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13-9

 Inventory records
 Includes information on the status of each item by time period,
called time buckets
 Information about
 Gross requirements
 Scheduled receipts

 Expected amount on hand
 Other details for each item such as
 Supplier
 Lead time
 Lot size policy

 Changes due to stock receipts and withdrawals
 Canceled orders and similar events

LO 13.2

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13-10

LO 13.2

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13-11

 Primary Outputs
 Planned orders
 A schedule indicating the amount and timing of future
orders
 Order releases
 Authorizing the execution of planned orders
 Changes
 Revisions of the dates or quantities, or the cancellation of
orders

LO 13.2

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13-12

 Secondary Outputs
 Performance-control reports
 Evaluation of system operation, including deviations from plans
and cost information
 e.g., missed deliveries and stockouts

 Planning reports
 Data useful for assessing future material requirements
 e.g., purchase commitments

 Exception reports
 Data on any major discrepancies encountered
 e.g., late and overdue orders, excessive scrap rates, requirements for

nonexistent parts

LO 13.2

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13-13

 MRP processing takes the end item requirements

specified by the master schedule and “explodes” them
into time-phased requirements for assemblies, parts,
and raw materials offset by lead times

LO 13.3

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13-14

Week Number

1

2

3

4

5

6

Gross Requirements
Scheduled Receipts
Projected on hand
Net requirements
Planned-order-receipt
Planned-order release

Gross requirements
• Total expected demand

Scheduled receipts
• Open orders scheduled to arrive

Projected Available
• Expected inventory on hand at the beginning of each time
period
LO 13.3

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13-15

Week Number

1

2

3

4

5

6

Gross Requirements
Scheduled Receipts

Projected on hand
Net requirements
Planned-order-receipt

Planned-order release

Net requirements
• Actual amount needed in each time period

Planned-order receipts
• Quantity expected to received at the beginning of the period
offset by lead time

Planned-order releases
• Planned amount to order in each time period
LO 13.3

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13-16

 The MRP is based on the product structure tree diagram
 Requirements are determined level by level, beginning

with the end item and working down the tree
 The timing and quantity of each “parent” becomes the basis for

determining the timing and quantity of the “children” items directly
below it
 The “children” items then become the “parent” items for the next
level, and so on

LO 13.3

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13-17

Shutter

Frames (2)

LO 13.3

Wood
sections (4)

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13-18

LO 13.3

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13-19

 Pegging
 The process of identifying the parent items that have

generated a given set of material requirements for an
item

LO 13.3

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13-20

 An MRP is not a static document
 As time passes
 Some orders get completed
 Other orders are nearing completion
 New orders will have been entered
 Existing orders will have been altered
 Quantity changes
 Delays
 Missed deliveries

LO 13.3

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13-21

 Two basic systems
 Regenerative system
 Approach that updates MRP records periodically
 Essentially a batch system that compiles all changes that occur

within the time interval and periodically updates the system
 A revised production plan is developed in the same way the
original plan was developed

 Net-change system
 Approach that updates MRP records continuously
 The production plan is modified to reflect changes as they occur

 Only the changes are exploded through the system

LO 13.3

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13-22

 Safety Stock
 Theoretically, MRP systems should not require safety stock
 Variability may necessitate the strategic use of safety stock
 A bottleneck process or one with varying scrap rates may cause
shortages in downstream operations
 Shortages may occur if orders are late or fabrication or assembly
times are longer than expected
 When lead times are variable, the concept of safety time is often
used
 Safety time
 Scheduling orders for arrival or completion sufficiently ahead of

their need so that the probability of shortage is eliminated or
significantly reduced

LO 13.3

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13-23

 Lot-for-Lot (L4L) ordering

 The order or run size is set equal to the demand for that period
 Minimizes investment in inventory
 Results in variable order quantities
 A new setup is required for each run
 Economic Order Quantity (EOQ)
 Can lead to minimum costs if usage of item is fairly uniform
 This may be the case for some lower-level items that are common to different

‘parents’
 Less appropriate for ‘lumpy demand’ items because inventory remnants often
result

 Fixed Period Ordering
 Provides coverage for some predetermined number of periods

LO 13.3

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13-24

 Material goods that form a part of

product – service
 Food catering service
 Estimating quantities of ingredients
 Estimating delivery times

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13-25

 Enables managers to easily
 Determine the quantities of each component for a given order size
 Know when to release orders for each component
 Be alerted when items need attention

 Additional benefits
 Low levels of in-process inventories
 The ability to track material requirements
 The ability to evaluate capacity requirements
 A means of allocating production time
 The ability to easily determine inventory usage via backflushing
 Exploding an end item’s BOM to determine the quantities of the components
that were used to make the item

LO 13.4

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13-26

 To implement an effective MRP system requires:
 A computer and the necessary software to handle computations and
maintain records
 Accurate and up-to-date
 Master schedules
 Bills of materials
 Inventory records
 Integrity of data files

LO 13.4

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13-27

 Consequence of inaccurate data
 Missing parts
 Ordering incorrect numbers of items
 Inability to stay on schedule

 Other problems
 Assumptions of constant lead times
 Products being produced differently from the BOM
 Failure to alter a BOM when customizing a product

 Inaccurate forecasts

LO 13.5

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13-28

 Manufacturing resources planning (MRP II)
 Expanded approach to production resource planning, involving

other areas of the firm in the planning process and enabling
capacity requirements planning
 Most MRP II systems have the capability of performing simulations to

answer a variety of “what if” questions so they can gain a better
appreciation of available options and their consequences

LO 13.6

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13-29

LO 13.6

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13-30

 When MRP II systems began to include feedback loops,

they were referred to as Closed Loop MRP
 Closed Loop MRP
 Systems evaluate a proposed material plan relative to available

capacity
 If a proposed plan is not feasible, it must be revised
 This evaluation is referred to as capacity requirements planning

LO 13.6

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13-31

 Capacity requirements planning (CRP)
 The process of determining short-range capacity requirements.
 Inputs to capacity requirement planning
 Planned-order releases for the MRP
 Current shop loading
 Routing information
 Job time
 Key outputs
 Load reports for each work center

LO 13.7

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13-32

 Load reports
 Department or work center reports that compare known

and expected future capacity requirements with
projected capacity availability

LO 13.7

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13-33

 Enterprise resource planning (ERP)
 ERP was the next step in an evolution that began with MRP and

evolved into MRPII
 ERP, like MRP II, typically has an MRP core
 ERP provides a system to capture and make data available in real

time to decision makers and other users throughout an
organization
 ERP systems are composed of a collection of integrated modules

LO 13.8

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13-34

Module

Brief Description

Accounting/Finance

A central component of most ERP systems. It provides a range of financial reports,
including general ledger, accounts payable, accounts receivable, payroll, income
statements, ad balance sheets

Marketing

Supports lead generation, target marketing, direct mail, and sales

Human Resources

Maintains a complete data base of employee information such as date of hire,
salary, contact information, performance evaluations, and other pertinent
information

Purchasing

Facilitates vendor selection, price negotiation, making purchasing decisions, and
bill payment

Production Planning

Integrates information on forecasts, orders, production capacity, on-hand
inventory quantities, bills of material, work in process, schedules, and production
lead times

Inventory Management

Identifies inventory requirements, inventory availability, replenishment rules, and
inventory tracking

Distribution

Contains information on third-party shippers, shipping and delivery schedules,
delivery tracking

Sales

Information on orders, invoices, order tracking, and shipping

Supply Chain Management

Facilitates supplier and customer management, supply chain visibility, and event
management

LO 13.8

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13-35

 The ‘big bang’
 Companies cast off all of their legacy systems at once and implement a

single ERP system across the entire company
 The most ambitious and difficult implementation approach
 Franchising strategy
 Independent ERP systems are installed in each business unit of the

enterprise while linking common processes across the enterprise
 Suits large or diverse companies that do not share many common processes
across business units
 Slam dunk
 ERP dictates the process design where the focus is on a few key processes

 More appropriate for smaller companies expecting to grow into ERP

LO 13.8

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13-36

 How can ERP improve a company’s business performance?
 How long will an ERP implementation project take?
 How will ERP affect current business processes?
 What is the ERP total cost of ownership?

 What are the hidden costs of ERP ownership?

LO 13.8

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13-37

Inventory
Management

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You should be able to:
LO 12.1
LO 12.2
LO 12.3
LO 12.4
LO 12.5
LO 12.6
LO 12.7
LO 12.8

Define the term inventory
List the different types of inventory
Describe the main functions of inventories
Discuss the main requirements for effective management
Explain periodic and perpetual review systems
Describe the costs that are relevant for inventory management
Describe the A-B-C approach and explain how it is useful
Describe the basic EOQ model and its assumptions and solve typical
problems
LO 12.9 Describe the economic production quantity model and solve typical
problems
LO 12.10 Describe the quantity discount model and solve typical problems
LO 12.11 Describe reorder point models and solve typical problems
LO 12.12 Describe situations in which the fixed-order interval model is appropriate,
and solve typical problems
LO 12.13 Describe situations in which the single-period model is appropriate and
solve typical problems

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12-2

 Inventory
 A stock or store of goods

 Independent-demand items
 Items that are ready to be sold or used
Inventories are a vital part of business: (1) necessary for
operations and (2) contribute to customer satisfaction
A “typical” firm has roughly 30% of its current
assets and as much as 90% of its working capital
invested in inventory

LO 12.1

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12-3

 Raw materials and purchased parts
 Work-in-process (WIP)
 Finished goods inventories or merchandise
 Tools and supplies

 Maintenance and repairs (MRO) inventory
 Goods-in-transit to warehouses or customers (pipeline

inventory)

LO 12.2

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12-4

 Inventories serve a number of functions such as:
1.
To meet anticipated customer demand
2. To smooth production requirements
3. To decouple operations
4. To protect against stockouts
5. To take advantage of order cycles
6. To hedge against price increases
7. To permit operations
8. To take advantage of quantity discounts

LO 12.3

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12-5

 Inventory management has two main concerns:
1. Level of customer service
 Having the right goods available in the right quantity in the
right place at the right time
2. Costs of ordering and carrying inventories
 The overall objective of inventory management is to achieve
satisfactory levels of customer service while keeping
inventory costs within reasonable bounds
1. Measures of performance
2. Customer satisfaction
 Number and quantity of backorders
 Customer complaints
3. Inventory turnover
LO 12.3

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12-6

 Ratio of annual cost of goods sold to average

inventory investment
 How many times a year the inventory is sold
 Higher the better as it implies more efficient use of the

inventory

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12-7

 Requires:
1.
A system keep track of inventory
2. A reliable forecast of demand
3. Knowledge of lead time and lead time variability
4. Reasonable estimates of

Holding costs

Ordering costs

Shortage costs
5. A classification system for inventory items

LO 12.4

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12-8

 Periodic system
 Physical count of items in inventory made at periodic

intervals
 Perpetual inventory system
 System that keeps track of removals from inventory

continuously, thus monitoring current levels of each
item
 An order is placed when inventory drops to a

predetermined minimum level
 Two-bin system
 Two containers of inventory; reorder when the first is empty

LO 12.5

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12-9

 Universal product code (UPC)
 Bar code printed on a label that has information about

the item to which it is attached
 Radio frequency identification (RFID) tags
 A technology that uses radio waves to identify objects,

such as goods, in supply chains

LO 12.5

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12-10

 Purchase cost
 The amount paid to buy the inventory

 Holding (carrying) costs
 Cost to carry an item in inventory for a length of time, usually

a year

 Ordering costs
 Costs of ordering and receiving inventory

 Setup costs
 The costs involved in preparing equipment for a job
 Analogous to ordering costs

 Shortage costs
 Costs resulting when demand exceeds the supply of

inventory; often unrealized profit per unit

LO 12.6

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12-11

 A-B-C approach
 Classifying inventory according to some measure of importance, and

allocating control efforts accordingly
 A items (very important)
 10 to 20 percent of the number of items in inventory and about 60 to 70
percent of the annual dollar value
 B items (moderately important)
 C items (least important)
 50 to 60 percent of the number
of items in inventory but only
about 10 to 15 percent of the
annual dollar value

LO 12.7

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12-12

 Cycle counting
 A physical count of items in inventory

 Cycle counting management
 How much accuracy is needed?
 A items: ± 0.2 percent

 B items: ± 1 percent
 C items: ± 5 percent
 When should cycle counting be performed?
 Who should do it?

LO 12.7

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12-13

 Economic order quantity models identify the optimal

order quantity by minimizing the sum of annual costs
that vary with order size and frequency
1.
2.
3.

LO 12.8

The basic economic order quantity model
The economic production quantity model
The quantity discount model

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12-14

 The basic EOQ model is used to find a fixed order

quantity that will minimize total annual inventory
costs
 Assumptions:
1.

2.
3.
4.
5.

6.

LO 12.8

Only one product is involved
Annual demand requirements are known
Demand is even throughout the year
Lead time does not vary
Each order is received in a single delivery
There are no quantity discounts

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12-15

Profile of Inventory Level Over Time

Q

Usage
rate

Quantity
on hand

Reorder
point

Receive
order

Place
order

Receive
order

Time
Place
order

Receive
order

Lead time

LO 12.8

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12-16

Total Cost = Annual Holding Cost + Annual Ordering Cost
=

Q
H
2

+

D
S
Q

where
Q = Order quantity in units
H = Holding (carrying) cost per unit, usually per year
D = Demand, usually in units per year
S = Ordering cost per order

LO 12.8

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12-17

Annual Cost

The Total-Cost Curve Is U-Shaped
Q
D
TC = H + S
2
Q
Holding Costs

Ordering Costs

QO (optimal order quantity)

LO 12.8

Order Quantity
(Q)

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12-18

 Using calculus, we take the derivative of the total cost

function and set the derivative (slope) equal to zero and
solve for Q.
 The total cost curve reaches its minimum where the
carrying and ordering costs are equal.

 Length of the optimal order cycle = Q0 / D

LO 12.8

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12-19

 The batch mode is widely used in production. In certain

instances, the capacity to produce a part exceeds its usage
(demand rate).
 Assumptions
 Only one item is involved

 Annual demand requirements are known
 Usage rate is constant
 Usage occurs continually, but production occurs periodically
 The production rate is constant
 Lead time is known and constant

 There are no quantity discounts

LO 12.9

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12-20

Q
Production
and usage

Usage
only

Production
and usage

Usage
only

Production
and usage

Qp
Cumulative
production

Imax

Amount
on hand

Time

LO 12.9

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12-21

TC min = Carrying Cost + Setup Cost
æI ö
D
max
=ç
÷H + S
Q
è 2 ø
where
I max = Maximum inventory
=

Qp

p – u)
(
p

p = Production or delivery rate
u = Usage rate

LO 12.9

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12-22

2 DS
Qp =
H

LO 12.9

p
p −u

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12-23

 Other parameters

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consent of McGraw-Hill Education.

12-24

 Quantity discount
 Price reduction for larger orders offered to customers to

induce them to buy in large quantities
Total Cost = Carrying Cost + Ordering Cost + Purchasing Cost
Q
D
= H + S + PD
2
Q
where
P = Unit price

LO 12.10

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McGraw-Hill Education.

12-25

LO 12.10

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12-26

The total-cost curve
with quantity discounts
is composed of a
portion of the total-cost
curve for each price

LO 12.10

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12-27

 Reorder point
 When the quantity on hand of an item drops to this amount, the
item is reordered.
 Determinants of the reorder point
1.
The rate of demand
2. The lead time
3. The extent of demand and/or lead time variability
4. The degree of stockout risk acceptable to management

LO 12.11

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12-28

ROP = d  LT
where
d = Demand rate (units per period, per day, per week)
LT = Lead time (in same time units as d )

LO 12.11

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McGraw-Hill Education.

12-29

 Demand or lead time uncertainty creates the possibility

that demand will be greater than available supply
 To reduce the likelihood of a stockout, it becomes
necessary to carry safety stock
 Safety stock

 Stock that is held in excess of expected demand due to variable

demand and/or lead time

Expected demand
ROP =
+ Safety Stock
during lead time
LO 12.11

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McGraw-Hill Education.

12-30

LO 12.11

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McGraw-Hill Education.

12-31

 As the amount of safety stock carried increases, the

risk of stockout decreases.
 This improves customer service level

 Service level
 The probability that demand will not exceed supply during lead
time
 Service level = 100% − stockout risk

LO 12.11

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McGraw-Hill Education.

12-32

 The amount of safety stock that is appropriate for a

given situation depends upon:
The average demand rate and average lead time
2. Demand and lead time variability
3. The desired service level
1.

Expected demand
ROP =
+ z dLT
during lead time
where
z = Number of standard deviations

 dLT = The standard deviation of lead time demand
LO 12.11

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12-33

The ROP based
on a normal
distribution of lead
time demand

LO 12.11

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12-34

ROP = d  LT + z d LT
where
z = Number of standard deviations
d = Average demand per period (per day, per week)

 d = The stdev. of demand per period (same time units as d )
LT = Lead time (same time units as d )
Note: If only demand is variable, then  dLT =  d

LO 12.11

LT

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12-35

ROP = d  LT + zd LT
where
z = Number of standard deviations
d = Demand per period (per day, per week)

 LT = The stddev. of lead time (same time units as d )
LT = Average lead time (same time units as d )
Note: If only lead time is variable, then  dLT = d LT

LO 12.11

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McGraw-Hill Education.

12-36

 Fixed-order-interval (FOI) model
 Orders are placed at fixed time intervals
 Reasons for using the FOI model
 Supplier’s policy may encourage its use
 Grouping orders from the same supplier can produce savings in
shipping costs
 Some circumstances do not lend themselves to continuously
monitoring inventory position

LO 12.12

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12-37

Fixed Quantity

Fixed Interval

LO 12.12

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12-38

Expected demand
Amount = during protection + Safety − Amount on hand
to Order
at reorder ti me
stock
interval
= d (OI + LT) + z d OI + LT − A
where
OI = Order interval (length of time between orders)
A = Amount on hand at reorder ti me

LO 12.12

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McGraw-Hill Education.

12-39

 Single-period model
 Model for ordering of perishables and other items with limited
useful lives
 Shortage cost
 Generally, the unrealized profit per unit
 Cshortage = Cs = Revenue per unit – Cost per unit
 Excess cost
 Different between purchase cost and salvage value of items left
over at the end of the period
 Cexcess = Ce = Cost per unit – Salvage value per unit

LO 12.13

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McGraw-Hill Education.

12-40

 The goal of the single-period model is to identify the order

quantity that will minimize the long-run excess and
shortage costs
 Two categories of problem:
 Demand can be characterized by a continuous distribution

 Demand can be characterized by a discrete distribution

LO 12.13

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12-41

Cs
Service level =
C s + Ce
where
Cs = shortage cost per unit
Ce = excess cost per unit
Ce

Cs

Service level
Quantity
So
Balance Point

LO 12.13

So =Optimum
Stocking Quantity

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McGraw-Hill Education.

12-42

Aggregate Planning
and Master
Scheduling

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written consent of McGraw-Hill Education.

11-1

You should be able to:
LO 11.1
LO 11.2
LO 11.3
LO 11.4
LO 11.5
LO 11.6
LO 11.7
LO 11.8

Explain what aggregate planning is and how it is useful
Identify the variables decision makers have to work with in
aggregate planning
Describe some of the strategies that can be used for meeting
uneven demand
Describe some of the graphical and quantitative techniques
planners use
Prepare aggregate plans and compute their costs
Discuss aggregate planning in services
Disaggregate an aggregate plan
Describe the master scheduling process and explain its
importance
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11-2

 Aggregate planning
 Intermediate-range capacity planning that typically

covers a time horizon of 2 to up to 18 months
 Useful for organizations that experience seasonal or
other variations in demand
 Goal:
 Achieve a production plan that will effectively utilize the

organization’s resources to satisfy demand

LO 11.1

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McGraw-Hill Education.

11-3

LO 11.1

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McGraw-Hill Education.

11-4

 Why do organizations need to do aggregate planning?
 Planning
 It takes time to implement plans
 Strategic
 Aggregation is important because it is not possible to predict
with accuracy the timing and volume of demand for individual
items
 It is connected to the budgeting process
 It can help synchronize flow throughout the supply chain; it affects
costs, equipment utilization, employment levels, and customer
satisfaction

LO 11.1

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McGraw-Hill Education.

11-5

 The plan must be in units of measurement that can be

understood by the firm’s non-operations personnel


Aggregate units of output per month



Dollar value of total monthly output



Total output by factory



Measures that relate to capacity such as labor hours

LO 11.1

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McGraw-Hill Education.

11-6

 Most organizations use rolling 3, 6, 9, and 12

month forecasts
 Forecasts are updated periodically, rather than relying

on a once-a-year forecast
 This allows planners to take into account any changes in
either expected demand or expected supply and to
develop revised plans

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11-7

 Strategies to counter variation:
 Maintain a certain amount of excess capacity to handle increases in
demand
 Maintain a degree of flexibility in dealing with changes
 Hiring temporary workers
 Using overtime
 Wait as long as possible before committing to a certain level of
supply capacity
 Schedule products or services with known demands first
 Wait to schedule other products until their demands become
less uncertain

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McGraw-Hill Education.

11-8

Forecast of
aggregate
demand for the
intermediate
range

Develop a
general plan to
meet demand
requirements

Update the
aggregate plan
periodically
(e.g., monthly)

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11-9

 Aggregate planners are concerned with the
 Demand quantity
 If demand exceeds capacity, attempt to achieve balance by
altering capacity, demand, or both
 Timing of demand
 Even if demand and capacity are approximately equal, planners
still often have to deal with uneven demand within the planning
period

LO 11.2

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McGraw-Hill Education.

11-10

 Resources
 Workforce/production rates
 Facilities and equipment
 Demand forecast
 Policies
 Workforce changes
 Subcontracting
 Overtime
 Inventory levels/changes
 Back orders

LO 11.2

 Costs
 Inventory carrying
 Back orders
 Hiring/firing
 Overtime
 Inventory changes
 Subcontracting

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11-11

 Total cost of a plan
 Projected levels of
 Inventory
 Output

 Employment
 Subcontracting
 Backordering

LO 11.2

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11-12

 Proactive
 Alter demand to match capacity

 Reactive
 Alter capacity to match demand

 Mixed
 Some of each

LO 11.2

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McGraw-Hill Education.

11-13

 Pricing
 Used to shift demand from peak to off-peak
periods
 Price elasticity is important
 Promotion
 Advertising and other forms of promotion
 Back orders
 Orders are taken in one period and deliveries
promised for a later period
 New demand
 Create new demand to absorb excess capacity
generated due to peak time demands

LO 11.2

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McGraw-Hill Education.

11-14

 Hire and layoff workers
 Overtime/slack time
 Part-time workers
 Inventories

 Subcontracting

LO 11.2

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McGraw-Hill Education.

11-15

Maintain a level workforce
2. Maintain a steady output rate
3. Match demand period by period
4. Use a combination of decision variables
1.

LO 11.3

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McGraw-Hill Education.

11-16

 Level capacity strategy:
 Maintaining a steady rate of regular-time output while

meeting variations in demand by a combination of
options:
 Inventories, overtime, part-time workers, subcontracting,

and back orders

 Chase demand strategy:
 Matching capacity to demand; the planned output for a

period is set at the expected demand for that period

LO 11.3

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McGraw-Hill Education.

11-17

 Capacities are adjusted to match demand

requirements over the planning horizon
 Advantages
 Investment in inventory is low
 Labor utilization in high

 Disadvantages
 The cost of adjusting output rates and/or workforce levels

LO 11.3

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McGraw-Hill Education.

11-18

 Capacities are kept constant over the planning

horizon
 Advantages
 Stable output rates and workforce

 Disadvantages
 Greater inventory costs
 Increased overtime and idle time
 Resource utilizations vary over time

LO 11.3

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McGraw-Hill Education.

11-19

 General procedure:
1. Determine demand for each period
2. Determine capacities for each period
3. Identify pertinent company or departmental policies

4. Determine unit costs
5. Develop alternative plans and costs
6. Select the plan that best satisfies objectives. Otherwise return to step 5.

LO 11.4

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McGraw-Hill Education.

11-20

 Trial-and-error approaches consist of developing simple

tables or graphs that enable planners to visually compare
projected demand requirements with existing capacity
 Alternatives are compared based on their total costs
 Disadvantage of such an approach is that it does not
necessarily result in an optimal aggregate plan

LO 11.4

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McGraw-Hill Education.

11-21

Period

1

2

3

4

5

Total

Forecast
Output
Regular time
Overtime
Subcontract
Output – Forecast
Inventory
Beginning
Ending
Average
Backlog
Costs Output
Regular
Overtime
Subcontract
Hire/Lay of
Inventory
Back orders
Total

TABLE 11.4 Worksheet/spreadsheet
LO 11.4

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McGraw-Hill Education.

LO 11.4

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McGraw-Hill Education.

11-23

 Linear programming models
 Methods for obtaining optimal solutions to problems

involving the allocation of scarce resources in terms of
cost minimization or profit maximization.
 Simulation models
 Computerized models that can be tested under different

scenarios to identify acceptable solutions to problems

LO 11.4

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McGraw-Hill Education.

11-24

LO 11.5

11-25

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McGraw-Hill Education.

Period

1

2

3

4

5

6

Total

Forecast

200

200

300

400

500

200

1,800

Costs
Output
Regular time = $2 per skateboard
Overtime
= $3 per skateboard
Subcontract = $6 per skateboard
Inventory
= $1 per skateboard per period on average inventory
Back orders
= $5 per skateboard per period
Planners for a company that makes several models of skateboards are about to
prepare an aggregate plan that will cover six periods.

They want to evaluate a plan that calls for a steady rate of regular-time output,
mainly using inventory to absorb the uneven demand but allowing some backlog.
Overtime and subcontracting are not used because they want steady output.
They intend to start with zero inventory on hand in the first period.

LO 11.5

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McGraw-Hill Education.

11-26

Period

1

2

3

4

5

6

Total

Forecast

200

200

300

400

500

200

1,800

Regular time

300

300

300

300

300

300

1,800

Overtime

—

—

—

—

—

—

Subcontract

—

—

—

—

—

—

100

100

0

(100)

(200)

100

Beginning

0

100

200

200

100

0

Ending

100

200

200

100

0

0

Average

50

150

200

150

50

0

600

0

0

0

0

100

0

100

Output

Inventory
Output 2 Forecast

0

Inventory

Backlog

LO 11.5

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McGraw-Hill Education.

11-27

Period

1

2

3

4

5

6

Total

Regular time

$600

$600

$600

$600

$600

$600

Overtime

—

—

—

—

—

—

Subcontract

—

—

—

—

—

—

Hire/Layoff

—

—

—

—

—

—

Inventory

$50

$150

$200

$150

$50

$0

$600

Backlog

$0

$0

$0

$0

$500

$0

$500

$650

$750

$800

$750

$1,150

$600

$4,700

Costs
Output

Total

LO 11.5

$3,600

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McGraw-Hill Education.

11-28

Technique

Solution Approach

Characteristics

Spreadsheet

Heuristic (trial and
error)

Intuitively appealing, easy to understand;
solution not necessarily optimal

Linear programming

Optimizing

Computerized; linear assumptions not always
valid

Simulation

Heuristic (trial and
error)

Computerized model can be examined under a
variety of conditions

TABLE 11.7 Summary of mathematical planning techniques
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written consent of McGraw-Hill Education.

11-29

 Hospitals:
 Aggregate planning used to allocate funds, staff, and supplies to meet the

demands of patients for their medical services
 Airlines:
 Aggregate planning in this environment is complex due to the number of

factors involved
 Capacity decisions must take into account the percentage of seats to be
allocated to various fare classes in order to maximize profit or yield
 Restaurants:
 Aggregate planning in high-volume businesses is directed toward

smoothing the service rate, determining workforce size, and managing
demand to match a fixed capacity
 Can use inventory; however, it is perishable

LO 11.6

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McGraw-Hill Education.

11-30

 The resulting plan in services is a time-phased projection

of service staff requirements
 Aggregate planning in manufacturing and services is
similar, but there are some key differences:
1.

2.
3.
4.

LO 11.6

Demand for service can be difficult to predict
Capacity availability can be difficult to predict
Labor flexibility can be an advantage in services
Services occur when they are rendered

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11-31

 Yield management
 An approach to maximizing revenue by using a strategy

of variable pricing; prices are set relative to capacity
availability
 During periods of low demand, price discounts are
offered
 During periods of peak demand, higher prices are
charged
 Users of yield management include
 Airlines, restaurants, hotels, restaurants

LO 11.6

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McGraw-Hill Education.

11-32

Aggregate
Plan

Disaggregation

Master
Schedule

LO 11.7

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McGraw-Hill Education.

11-33

 Master schedule:
 The result of disaggregating an aggregate plan
 Shows quantity and timing of specific end items for a

scheduled horizon

LO 11.7

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McGraw-Hill Education.

11-34

 The heart of production planning and control
 It determines the quantity needed to meet demand from all sources
 It interfaces with
 Marketing
 Capacity planning
 Production planning

 Distribution planning

 Provides senior management with the ability to determine whether

the business plan and its strategic objectives will be achieved

LO 11.8

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McGraw-Hill Education.

11-35

Period

1

2

“frozen”
(firm or
fixed)

LO 11.8

3

4

5

“slushy”
somewhat
firm

6

7

8

9

“liquid”
(open)

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11-36

Inputs

Outputs

Beginning inventory
Forecast

Customer orders

LO 11.8

Projected inventory
Master
Scheduling

Master production schedule
Uncommitted inventory

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McGraw-Hill Education.

11-37

 The master production schedule (MPS) is one of the

primary outputs of the master scheduling process
 Once a tentative MPS has been developed, it must be validated

 Rough cut capacity planning (RCCP) is a tool used in

the validation process
 Approximate balancing of capacity and demand to test the

feasibility of a master schedule
 Involves checking the capacities of production and warehouse

facilities, labor, and vendors to ensure no gross deficiencies exist
that will render the MPS unworkable

LO 11.8

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McGraw-Hill Education.

11-38

LO 11.8

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McGraw-Hill Education.

11-39

LO 11.8

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McGraw-Hill Education.

11-40

LO 11.8

Week

Inventory
from
Previous
Week

Requirements

Inventory
before MPS

1

64

33

31

31

2

31

30

1

1

3

1

30

-29

4

41

30

11

5

11

40

-29

6

41

40

1

7

1

40

-39

+

70

=

31

8

31

40

-9

+

70

=

61

(70)
MPS

+

70

Projected
Inventory

=

41
11

+

70

=

41
1

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McGraw-Hill Education.

11-41

LO 11.8

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McGraw-Hill Education.

11-42

LO 11.8

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McGraw-Hill Education.

11-43

Name

Discussion 25

Description

25 points

Rubric Detail
Levels of Achievement
Criteria

Exceeds
Expectations

Meets
Expectation

Some
Expectations

Unsatisfactory

Quantity

5 to 6 points

3 to 4 points

1 to 2 points

0 to 0 points

Initial post and
two other posts
of substance.

Initial post and
one other post
of substance.

Initial post only.

Did not
participate.

5 to 6 points

3 to 4 points

1 to 2 points

0 to 0 points

Demonstrates
excellent
knowledge of
concepts, skills,
and theories
relevant to the
topic.

Demonstrates
knowledge of
concepts, skills,
and theories.

Demonstrates
satisfactory
knowledge of
concepts, skills,
and theories.

Did not
participate.

5 to 6 points

3 to 4 points

1 to 2 points

0 to 0 points

Discussion
post(s) exceed
expectations in
terms of support
provided and
extend the
discussion.

Discussion
post(s) meet
expectations in
terms of
support
provided.

Statements are
satisfactory in
terms of
support
provided.

Did not
participate.

6 to 7 points

4 to 5 points

1 to 2 points

0 to 0 points

Writing is well
organized, clear,
concise, and
focused; no
errors.

Some significant
but not major
errors or
omissions in
writing
organization,
focus, and
clarity.

Numerous
significant
errors or
omissions in
writing
organization,
focus, and
clarity.

Did not
participate.

Content

Support

Writing

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