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Inventory Management

This book is a part of the course by Jaipur National University, Jaipur.This book contains the course content for Inventory Management.

JNU, JaipurFirst Edition 2013

The content in the book is copyright of JNU. All rights reserved.No part of the content may in any form or by any electronic, mechanical, photocopying, recording, or any other means be reproduced, stored in a retrieval system or be broadcast or transmitted without the prior permission of the publisher.

JNU makes reasonable endeavours to ensure content is current and accurate. JNU reserves the right to alter the content whenever the need arises, and to vary it at any time without prior notice.

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Index

ContentI. ................................................II

List of FiguresII. ................................ VIII

List of TablesIII. ....................................X

AbbreviationIV. ................................... XI

Case StudyV. ........................................136

BibliographyVI. ...................................147

Self Assessment AnswersVII. .............151

Book at a Glance

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Contents

Chapter I ...........................................................................................................1Planning Foundations .....................................................................................1Aim ....................................................................................................................1Objectives ..........................................................................................................1Learning outcome ............................................................................................11.1 Defining Inventory .....................................................................................21.2 Nature of Inventory ...................................................................................4 1.2.1 Raw Materials ...............................................................................5 1.2.2 Work-In-Process ............................................................................6 1.2.3 Finished Goods .............................................................................6 1.2.4 MRO Goods Inventory .................................................................61.3 Types Of Inventory ....................................................................................7 1.3.1 Transit Inventory ...........................................................................7 1.3.2 Buffer Inventory ............................................................................8 1.3.3 Anticipation Inventory ..................................................................8 1.3.4 Cycle Inventory .............................................................................91.4 Top 5 Principles of Inventory Management ............................................91.5 Inventory Planning: Basic Concepts ......................................................121.6 Need for Planning ....................................................................................141.7 Reasons for Maintaining Raw Material Inventory ...............................161.8 Resource Inventory Management...........................................................171.9 Production Planning ...............................................................................181.10 Planning in Inventory Control .............................................................191.11 Hierarchy of Planning ............................................................................191.12 Business Needs ......................................................................................201.13 An effective Material Organisational Structure ..................................211.14 Methods of Valuation of Inventory .......................................................211.15 Ratio Analysis in Business ....................................................................231.16 Inventory on the Income Statement ....................................................25 1.16.1 Inventory on the Balance sheet ................................................26Summary .........................................................................................................27References .......................................................................................................28Recommended Reading .................................................................................28Self Assessment ..............................................................................................29

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Chapter II .......................................................................................................31Long Range Planning and Forecasting ........................................................31Aim ..................................................................................................................31Objectives ........................................................................................................31Learning outcome ..........................................................................................312.1 Introduction .............................................................................................322.2 Basics of Strategic Planning ....................................................................332.3 Creation of Strategic Plan ......................................................................332.4 Strategy of Team Development and Business Plans..............................362.5 Concepts of Business Planning ...............................................................372.6 Forecasting Techniques ...........................................................................37 2.6.1 Forecasting Planning and Goals ..................................................38 2.6.2 Principles of Forecasting .............................................................39 2.6.3 Demand Patterns .........................................................................39 2.6.4 Reasons for Forecasting ..............................................................40 2.6.5 Time for Forecasts.......................................................................412.7 Methods of Forecasting ...........................................................................42 2.7.1 Qualitative Forecasting Methods ................................................43 2.7.2 Quantitative Forecasting Methods ..............................................44 2.7.2.1 Time Series Forecasting Methods .................................452.8 Measuring Forecast Errors .....................................................................492.9 Criteria for Selecting a Forecasting Method .........................................50Summary .........................................................................................................51References .......................................................................................................51Recommended Reading .................................................................................52Self Assessment ...............................................................................................53

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Chapter III ......................................................................................................55Sales and Operations Planning ....................................................................55Aim ..................................................................................................................55Objectives ........................................................................................................55Learning outcome ..........................................................................................553.1 Basics of Sales and Operations Planning ......................................................... 56 3.1.1 Approaches of Sales and Operation Planning .............................573.2 Definitions – Sales and Operation Planning ..........................................593.3 Importance of S and OP Process ...........................................................613.4 Operations Planning for S and OP Process ..........................................623.5 Theory of Constraints Affects Sales and Operations Planning ............64 3.5.1 Systems as Chains .......................................................................64 3.5.2 Throughput, Inventory, and Operating Expense .........................66 3.5.3 The Five Focusing Steps .............................................................673.6 Formal Work on the Case Study ............................................................68Summary .........................................................................................................70References .......................................................................................................70Recommended Reading .................................................................................71Self Assessment ...............................................................................................72

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Chapter IV ......................................................................................................75Making Effective Presentations ...................................................................75Aim ..................................................................................................................75Objectives ........................................................................................................75Learning outcome ..........................................................................................754.1 Basic Skills Required for Making Effective Presentations ...................76 4.1.1 Tools for Effective Presentations ................................................774.2 Planning a Presentation ..........................................................................784.3 Preparation for Sales and Operation Plan ...........................................86 4.3.1 Develop a Proposed Sales and Operations Planning Policy and Meeting Agenda. .................................................................90 4.3.2 Implement Full Sales and Operations Planning ..........................91Summary .........................................................................................................96References .......................................................................................................96Recommended Reading .................................................................................97Self Assessment ..............................................................................................98

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Chapter V ......................................................................................................100Master Scheduling .......................................................................................100Aim ................................................................................................................100Objectives ......................................................................................................100Learning outcome ........................................................................................1005.1 Introduction ............................................................................................101 5.1.1 Master Production Scheduling .................................................101 5.1.2 Objectives of Master Production Scheduling ..........................102 5.1.3 Functions of Master Production Schedule ................................103 5.1.4 Time Interval and Planning Horizon for MPS .........................104 5.1.5 Time Fences in Master Production Schedules .........................104 5.1.6 Guidelines for Master Scheduling ...........................................105 5.1.7 Updating of MPS .....................................................................105 5.1.8 MPS in Produce-to-stock and Produce-to-order Firms .............105 5.1.9 Length of Planning Horizon of MPS .......................................1065.2 Identify the Components Necessary to Develop a Master Production Schedule (MPS) ..................................................................106 5.2.1 Available-To-Promise (ATP) .....................................................107 5.2.2 MPS time horizon .....................................................................108 5.2.3 The Four Fundamentals ............................................................1095.3 Describe and Develop the Master Schedule (MS) ...............................111 5.3.1 Inputs to MPS ..........................................................................112 5.3.2 Outputs of MPS ........................................................................112 5.3.3 MPS Terminology ....................................................................113 5.3.4 Misconception about MPS ......................................................114 5.3.5 The Logic of Master Schedule ..................................................114 5.3.6 Twelve Principles of Master Scheduling ..................................117 5.3.7 Importance of Master Scheduling in Production Plan .............118Summary .......................................................................................................120References .....................................................................................................120Recommended Reading ...............................................................................121Self Assessment .............................................................................................122

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Chapter VI ....................................................................................................124Future Planning Topics ................................................................................124Aim ................................................................................................................124Objectives ......................................................................................................1246.1 Identify and discuss emerging topics in planning ...............................1256.2 Emerging Trends in Inventory Management ......................................125 6.2.1 Inventory Optimization (IO) .....................................................127 6.2.2 Inventory Optimization (IO) Technologies ...............................127 6.2.3 Just In Time (JIT) ......................................................................128 6.2.4 The Future of Inventory Management in the Era of E-Commerce .............................................................................1296.3 Inventory Modelling Technology ..........................................................130 6.3.1 Modelling Demand Behaviour ..................................................130Summary .......................................................................................................132References ....................................................................................................132Recommended Reading ...............................................................................133Self Assessment .............................................................................................134

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List of Figures

Fig. 1.1 Summary of purchasing plan ................................................................4Fig. 1.2 Nature of inventory goods ....................................................................5Fig. 1.3 Types of inventory ................................................................................7Fig. 1.4 Five principles of inventory management ..........................................10Fig. 1.5 The 5S .................................................................................................11Fig. 1.6 Functions of raw material inventory management .............................12Fig. 1.7 Models of inventory management approach ......................................12Fig. 1.8 EOQ model .........................................................................................13Fig. 1.9 Reasons for planning ..........................................................................15Fig. 1.10 Resource management as a process ..................................................18Fig. 1.11 Hierarchy in interactive inventory management ...............................20Fig. 1.12 Hierarchy in organisational structure ...............................................20Fig. 1.13 Elements of an effective material management organisation ...........21Fig. 1.14 Methods of valuation of inventory methods .....................................22Fig. 1.15 Ratio assessment of Inventory in an organisation ...........................23Fig. 2.1 Step process of strategic plan .............................................................33Fig. 2.2 Demand patterns of forecasting ..........................................................40Fig. 2.3 Time for forecasts ...............................................................................42Fig. 2.4 Methods of forecasting techniques .....................................................43Fig. 2.5 Types of qualitative methods ..............................................................43Fig. 2.6 Types of quantitative methods ............................................................45Fig. 3.1 Plans included in sales and operations planning ................................56Fig. 3.2 Two approaches to sales and operation planning ...............................58Fig. 3.3 Approaches to production plan ...........................................................59Fig. 3.4 The sales and operations planning framework ...................................61Fig. 3.5 Benefits of sales and operation planning ............................................62Fig. 3.6 The sales and operations planning implementation ............................63Fig. 3.7 Theory of constraints ..........................................................................65Fig. 3.8 Three Dimensions in theory of constraints .........................................66Fig. 3.9 Three options for system improvement ..............................................67Fig. 4.1 Tools of effective presentation ............................................................77Fig. 4.2 The P-I diagram ..................................................................................79Fig. 4.3 Four factors required to analyse audience ..........................................80Fig. 4.4 Organising one’s thoughts ..................................................................81Fig. 4.5 Stating sub-points in the presentation .................................................82Fig. 4.6 Uses of handouts in presentation ........................................................83Fig. 4.7 Functions of introduction....................................................................84Fig. 4.8 Steps taken to plan a presentation .......................................................86Fig. 4.9 Measurement Standard reviewed at each meeting .............................92Fig. 4.10 Factors of Rough Cut Capacity Planning .........................................93Fig. 4.11 Key Operating objectives in Rough Cut Capacity Planning ............94Fig. 5.1 Four sections of time fence ...............................................................104

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Fig. 5.2 Planned BOM ...................................................................................107Fig. 5.3 Multiple MPS Levels ........................................................................107Fig. 5.4 Available To Promise ........................................................................108Fig. 5.5 Four Fundamentals ...........................................................................111Fig. 5.6 Matching demand through MPS .......................................................118

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List of Tables

Table 2.1 Time for forecast .............................................................................41Table 2.2 Components of time series demand .................................................46Table 3.1 Throughput, Inventory and operating expense .................................66Table 4.1 Educational steps in Sales and Operation Planning .........................89Table 5.1 MPS Table ......................................................................................109Table 5.2 Format of MPS Table .....................................................................113Table 5.3 MPS Table ......................................................................................115Table 5.4 Scheduling planned order release for Product 2400A base on Master Schedule ........................................................................116Table 6.1 Different types of inventory management and control techniques ..........................................................................128

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Abbreviations

APICS - Advancing Productivity, Innovation and Competitive SuccessAPS - Advanced Planning Software systemsATP - Available-To-PromiseCEO - ChiefExecutiveOfficerCFE - Cumulative Sum of Forecast ErrorsCPG - Consumer Packages GoodsCPU - Central Processing UnitCRT - Cathode Ray TubeEOQ - Economic Order QuantityERP - Enterprise Resource PlanningFIFO - First-In-First-OutGUI - Graphical User InterfaceHPCL - Hindustan Petroleum Corporation LimitedIO - Inventory OptimisationJIT - Just in TimeLA - Los AngelesLFL - Lot-Far-LotLIFO - Last-In-First-OutMAD - Mean Absolute DeviationMAPE - Mean Absolute Percent ErrorMNCs - Multinational Companies MPS - Master Production ScheduleMRO - Maintenance Repair and Operating SuppliesMRP - Material Requirement PlanningMSE - Mean Squared ErrorPOS - Point-Of-Sale S&OP - Sales and Operation PlanningSKU - Stock Keeping Unit SMART - Specific,measurable,possible,relevant,andtime-framedSWOT - Strengths, Weaknesses, Opportunities, and ThreatsT, I and O E - Throughput, Inventory, and Operating ExpenseTOC - Theory of ConstraintsVMI - Vendor Managed Inventory WIP - Work In Progress

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Chapter I

Planning Foundations

Aim

The aim of this chapter is to:

discuss the meaning of inventory •

state different types of inventory in business•

illustrate the nature of inventory in business•

Objectives

The objectives of this chapter are to:

highlight the principles of inventory management •

state different methods of inventory valuation •

clarify the different assessment ratios of inventory in business•

Learning outcome

At the end of this chapter, you will be able to:

understand the concepts and procedures in inventory management •

explainthecrucialroleofinventoryinbusinessprofitability•

di• scuss the formulation and application of methods for inventory

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1.1 Defining InventoryInventory is one of the new, noticeable and concrete aspects for many small businessowners.Rawmaterials,goodsinprocessandfinishedgoodsallrepresentvarious forms of inventory. Each type represents money tied up until the inventory leaves the company as purchased products. Similarly, merchandise stocks in a retailstorecontributetoprofitsonlywhentheirsaleputsmoneyintothecashregister. Inventory is an idle stock of physical goods that contain economic value, and are held in various forms by an organisation in its custody awaiting packing, processing, transformation, use or sale in future.

Literally, inventory refers to stocks of anything necessary to do business. These stocks represent a large portion of the business investment and must be well managedinordertomaximiseprofits.Infact,manysmallbusinessescannotabsorbthe types of losses arising from poor inventory management. Unless inventories arecontrolled,theyareunreliable,inefficientandcostly.

Inventory is a list of goods and materials or those goods and materials themselves, held available in stock by a business. Inventory are held in order to manage and hide from the customer the fact that, manufacture delay is longer than delivery delay, and also to ease the effect of imperfections in the manufacturing process thatlowerproductionefficienciesifproductioncapacitystandsidleforlackofmaterials.

Any organisation which is into production, trading, sale and service of a product will necessarily hold stock of various physical resources to aid in future consumption and sale. While inventory is a necessary evil of any such business, it may be noted that the organisations hold inventories for various reasons, which include speculative purposes, functional purposes, physical necessities etc.

From the above definition the following points stand outwith reference toinventory:


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All organisations engaged in production or sale of products hold

inventory in one form or other.

Inventory can be in complete or incomplete state.

Inventory is held to facilitate future consumption, sale or further processing/value addition.

All inventoried resources have economic value and can be considered

as assets of the organisation.

Oneofthemostsignificantaspectsofinventorycontrolistohavetheitemsinstock at the moment they are required. This includes going into the market to buy the goods early enough to ensure delivery at the proper time. Thus, buying requires advance planning to determine inventory needs for each time period and thenmakingthecommitmentswithoutprocrastination.Forinstance,aretailfirmmust formulate a plan to ensure the sale of the greatest number of units. Similarly, a manufacturing business must formulate a plan to ensure enough inventory is onhandforproductionofafinishedproduct.Insummary,thepurchasingplandetails will be as follows:

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When commitement should be placed

Whenthefirstdeliveryshouldbereceived

When the inventory should be peaked

When reorders should not be placed

When the item should no longer be in stock

Purchase Plan

Details

Fig.1.1 Summary of purchasing plan

Well planned purchases affect the price, delivery and availability of products for sale.

1.2 Nature of InventoryInventory of materials occurs at various stages and departments of an organisation. A manufacturing organisation holds inventory of raw materials and consumables requiredforproduction.Italsoholdsinventoryofsemi-finishedgoodsatvariousstages in the plant with various departments. Finished goods inventory is held at plant,FGStores,distributioncentresetc.Furtherbothrawmaterialsandfinishedgoods those which are in transit at various locations also form a part of inventory depending upon who owns the inventory at the particular juncture. Finished goods inventory is held by the organisation at various stocking points or with dealers and stockiest until it reaches the market and end customers.

Besidesrawmaterialsandfinishedgoods,organisationsalsoholdinventoriesofspare parts to service the products. Defective products, defective parts and scrap also form a part of inventory as long as these items are inventoried in the books of the company and have economic value. Generally, inventory types can be groupedintofourclassifications:


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Raw Materials

Work in Progress

Finished Goods

MRO Goods

Nature of Inventory

Goods

Fig. 1.2 Nature of inventory goods

1.2.1 Raw MaterialsRaw materials are inventory items which are used in the manufacturer’s conversion process to produce components, subassemblies, or finished products.Theseinventory itemsmaybeobjectsorelements that thefirmhaspurchased fromoutside the organisation. They also may be commodities or extracted materials that thefirmoritssubsidiaryhasproducedorextracted.Eveniftheitemispartiallyassembledorisconsideredafinishedgoodtothesupplier, thepurchasermayclassifyitasarawmaterialifhisorherfirmhadnoinputintoitsproduction.Usually, raw materials are commodities such as ore, grain, minerals, petroleum, chemicals, paper, wood, paint, steel, and food items. However, items such as nuts and bolts, ball bearings, key stock, casters, seats, wheels, and even engines may beconsideredasrawmaterialsiftheyarepurchasedfromoutsidethefirm.

Thebill-of-materialsfileinamaterialrequirementsplanningsystem(MRP)ora manufacturing resource planning (MRP II) system utilises a tool known as a product structure tree to clarify the relationship among its inventory items and provideabasisforfillingoutor“exploding,”themasterproductionschedule.Consider an example of a rolling cart. This cart consists of a top that is pressed from a sheet of steel, a frame formed from four steel bars, and a leg assembly consisting of four legs, rolled from sheet steel, each with a caster attached.

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Commonly, raw materials are used in the manufacture of components. These components are then incorporated into thefinal product or becomepart of asubassembly. Then, the subassemblies are used to manufacture or assemble the finalproduct.Apartthatgoesintomakinganotherpartisknownasacomponent,while the part it goes into is known as its parent. Any item which does not have a component is regarded as a raw material or purchased item. From the product structure tree it is clear that the rolling cart’s raw materials are steel, bars, wheels, ball bearings, axles, and caster frames.

1.2.2 Work-In-ProcessWork-in-process (WIP) is made up of all the materials, parts (components), assemblies, and subassemblies that are being processed or are waiting to be processed within the system. This generally includes all material from raw material that has been released for initial processing up to material that has been completely processed and is awaitingfinal inspection and acceptance beforeinclusioninfinishedgoods.

Any item that has a parent but is not a raw material is considered to be work-in-process. A glance at the rolling cart product structure tree example reveals that work-in-process in this situation consists of tops, leg assemblies, frames, legs, and casters. Actually, the leg assembly and casters are labelled as subassemblies because the leg assembly consists of legs and casters and the casters are assembled from wheels, ball bearings, axles, and caster frames.

1.2.3 Finished GoodsAfinishedgoodisacompletedpartthatisreadyforacustomerorder.Therefore,finishedgoodsinventoryisthestockofcompletedproducts.Thesegoodshavebeeninspectedandhavepassedfinalinspectionrequirementssothattheycanbetransferredoutofwork-in-processandintofinishedgoodsinventory.Fromthispoint,finishedgoodscanbesolddirectlytotheirfinaluser,soldtoretailers,soldto wholesalers, sent to distribution centres or held in anticipation of a customer order.

Anyitemthatdoesnothaveaparentcanbeclassifiedasafinishedgood.Bylooking at the rolling cart product structure tree example one can determine that thefinishedgoodinthiscaseisacart.

1.2.4 MRO Goods InventoryMaintenance, repair, and operating supplies, or MRO goods, are items that are used to support and maintain the production process and its infrastructure. These goods are usually consumed as a result of the production process but are not directly apartofthefinishedproduct.ExamplesofMROgoodsincludeoils,lubricants,coolants, janitorial supplies, uniforms, gloves, packing material, tools, nuts, bolts, screws,shimstock,andkeystock.Evenofficesuppliessuchasstaples,pensandpencils, copier paper, and toner are considered part of MRO goods inventory.


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1.3 Types Of InventoryInventoriescanbefurtherclassifiedaccordingtothepurposetheyserve.Thesetypes include transit inventory, buffer inventory, anticipation inventory, decoupling inventory, cycle inventory, and MRO goods inventory. Some of these also are know by other names, such as speculative inventory, safety inventory, and seasonal inventory.

Transit Inventory

Types of Inventory

Buffer Inventory

Anticipation Inventory

Cycle Inventory

MRO Goods

Inventory

Fig.1.3 Types of inventory

1.3.1 Transit InventoryTransit inventories are the ones that need to transport items or material from one location to another, and from the fact that there is some transportation time involved in getting from one location to another. Sometimes this is referred to as pipeline inventory. Merchandise shipped by truck or rail can sometimes take days or even weeks to go from a regional warehouse to a retail facility. Big companies such as automobile manufacturers, employ freight consolidators to pool their transit inventories coming from various locations into one shipping source in order to take advantage of economies of scale. Of course, this can greatly increase the transit time for these inventories, hence an increase in the size of the inventory intransit.TakethecaseofHPCL,thetransportsaredonefromrefinerytothecustomer through different modes of transport i.e., Pipeline, Roadways (Tankers), Shipping,etc.thetimetakenforgoodstoreachfromrefinerytothecustomeriscalled transit inventory.

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1.3.2 Buffer InventorySome inventory used to protect against the uncertainties of supply and demand, as well as unpredictable events such as poor delivery reliability or poor quality of a supplier’s products. These inventory cushions are often referred to as safety stock. Safety stock or buffer inventory is any amount held on hand that is over and above that currently needed to meet demand. Generally, the higher the level ofbufferinventory,thebetterthefirm’scustomerservice.Thisoccursbecausethefirmsuffersfewer“stock-outs”(whenacustomer’sordercannotbeimmediatelyfilledfromexistinginventory)andhaslessneedtobackordertheitem,makethecustomer wait until the next order cycle, or even worse, causes the customer to leaveempty-handedtofindanothersupplier.Obviously,thebetterthecustomerservice the greater the likelihood of customer satisfaction.

1.3.3 Anticipation InventorySomefirmswillpurchaseandholdinventorythatisinexcessoftheircurrentneedin expectation of a possible future event. Such events may include a price increase, a seasonal increase in demand, or even an impending labour strike. This tactic is commonly used by retailers, who routinely build up inventory months before the demand for their products will be unusually high (i.e., at Halloween, Christmas, or the back-to-school season). For manufacturers, anticipation inventory allows them to build up inventory when demand is low (also keeping workers busy during slack times) so that when demand picks up the increased inventory will be slowlydepletedandthefirmdoesnothavetoreactbyincreasingproductiontime(along with the subsequent increase in hiring, training, and other associated labour costs).Therefore,thefirmhasavoidedbothexcessiveovertimeduetoincreaseddemand and hiring costs due to increased demand. It also has avoided layoff costs associated with production cutbacks, or worse, the idling or shutting down offacilities.Thisprocessissometimescalled“smoothing”becauseitsmoothesthepeaksandvalleysindemand,allowingthefirmtomaintainaconstantlevelof output and a stable workforce.

Case I: Let’s take a case of Dulux paint, in paint industry there will be a seasonality of demand. Which means their production will be throughout the year and distribution will be on peak time i.e., market demand will be more in the month of March to May and June to November, this will be done for smooth distribution. Very rarely, if ever, will one see a production facility where every machine in the process produces at exactly the same rate. In fact, one machine may process parts several times faster than the machines in front of or behind it. Yet, if one walks through the plant it may be seen that all machines are running smoothly at the same time. It also could be possible that while passing through the plant, one notices that several machines are under repair or are undergoing some form of preventive maintenance. Even so, this does not seem to interrupt the flowofwork-in-processthroughthesystem.Thereasonforthisistheexistenceof an inventory of parts between machines, a decoupling inventory that serves as a shock absorber, cushioning the system against production irregularities. As such it“decouples”ordisengages theplant’sdependenceupon thesequential


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requirements of the system (i.e., one machine feeds parts to the next machine).The moreinventoryafirmcarriesasadecouplinginventorybetweenthevariousstagesin its manufacturing system (or even distribution system), the less coordination is needed to keep the system running smoothly. Naturally, logic would dictate that aninfiniteamountofdecouplinginventorywouldnotkeepthesystemrunningin peak form. A balance can be reached that will allow the plant to run relatively smoothlywithoutmaintaininganabsurdlevelofinventory.Thecostofefficiencymust be weighed against the cost of carrying excess inventory so that there is an optimum balance between inventory level and coordination within the system.

Case II: Take a case of Book making industry. The manager knows that paper making machine will not be working after two days and production will stop because of that so, they will produce more quantity of papers in advance and when the machine is not working at that time binding will be done. As a result distribution will not be affected by stopping the production.

1.3.4 Cycle InventoryThose who are familiar with the concept of economic order quantity (EOQ) know that the EOQ is an attempt to balance inventory holding or carrying costs with the costs incurred from ordering or setting up machinery. When large quantities are ordered or produced, inventory holding costs are increased, but ordering/setup costs decrease. Conversely, when lot sizes decrease, inventory holding/carrying costs decrease, but the cost of ordering/setup increases since more orders/setups are required to meet demand. When the two costs are equal (holding/carrying costs and ordering/setup costs) the total cost (the sum of the two costs) is minimised. Cycle inventories, sometimes called lot-size inventories, result from this process. Usually, excess material is ordered and, consequently, held in inventory in an effort to reach this minimisation point. Hence, cycle inventory results from ordering in batches or lot sizes rather than ordering material strictly as needed.

1.4 Top 5 Principles of Inventory ManagementInventory management is the most integral part of any business, small or large .The principles of inventory management can be listed as under :

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Demand Forecasting

Warehouse Flow

Inventory Turns/Stock

Rotation

Cycle Counting

Process Auditing

Principles of Inventory Management

Fig. 1.4 Five principles of inventory management

Demand forecastingDependingontheindustry,inventoryranksinthetopfivebusinesscosts.Accuratedemand forecasting has the highest potential savings for any of the principles of inventory management. Both over supply and under supply of inventory can have critical business costs. Whether it is end-item stocking or raw component sourcing, the more accurate the forecast can be.

Establishing appropriate max-min management at the unique inventory line level, based on lead times and safety stock level help ensure that you have what when you need it. This also avoids costly overstocks. Idle inventory increases incremental costs due to handling and lost storage space for fast-movers.

Warehouse flowThe old concept of warehouses being dirty and unorganised is out dated and costly. Lean manufacturing concepts, including 5S have found a place in warehousing. Sorting, setting order, systemic cleaning, standardising, and sustaining the discipline ensure that no dollars are lost to poor processes.


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Sorting

Systemic Cleaning

StandardisingSustaining the

Discipline

Setting Order

Fig. 1.5 The 5S

The principles of inventory management are not any different from other industrial processes. Disorganisation costs money. Each process, from housekeeping to inventory transactions needs a formal, standardised process to ensure consistently outstanding results.

Inventory turns/stock rotationIn certain industries, such as pharmaceuticals, foodstuffs and even in chemical warehousing, managing inventory can be critical to minimising business costs. Inventory turns is one of the key metrics used in evaluating how effective your executionisoftheprinciplesofinventorymanagement.Definingthesuccesslevelforstockrotationiscriticaltoanalysingyourdemandforecastingandwarehouseflow.

Cycle countingOne of the key methods of maintaining accurate inventory is cycle counting. It helps measure the success of your existing processes and maintains accountability of potential error sources.There arefinancial implications to cycle counting.Some industries require periodic 100% counts. These are done through perpetual inventory count maintenance or through full-building counts.

Proactive One of the cornerstone principles of inventory management is to audit early and often.Errorsourceidentificationstartswithprocessaudits.Processauditsshouldoccur at each transactional step, from receiving to shipping and all inventory transactions in between.

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1.5 Inventory Planning: Basic ConceptsEvery organisation which is engaged in production, sales or trading of products, hold inventory in one or the other form. While production and manufacturing organisations hold rawmaterial inventories, finished goods and spare partsinventories, trading companiesmight hold only finished goods inventoriesdepending upon the business model.

Raw material inventory management essentially deals with two major functions, which are:

Inventory Planning

Inventory Tracking

Functions of Raw Material


Fig. 1.6 Functions of raw material inventory management

As inventory planners, their main job consists of analysing demand and deciding when to order and how much to order new inventories. Traditional inventory management approach consists of three models namely:

Economic Order Quantity (EOQ)

Continuous Order Model

Periodic System Model

Fig. 1.7 Models of inventory management approach


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EOQ (Economic Order Quantity): • Economic Order Quantity method determines the optimal order quantity that will minimise the total inventory cost. EOQ is a basic model and further models developed based on this model include Production Quantity Model and Quantity Discount Model.

Annual cost ($) Minimum

Total Annual Total Annual Cost

Annual Ordering Cost

Annual carrying Cost

Order Quantity

Fig. 1.8 EOQ model(Source: http://www.managementstudyguide.com/inventory-planning.htm)

EOQ for Production Lot: This model is also used to determine the order �size and the production lot for an item to be produced at one stage of production and stored as work in progress inventory to be supplied to the next state of production or to the customer.

Continuous Order Model:• Thismodelworksonfixedorderquantitybasiswhere a trigger forfixedquantity replenishment is releasedwhenever theinventory level reaches predetermined safety level and triggers re ordering.Periodic System Model:• This model works on the basis of placing order after afixedperiodoftime.

Example: Biotech. Co produces chemicals to sell to wholesalers. One of the raw materials it buys is sodium nitrate which is purchased at the rate of $22.50 per ton. Biotech’s forecasts show a estimated requirement of 5, 75,000 tons of sodium nitrate for the coming year. The annual total carrying cost for this material is 40% of acquisition cost and the ordering cost is $595. What is the Most Economical Order Quantity?

Solution: EOQ =

D = Annual DemandC = Carrying CostS = Ordering CostD = 5, 75,000 tonsC =0.40(22.50) = $9.00/Ton/YearS = $595/Order

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EOQ =

= 27,573.135 tons per Order

This model pre supposes certain assumptions as under:No safety stocks available in inventory.•No shortages allowed in order delivery.•Demandisatuniformrateanddoesnotfluctuate.•Lead time for order delivery is constant.•One order = One delivery (no shortages allowed)•This model does not take into account other costs of inventory such as stock •out cost, acquisition cost etc to calculate EOQ.

In this model, the demand increases for production the inventory gets depleted. When the inventory drops to a critical point the re order process gets triggered. Neworderisalwaysplacedforfixedquantities.Onreceiptofthedeliveryagainstthe order the inventory level goes up. In addition, by using this model, further data extrapolation is possible to determine other factors like how many orders are to be placed in a year and what is the time lapse between orders etc.

1.6 Need for PlanningEvery organisation would have to maintain inventory for various purposes. Optimum inventory management is the goal of every inventory planner. Over inventoryorunderinventorybothaffectfinancialimpactaswellaseffectbusinessopportunities.

Inventory holding is resorted to by organisations as hedge against various external and internal factors such as precaution, opportunity, a need and for speculative purposes.Planningisdefiningorganisationalgoals,establishingastrategyforreaching those goals and developing a comprehensive hierarchy of plans to integrate and coordinate activities. It can be either formal or informal, depending on the time frame and amount of documentation. Planning should be done for four reasons.

First planning coordinates effort by giving direction to managers and •non-managers. When all members of organisation understand where the organisation is going and what they should do to contribute to the objectives, they will coordinate their activities and cooperate with each other. On the other hand, various organisational members or their units might work against one another.


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Second planning reduces uncertainty by forcing managers to look ahead, •anticipate change and develop appropriate responses. If the environment never changes, there would be little need for planning. In that case everything can be spell out in some manual. Technological, social, political, economic, and legal changes are ever-present. The environment is too dynamic to left the organisation’s survival to chance.Third planning reduces redundancy. Coordination beforehand can uncover •theredundancyandwhenendsandmeansareclear,inefficienciesbecomeobvious.Fourth planning sets standards or objectives that facilitate control over the •process of achieving goals.

Set Control Standards

Provide Direction

Reduce the Impact of Change

Minimise Waste or

Redundancy

Reasons for Planning

Fig. 1.9 Reasons for planning

Planning is essential to: defineanorganisation’sgoalsandrequirementsfororganisationalstructure•and employees establish an overall strategy and objectives for leading and directing •develop a comprehensive hierarchy of plan and standards for controlling •organisation’s activities

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1.7 Reasons for Maintaining Raw Material Inventoryraw material inventory warehouses attached to the production facilitiesin many organisations. The raw materials, consumables, and packing materials are stored and issue for production on JIT (Just in Time)basis. The reasons for holding inventories can vary from case to case basis which can be reviewed as under:.

Meet variation in production demandThe sales, estimates, orders, and stocking patterns in an organisation keep changing .resulting in Production plan changes Accordingly the demand for raw material supplyforproductionvarieswiththeproductplanintermsofspecificSKU(Stock Keeping Unit) as well as batch quantities. Issuing the required quantity and item to production just in timemakes holding inventories at a nearby warehouse important.

Cater to cyclical and seasonal demandSome demand in market and supplies are seasonal depending upon various factors like seasons; festivals etc and past sales data help companies to anticipate a huge surge of demand in the market well in advance. Accordingly they stock up raw materials and hold inventories to be able to increase production and rush supplies to the market to meet the increased demand.

Economies of scale in procurementMany organisations buy raw materials in larger lot and holding inventory as it is found to be cheaper for the companies than buying frequent small lots. In such cases one buys in bulk and holds inventories at the plant warehouse.

Take advantage of price increase and quantity discountsIf there is a price increase anticipated by the managers few months down the line due to changes in demand and supply in the national or international market, impact of taxes and budgets etc. So the companies tend to buy raw materials in advance in order to hedge against increased costs holds stocks. Companies resort to buying in bulk and holding raw material inventories to take advantage of the quantity discounts offered by the supplier. The savings on account of the discount enjoyed would be substantially higher that of inventory carrying cost in such cases.

Reduce transit cost and transit timesOne can save a lot in terms of transportation cost buy buying in bulk and transporting as a container load or a full truck load as raw materials being imported from a foreign country or from a far away vendor within the country, Part shipments can be costlier. In terms of transit time too, transit time for full container shipment or a full truck load is direct and faster unlike part shipment loadwherethefreightforwarderwaitsforotherloadstofillthecontainerwhichcan take several weeks. There could be a lot of factors resulting in shipping delays and transportation too, which can hamper the supply chain forcing companies to hold safety stock of raw material inventories.


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Long lead and high demand items need to be held in inventoryOften raw material supplies from vendors have long lead running into several months. If the particular item is in high demand, and short supply one can expect disruption of supplies making it safer to hold inventories and have control.

1.8 Resource Inventory ManagementResource inventory management manage the information pertaining to all the resources used to implement services and products. Various element management systems and resource inventory database systems are areas which typically linked to this application Resource Management applications also play a role in managing spare parts; dumb resources such as cable pairs, and external plant and customer premises equipment. These applications can also be used to discover and manage underutilised or ‘stranded’ resources. Resources are the most integral part of Inventory management Emergency management and incident response activities which require carefully managed resources such as personnel, teams, facilities, equipment, and/or supplies to meet incident needs. Utilisation of the standardised resource management concepts such as typing, inventorying, organising, and tracking will facilitate the dispatch, deployment, and recovery of resources before, during,andafteranincident.Ifresourcemanagementisflexibleandcanbescaledthenitwillsupportanyincidentandbeadaptabletochanges.Efficientandeffectiveuse of resources requires that resource management concepts and principles be used in all phases of emergency management and incident response.

The resource management process would be divided for convenience as two separate process: resource management as an element of preparedness and resource management during an incident. The preparedness activities (resource typing, credentialing, and inventorying) are carried out on a regular basis which helps ensure that resources are ready to be mobilised when called to an incident. During anincident,Resourcemanagementwouldbeconsideredasafiniteprocess,asshowninthebelowfigure,withadistinctbeginningandendingspecifictotheneeds of the particular incident.

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Identify requirements

Order and Aqcuire

Mobilise

Track and Report

Recover/demobilise

Expendable/Non-

expendable

Reimburse

Inventory

IncidentPreparedness activities for Resource management• Resourcestyping• Credentialing

Fig. 1.10 Resource management as a process

Credentialing The credentialing process entails the objective evaluation and documentation of anindividual’scurrentcertification,license,ordegree;trainingandexperience;andcompetenceorproficiencytomeetnationallyacceptedstandards,provideparticular services and/or functions, or perform specific tasks under specificconditions during an incident.

1.9 Production Planning Production planning is strongly related to the layout type of a considered production system. An experimental analysis of production systems to be found in industrial practicerevealsmanydifferenceswhichhaveasignificantimpactonthetypeofplanning models that may be applicable in a certain planning environment. There arenumerousdifferentlayouttypes,e.g.fixedpositionlayout,processlayout(jobshopproduction),productlayout(flowlines),just-in-timeproductionsystems,andcellularlayout,amongothers.Ineachtypeofproductionsystemspecificplanningproblems emerge for which the literature provides an appropriate modelling and solution approach.

A wide variety of planning approaches are partly implemented for the solution of the production planning problems. The operations management literature provides in so called Advanced Planning Software systems (APS) for this. It is a common


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property of most of these approaches, such as aggregate production planning, master planning as well as lot sizing, that planning is based on forecasts of future demands. This is treated as deterministic data in the planning process. This could be interpreted as the external demand quantities and the flow times (including waiting times caused by bottlenecks or machine breakdowns) as well as the scrap rates whichinsomeindustriesaresignificant,aretreatedasdeterministicfactors.Inrealityrandominfluencestakeeffect,planningconceptsarerequiredwhichareable to take the unavoidable uncertainty on all levels of planning and control of the value-adding processes into account.

From a theoretical point of view, this would mean to extend, say, a mixed-integer multi-level capacitated dynamic lot sizing model by including random variables in the model formulation. Such an approach are considered disappointing as for many production planning models including the deterministic version of the problem can be solved satisfactorily.

1.10 Planning in Inventory Control For retailers, planning ahead is one of the most important aspects of inventory control management. This includes prepping activities like going into the market to buy the goods early enough to ensure delivery on time. Therefore buying requires advance planning to determine inventory needs for each time period and then making the commitments without procrastination. New items are for sale months before the actual calendar date for the beginning of the new season,. It is vital to formulate buying plans early enough to allow for intelligent buying without any last minute panic purchases The early offering for sale of new items is that the retailer regards the calendar date for the beginning of the new season as the merchandise date for the end of the old season.

For example, many retailers view March 21 as the end of the spring season, June 21 as the end of summer and December 21 as the end of winter. Exhaustion of the inventory Part of your purchasing plan must include accounting for the same Before a decision can be made as to the level of inventory to order, one must determine how long the inventory you have in stock will last. For instance, a retail firmmustformulateaplantoensurethesaleofthegreatestnumberofunits.Amanufacturing business must formulate a plan to ensure enough inventories is on handforproductionofafinishedproduct.

1.11 Hierarchy of PlanningThe inventory department is a very important department in any organisation The hierarchy of planning inventory can be explained with the help of the following figure:

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Manage Inventory

Update Stock

Process Sale

Process Return

Process Shipment

Modify Record

Add Record

Delete Record

Genarate Report

Manage Report

Respond to Query

Display Status Report

Fig. 1.11 Hierarchy in interactive inventory management(Source: http://www.hit.ac.il/staff/leonidm/information-systems/ch64.

html#Heading6)

1.12 Business Needs The functions of business are to reduce purchasing and inventory costs.

If a connection is brought about between inventory control, purchasing, and •sales order processing with demand planning, it will further help in reducing costs,improvecashflow,andhelpensurethatyouhavetherightstockavailablewhen you need it. Gaining visibility into inventory processes by effectively balancing availability •with demand and track items and their possible expiration dates throughout the supply chain to help minimise on-hand inventory, optimise replenishment, andincreasewarehouseefficiency.To improve customer satisfaction, make more accurate order promises •and intelligent last-minute exceptions with access to up-to-date inventory information.Respond quickly and knowledgably to customer queries for improved customer •service. Reduce time to market. With integrated order, inventory, and distribution •processes, as well as item tracking capabilities, your business can reduce manual data entry and get your goods to market fast.

General Management

Manucfacturing

Purchasing Production Planning

and Inventory Control

Distribution andTraffic

MarketingMaterials Manager Finance Human

Relation

Fig.1.12 Hierarchy in organisational structure


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The output of an undertaking depends on successful implementation of activities which are followed in the process of building an effective organisational structure. These activities consist of assigning duties and responsibilities clearly. Various departments decide the requirements according to the qualifications of eachposition determining each task to be carried out.

1.13 An effective Material Organisational Structure

DefineDuties

Periodical Checks

Proper Delegation of

Authority

Proper Assignment of Responsilities

Acheive Co-ordination

Functional Decentralisation

Fig. 1.13 Elements of an effective material management organisation

An effective material organisational structure should also be economic. In an organisational structure, the materials manager exercises a high degree of coordination and control over all the material activities. A single line of command runs through the organisational structure where activities constitute different stages of a single function.

An integrated form helps in rapid transfer of data through effective and informal communication channels ensuring cost savings and improvements in service levels. A central materials manager is on par with engineering and production and enjoys better support and coordination in the accomplishment of the materials function. This creates an atmosphere of trust and better relations between the user department and the materials management department.

1.14 Methods of Valuation of InventoryIncreased automation and item tracking capabilities help you improve inventory

accuracy and better match with the goods you have on hand with customer demand.

In order to assign a cost value to inventory, you must make some assumptions about the inventory on hand. Under the federal income tax laws, a company canonlymaketheseassumptionsonceperfiscalyear.Taxtreatmentisoftenanorganisation’schiefconcernregardinginventoryvaluation.Therearefivecommoninventory valuation methods:

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First-in,First-out (FIFO) inventoryvaluation assumes that thefirst goods•purchasedarethefirsttobeusedorsoldregardlessoftheactualtimingoftheiruseorsale.Thismethodismostcloselytiedtoactualphysicalflowofgoods in inventory. Last-in, First-out (LIFO) inventory valuation assumes that the most recently •purchased/acquiredgoodsarethefirst tobeusedorsoldregardlessof theactual timing of their use or sale. Since items you have just bought often cost more than those purchased in the past, this method best matches current costs with current revenues. AverageCostMethodofinventoryvaluationidentifiesthevalueofinventory•and cost of goods sold by calculating an average unit cost for all goods available for sale during a given period of time. This valuation method assumes that ending inventory consists of all goods available for sale.

Average Cost = Total Cost of Goods ÷ Total Quantity of Goods Available for Sale

AvailableforSaleSpecificCostMethod(alsoActualCostMethod)ofinventoryvaluation assumes that the organisation can track the actual cost of an item into, through, and out of the facility. That ability allows you to charge the actual cost ofagivenitemtoproductionorsales.Specificcostingisgenerallyusedonlybycompanies with sophisticated computer systems or reserved for high-value items such as artwork or custom-made items.

Standard Cost Method of inventory valuation is often used by manufacturing •companies to give all of their departments a uniform value for an item throughoutagivenyear.Thismethodisa“bestguess”approachbasedonknown costs and expenses such as historical costs and any predictable changes comingupintheforeseeablefuture.Itisnotusedtocalculateactualnetprofitor for income tax purposes. Rather, it is a working tool more than a formal accounting approach.

First-in, First-out (FIFO)

Last-in, First-out (LIFO)

Average Cost Method

Standard Cost Method

Fig. 1.14 Methods of valuation of inventory methods


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1.15 Ratio Analysis in Business Ratio is an expression of number of items which is contained within another. ThebusinessworldusesRatiosinselectingpartsofanorganisation’sfinancialstatements.Itcomparesonesetoffinancialconditionstoanother.Acompany’sfinancialstatementscontainimportantaspectsofthebusiness.Byreviewingtheseaspects, determination of an organisation’s economic well-being can be achieved. Divisionofonebytheotherisonewayofreviewingthesefinancialconditions.For example, if you had $200 cash and $100 worth of debts, you could divide the cash (assets) by the debt (liabilities) getting a ratio of 2 to 1. In other words, you have twice as many assets as you have in liabilities. Ratios are useful tools to explain trends and also help in summarising business results. Often third parties, such as banks use ratios to determine a company’s credit worthiness. A ratio holds little meaning but however when it is compared to other industry and/or company-specificfiguresorstandards,ratioscanbepowerfulinhelpingtoanalyseyour company’s current and historical results. Companies in the same industry often have similar liquidity ratios or benchmarks, as they often have similar cost structures. Your company’s ratios can be compared to:

Prior period(s) •Company goals or budget projections •Companies in your industry •Companies in other industries•Companies in different geographic regions•

The following can list three ratios that are useful when assessing inventory in an organisation.

Current Ratio

Quick ratio/ Acid test

Inventory turnover ratio

Fig. 1.15 Ratio assessment of Inventory in an organisation

Current Ratio. The current ratio assesses the organisation’s overall liquidity •which indicates a company’s ability to meet its short-term obligations. The current ratio indicates how much of assets we have against liabilities that the organisation owes. In other words, it measures whether or not a company will be able to pay its bills. The current ratio is calculated as follows:

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Current Ratio = Current Assets ÷ Current Liabilities

Current Assets refers to those assets which are in form of cash or that are easily convertible to cash within one year, such as accounts receivable, securities, and inventory. Current Liabilities refers to liabilities that are due and payable within twelve months, such as accounts payable, notes payable and short-term portion of long-term debt. Standards for the current ratio vary from industry to industry. Companies that carry inventory also have higher current ratios. Manufacturing companies are included in this latter group where in they inventory in the form of finishedgoodshavereadyforsaleandalsotheycarryinventoryofgoodsthatarenot yet ready for sale. The longer it takes a company to manufacture the inventory will have higher the current ratio and the more inventory it must keep on hand. A low current ratio may signal either that a company has liquidity problems or has trouble meeting its short and long-term obligations. In other words, the organisation mightbesufferingfromalackofcashflowtocoveroperatingandotherexpenses.As a result, accounts payable may be building at a faster rate than receivables. This is sometimes used in conjunction with other factors to determine the overall financialhealthofanorganisationasanindication.Infact,somecompanieswillhavegoodcashflowcansustainlower-than-averagecurrentratiosbecausetheymove their inventory quickly and/or are quick to collect from their customers. A high current ratio is not necessarily desirable. It might indicate that the company is holding high-risk inventory or just maybe doing a bad job of managing its assets. For example, fashion retailers may have costly inventory, but they might also have significanttroublegettingridoftheinventory—ifatallthewrongclothinglinewere to be selected. The fact that makes it a high-risk company, forcing creditors torequireabiggerfinancialcushion.Further,ifahighcurrentratioisaresultof a very large cash account can be used as an indicator that the company is not reinvesting its cash appropriately. The liquidity problems might still exist even if thecurrentratiolooksfineasotherfactorsmustbetakenintoconsideration.Sinceratios look at quantity, not quality, it is important to look at what the current assets consist of to determine if they are made up of slow-moving inventory.

Quick Ratio or Acid Test. The quick ratio compares the organisation’s most •liquid current assets to its current liabilities. The quick ratio is calculated as follows:

Quick Ratio = (Current Assets – Inventories) ÷ Current Liabilities

In other words, the company has at less in liquid assets (likely in the form of accountsreceivable)thanliabilities.Industriesthathavesignificantcashsales(such as grocery stores) tend to be even lower. As with the current ratio, a low quickratiocouldbeanindicatorofcashflowproblems,whileahighratiomayindicate poor asset management as cash may be properly reinvested or accounts receivable levels are out of control. An organisation’s ability to promptly collect itsaccountsreceivablehasasignificantimpactonthisratio.Ithasmorecollectionresults in more liquidity.


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Inventory Turnover Ratio. The inventory turnover ratio measures how many •times inventory is replaced over a period of time on an average. In simple terms, an inventory turn occurs every time an item is received, is used or sold, and then is replaced. If an SKU (Store Keeping Unit) came in twice during the year, was used/sold, and then replenished, that would be two turns per year. If this happened once per month, it would be twelve turns per year, and so forth. Since the ability to move inventory quickly Inventory turnover is considered quite an important measure since it directly impacts the company’s liquidity. Inventory turnover is calculated as follows:

Inventory Turnover Ratio = Cost of Goods Sold ÷ Average InventoryEssentially, when a product is sold, it is subtracted from inventory and transferred to cost of goods sold. Therefore, this ratio indicates how quickly inventory is movingforaccountingpurposes.Itdoesnotnecessarilyreflecthowmanytimesactual physical items were handled within the facility itself. This is true because the cost of goods sold number may include items you sold but never physically handled. For example, items that we purchase and then have drop-shipped directly at our customer’s site aren’t ever handled within our facility. A more accurate measure of how many times actual physical inventory turned within the site would be:

Inventory Turnover Ratio = Cost of Goods Sold ÷ Average InventoryIftheinventoryhasshownanincreaseordecreasesignificantlyduringtheyear,thentheaverageinventoryfortheyearmaybedistortedandnotaccuratelyreflectyour turnover ratio going forward.

Also, if the company uses the LIFO method of accounting, the ratio may be inflatedbecauseLIFOundervaluestheinventorysometimes.Unlikethecurrentratio and quick ratio, the inventory turnover ratio does not abide to any standard range. Organisations with highly perishable products can have inventory turns of 30 times a year or more. Companies that retain large amounts of inventory or that require a long time to build their inventory might have turns of only two or three times a year. In general, the overall trend in business today is to reduce carrying costs by limiting the amount of inventory in stock at any given time. As a result, both individual inventory turnovers and industry averages in this area have increased in recent years. It is important to understand, however, that many factors can cause a low inventory turnover ratio. The company may be holding the wrong type of inventory, its quality may be suffering, or it may have sales/marketing issues.

1.16 Inventory on the Income Statement Theincomestatementisareport thatidentifiesacompany’srevenues(sales),expenses, and resultingprofits.While thebalance sheetgivesyouafinancialpicture of a companyon a specific date (June 30, for example), the incomestatement covers a given period of time (June 1 through June 30). The cost of goodssoldistheitemontheincomestatementthatreflectsthecostofinventory

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flowingoutofabusiness.Thebusinessmakesmoneybyusingorsellinginventory.That inventory costs the businessman money while acquiring it Cost of goods sold (on the income statement) represents the value of goods (inventory) sold during the accounting period. The value of goods that are not sold is represented by the ending inventory amount on the balance sheet calculated as:

Ending Inventory = Beginning Inventory +Purchases Inventory -Cost of Goods Sold

This information is also useful because it can be used to show how a company “officially”accountsforinventory.Thecostofpurchasescanbearrivedwithoutknowing the actual costs by turning around the equation as follows:

Purchases = Ending inventory – Beginning Inventory + Cost of goods sold The costs of goods are sold if you know what your purchases are by making the following calculation:

Cost of goods sold = Beginning Inventory + Purchases- Ending Inventory

1.16.1 Inventory on the Balance sheet Thebalancesheetshowsthefinancialpositionofacompanyonaspecificdate.Itprovides details for the basic accounting equation: Assets = Liabilities + Equity. In other words, assets are a company’s resources while liabilities and equity are how those resources are paid for

Assets represent a company’s resources. Assets can be in the form of cash or •otheritemsthathavemonetaryvalue—includinginventory.Assetsaremadeup of (a) current assets (assets that are in the form of cash or that are easily convertible to cash within one year such as accounts receivable, securities, andinventory),(b)longer-termassetssuchasinvestmentsandfixedassets(property/plant/equipment), or (c) intangible assets (patents, copyrights, and goodwill).Liabilities represent amounts owed to creditors (debt, accounts payable, and •lease-term obligations). Equity represents ownership or rights to the assets of the company (common •stock, additional paid-in capital, and retained earnings).

Inventory is among a company’s current assets as it can be sold within one year. Thisinformationisusedtocalculatefinancialratiosthathelpassessthefinancialhealth of the company The balance sheet is one important place that inventory playsa role in thefinancialanalysisof thecompany. Italsoshowsupon theincome statement in the form of cost of goods sold.


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SummaryInventory refers to stocks of anything necessary to do business. These stocks •represent a large portion of the business investment and must be well managed inordertomaximiseprofitsOneofthemostsignificantaspectsofinventorycontrolistohavetheitems•in stock at the moment they are required. This includes going into the market to buy the goods early enough to ensure delivery at the proper time.Raw materials are inventory items that are used in the manufacturer’s •conversion process to produce components, subassemblies, or finished products. These inventory items may be commodities or extracted materials thatthefirmoritssubsidiaryhasproducedorextractedWork-in-process (WIP) is made up of all the materials, parts (components), •assemblies, and subassemblies that are being processed or are waiting to be processed within the system. Afinished good is a completed part that is ready for a customer order.•Therefore,finishedgoodsinventoryisthestockofcompletedproducts.Thesegoodshavebeeninspectedandhavepassedfinalinspectionrequirementssothattheycanbetransferredoutofwork-in-processandintofinishedgoodsinventory. Maintenance, repair, and operating supplies, or MRO goods, are items that •are used to support and maintain the production process and its infrastructure. These goods are usually consumed as a result of the production process but arenotdirectlyapartofthefinishedproductTransit inventories are the ones that need to transport items or material from •one location to another, and from the fact that there is some transportation time involved in getting from one location to another. Some inventory used to protect against the uncertainties of supply and demand, •as well as unpredictable events such as poor delivery reliability or poor quality of a supplier’s productsSomefirmswillpurchaseandholdinventorythatisinexcessoftheircurrent•need in expectation of a possible future event. Such events may include a price increase, a seasonal increase in demand, or even an impending labour strike. This tactic is commonly used by retailers, who routinely build up inventory months before the demand for their products will be unusually highMaintenance, repair, and operating supplies, or MRO goods, are items that are •used to support and maintain the production process and its infrastructureFirst-in,First-out (FIFO) inventoryvaluation assumes that thefirst goods•purchasedarethefirsttobeusedorsoldregardlessoftheactualtimingoftheir use or saleLast-in, First-out (LIFO) inventory valuation assumes that the most recently •purchased/acquiredgoodsarethefirst tobeusedorsoldregardlessof theactual timing of their use or sale

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AverageCostMethodofinventoryvaluationidentifiesthevalueofinventory•and cost of goods sold by calculating an average unit cost for all goods available for sale during a given period of time.Standard Cost Method of inventory valuation is often used by manufacturing •companies to give all of their departments a uniform value for an item throughout a given year.The current ratio assesses the organisation’s overall liquidity and indicates a •company’s ability to meet its short-term obligationsQuick Ratio or Acid Test. The quick ratio compares the organisation’s most •liquid current assets to its current liabilities.The inventory turnover ratio measures, on average, how many times inventory •is replaced over a period of time.

ReferencesWalker, M., 2008.• Inventory Management-Introduction [Video online] Available at :<http://www.youtube.com/watch?v=qkZQxXJuqKo>[Accessed 01July 2011].BeckySavage, 2008.LIFO Vs FIFO [Video online ] Available at :<http://www.•youtube.com/watch?v=ExNsFh0_39s>[ Accessed 04 July 2011].Muller, M., 2003.• Essentials of inventory management, AMACOM Div American Mgmt Assn.Bose, C.D., 2006.• Inventory Management, PHI Learning Pvt. Ltd.FEMA, Resource Management [Online] Available at :<http://www.fema.gov/•emergency/nims/ResourceMngmnt.shtm>[Accessed 04 July 2011].Tmforum, • Resource Inventory Management [Online] Available at:<http://www.tmforum.org/ResourceInventoryManagement/2556/home.html>[Accessed 04 July 2011].

Recommended ReadingPiasecki, D.J.,2003. • Inventory Accuracy: People, Processes, & Technology, Ops PubBragg, S.M.,2011.• Inventory Best Practices,2nd,ed.,Wiley Mercad• o, E.C.,2007. Hands-On Inventory Management (Resource Management), Auerbach Publications


http://www.amazon.com/s/ref=ntt_athr_dp_sr_1?_encoding=UTF8&sort=relevancerank&search-alias=books&field-author=CPIM%2C C.P.M. Ed C. Mercado

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Self Assessment _____________is a list of goods and materials or those goods and materials 1. s held available in stock by a business

Inventorya. Supplies b. Commoditiesc. Productsd.

Some inventory used to protect against the uncertainties of supply and demand 2. are called _______________

MRO inventory a. Buffer inventory b. Anticipation inventoryc. Transit Inventoryd.

__________ are items that are used to support and maintain the production 3. process and its infrastructure

Finished Goodsa. Raw Materialb. Maintenance, repair, and operating supplies(MRO goods)c. Work in Progress goodsd.

_____________ is that inventory valuation assumes that the first goods4. purchasedarethefirsttobeusedorsoldregardlessoftheactualtimingoftheir use or sale

Last-in, First-out (LIFO) a. Average Cost Method b. Standard Cost Method c. First-in, First-out (FIFO)d.

__________________of inventory valuation is often used by manufacturing 5. companies to give all of their departments a uniform value for an item throughout a given year.

Standard Cost Methoda. First-in, First-out (FIFO)b. Last-in, First-out (LIFO) c. Average Cost Methodd.

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______________compares the organisation’s most liquid current assets to 6. its current liabilities

Last-in, First-out (LIFO) a. Average Cost Method b. Standard Cost Methodc. The Quick ratio test d.

______________inventory valuation assumes that the most recently Purchased/7. acquiredgoodsarethefirsttobeusedorsoldregardlessoftheactualtimingof their use or sale

Average Cost Method a. Standard Cost Methodb. First-in, First-out (FIFO)c. Last-in, First-out (LIFO)d.

_____________are the ones that need to transport items or material from one 8. location to another, and from the fact that there is some transportation time involved in getting from one location to another.

MRO inventory a. Buffer inventory b. Anticipation inventoryc. Transit Inventoryd.

______________________measures, on average, how many times inventory 9. is replaced over a period of time.

The inventory turnover ratioa. The Quick ratiob. The Current ratioc. Last-in, First-out (LIFO)d.

_______________assesses the organisation’s overall liquidity and indicates 10. a company’s ability to meet its short-term obligations

The inventory turnover ratioa. The Current ratiob. Last-in, First-out (LIFO)c. The Quick ratiod.


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Chapter II

Long Range Planning and Forecasting

Aim

The aim of this unit is to:

introduce the concept of basic strategic planning•

explain the creation of strategic plan•

illustrate the strategy of team development and business plans•

Objectives

The objectives of this unit are to:

state the principles of forecasting•

enlist the various methods of demand patterns •

analyse the criteria for selecting a forecasting method•

Learning outcome

At the end of this unit, you will be able to:

discuss the concepts of business planning•

understandthecrucialroleofforecastingmethodsinbusinessprofitability•

de• scribe measuring forecast errors

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2.1 Introduction Managers of any department, warehouse, or supply chain want to be successful in any organisation. The manager has to employ an effective inventory management strategy to guarantee success in the organisation. The most successful retail, warehouse, and supply chain managers are those who are fully aware of the state of their stocked inventory at any time and have a system that helps keeping up which allows them to easily index and monitor the coming and going of product within that inventory.

Implementinganinventorymanagementplanbeginswiththespecificitemsthatone has and the type of storage location in which the product is kept. A strategy may involve careful planning for spatial needs, especially if you must maintain a number of items in a minimal amount of space. An appropriate plan at this point would be to create a diagram of your warehousing or storage environment and map out the locations of stocked items that will best organise the materials with no wasted space. The success of tracking and managing your inventory can be accomplished with electronic tools or simply by hand.

The next order of business is where the managers are mapping out the strategy tomaximisetheprofit.Manytimes,theitemsintheinventorymayremaintherewithout moving for long periods of time due to lack of demand. This is not only a wasted expense but also takes up valuable room in the warehouse or supply room thatcouldbefilledwithafastersellingitemwhichwoulddrawmoreprofit.Theinventorymanagementstrategyshoulddefinitelyincludesomeformoftrackingsystemtoidentifyquicksellingproducts,aswellasthosewiththehighestprofitmargin. Such systems will report what items should be maintain at high levels withintheinventorytomeetdemandandmaximiseprofit.

Any business inventory management strategy would not be complete without a well equipped software system that allows the manager to keep track of every item that comes in and out of his warehouse. This means that, when inventory checks are completed, the manager will be able to identify errors, thefts, losses, and any other discrepancies much more readily. It will also assist in ordering process, since the electronic tracking will give information on exact quantities of inventory without having to run out and count everything by hand. When the manager sees that the stock of a particular item is low, he can prepare to reorder.

Thefinal implementationofaneffective inventorymanagementstrategy is tomake sure that all items are properly labelled. Wrong or incomplete labelling can lead to several problems, includingwrong identificationby the software,misplacementwhenrestockingtheinventory,lossoftheitem,orinabilitytofindit for shipment or shelving later.


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2.2 Basics of Strategic PlanningAsamanagerofasmallormediumsizedfirmhavingastrategyplanisthemostimportant and intimidating activity. Organisations of any size which effectively utilise a strategic plan enjoy a much greater chance of long-term success, whether measuredinkeyfinancialperformanceindicators,longevity,orculturalstability.Aconciseworkingdefinitionof“Strategy”canbeprovidedas“whatacompanydoes,ordoesnotdotofulfilitsvisioninacompetitivemarketplace”.

The high-impact strategic plan can be presented effectively on one page. Its elements can be expressed in a few well-chosen words, clauses or sentences. The strategic plan and operations or business plan are not the same. The latter two are compliant to the strategic plan and are shorter in timeframe, and far more detailed. One great feature is that it is powerful enough to guide the daily activities of dozens, hundreds, and even thousands of employees.

Within the strategic plan, senior management sets the dominant logic and the moral compass of the organisation. It is an opportunity to unambiguously document ethics for leadership continuity. It forces introspection and situational analysis. Primarily through articulation of core values, it provides a directional beacon especially in hard times.

2.3 Creation of Strategic Plan Thecreationofastrategicplanisafive-stepprocesswhichcouldbelistedasfollows:

Vision

Strategic Plan

Core Values

StrategicObjectives

SWOT Analysis

The Mission

Fig. 2.1 Step process of strategic plan

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Vision Having a vision is an inspirational call to action. In a few short words, the Chief executiveofficerorseniormanagerusestheVision,topointatthewaytothecompany’s future. It should include emotions and should be designed to last for many years. We could take an illustration of Google’s vision statement which is “Todevelopaperfectsearchengine.”

Core ValuesThe downfalls of countless corporations each year are due to ethical problems therefore, preparing a statement of core values becomes vitally important. Choosingfiveor sixwordsor shortphraseswhichdefine thevaluesmustbebasictotheworkingculture.Examplesofsuchwordsmightinclude“integrity”,“transparency”,or“honesty”.Corevalueswillguidetheorganisationinmakinghardchoicesinverydifficulttimeswhichshouldnotbecompromised.Hiringpeoplewhodefinecorevalueswillhelptheorganisationinstrategicplanning.

The MissionAn effective mission statement is one which tells about the company story and ideals in less than 30 seconds. Now a days , companies have mission statements comprised of three or four short sentences, it is more detailed than the Vision, andisoftenwritteninthepresenttense.Itdefinesyourcompany’scustomers,products, and how your company contributes unique value for its customers.

Strategic ObjectivesStrategic objectives should be specific,measurable, possible, relevant, andtime-framed(SMART).Threetofiveobjectivesshouldsuffice,andtheyshouldbeattainablewithinonetothreeyears.Forreasonsofconfidentiality,strategicobjectives are rarely published outside the company, but they must be effectively communicated to all employees.

SWOT AnalysisThis acronym stands for Strengths, Weaknesses, Opportunities, and Threats. An honest, fact-based discussion between senior management and key advisors needs to take place. Documenting strengths and weaknesses tends to involve serious introspection, while opportunity and threat analysis tend to require external environmentalscanning.Sinceitestablishesthefirm’scurrentpositionrelativeto its competitive environment, the SWOT can be very useful in establishing objectives and even the mission. It is therefore frequently performed early in the planning process.

The strategic plan is a living document which must be must be communicated effectivelyandconstantlywiththeemployeesofthefirm.Successfulbusinessesfrequentlyfitintheplanintotheannualemployeeperformancereviewprocess,ensuring that individual and departmental goals and objectives are going hand in hand with the strategic plan. The strategic plan should be reviewed at least annually, noting any SWOT changes that might require modifying strategic objectives. A


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complete renewal of the strategic plan should be undertaken every three years. A good plan will also discourage spending on projects that are not associated with strategicgoalsandhelpingtopreventdeliberateconflictsbetweenoperationaldepartments.

There are several ways in which a manager can simplify your system of product inventorymanagement.Choosingthemethodsandproceduresthatsuitsthefirmis very important so that the manager can follow the guidelines set up initially. If the manager thinks of a procedure that is felt not important or vital to the system,thenitwillbedifficultforthemtofollowit.Thisisequallydifficulttokeep sticking to the policy as the same is expected by the staff. Following are few suggestions to get proper product inventory management strategies for the departments in any organisation.

OrganisationOrganising the stock within the space provided has to be determined by the managers. Several methods could assist the managers in making this decision simpler. The most popular products to be the most easily accessible as their use are frequent. Mapping out the space which is available and a look at the size of items that has to be stocked. How much quantity to keep is also an idea any manager should get. Chalking it out on paper and scratching out where each item wouldbestbelocatedtomaintainorganisationwhilestillmakingefficientuseofthe room is a great product inventory management strategy.

AnalysisAll items that, afirmhas in stockwhenanymanager takesover theproductinventory management process is necessary. A look at sales records and stock that hasn’t moved for several months so, the only option left is to get rid of that product entirely. It is better to determine the course of action when the kind of product arrives, product quantity in stock, and the number of other items for which more storage space will be needed, is to simply write it off. They are offered at reducedpricesforquicksaletohelpcutthefirmslosses,butitisbesttoremoveit and make way for items that bring in revenue.

BudgetTheconceptherewouldbethatthefirmhasspaceformorestock,sothatthereisnoneedtojustfillit.Sometimesthesespaceshelpinfutureincasethereisa need for the stock to be kept. For example, you have a product that goes on sale and the demand soars. This space can be used to store temporary additional stock of that item. It is better to have open space than to overextend the budget by ordering too many items. Also, having too much inventory on hand detracts from the value of the company.

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ToolsMakeuseof software andother tools that thefirmhas forproduct inventorymanagement. Most of the software packages available will give the manager an analysis reports that can help him make better decisions in the future and help him track the goods in the warehouse, taking a lot of stress and strain off his shoulders .Motivatingtheirteamtomaintainafreeflowinginventoryprocesswiththehelpof the software tools.

2.4 Strategy of Team Development and Business PlansCreating a business plan for a small business is like laying a path to success, building it brick by brick. The toughest part is starting from scratch and having a well laid plan. But once started, each brick, strategically placed, takes you one step further with great thought and determination. This is the most important tool for a small business owner. It is a manager’s guide, or roadmap, to success because it should scrutinise every aspect of the business.

The main areas this document should contain are Management and Operations Plans, Market Analysis, Services and Pricing, Sales Strategy and Financial Analysis. The biggest mistake entrepreneurs make is placing the business plan on a shelf and never reviewing it again. The business plan provides guidelines, projections and suppositions. It does not provide certainty or absolutes. Therefore, it must continue to be continuously revised. This document is a living, breathing document that helps the owner see what works, what doesn’t, what has changed and what needs to change.

Three key components that should be analysed closely are the Sales and Service, Market Analysis and Pricing. When starting a business, research on the projected market can only provide a best guess. As the business grows, the entrepreneur will findvariationsthatshouldbeincludedintothebusinessplanwithoutfail.Whenreviewing the business‘s client base, the manager might discover a need to adjust hisassumptions.Afterscrutinisinghisfindingsandmakechangestohisbusinessplan accordingly. The Sales strategy might also change for example, the plan might have called for print advertising and direct mail, but suddenly discovered that networking and referrals turned out to be the best way to secure sales. The advertising budget will adjust positively with this scenario, but there may be a need of an additional part-time employee to cover the time where manager is attending networking meetings.

Let’s consider a cleaning service, established to do weekly cleaning to the Boomer market. The advertising was directed at the Boomers, and it is noticed that it reached the consumers it targeted exactly. The ones calling to hire a cleaning service for their parents who are old. The aging seniors would most likely need less frequency(monthlyorquarterly),whichcouldcreateacashflowissue.Therefore,theremightbeaneedforadifferentpricingstructure.Morerefiningtotheplanwill make it a better path to success. A business plan will help to see where the business is and where it can go. It will help to determine if the business is staying


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on track or there is a need to focus again. Just like a brick path that needs constant care, the same is true for a business plan. The manager must secure loose ones, replace broken ones, pull weeds, and often widen and lengthen the entire path to handleadditionaltraffic(customers,products,services).Thisvitaldocumentwillmake the journey more enjoyable and more successful, but only if it is visited and revised often rather than sitting on a shelf collecting dust.

2.5 Concepts of Business PlanningBusinesses often have a considerable part of their investment tied up in inventory. At the end of the year, only the cost of those goods that are sold can be deducted as a business expense on the taxes paid, the unsold portion is considered part of the company’s assets.Inordertomakeareasonableprofit,theinventorymustbemanaged in most effective way to provide enough products for good customer service,butnotsomuchastocausefinancialdifficulties.Therearedifferentwaysof accomplishing this balance. All require good management skills and decision making.

First of all, precise recordkeeping is vital. Inventory records can be kept manually or by using more sophisticated computer programs. While the type of system and kinds of records may vary from business to business, all require accuracy and timeliness to be effective. At the end of the year you will need to physically take inventory.

Successful inventory management requires a balance between the costs and benefitsofinventory.Costsincludenotonlythemoneytiedupintheinventory,butalsostorage,insurance,taxes,etc.Thebenefitsofinventoryincludehavingadequate stock on hand, a wide assortment, low cost volume purchases, etc. It is difficulttomaintainthecorrectbalancebutthefollowingconsiderationsshouldbe kept in mind:

Highinventoriesincreasefinancialrisk.•Maintain a wide assortment but keep an adequate supply of those items with •quick turnover.Increaseturnoverbutdon’tsacrificeservicelevel.•Make volume purchases for lower prices, but don’t end up with slow moving •inventory.Have plenty of inventories on hand, but don’t get stuck with obsolete items.•

Many industries rely on a ratio which measures inventory turnover rate. Inventory Turnover Rate can be calculated in various ways, providing a rough guideline by which managers can set goals and measure performance.

2.6 Forecasting TechniquesThere are various forecasting techniques in inventory management that helps in theorganisationsprofitability.Wewillfirstunderstandthemeaningofforecasting,planning and goals.

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2.6.1 Forecasting Planning and GoalsForecasting is a term used to describe the prediction of future events. Demand planning is the process of recognising economic demands for products in the marketplace. Forecasting enables the future to be visualised, it creates a baseline against which actual data can be measured. The key in demand planning is to monitor the gaps between the anticipated (forecast) and the achieved (actual) and then, using forecasting skills and tools to reduce the gap in the next cycle.

Forecast is an estimate of future demand. A forecast can be determined by mathematical means using historical data; it can be created subjectively by using estimates from informal sources; or it can represent a combination of both techniques.

Forecasting is a common statistical task in business, where it helps inform decisions about

scheduling of production, transportation and personnel, and provides a guide to long-term

strategic planning. However, business forecasting is often done poorly and is frequently confused with planning and goals. They are three different things.

Forecasting is about predicting the future as accurately as possible, given •all the information available including historical data and knowledge of any future events that might impact the forecasts.Goals should be linked to forecasts and plans, but this does not always occur. •Too often, goals are set without any plan for how to achieve them, and no forecasts for whether they are realistic.Planning is a response to forecasts and goals. Planning involves determining •the appropriate actions that are required to make your forecasts match your goals.

Forecasting should be an integral part of the decision-making activities of management, as

it can play an important role in many areas of a company. Modern organisations require short-medium- and long-term forecasts, depending on the specific application. Short-term forecasts are needed for scheduling of personnel, production and transportation. As part of the scheduling process, forecasts of demand are often also required. Medium-term forecasts are needed to determine future resource requirements in order to purchase raw materials, hire personnel, or buy machinery and equipment. Long-term forecasts are used in strategic planning. Such decisions must take account of market opportunities, environmental factors and internal resources. An organisation needs to develop a forecasting system involving several approaches to predicting uncertain events. Such forecasting systems require the development of expertise in identifying forecasting problems,


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applying a range of forecasting methods, selecting appropriate methods for each problem,andevaluatingandrefiningforecastingmethodsovertime.Itisalsoimportant to have strong organisational support for the use of formal forecasting methods if they are to be used successfully.

2.6.2 Principles of ForecastingWhile planning a forecast, certain points should be considered

The forecast will be more accurate for groups: Total units sold are easier to •forecastthanspecificproducts.Theforecastthat,acompanywillsellatotalof2500lakhsnextyearmightbeusefulforcashflowinformation,buttheremustbe more details of 12 modules (subassemblies), forecasting the 12 modules will be more accurate than forecasting 100 lakhs and will meet the needs of a manufacturing planning systems.The Forecasts will be more accurate for the short term: The further out you go, •the less accurate you are. Every effort should be made to reduce the cumulative lead time required for the planned item. The cumulative lead time is the total planned length of time to produce and distribute an item. It is the longest combination of events and critical path, necessary for product availability.The forecast will be wrong: Although there will be a forecast error, it is most •important to have an estimate of that error. Through mathematical techniques, it is possible to estimate the probability of error. For example, the forecast of weekly demand may be 100, but based on past deviations from average, the actual demand may be expected to vary from plus or minus 6.98% of the time.The forecast should be tested before using: There are many models to use for •forecasting and it is recommended to test the various techniques based on the same past history. The technique or model that worked best in the past will most likely work best in the future.The forecast is no substitute for actual demand: As there will be a degree •of error in any forecast, reducing lead time as much as possible , so as to allow actual demand history to have a greater impact on the forecast is most desirable.

2.6.3 Demand PatternsIn tracking demand history, the data will indicate one of five patterns or combinationsthatmayapply.Thefivetimeseriespatternsare:

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Linear Pattern

Trend Pattern

Cyclical Pattern

Seasonal Pattern

Random Happenings

Fig. 2.2 Demand patterns of forecasting

Linear pattern: The activity will follow a straight line (linear) pattern, such •as growth of vada pav sales. Trend pattern: A pattern which indicates a trend over and beyond the linear •pattern, such as a product demand that is growing due to not only population growth, but also to superior quality.Cyclical pattern: An example is a product with a life cycle of 3 years and •therefore a replacement cycle of 3 years. The business cycle may also be considered using random happenings.Seasonal pattern: Examples are lawn mower sales in the spring and snow •blower sales in the fall.Randomhappenings:Thisisirregularanddifficulttounderstand.Abroken•windshield is an example of factors causing random happenings.

2.6.4 Reasons for ForecastingThe type of Forecast solution that is needed will vary depending on the reasons selected but the key drivers which probably will be:

To reduce uncertainty:Every manager feels the need to predict future demand which will in turn reduce uncertainty. It is however not so easy to do so. Prediction leads to reduced costs as the management becomes more responsive to the needs in the market. This eventually leads to improved customer service.

To anticipate change:Business conditions keep changing every day. There are new competitors in market which pose a threat to the sale margins. Planning for future change, in order to adjust with changes in the environment, competitors, new entrants, etc. supports the company strategy.


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To improve communication:Forecastinghelpscommunicationbetweenalldepartmentsandaffiliates.Effectivecommunication drives continuous improvement and migrates to intelligent models. Provide elements of realism to reduce inventories driven by fanciful sales targets

To increase knowledge:Project production capacity, project future costs and revenues, compare forecast and actuals to budget, evaluate marketing initiatives and decipher correlations between casuals and actuals

2.6.5 Time for Forecasts

Time Process

0-12 MonthsHigh level process just before budget cycle. Aimed at setting base for Budget discussion and high level capacity check (long horizon).

6-12 Months Process to set sales targets. Set once or twice a year.

0-6 MonthsProcess which is aimed at providing accurate predictions of market potential. Data used to drive supply planning, allocation and production operations.

1 MonthProcess (weekly/daily) used to obtain latest sales data from Sales (orders + expected orders). Applies to current month only.

Table 2.1 Time for forecast

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Budget review

Budget Process

Sales forecasts

Sales progress

Budget Process

Fig. 2.3 Time for forecasts

2.7 Methods of ForecastingMany businesses have a very practical approach when they use forecasting techniques. A number of important business decisions could possibly be affected by the forecasted sales of a given product. Production schedules, raw material purchasing plans, policies regarding inventories, and sales quotas will be affected by such forecasts. It is vitally important for the business to make use of accurate forecasting methodologies after taking into considerations all risks in the market.

All forecasting methods can be divided into two broad categories: Qualitative and Quantitative. Many forecasting techniques use past or historical data in the form of time series. A time series is simply a set of observations measured at successive points in time or over successive periods of time. Forecasts essentially provide futurevaluesofthetimeseriesonaspecificvariablesuchassalesvolume.Divisionof forecasting methods into qualitative and quantitative categories is based on the availability of historical time series data.


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Qualitative methods

Quantitativemethods

Forecasting Methods

Fig. 2.4 Methods of forecasting techniques

2.7.1 Qualitative Forecasting MethodsMethods generally employ the judgment of experts to generate forecasts. A key advantage of these procedures is that they can be applied in situations where historical data are simply not available. Moreover, even when historical data are available,significantchangesinenvironmentalconditionsaffectingtherelevanttime series may make the use of past data irrelevant and questionable in forecasting future values of the time series. For example, historical data on gasoline prices would likely be of questionable value in determining future gasoline prices if otherfactors(oilboycotts,gasolinerationingprograms,scientificbreakthroughsinalternative energy use, etc.) suddenly assumed increased importance. Qualitative forecasting methods offer a way to generate forecasts in such cases. Three important qualitative forecasting methods are: the Delphi technique, scenario writing, and the subject approach. Qualitative forecasting methods are based on educated opinions of appropriate persons.

Qualitative Methods

Delphi Method

Product Life Cycle

Analogy

Market Research

Expert Judgement

Fig. 2.5 Types of qualitative methods

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Delphi method:• This forecasting is also a non-quantitative technique for forecasting. It draws its name from the Oracles of Delphi, which in Greek ancient times advised people based on intuition and common sense. These are those methods that use so-called objective predictions involving quantitative analysis. This particular method is based on purely expert opinions. It has been demonstrated that predictions obtained this way can be at least as accurate as other procedures. The core of the procedure is to use the estimation of opinions and predictions by a number of experts over a number of rounds in carefully managed sequences. One of the most important factors in Delphi forecasting is the selection of experts. The persons invited to participate must be knowledgeable about the issue and they should belong to different backgrounds. The number must not be too small to make the assessment too narrowly based, nor too large making it cumbersome to coordinate. It is widely considered that 10 to 15 experts can provide a good base for the forecast. In short , this forecasting method is developed by a panel of experts who anonymously answer a series of questions; responses are fed back to panel members who then may change their original responses Market research• : The objective of conjoint analysis is to determine what combinationofalimitednumberofattributesismostinfluentialonrespondentchoice or decision making. A controlled set of potential products or services is shown to respondents and by analysing how they make preferences between these products, the implicit valuation of the individual elements making up the product or service can be determined. These implicit valuations (utilities or part-worth) can be used to create market models that estimate market share, revenueandevenprofitabilityofnewdesigns.Examplescouldbepanels,questionnaires, test markets, surveys.Product life-cycle analogy: These • forecasts are based on life-cycles of similar products, services, or processes. Products go through a life cycle of introduction, growth, maturity and decline. It is based on experiences of similar products in the past, one can make decision.Expert judgement• : The forecast made by experts are based on experience and understanding of the situation by management, sales force, or other knowledgeable person.

2.7.2 Quantitative Forecasting MethodsThese methods are used when historical data on variables of interest are available. These methods are based on an analysis of historical data concerning the time seriesofthespecificunfixednatureofinterest.Therearethreemajorcategoriesofquantitativeforecastingmethods.Thefirsttypeusesthepasttrendofaparticularvariable in order to make a future forecast of the variable. In recognition of this method’s reliance on time series of past data of the variable that is being forecasted, itiscommonlycalledthe“timeseriesmethod.”Thesecondcategoryofquantitativeforecasting techniques also uses historical data. But in forecasting future values of a variable, the forecaster examines the cause-and-effect relationships of the variablewithotherrelevantvariablessuchasthelevelofconsumerconfidence,


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changes in consumers’ disposable incomes, the interest rate at which consumers canfinance their spending throughborrowing, and the state of the economyrepresented by such variables as the unemployment rate. Thus, this category of forecasting techniques uses, past time series on many relevant variables to produce the forecast for the variable of interest. Forecasting techniques falling under this category are called causal methods, since such forecasting is predicated on the cause-and-effect relationship between the variable forecasted and the other selected elements.

Quantitative Methods

Time Series Method

Moving Averages

Focus Forecasting

Mathematical Models

Causal Method

Exponential Smoothing

Box-Jenkins Method

Fig .2.6 Types of quantitative methods

2.7.2.1 Time Series Forecasting MethodsTime series forecasting methods are based on analysis of historical data (time series: a set of observations measured at successive times or over successive periods). They make the assumption that past patterns in data can be used to forecast future data points.

Moving averages (simple moving average, weighted moving average): Forecast •is based on arithmetic average of a given number of past data points. Exponential smoothing (single exponential smoothing, double exponential •smoothing): A type of weighted moving average that allows inclusion of trends, etc.Mathematical models (trend lines, log-linear models, Fourier series, etc.): •Linearornon-linearmodelsfittedtotime-seriesdata,usuallybyregressionmethods.Box-Jenkins methods: Autocorrelation methods used to identify underlying •timeseriesandtofitthe“best”model.

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Components of time series demand The components of the time series demand are given in the table below:

Component ExplanationAverage The mean of the observations over time.

Trend A gradual increase or decrease in the average over time.

Seasonalinfluence Predictable short-term cycling behaviour due to time of day, week, month, season, year, etc.

Cyclical movement Unpredictable long-term cycling behaviour due to business cycle or product/service life cycle.

Random error Remaining variation that cannot be explained by the other four components.

Table 2.2 Components of time series demand

Simple Moving AverageMoving average techniques forecast demand by calculating an average of actual demandsfromaspecifiednumberofpriorperiods.Eachnewforecastdropsthedemand in the oldest period and replaces it with the demand in the most recent period;thus,thedatainthecalculation“moves”overtime.

Simple moving average: At = D

Where N = total number of periods in the averageForecast for period t+1: Ft+1 = AtKey decision: N - How many periods should be considered in the forecastTradeoff: Higher value of N - greater smoothing, lower responsivenessLower value of N - less smoothing, more responsiveness

The more periods (N) over which the moving average is calculated, the less •susceptible the forecast is to random variations, but the less responsive it is to changes.A large value of N is appropriate if the underlying pattern of demand is •stable.A smaller value of N is appropriate if the underlying pattern is changing or if •itisimportanttoidentifyshort-termfluctuations.

Weighted Moving AverageWeighted moving average is a moving average where each historical demand may be weighted differently.Average: At = W1 Dt + W2 Dt-1 + W3 Dt-2 + ... + WN Dt-N+1where:


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N = total number of periods in the averageWt = weight applied to period t’s demandSum of all the weights = 1Forecast: Ft+1 = At = forecast for period t+1

Exponential SmoothingExponential smoothing gives greater weight to demand in more recent periods, and less weight to demand in earlier periods.Average: At = a Dt + (1 - a) At-1 = a Dt + (1 - a) FtForecast for period t+1: Ft+1 = AtWhere:At-1 =“seriesaverage”calculatedbytheexponentialsmoothingmodeltoperiodt-1a = smoothing parameter between 0 and 1the larger the smoothing parameter , the greater the weight given to the most recent demand

Double Exponential Smoothing (Trend-Adjusted Exponential Smoothing)When a trend exists, the forecasting technique must consider the trend as well as the series average. Ignoring the trend will cause the forecast to always be below (with an increasing trend) or above (with a decreasing trend) actual demand.Double exponential smoothing smooths (averages) both the series average and the trendForecast for period t+1: Ft+1 = At + TtAverage: At = aDt + (1 - a) (At-1 + Tt-1) = aDt + (1 - a) FtAverage trend: Tt = B CTt + (1 - B) Tt-1Current trend: CTt = At - At-1Forecast for p periods into the future: Ft+p = At + p Ttwhere:At = exponentially smoothed average of the series in period tTt = exponentially smoothed average of the trend in period tCTt = current estimate of the trend in period ta = smoothing parameter between 0 and 1 for smoothing the averagesB = smoothing parameter between 0 and 1 for smoothing the trend

Multiplicative Seasonal MethodWhat happens when the patterns you are trying to predict display seasonal effects?

What is seasonality? - It can range from true variation between seasons, to variation between months, weeks, days in the week and even variation during a single day or hour.

To deal with seasonal effects in forecasting two tasks must be completed:A forecast for the entire period (i.e., year) must be made using whatever •forecasting technique is appropriate. This forecast will be developed using whatever.

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Theforecastmustbeadjusttoreflecttheseasonaleffectsineachperiod(i.e.•month or quarter).

The multiplicative seasonal method adjusts a given forecast by multiplying the forecast by a seasonal factor.

Step 1: Calculate the average demand y per period for each year (y) of past data by dividing total demand for the year by the number of periods in the year.

Step 2: Divide the actual demand Dy,t for each period (t) by the average demand y per period (calculated in Step 1) to get a seasonal factor fy,t for each period; repeat for each year of data.

Step 3: Calculate the average seasonal factor t for each period by summing all the seasonal factors fy,t for that period and dividing by the number of seasonal factors.

Step 4: Determine the forecast for a given period in a future year by multiplying the average seasonal factor t by the forecasted demand in that future year.

Seasonal Forecasting (multiplicative method)Actual Demand

Year Q1 Q2 Q3 Q4 Total Avg1 100 70 60 90 320 802 120 80 70 110 380 953 134 80 70 100 381 96

Seasonal FactorYear Q1 Q2 Q3 Q41 1.25 .875 .75 1.1252 1.26 .84 .74 1.163 1.4 .83 .73 1.04Avg. Seasonal Factor 1.30 .85 .74 1.083

Seasonal Factor - the percentage of average quarterly demand that occurs in each quarter.

Annual Forecast for year 4 is predicted to be 400 units.Average forecast per quarter is 400/4 = 100 units.Quarterly Forecast = avg. forecast × seasonal factor.

Q1: 1.303(100) = 130•Q2: .85(100) = 85•Q3: .74(100) = 74•Q4: 1.083(100) = 108•


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Causal Forecasting MethodsCausal forecasting methods are based on a known or perceived relationship between the factor to be forecast and other external or internal factors.

Regression: Mathematical equation relates a dependent variable to one or more •independentvariablesthatarebelievedtoinfluencethedependentvariable.Econometric models: System of interdependent regression equations that •describe some sector of economic activity.Input-outputmodels:Describestheflowsfromonesectorof theeconomy•to another, and so predicts the inputs required to produce outputs in another sector.Simulation modelling-• Different equations are used in production ordering activities under this method

Focus Forecasting“Focusforecasting”referstoanapproachtoforecastingthatdevelopsforecastsbyvarioustechniques,thenpickstheforecastthatwasproducedbythe“best”ofthesetechniques,where“best”isdeterminedbysomemeasureofforecasterror.

Example: Forthefirstsixmonthsoftheyear,thedemandforaretailitemhasbeen15, 14, 15, 17, 19, and 18 units. A retailer uses a focus forecasting system based on two forecasting techniques: a two-period moving average, and a trend-adjusted exponential smoothing model with = 0.1 and = 0.1. With the exponential model, the forecast for January was 15 and the trend average at the end of December was 1.

The retailer uses the mean absolute deviation (MAD) for the last three months as the criterion for choosing which model will be used to forecast for the next month.

a. What will be the forecast for July and which model will be used?b. Would you answer to Part a. be different if the demand for May had been 14 instead of 19?

2.8 Measuring Forecast ErrorsThere are two aspects of forecasting errors to be concerned about - Bias and Accuracy.

Bias: A forecast is biased if it errs more in one direction than in the other. The method tends to under-forecasts or over-forecasts.

Accuracy: Forecast accuracy refers to the distance of the forecasts from actual demand ignore the direction of that error.

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Example: For six periods forecasts and actual demand have been tracked The following table gives actual demand Dt and forecast demand Ft for six periods:

t Dt Ft Et (Et)2 |Et| | Et|/ Dt

1 170 200 -30 900 30 17.6%2 230 195 35 1225 35 15.2%3 250 210 40 1600 40 16.0%4 200 220 -20 400 20 10.0%5 185 210 -25 625 25 13.5%6 180 200 -20 400 20 11.1%Total - - -20 5150 170 83.5%

Forecast MeasureCumulative sum of forecast errors (CFE) = -201. Mean absolute deviation (MAD) = 170 / 6 = 28.332. Mean squared error (MSE) = 5150 / 6 = 858.333. Standard deviation of forecast errors = 5150 / 6 = 29.304. Mean absolute percent error (MAPE) = 83.4% / 6 = 13.9%5. Forecast has a tendency to over-estimate demand.•Average error per forecast was 28.33 units, or 13.9% of actual demand.•Sampling distribution of forecast errors has standard deviation of 29.3 •units.

2.9 Criteria for Selecting a Forecasting MethodObjectives: 1. Maximise Accuracy and 2. Minimise BiasPotential Rules for selecting a time series forecasting method. Select the method that

gives the smallest bias, as measured by cumulative forecast error (CFE); or•gives the smallest mean absolute deviation (MAD); or•gives the smallest tracking signal; or•supports management’s beliefs about the underlying pattern of demand•


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SummaryImplementinganinventorymanagementplanbeginswiththespecificitems•that one has and the type of storage location in which the product is kept.Asamanagerofasmallormediumsizedfirm,havingastrategyplanisthe•most important and intimidating activity. Thecreationofastrategicplanisafive-stepprocess–Strategicobjectives,•SWOT analysis, core values, the mission, vision.The biggest mistake entrepreneurs make is placing the business plan and never •reviewing it often. The business plan provides guidelines, projections and suppositions of how the business works. It must continue to be continuously revisedInordertomakeareasonableprofit,anybusiness’sinventorymustbemanaged•in the most effective way to provide enough products for good customer service,andshouldalsoavoidfinancialdifficulties.Forecasting is a common statistical task in business, where it helps inform •decisions about scheduling of production, transportation and personnel, and provides a guide to long-term strategic planning.All forecasting methods can be divided into two broad categories: Qualitative •and Quantitative methods. Qualitative Forecasting methods generally employ the judgment of experts •to generate forecasts. A key advantage of these procedures is that they can be applied in situations where historical data are simply not available.Themethodsunderqualitativeforecastingtechniquesare–Delphimethod,•Market research, Product life-cycle analogy and Expert judgement.Quantitative methods are used when historical data on variables of interest are •available. These methods are based on an analysis of historical data concerning thetimeseriesofthespecificunfixednatureofinterest.Themethods under quantitative forecasting techniques are –Time series•method, Usual method and focus forecastingThemethodsundertimeseriesare–Movingaverages,Exponentialsmoothing,•Mathematical models, Box Jenkins methods

ReferencesUniversity of Guelph, • Forecasting [Online] Available at: <http://www.uoguelph.ca/~dsparlin/forecast.htm#SIMPLE%20MOVING%20AVERAGE [Accessed at 05 July 2011].MicrosoftOffice,• Forecast inventory levels with Moving Average analysis, [Online]Availableat:<http://office.microsoft.com/en-us/excel-help/forecast-inventory-levels-with-moving-average-analysis-HA001086480.aspx> [Accessed at 05.July.2011].Aiello J. L., 2007.• Rightsizing Inventory (Resource Management), Auerbach Publications.

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Zipkin, P.H., 2000. Foundations of Inventory Management, McGraw-Hill/•Irwin. • Pomscm,2009,Forecasting [Video online] Available at: < http://www.youtube.com/watch?v=YYspDbriCF8>[Accessed 5 July 2011]. • Thetravhischool,2010,Delphi Method 1, [Video online] Available at: < http://www.youtube.com/watch?v=FFfKOSTftcs&feature=related> [Accessed 5 July 2011].

Recommended ReadingSilver, • E. A., Pyke, D.F., and Peterson, R., 1998. .Inventory Management and Production Planning and Scheduling, 3rd ed.,Wiley.Tersine, R.J., 1993. Principles• of Inventory and Materials Management, 4 ed., Prentice Hall.Wild ,T., 2002. • Best Practice in Inventory Management, 2nd ed.,Butterworth-Heinemann.


http://www.youtube.com/user/pomscm

http://www.youtube.com/watch?v=YYspDbriCF8


http://www.youtube.com/user/thetravhischool

http://www.amazon.com/Edward-A.-Silver/e/B001KDYIZY/ref=ntt_athr_dp_pel_1

http://www.amazon.com/s/ref=ntt_athr_dp_sr_2?_encoding=UTF8&sort=relevancerank&search-alias=books&field-author=David F. Pyke

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Self AssessmentWhat does SWOT analysis in inventory world of business mean?1.

Strengths, Weaknesses, Opportunities, and Threatsa. Strategy, Weaknesses, Opportunities, and Threatsb. Strengths, Work, Opportunities, and Threatsc. Strengths, Weaknesses, Operation, and Threatsd.

Which of the following are the two broad categories of forecasting 2. methods?

Usual method and Focus method a. Qualitative method and Quantitative method.b. Time series method and Quantitative method c. Weighted moving average and Exponential smoothing d.

_________________methods are based on a known or perceived relationship 3. between the factor to be forecast and other external or internal factors.

Weighted moving average forecastinga. Multiplicative seasonal forecasting b. Causal forecastingc. Usual forecastingd.

Which of the following statements are true?4. Simple moving average is a moving average where each historical demand a. may be weighted differently.Time series forecasting methods are based on a known or perceived b. relationship between the factor to be forecast and other external or internal factors.Mathematical mode methods used to identify underlying time series and c. tofitthe“best”model.Exponential smoothing gives greater weight to demand in more recent d. periods, and less weight to demand in earlier periods.

_________________is a moving average where each historical demand may 5. be weighted differently.

Simple movinga. Exponential smoothingb. Focus forecastingc. Weighted moving averaged.

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________________method adjusts a given forecast by multiplying the forecast 6. by a seasonal factor.

The Multiplicative seasonala. The simple moving methodb. Exponential smoothingc. Times seriesd.

_______________________ includes both the series average and the trend 7. methods of forecasting.

Double exponential smoothinga. Exponential smoothingb. Time Seriesc. Simple moving d.

Which of the statements are true?8. Quantitative Forecasting Methods are based on an analysis of historical a. dataconcerningthetimeseriesofthespecificunfixednatureofinterest.Product life-cycle analogy of forecasting is also a quantitative technique b. for forecasting.Delphi method forecasts based on life-cycles of similar products, services, c. or processes.Time series forecast made by experts are based on experience and d. understanding of the situation by management, sales force, or other knowledgeable person.

Which of the statements are true?:9. Focus methods are based on a known or perceived relationship between a. the factor to be forecast. Exponential smoothing techniques forecast demand by calculating an b. averageofactualdemandsfromaspecifiednumberofpriorperiodsandother external or internal factors.Expert researchc. forecasts based on life-cycles of similar products, services, or processes.Market research valuations can be used to create market models that d. estimatemarketshare,revenueandevenprofitabilityofnewdesigns.

_______________ of forecasting is also a non-quantitative technique for 10. forecasting which in Greek ancient times advised people based on intuition and common sense.

Delphi methoda. Market researchb. Expert judgementc. Product cycle analogyd.


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Chapter III

Sales and Operations Planning

Aim


discuss the meaning of sales and operation planning•

enlist different types of approaches in sales and operation planning•

illustrate the importance of sales and operation planning•

Objectives


state the theory of constraints•

discuss the 5 focusing steps of theory of constraints •

explain the importance of sale and operation process in an organisation•

Learning outcome


understand the concepts of Sales and Operation Planning•

explain the Theory of Constraints •

disc• uss the system level measurements

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3.1 Basics of Sales and Operations PlanningEverybusinessmanwantstoaddvaluetohisfirmororganisation.Forthisatestedandproventechniqueisrequiredwhichcanbringsignificantnewvaluetoyourfirm’ssupplychaineffort.Aplanningtoolcanimproveforecastaccuracy,bettermatch supply with demand, and greatly reduce dependence on inventory.

Sales and operations planning has become a major tool for supply chain leaders tired of accepting the natural problems with poor sales forecast accuracy, complications with planning and scheduling due to changing customer demand. There is a need to build safety stocks into inventory for the predictable problems introduced by certainties in the marketplace. This paper addresses the ideas behind sales and operation planning and discusses techniques that have been successfully applied.

Sales and operation planning is all about gathering information that’s generally available which may be not provided or used. The need is to balancing supply anddemandinawaythatovercomesthedeficienciesofweakforecastingandresults in more optimum performance coming from the initial suppliers to the satisfiedcustomers.Thetechniqueswillbeusedtodemonstratehowtoapplythetool to cope with the problems and meet business objectives through the solutions it provides.

Sales and operations planning(S and OP) is an integrated business management process through which the executive/leadership teams try to continually focus alignment and bring out synchronisation among all functions of the organisation. The Sales and operations planning include the following plans:

Updated Sales Plan

Strategic Initiative Plan

Customer Lead Time (Backlog)

Plan

New Product Development

Plan

Resulting Financial Plan

Production Plan

Inventory Plan

Fig. 3.1 Plans included in sales and operations planning


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Planfrequencyandplanninghorizondependonthespecificsofthatparticularindustry. Short product life cycles and high demand instability require a tighter planning .The S AND OPprocess also enables effective supply chain management.

A properly implemented S and OP process routinely reviews customer demand and supply resources. If required it again plans quantitatively across an agreed rolling horizon. The re-planning process focuses on changes from the previously agreed sales and operations plan. It not only helps the management team to understand how the current level of performance is by company but also focuses on future actions and anticipated results. The S and OP process enables companies who have an integrated business management process to monitor the execution of the company’s strategies.

Afterapplyingsalesandoperationplanningsomefirmscanattainprofitsdoingthe following:

increasing revenues due to decrease in stocks•determining accurate demand from customers•reducing inventories as per needs•shortening cycle times from order to cash•improving planning and scheduling •eliminating mistakes in the processing•better satisfying customers while reducing supplier frustrations•

3.1.1 Approaches of Sales and Operation PlanningThere are two different approaches which are used in sales and operations planning, namely, top-down planning and bottom-up planning.

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Top Down Planning

Bottom Up Planning

Sales and Operations Planning

Fig. 3.2 Two approaches to sales and operation planning

Top-down planningTop-down planning is the simplest approach to sales and operations planning. In this approach, there is a single sales forecast that drives the planning process. The forecast is derived from a combination of products and services that require similar resources,forexample,anumberofmanufacturedfinishedproducts.Usingtop-down planning, the management can create strategic plans based on the overall forecastanddividetheresourcesacrossthefinishedgoodsintheplan.

Bottom-up planningThis approach is used by companies which do not have a stable manufacturing scheduleandthenumberandtypeoffinishedgoodscanchangefrommonthtomonth. In this scenario the sales forecast is not helpful for resource planning. The management needs to calculate the resources for each of the products and then merge the resources to get an overall picture of resource requirements.

Production plansAfter a company has worked through their sales forecasts and calculated the resource requirements, the various alternate production plans should be generated. There are three approaches that are used for the production plan, which are as follows:


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Level Production Plan

Chase Production Plan

Mixed Production Plan

Fig. 3.3 Approaches to production plan

The level production plan is used where the cost of making a change in the •production level is extremely expensive, while the cost of holding inventory is very low, for example in the oil industry. Using the level production plan, the production remains constant and inventory is used to absorb the differences between the sales forecast and the production.The chase production plan is the opposite of the level production plan. In this •production plan the production is changed for each time interval of the plan to match the sales forecast for that interval. With this approach the production is always chasing the demand, hence the name, chase production plan. This approach is best used for companies who either cannot hold inventory or to do so is extremely expensive, while changes in production costs very little.The mixed production plan takes elements from both the chase and level plans, •where there will be variances in production and inventory levels which will produce the best production plan.

3.2 Definitions – Sales and Operation PlanningAPICSdefinesSales andOperationPlanningas“Thefunctionofsetting theoverall level of manufacturing output (production plan) and other activities to best satisfy the current planned levels of sales (sales plan and/or forecasts), while meetinggeneral business objectives of profitability, productivity, competitivecustomer lead times, etc., as expressed in the overall business plan. One of its primary purposes is to establish production rates that will achieve management’s objective of maintaining, raising, or lowering inventories or backlogs, while usually attempting to keep the workforce relatively stable. It must extend through aplanninghorizonsufficienttoplanthelabour, equipment, facilities, material, andfinancesrequiredtoaccomplishtheproductionplan.Asthisplanaffectsmanycompany functions, it is normally prepared with information from marketing, manufacturing,engineering,finance,materials,etc.”

http://en.wikipedia.org/wiki/Labour_(economics)

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Sales andoperations planning has also beendescribed as “a set of decision-makingprocessestobalancedemandandsupply,tointegratefinancialplanningand operational planning, and to link high level strategic plans with day-to-day operations”

S and OP is a process where executive level management meet regularly and reviewsprojectionsfordemand,supplyandtheresultingfinancialimpact.SandOP is a decision making process that keeps the overall view of the company’s business plan in mind and plans every business area in line with it. The overall resultoftheSandOPprocessisthatasingleoperatingplaniscreatedthatidentifiesthe allocation of company resources, including time, money and employees.

S and OP is not a new technique to the management world but is a management tool for decades. There is a wide variation in the degree to which it is used and the results of the effort over an extended time frame. It also shows that most companies failed to pursue it to best case conditions and as a result their interest faded and therefore dropped it from the high priority activity list. Current studies indicate leadingthatfirmshavere-discoveredthetoolandaregenerallywellpleasedwiththe renewed effort. With the help of willing suppliers and customers, they have introduced combined techniques that dramatically and favourably impact sales forecast accuracy and the matching of supply with demand so cycle times and inventoriescanbesignificantlyreduced,whileimprovingresponsiveness.

Some of the points to be noted about sales and operations planning are that it doesnotcomplywitha“BestPractice”approachofstructuredprocesses.Datasupported, consensus decision making and understanding of the business direction and potential risks for moving forward are not often included.

Some firms resort to developing a formal and robust sales and operationsplanning process. Such efforts will become a vehicle for the communication and integrationofthedemandandsupplyplanningactivitieswiththefinancialplansof the company. This move will introduce clear and better understanding and communication of the business direction and potentials risks ahead throughout theorganisation.Apilotapproachcanalsobediscussedthatallowsfora“proofofconcept”forapieceofthebusinessthereforeminimisingriskbeforerollingout S and OP across the entire organisation.

Belowisanillustrationoftheapproachthatcanbetaken,asthefirmmovesfroman initial assessment to design and prototype of the system to be applied. It includes a recommended pilot phase and concludes with a successful roll-out.


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Completed High Impact Supply Chain Assessment Proposing Next Phase

AssessDesign

and Prototype

Pilot Roll - out

Fig. 3.4 The sales and operations planning framework

3.3 Importance of S and OP Process Every company does some kind of production planning whether as a formal processorsomethinginformalliketalkinginahall.Therearemanybenefitsafteradopting Sales and Planning operations which could be listed:

It makes customer service objectives happen through better management of •finishedgoodsinventoryorbacklog.Oneofthemostimportanttoolsinacustomer driven organisation is Sales and operation planning .The market trendskeepsfluctuatingconstantlysotherecannotbearightleveloffinishedgoods inventory therefore sales and operation planning techniques comes to the rescue of the managers. Response to the marketplace is most importance as compared to managing inventories in right number.It connects strategy and operations- Sales and operations planning ties up the •company’s high level business and strategic plans to the operations of each department, guaranteeing harmony among them. Many organisations face a loss due to loss of control and lack of effective communication within the organisationastheyhavefinancialplanswhicharenotdirectlytiedupwiththe operating system. Ityieldsaworkableplan–Someofthefactorsthatleadtothefailureofa•workable plan are competitive pressures, unreasonable customers and increasing expectations from top management. In order to make this plan workable, Sales and operation process is adopted where a series of reality checks are done so that the plan is attainable .A rough cut test is passed through the plan just to verify the detail material and capacity plans. Each department participates in the process where all the key functions of the plans are accounted for eliminating surprises.It makes it • possibletomanagechange–managingchangeinbusinesshavetwoaspects–oneismakingachangeattherightlevelandsecondthatchangehappens.

Salesandoperationplanningistheappropriateplacetomakesignificantchangesbecause it ensures that all department are in agreement. It links the low level and high level plans. Detail plans are translated well once the changes are made at the sales and operation planning level.

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It provides a basis for measuring performance. This process is related to the •development of a common workable plan which is agreed by all. Such plan becomes a basis for measurement. Then the emphasis is laid on if the plan is attainable. . Many questions arise from if the plan is overstated and if someone needs to accept some part of the blame and there is little accountability. Therefore Sales and operation planning is critical to maintaining accountability and managing company effectively.

Improves Customer services levels

Improves Inventory levels

Improves control of the business

improves overall communication

Fig. 3.5 Benefits of sales and operation planning

3.4 Operations Planning for S and OP Process Manufacturers in the Consumer Packages Goods (CPG) Sector were the early adopters of supply chain forecasting method in their organisation. CPG manufacturersfocusedonminimisingtheforecasterrortodrivefillratesandlowerinventorycarryingcostsbycateringtothefirmdemandsoftheRetailPartners.CPG companies started adopting S and OP process to develop forecast agreement and holistic planning.

Most CPG supply chains have active sales and operations planning process, which is cross-functional with participation from sales, marketing, logistics, supply planning,finance, salesplanninganddemandplanning functions.A tolerancebetween forecasts with different objectives is one of the important philosophy of sales and operation planning. This process thrives on group effort and honest communication between key organisational players. This is a unique process embodying several information sharing sessions and decision forums, with the finalintenttogenerateanorganisationalplan. Some times the S and OP implementation with an on-site workshop are organised by lots of companies. These type of workshops will be a key input and bring to limelightmanycompany-specificdrivers.Suchworkshopaddressesthekeysteps


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in developing and implementing an effective Sales and OP process. By having your key stakeholders attend this workshop, a huge competitive advantage is attained in moving forward the idea of integrated business planning.

The technique starts with gathering the projected demand information and compiling it in a usable form by multiple constituents across the supply chain. From that information, a “consensus demand forecast” is generated.Biggerinputs from key customers are amended by knowledge of current operating and market conditions beginning with the sales forecast originally used for planning purposes.

In the next step, an evaluation is made to match the consensus demand against any known or anticipated manufacturing and logistics constraints. When problems are encountered, the system is used to notify important constituents on either side of themanufacturingfirm.Specificconflictsareconsideredforresolutionthroughagate that determines whether they can be resolved or need further attention. Where they can be resolved, there is a step in which alternative actions are considered anddecisionsaremadetoresolvetheconflict.

Whentheconflictscannotbeimmediatelyresolved,thenextstepistoestablisha“consensusexecutionforecast”ornewsupplyplanthatisagaincommunicatedto all important constituents. Finally, there is a step to monitor progress versus the altered demand and supply plans. The overall objectives, of course, are the optimal utilisation of corporate and enterprise resources and better satisfaction of the customer

Optimal utilisation of

Corporate resources

Gather information and compile

Establish a Demand

Plan

Evaluate against

constraints

Establish a supply plan

Monitor progress vs. Demand and supply plans

Conflicts

Yes

No

Fig. 3.6 The sales and operations planning implementation

S and OP have served companies well for many years as a way to balance supply and demand. But traditional S and OP processes were designed before globalisation and these days due to the internet, business world has gone through lots of changes.

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Companies want to achieve their goals to maximise business opportunities and lessen risks. Uncertainty of demand, volatility of supply, and increasing customer expectations are challenging factors in the business world and also the need of S and OP.

3.5 Theory of Constraints Affects Sales and Operations PlanningThe Theory of Constraints (TOC) is a philosophy of management and improvement which was originally developed by Eliyahu M. Goldratt and introduced in his book -The Goal. It is based on the fact that, like a chain with its weakest link, in any complex system at any point in time, often only one aspect of that system that is limiting its ability to achieve more of its goal. The particular constraint mustbeidentifiedsothatthesystemattainssignificantimprovementandtheinthe mind whole system must be managed.

Problems are looked at from a system level in TOC unlike to some quality methods thatarefocusedonspecificprocesses.Whenimprovingasystem,onemustlookat the goal of the system, and then what constrains it from achieving the goal. Thegoalofabusinessistomakeprofitsnowandinfuture.Theconstraintcanbeviewed as its weakest link, and a system can have only one weakest link at any giventime.TOChelpsusfindandmanagethatweakestlink.Inorganisationsimprovement activity does little to improve the overall strength of the system. It is understood that strengthening a non-weak link could further strain the weakest link to the point of breaking the system.

The body of knowledge and analytical tools (the TOC Thinking Processes) that givepowertoTOCcomefromexperienceinthe“accuratesciences”andarebasedon rigorous which are also easily understood, cause-and-effect logic. These tools also provide the ability to support the development of breakthrough solutions throughthepremise.Fundamentallyintherealworld,allsystemicconflictsthatrestrainactionaretheresultofunexaminedassumptionsthatcanbeidentifiedand corrected for true win-win solutions.

As a whole, the TOC thinking processes provide an integrated problem-solving methodology that addresses not only the construction of solutions but it also takes care of the need for communication and collaboration that successful implementation requires in an organisation. These constraints determine the output of a system whether they are approved or not. So manager’s best interest would lie in identifying and reduce the system constraints within the organisation. The theory of constraints is both descriptive and prescriptive in nature. It describes the cause of system constraints and also provides guidance on their resolution.

3.5.1 Systems as ChainsA system is a collection of interrelated, independent processes that work together to turn inputs into outputs in the pursuit of some goal. A chain always has one weakest link and any force applied to the chain at an increasing rate would lead to breakage at the weakest link. Therefore, the weakest link would be the


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constraint that prevents the system (chain) from doing any better at achieving its goal (accepting force). Goldratt states that at any given time there is only one constraint in a system that limits the output of the entire system. The remaining “links”areknownasnonconstraints.

After strengthening one constraint, the system is stronger. It should not be forgotten thatthesystemdoesnotbecomeinfinitelystronger.Theconstraintsimplymigratesto a different component of the system.

Inputs OutputProcess A

10 units/day

6 units/day

8 units/day

Market demand 15

Source : Adapted from Goldratt’s Theory of Constraints by H. William Dettmer

Process B

Process C

Fig. 3.7 Theory of constraints

An ExampleTo get a better understanding lets take a look at the theory of constraints and non constraints. Consider a production system that runs raw materials through three componentprocessesandthenturnsthemintoafinishedproduct.

Let’s assume that each process is equivalent to a link in the production chain. Here constraints of the chain would be -Process B is the weakest link. Process B produces the least at only six units per day. Process A and C are the non constraints. Imagine that the manufacturer improves process B until it can produce 18 units per day. Now, process C becomes the system constraint while the non constraints are everywhere else. If process improvements continue until all processes are producing 18 units per day or higher, the system constraint becomes the marketplace, which can accept only 15 units per day.

Internal constraints have been replaced by an external constraint at this point. Overall, the theory of constraints emphasises fixing theweakest link in thechain—thesystemconstraint—andtemporarilyignoringthenonconstraints.Inthis way, the theory has a greater impact on process improvement.

Rather than spreading limited time, energy, and resources across an entire system (which may or may not result in tangible results), teams focus on that part of the system with the potential to produce immediate system improvement

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3.5.2 Throughput, Inventory, and Operating ExpenseIn order to determine the effect that any local action has on progress toward a system goal, Goldratt created a simple relationship chart between three system-level measurements: throughput (T), inventory (I), and operating expense (OE).

Dimensions Examples

Throughput :Rate at which an entire system generates money through sales of a product or services.

Money(forprofitorganisation)•Delivery of a product or service •to the customer ( non profi t organisation)

Inventory: All of the money a system invests in the products or services it intends to sell.

Raw Materials•Unfinishedgoods•Purchased parts•Investment in equipment/ facilities•

Operating expense: All of the money a system spends in turning inventory into throughput.

Direct Labour•Utilities•Consumable supplies •Depreciation of assets •

Table 3.1 Throughput, Inventory and operating expense


Throughout Money coming in

Inventory money tied up inside

Systems $

Operating expense Money going out

$ $

Fig 3.8 Three Dimensions in theory of constraints

Given Goldratt’s three dimensions, organisations have three different options for system improvement: increasing T, reducing I, or reducing OE.


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The practical limits of reducing inventory and operating expenses are relatively low, as a system can’t produce many outputs without them. Theoretically, there’s no upper limit to how much an organisation can increase its throughput, but market sizes are limited.

The potential for increasing T tend to be much higher than the potential for decreasing I and OE. Therefore, a basic model for system improvements focuses on increasing T and making reduction of I and OE a secondary priority, as shown below


Maximise T

T I OE

Minimise I and OE without degrading T

Fig. 3.9 Three options for system improvement

3.5.3 The Five Focusing StepsThere are five focusing steps in theory of constraints,which are discussedbelow:Step 1: Identify thesystemconstraint inanorganisation identifies thepartofthe system that constitutes the weakest link in this step. Then it is important to understand if it is a physical constraint or a policy-related issue.

Step 2:Decidethewaystoexploittheconstraint.Heretheorganisations“exploit”the constraint by utilising every bit of the constraining component without committing to potentially expensive changes and/or upgrades.

Step 3: Subordinate everything else. To do that a plan in place is needed for exploiting the constraint; the organisation adjusts the rest of the system to enable the constraint to operate at maximum effectiveness.

Evaluate the results to see if the constraint still holds back system performance. If it is, the organisation proceeds to Step 4. It not, the constraint has been eliminated and the organisation skips ahead to Step 5.

Step 4: Elevate the constraint. If an organisation reaches Step 4, it means that Steps2and3werenotsufficientineliminatingtheconstraint.Atthispoint,theorganisation elevates the constraint by taking whatever action needed to eliminate it.

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This may involve major changes to the existing system, such as reorganisation, or capital improvements. Since these typically require a substantial up-front investment, the organisation should be certain that the constraint cannot be improved from Steps 1 through 3.

Step 5: Go back to Step 1. After a constraint is broken, the organisation repeats the steps all over again, looking for the next thing constraining link. At the same time, the organisation needs to monitor how the changes related to subsequent constraints impact the already improved constraints.

3.6 Formal Work on the Case StudySales and Operations Planning Process for a leading Indian Cement Manufacturer

Business scenarioOperations involved selling multiple brands which were transported through a multimode logistics network (rail, road, sea), either directly to customers or to 200+depotswhichservedthecustomers.Averylooselydefinednon-uniformsalesand operations planning process with limited involvement of all stakeholders. Planning is done at a very aggregate level.

Limited visibility and buy-in of the current process outputs. Somehow it did not drive the supply chain.

Incorrect Sourcing decisions (source, mode) to meet demand. Increased logistics costs

Reduced ability to react to changes in supply chain (e.g., reallocation of material due to changes in demand over a month). Capacity Constrained Situation. Affected service levels

Threat from regional players providing superior service levels and entry of MNC’s.

Our solutionAnintegratedandwelldefinedsalesandoperationsplanningprocesswasdefinedand implemented. It involved all the key stakeholders including the territory sales managers, regional heads, zonal heads and the central planning team. It was designed to work at more granular level than before. The process outputs were visible to all the stakeholders and a ‘single plan’ was driving the supply chain. Metrics were put in place to measure the process compliance and output of each stakeholder.

A best source-mode combination was suggested to meet demands depending on minimum and maximum level of demand to be met, the revenue realisation from meeting the demand and the logistics costs incurred in meeting the demand.


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Granular level of planning (month to days) meant more granular demand picture over a month and a better ability to reallocate material based on demand profiles.

Benefits Existence of single plan and visibility of that plan to key stakeholders ensured better coordination between them. It also ensured better coordination with externalstakeholders–plantlogisticsteamswereabletogivebettervisibilitytotransporters and railways on the requirements, sales team was able to give more realistic commitments to their customers. The sum total of the above meant better customer service levels. Logistics cost reduction on account of better way to decide on source-mode and more granularities in planning

Accountability on account of more visibility and metrics framework.

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SummarySales and operations planning(S and OP) is an integrated business management •process through which the executive/leadership teams try to continually focus, alignment and bring out synchronisation among all functions of the organisation.Top-down planning is the simplest approach to sales and operations planning. •In this approach, there is a single sales forecast that drives the planning process.This approach is used by companies that do not have a stable manufacturing •scheduleandthenumberandtypeoffinishedgoodscanchangefrommonthto month.Salesandoperationsplanninghasalsobeendescribedas“asetofdecision-•makingprocessestobalancedemandandsupply,tointegratefinancialplanningand operational planning, and to link high level strategic plans with day-to-dayoperations”.The Theory of Constraints (TOC) is a philosophy of management and •improvement originally developed by Eliyahu M. Goldratt and introduced in his book -The Goal.In order to determine the effect that any local action has on progress toward •a system goal, Goldratt created a simple relationship chart between three system-level measurements: throughput (T), inventory (I), and operating expense (OE).

ReferencesMurray, M., • Sales and Operations Planning, [Online] Available at:<http://logistics.about.com/od/tacticalsupplychain/a/sandop.htm> [Accessed on 07 July 2011]. IE Group, 20• 11,Sales & Operations Planning Summit ,[Online] Available at: <http://www.theiegroup.com/SOP/Overview.html>[Accessed on 07 July 2011]. Demand Solutions, 2008, How to Execute a Successful Sales & Operations Planning Process, [Video online] Available at : < http://www.youtube.com/watch?v=bIMjU4yjeT4>[Accessed 7 July 2011].Martensson, H., 2007• . The Chain Theory,[Video online] Available at: < http://www.youtube.com/watch?v=FbX9kQa-_eQ> [Accessed 7 July 2011].Wallace, • T. F. and Stahl, R. A., 2008. Sales and Operations Planning: The How-to Handbook, 3rd ed., T. F. Wallace & Co.Goldratt, E. M., 1999. • Theory of Constraints, North River Press.


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Recommended ReadingDougherty, J. and Gray, C., 2006. • Sales & Operations Planning - Best Practices: Lessons Learned , Trafford Publishing.Singh H., 2009. • A Practical Guide for Improving Sales and Operations Planning, Supply Chain Consultants.Inc. Oliver Wight International, 2005. • The Oliver Wight Class A Checklist for Business Excellence (The Oliver Wight Companies), 6th ed., Wiley.

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Self AssessmentThe Theory of Constraints (TOC) is a philosophy of management and 1. improvement originally developed by_________________.

Eliyahu M. Goldratta. Eliott Goldrattb. Ellis Goldrattc. Ellien Godrattd.

Rate at which an entire system generates money through sales of a product 2. or services is _____________ .

throughputa. inventoryb. operating expensesc. investmentd.

All of the money a system invests in the products or services it intends to sell 3. is _________________ .

throughputa. inventoryb. operating expensesc. investmentd.

All of the money a system spends in turning inventory into throughput is 4. ______________ .

Throughputa. Inventoryb. Operating Expensesc. Investmentd.

_________________ is the simplest approach to sales and operations 5. planning.

Top-down planninga. Bottom-Up Planningb. Top-bottom planningc. Top- end planningd.


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_______________ is used by companies that do not have a stable 6. manufacturingscheduleandthenumberandtypeoffinishedgoodscanchangefrom month to month.

Top-down planninga. Bottom-Up Planningb. Top-bottom planningc. Top- end planningd.

State if the following statement is false?7. It connects strategy and operations is one of the objectives of S and OP.a. It yields a workable plan is one of the objectives of S and OP.b. It makes it possible to manage change is one of the objectives of S and c. OP.Decide the ways to exploit the constraint is one of the objectives of S and d. OP.

State if the following statement is false?8. Identifythesystemconstraintinanorganisationidentifiesthepartofthea. system that constitutes the weakest link in this step is the one of the focus steps.Elevate the constraint is the one of the focus steps.b. To do that a plan in place is needed for exploiting the constraint is the one c. of the focus steps.AnintegratedandwelldefinedSalesandOperationsPlanningprocessd. wasdefinedandimplementedistheoneofthefocussteps.

State if the following statement is false?9. Sales and operations planning(S and OP) is an integrated business a. management process through which the executive/leadership teams try to continually focus, alignment and bring out synchronisation among all functions of the organisation.The Theory of Constraints (TOC) is a philosophy of management and b. improvement originally developed by Eliyahu M. Goldratt and introduced in his book -The Goal.A simple relationship chart between three system-level measurements: c. Throughput (T), Investment (I), and Operating expense (OE).Table of Constraints is based on the fact that, like a chain with its weakest d. link, in any complex system at any point in time, there is most often only one aspect of that system that is limiting its ability to achieve more of its goal.

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State if the following statement is false?10. Inventory is the money a system invests in the products or services it a. intends to sell. Throughput is the rate at which an entire system generates money through b. sales of a product or services.Organising expense is all of the money a system spends in turning inventory c. into throughput.Sales and Operation management is a process where executive level d. management meet regularly and reviews projections for demand, supply andtheresultingfinancialimpact.


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Chapter IV

Making Effective Presentations

Aim


introduce basic skills required for making presentations•

elaborate presentation plan•

elucidate sales and operations plan•

Objectives


describe tools of effective presentation•

explain steps required for planning a presentation •

detail outline of sales and operations plan•

Learning outcome


deliver presentation like a professional•

prepare an effective presentation based on research•

implem• ent sales and operation plan

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4.1 Basic Skills Required for Making Effective PresentationsA presentation is needed during business meetings, product launches, job interviews, trainings, as well as in selling products and services. Working professionals will generally be asked to give presentation in the presence of one or more people. Individuals whose presentation skills are lacking must work doubly hard to improve their skills. These days giving a presentation is an opportunity toshine.Forprofessionalswhoarealwaysnervousorhavedifficultyexpressingtheir thoughts and ideas, it becomes a barrier to career growth. Some presentation skills training focuses on the key aspects that make an effective presentation. It is important to take note of necessary things you need to know in order to deliver an impressive presentation for both big and small audiences.

Presentation skills are often overlooked by many professionals in the greater scheme of career development. Effective speech is not just one of the only presentation skills. In the modern world messages are conveyed with the help of visuals. Usage of computer technology such as PowerPoint or WebEx widely used to communicate has become a boon for the managers. Networking is highly valued by emergency managers. It not only helps agencies to work together in disasters and builds relationships. It is an important career development tool.

Presentations can give anyone a fright but with the use of breathing techniques, visualisation techniques and many other aids, this fear can be taken care of. One of the best ways is to start with the contents of the material in order to ensure effective presentation. What one presents is as important as to how it is being presented.

Further, it also helps corporate and organisation in its aim of uniting the entire workforce for a common mission. Therefore, identifying the varied contents for the presentation is a vital step. Then one must focus on understanding the attitude of target audience and adopting an approach suitable to address them.

A better presentation skill helps in promoting co-operation between sections of the company as it displays high standards of professionalism. With this customers needsare taken into consideration. If the purpose and audience are taken in to consideration while making a presentation then it doesn’t matter if it is presented in an informal manner.


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4.1.1 Tools for Effective PresentationsHere are four simple tools for effective presentations.

Determination of a Style

Determine Core

Information

Know the Surroundings

Well

Usage of Humour

Tools of Effective

Presentation

Fig. 4.1 Tools of effective presentation

Determination of a styleWhile delivering a presentation, the style of one’s presentation helps in grabbing the attention of the audience. Hence, the style of presentation should match one’s personality and be suitable for the topic chosen. The style of one’s presentation comes across in the speaking manner, in the tone of voice, body language, expressions and gestures. Care should be taken that the styles are changed depending upon the choice of topic. For instance: A different style would be usedtoconveysalientscientificdatacomparedtothestyleadoptedtoinformtheaudiencethebenefitsofanewtypeofcosmetic.Thepresenter’spersonalityshould match the topic chosen, the audience and the knowledge. Implementing the correct style is vital to effective presentations. It is important to know the audience, topic and know strengths and weaknesses.

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Determine core informationThere should always be substance to the presentation. The vital information about product or service constitutes this substance. This is what the audience is interested in and all else is secondary to it. Before any professional tries to inject some humour in their presentation, they should also have the substance in place. In verbal presentation emphasis is laid as to what is to be said and how it should be said in what way it would affect the audience. They probably would be surprised at the unique details presented. They have to be moved by the potential involved eventually helping them to take action. All of these things must be planned and structured beforehand. Creation of core of the information is not only important butensuringitfollowsalogicalmanner.Itshouldflowwellwhichwillhelpincreating effective presentations

Know the surroundings wellIt’s essential that the presenter has an understanding of the space where he will be doing a presentation or giving a speech. Whether he will be using props, a PowerPoint presentation or simply standing behind a lectern, it is important that he should get a grasp of the situation where he will be in. Visiting the venue aheadoftimeandfindingouthowtousetheirequipment,whereonecanplugthe laptop and how loud he needed to speak to ensure that everyone will be able to hear him comfortably.

Usage of humourHumour is one of the most powerful tools at one has at his disposal. It is one of the underlying emotions common to everyone, from presidents to the common layman.Humour canbeused formany things – it helps to connectwith theaudience on a deep, subconscious level. Initially, it helps to break the ice with the audience. It can also help the presenter feel less stressed and fearful when he takes the stage. A little humour makes the whole session better for the audience as well as the presenter. . A few well-placed anecdotes or an occasional joke about the state of the industry or even poking a bit of fun at oneself at key points during the presentation would be acceptable. The important thing is that the humour should feel natural rather than forced. Delivering an effective presentation is within reach providedtheutilisationoftheprinciplesisoutlined.Confidentpublicspeakingwould be easy once the presenter uses these strategies. The delivering an engaging and captivating speech would be a cakewalk.

4.2 Planning a Presentation In the beginning one should determine the objectives of the presentation. A presenter must answer this question. What does he want to achieve by giving a presentation to a particular audience. The answer to this question should help one plan his presentation. For example: If one has been asked to give presentation to a group of managers in his company on next year’s departmental budget. The important part is that what is to be accomplished with the presentation. Would it ask for a budget increase, or presenting a plan that shows how one can operate on lessmoney?Thinkaboutthespecificobjectiveskeepingaudienceinmindbeforepreparing your presentation.


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Step 1: Develop Objectives

Persuasive Informative

Fig. 4.2 The P-I diagram

This diagram describes the relationship between persuasive and informative presentations. They are not of separate types but in a way they exist on a scale. An example of an informative presentation: At the far end of the diagram would be a status report or a project update. All persuasive presentations contain elements of information given and all informative presentations contain elements of persuasion. Heading in the direction of the arrow, presentations become more and more persuasive. When the vertical line in the centre is crossed, in the direction of the arrow, the presenter tells the audience what change is requested; this in part, is the definitionofapersuasivepresentation.Presentationsontheinformativesideoftheline imply that some action should be taken, in a stronger and stronger manner, as the centre line is approached. Use of the P-I Diagram helps to determine the objective.Markingtheplaceonthediagramhelpsinfindingoutwhetherthepresentation falls in persuasive or informative.

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Step 2: Analysing the Audience When analysing the audience four items have to be considered.

Audience

Value• • Needs • Constraints • Demographic Information

Fig. 4.3 Four factors required to analyse audience

Values• : Values are very important to any group. Different organisations have different value systems. Giving a presentation outside your organisation is probably very different from delivering a presentation in-house. Again different departments within an organisation can have different values. Needs• : Itisimportanttofindoutinadvanceofthepresentationwhatarethe needs of the. This probably would be quite different from what one has thoughttheywouldneed.Thespeakerthenmustfindawaytoresolvethediscrepancy. • Constraints: They are some of the things that might hold the audience back from doing what one wants them to do or from knowing what one wants them to know. Internal politics can be a constraint. If one must get support from competing factions one must take that into consideration when organising the presentation. In addition, personality clashes and other forms ofconflictmayinterferewiththesuccess.Resistanceisencounteredwherethere is an expenditure of money. This should be taken into consideration in the presentation. All of professionals have their own area of specialisation. Use of technical language, abbreviations, acronyms, buzz words, etc which people in the audience might not understand. Ask the audience if they are familiarwiththeterminologyanddefineitifnecessary.Demographic Information• : Things like the size of the audience, location ofthepresentation,etc.,mayalsoinfluencetheorganisation.


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Step 3: Organising One’s Thoughts It is always a good idea to start organising the body of the speech and not worry about the introduction until later. Introductions are often generated by what goes into the body. Effective speakers have learned to build from the centre of their speech outward. Brainstorming some possible main ideas for the presentation would be of some help. Penning down ideas would come handy. The strategy is to generate as many ideas as possible. Start eliminating once large number of ideas iswrittendown.Twoandfivemainideasshouldbeperfectasatypicalnumberforapresentation.Ifmorethanfiveideasarepresentthenitshouldbereducedor you can put some of them as sub points. For example: Suppose while giving a presentation to upper management to defend the need for department’s request for a 20% budget increase next year. You develop a persuasive presentation where in audience analysis sheet, 10 to 15 original ideas have been created to focus on. However, it could be narrowed down to the following three:

We need to update our computer system

More programmers are needed to develop our computers

Wemusthavefinancedepartment

Fig. 4.4 Organising one’s thoughts These three ideas are the general assertions you plan to make to your audience. Specificexplanations,evidenceandbenefitsshouldbecomeone’ssubpoints.

Step 4: State the sub pointsOnce you have the main points of your presentation, it is time to develop supporting ideas. These may consist of explanations, data or other evidence to support your main ideas as shown in our example.

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Old system is antiquatedWill save money

immediately by creating proprietary programs

Need new data communication system

We need to update our computer system

More programmers are

needed to develop our computers

We must finance

department

Can’t use latest software Will be less independent on outside vendors

New Technology allows for better quality at

same cost

Old system costs are increasing because of

inefficiencyCan reassign most from

within companyNew Personnel will

contribute fresh ideas

Many breakdowns recently

Will help keep us competitive Need new programs

Hard to replace parts Can develop new products

New high speed printers will help develop new

products

Fig. 4.5 Stating sub-points in the presentation

You may have more or less sub points in your presentation. Once this procedure is completed, rearranging the cards that suits the need best. After trying different arrangements to see what will work best. Always keep the objectives and audience in mind.

STEP 5: State the benefits Inpersuasivepresentations,itisnecessarytotelltheaudiencespecificallywhatbenefitstheywillreceiveiftheydowhatyouask.Benefitsareusuallyplacedin the body of the presentation. An alternate method of organising a persuasive presentationmightbetosimplyusethebenefitsas themainpoints.Fromtheprevious example (Why our department needs a 20% larger budget next year) we mightsummarisethefollowingbenefitstoouraudience:

More money in our department will allow for a new computer system that •will keep us competitive in our industry.It,alongwith thenecessaryprogrammers,will increaseprofitsbecauseof•greaterefficiency.


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A new system will allow us to upgrade our existing products, as well as •develop new ones.

STEP 6: Develop handouts If decided about handouts (if any) are to be added to the presentation. Following are three major uses of handouts in a presentation. presentation.

To reinforce important information

To summarise action items for the audience to follow up on

To supply supporting data apart from visual aids

Fig. 4.6 Uses of handouts in presentation

Afterdecidingwhathandoutswouldbebeneficialthenthetimeastowhentheywill handed them out. There are three alternatives:

Before the Presentation:• The main problem with this is that the audience may wish to satisfy their curiosity about the contents of the handout as the speaker is speaking. When people are reading, they are not listening. One way to deal with this problem is to have the handout in place when the audience enters the room. This will allow them to read it before the speaker begins speaking. In addition, you can explain the handout, satisfying their curiosity about its contents. During the Presentation:• This must be used carefully. Handouts during a presentation must be disbursed quickly and be relevant to the point the speaker is making at the presentation. Otherwise, they will be a distracted n instead of being attentive. At the end of the Presentation:• During the presentation, the audience should be informed that they will receive a handout covering so and so relevant points at the end of the presentation. This will allow them to avoid having to take necessary notes. However using this technique would depend on the audience analysis. If the audience is accustomed to receiving handouts with presentations, or if it would be useful for them to follow the presentation with the data before them. The speaker may not want to withhold them. But it should be considered whether it is going to distract them from the verbal presentation (such as glossy photos, marketing brochures, etc.) and not add substantially to the presentation then it should be held back.

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STEP 7: Develop Visual Aids Once the organisational pattern has been established, there is a need to decide if and where the visual aids are going to used. For now it is important to determine howtheywillfitintotheplan.Forexample,thethirdsub-pointunderthefirstmajor idea in the sample presentation developed states that the old computer system is costing the company money. This point could be illustrated with a graph or similar visual showing the cost of the computer over the past three years versus the savings of a new system during the same time span.

STEP 8: Main Idea Preview/Review Sentence Thereisafamoussaying:Tellthemwhatyou’regoingtotellthem—Tellthem—Then tell them what you told them! In other words, previewing and reviewing the main points is a must in the presentation. This can be accomplished very easily by using a main idea preview sentence and a main idea review sentence. These sentences are separate from the introduction and conclusion.

STEP 9: Develop the Introduction Introductions consist of two major functions:

Providing necessary

information

Gathering attention

Introduction

Fig. 4.7 Functions of introduction

Providing necessary information: • This might include background material, establishingthesignificanceofthetopic,introducingoneselfandestablishingone’scredibilitybytellingtheaudiencewhyoneisqualifiedtospeakonthetopic. Additional types of information could be appropriate to deliver at this point too.


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Getting attention: • Right before the presentation the audience may be chatting with one another, daydreaming or reading the handout material that the speaker have cleverly placed on the table in advance of the presentation! Each presentation situation will call for its own necessary information depending on the audience analysis. However, almost all presentations require some type of attention getter. The smaller the group the smaller the attention getting device.

Here are some of the more common types: Technical Background: • Often speakers have to introduce their topic by giving some background information or data; they need to set the stage for what is to come in the body of the presentation. Anecdote: • An anecdote is a short story used to help illustrate a point. It is sometimes humorous but not always. An example might be something like this. In the same way, if we raise salaries for our production workers 10%, weshouldexpecttoincreaseproductivity.”Humour: • Humour is a great way to break the ice. Humour must be linked to the speaker, topic, audience or the occasion. Making jokes of racism or makes fun of national origin, religion or any personal topic should be avoided. There is nothing worse than a joke used in an introduction that has no connection to the speech. Questions:• There are two ways of involving questions in the presentation. First where open-ended question could be asked .The second way, and the safer of the two, is to ask for a show of hands. This device is an excellent way to get the audience’s attention.

STEP 10: Develop the Conclusion Good conclusions always return to material in the introduction of the presentation. They normally should refer the background material, rhetorical question, anecdote or data that one has used in the introduction. In persuasive presentations sometimes thereisaneedof“call-to-action”statementintheconclusion.Theconclusionshouldtellthemwhatspecificactiontheyneedtotake,howtotakeit,andwhenit must be taken. Introductions and conclusions put the head and tail on the body of the presentation. Without a developed conclusion, the presentation is considered incomplete. Fig. 4. shows the steps taken to build a powerful and effective presentation.

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DefineObjectives

Analyse Audience

Organise one’s thoughts

State sub-points

Statebenefits

Develop handouts

Develop Visual Aids

Introduction

Main Idea Preview/Review Sentence

Develop the conclusion

Fig. 4.8 Steps taken to plan a presentation

4.3 Preparation for Sales and Operation Plan Many companies implementing or operating integrated manufacturing planning andcontrolsystemshavediscoveredbenefitstobegainedbyformalisingandintegrating this planning process. This involves a monthly review process by top management and all functional areas of the company. Its ultimate goal is to always keep the detailed sales, manufacturing, purchasing and capacity planning systems in synchronisation with the latest high level plans of management (the business plan).

This presentation understands the basic philosophies, concepts and mechanics of Sales and Operations Planning, Master Production Scheduling and Material Retailing Planning. The purpose of this presentation is to provide a simple, step-by-step implementation plan to get started quickly and effectively.APICSDictionarydefinesandhighlightsthekeypointsfordevelopingtheSales and Operations Planning process and involvement of the right people in the process.


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Business Plan:• Astatementoflong-rangestrategyandincome,costandprofitobjectives usually accompanied by budgets, projected balance sheet and a cash flow(sourceandapplicationoffunds)statement.Itisusuallystatedintermsof money and grouped by product family. The business plan and the sales and operations plan should be in agreement with each other even if it is frequently statedindifferentterms.Topmanagementusuallyplansinsales,profit,funds,etc. to run the factory. A production plan should be stated in units and is always equal to the business plan in money terms which is a requisite.Sales &Operations Planning:• The function of setting the overall level of manufacturing output(production plan) and other activities is to best satisfy the current planned levels of sales (sales plan and/or forecasts). It is important tomeetgeneralbusinessobjectivesofprofitability,productivity,competitivecustomer lead times, etc., as expressed in the overall business plan.

One of its primary purposes is to establish production rates that will achieve �management’s objective of maintaining, raising, or lowering inventories or backlogs. It also attempts to keep the work force relatively stable. It must extend through a planninghorizon sufficient to plan the labour,equipment,facilities,material,andfinancesrequiredtoaccomplishtheproduction plan. The Sales and Operation plan affects many company functions therefore �it should be normally prepared with information from marketing, manufacturing, engineering,financeandmaterials. If topmanagementwishes to truly control inventories, backlogs and employment levels, it must ensure that the level of manufacturing output scheduled recognises current sales plans and backlogs. Concurrence from all company functions that can affect or be affected �by the plans is vital to ensure realism and commitment. The production plan must be stated in a unit of measure, by product family that can be converted and reconciled to detailed end item schedules.

Master Production Schedule (MPS): A schedule is maintained to record a set •of planning numbers which puts material requirements planning in motion. It representswhat the company plans to produce expressed in specificconfigurations,quantitiesanddates.Themasterproductionscheduleisnotasales forecast which represents a statement of demand. The master production schedule must take into account the forecast, the production plan and other important considerations such as backlog, availability of material, availability of capacity, management policy and goals, etc. For the master production schedule to achieve management’s objectives, it must exactly match the productionplan(andreflectgoals,constraints,etc.) inorder tosatisfy thesales plan.

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Rough Cut Capacity Planning:• The process of converting the production plan and/or the master production schedule into capacity needs for key resources: manpower, machinery, warehouse space, and vendor’s capabilities and in some cases-money.Productloadprofilesareoftenusedtoaccomplishthis.Theproduction plan and master production schedule must match each other and should be achieved for management’s goals to be met. But, to be achieved, they require recognising the physical constraints of the factory and vendors, and thefinancial constraints of budgets and cashflowplans.RoughCutCapacity Planning allows production plans and master production schedules to be checked and adjusted for reality.Time Fence: • A policy or guideline is established to note where various restrictions or changes in operating procedures take place. For example, changes to the master production schedule can be accomplished easily beyond the cumulative lead time whereas a change inside the cumulative lead time becomes increasinglymoredifficult to a point then these changes shouldberesisted.Timefencescanbeusedtodefinethesepoints.“WhenRoughCut Capacity Planning forecast changes, customer orders or the constraints of demonstrated capacity identify the need for rescheduling decisions, the procurement lead times of the various product families have to be considered. Top management and all affected functions must formulate policy that initiates the proper decision making guidelines, participants and management approval levels.These definitions outline themechanics necessary to effectivelyintegrate a good sales and operating plan with the other functions. There is a need for active leadership and participation by top management and all functional areas which is necessary during the design, implementation and ongoing operation of formal sales and operations planning .It is based on the company-wide impact of this process described above. It should be clear that thegeneralmanager,PresidentorChiefExecutiveOfficer(CEO)needstooversee this function. This process drives the planning and execution systems, whichdictatecustomerserviceandprofitability.TheexecutiveisthereforeresponsiblefortheprofitabilityandgrowthofthecompanyneedstocontrolSales and Operations Planning. The functional heads (vice presidents or directors)ofmarketing,manufacturing,design,financeandmaterialsmustalsoparticipate for the same reason. The master production scheduler, production and inventory control manager and marketing manager should also be present to propose needed plan changes and note in order to implement management decisions.Educate the Participants.• Gaining interest and involvement could be a laborious and slow process until there is a clear understanding of the goals. The impact and the process involved in Sales and Operations Planning has educational steps. They are not interchangeable but should be followed completely in sequence:


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Types Of Class Participants Purpose

MRP II for Top Management (outside class)

Top Management

Understand whole MRP II process, the role Sales and Operations Planning plays, Top Management’s role, the payback.

MRP II - Full Detail (outside class) Middle Management Same as above, but with

more mechanical detail

Sales & Operations Planning and Master Scheduling (outside class)

AllUnderstand how to implement and operate the system

2-Hour In-House Educational Sessions (approximately 20)

Top Management

Determine how the concepts will be applied at this company, set operating policies, assign implementation responsi-bilities

2-Hour In-House Educational Sessions (approximately 40)

Middle Management

Same as above, but in more procedural detail for Sales and Operations Planning, Master Scheduling and all other functions of MRP II.

Table. 4.1 Educational steps in Sales and Operation Planning

Define Planning Families• . Most companies group their products into families or lines, but often based on the customer’s perspective (i.e., products bought together such as a particular computer CPU with its matching printers, CRT’s,etc.).Itisvitaltoadditionallyoralternativelydefinefamiliesfroma manufacturing viewpoint. The basic rule to follow is that all products in a family must have a consistently proportional impact on costs, revenues and factory and supplier capacities. For example, a family could include knives, forks and spoons from a series of different patterns of silverware. Though knives, forks and spoons require widely varying manufacturing resources, a weighted average can be applied to the total number of pieces produced. Since knives, forks and spoons are sold in a consistent mix (place settings), if the production plan for the total pieces is changed, the impact on the critical manufacturing resources can be determined by multiplying the new plan times theweightedaverages(loadprofiles)foreachresource.Allproductsmustbe

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grouped in 10 to 12 families (a number capable of review in a 2 hour meeting). The units of measure in which the family production plans are expressed must also relate to the manufacturing process - pieces, sets, pounds, gallons, cases, etc. This allows the proper expression of rough cut capacity planning factors and demonstrated capacities. These physical units of measure can then be convertedbacktorupeesforfinancialanalysis.Define the Format• . A standard format to display forecasts (sales plans), customer orders, production plans, backlogs and inventories needs to be determined up front. This format should be extended for the full planning horizon (12 to 24 months). Individual companies often expand this format to also include investment as the key unit data.Prepare Pilot Data• . A few families should be selected which will best demonstratethebenefitoftheSalesandOperationsPlanningprocess.Thesemay include families subject to seasonal demand, marketing promotions, volatile swings in actual demand versus forecast and/or limited capability to adjust manufacturing output rates. Forecasts, actual customer demands, production and inventory plans.Actuals should be posted for the prior three months. Plans, forecasts and customer orders for at least the next three months (to start) should also be posted. The starting production plans can be derived from the current planning process or annual budgets or current master schedules, depending on what’s available. Any plans or forecasts that appear to require review or alteration should be highlighted. Marketing and planning personnel should jointly prepare suggested changes for top management review and approval.

4.3.1 Develop a Proposed Sales and Operations Planning Policy and Meeting Agenda. The policy of Sales & Operation policy should include:

Objective of the process.•Schedule of future meetings.•Attendees and their individual.•Responsibilities(suchas“VPMarketing-reviewofactualsversusforecasts/•salesplansandchangestothefuture”).A description of the mechanics of the planning process (how forecasts/sales •plans, backlogs, inventory goals, production plans, etc. are to be considered, by product family).A description of how demonstrated capacities by product family will be •maintained and utilised.A description of the Rough Cut Capacity Planning techniques to be used.•A guideline for determining which families will be reviewed in the meeting, •based on actual variances from forecasts and plans.


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A guideline for developing and approving various changes to the plans •depending on the timing and impact of the changes (e.g., different approvals required for overtime, subcontract, new hires, etc.).Astatementdefininghowtheplanswillbeusedtoestablishfinancialplans,•budgets and detailed Master Production Schedules and line item forecasts.A timed agenda for a monthly review meeting, to last no longer than 2 •hours.

Thefirstfewmeetingsoftenrunlongeraseveryoneisstillbecomingfamiliarwiththeprocess,formats,etc.Itmaytakeafewmonthlymeetingstofinetunetheprocessandfinalisetheproceduresandformats.Itmaybeadvisabletojustreview the initial pilot families, or to only gradually add new families until everythingisfinal.

4.3.2 Implement Full Sales and Operations PlanningThefollowingkeyissuesneedtoberesolvedtoensurethatthefullbenefitsofSales and Operations Planning can be achieved:

Horizon• : Establish how far out you need to plan based on the cumulative product replenishment cycle (manufacturing and purchase lead times) and the visibility required for planning changes in capacity (internal manufacturing, new plants and suppliers). Near the end of the horizon, data may be grouped quarterly.Rolling forecasts/sales plans• : The shipment forecast/plan needs to be maintained continually through the full horizon, not just determined annually.Bookings versus shipments• : The forecast/ sales plan must be expressed by customer requested ship dates, not by when the orders are received. In make-to-order companies this may involve developing standard lead time offset averages by product family, to convert planned booking dates into shipment dates.Somecompaniesfinditusefultotrackshipmentsandbookingsversusthe customer backlog, to provide early analysis by marketing of potential forecast changes.Production plans:• Iftheinitialnumbersusedareannualbudgetfiguresora total of current master production schedules, the process of maintaining a rolling, monthly-updated production plan, separate from the master production schedules, must be developed.

Ongoing measurement of how closely the summary of the master production schedules matches the production plans, by month, within tolerances established by family, should be initiated. Appropriate adjustments to the plan, based on changing customer demands, forecasts/sales plans and inventory levels should then be implemented.

Measurements: • A set of standard measurements, by family, should be published and reviewed at each meeting. These should include:

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Customer service

Sales v/s Forecast/plan

Shipment costs

Master Production schedule v/s Production plan

Actual production v/s MPS v/s Plan

Level and frequency changes of schedule

Fig. 4.9 Measurement Standard reviewed at each meeting

Establish demonstrated capacity• : For each family, the number of units possible to be manufactured each month should be determined from recent past history. The historical averages should not be exceeded unless known increasesincapacityareimplemented.Theplanshouldreflecttheinevitablelearning curve of introducing new people, suppliers or equipment.Full family planning• : Once the pilot families are being effectively managed through the full horizon, all other families should be added to the process, for the full horizon, representing virtually all manufacturing activity. The use of “average product” planning items for design-to-order business isoften required, in both Sales and Operations Planning and Master Production Scheduling. The use of planning bills of material will be needed at the master production schedule level.Rough cut capacity planning: • Key manufacturing and supplier capacity (and shorttermschedulechange)constraintsshouldbeidentifiedbyfamilyandexpressed as load factors that can be multiplied by the planned quantities to produce expected resource requirements. These may include:


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Total people

People by department or skill

Key work centres/ lines

bottlenecks

fully loaded

Proprietary ( no alternatives)

Prone to break down

Space

Key Suppliers

Inspection and Q.C.

Design/Engineering

Levels of Inventories

Fig. 4.10 Factors of Rough Cut Capacity Planning

Key operating objectives should be similarly expressed and analysed. These may include:

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ShipmentCosts

Inventory LevelProfit Work force

utilisation

Production Costs

Inventory Costs

Fig. 4.11 Key Operating objectives in Rough Cut Capacity Planning

Time zones (Fences): • Depending on the lead times to procure and manufacture products within a given family, changing a schedule at different points in the futurerepresentsvaryingdegreesofdifficultyandcost.Exactlywherethesezonesare for each familymustbedefined.Appropriate levelsof analysisand approval should then be prescribed for proposed changes in each zone. Factors to consider include the amount of potential disruption in the factory and at suppliers, the potential extra cost (air freight, overtime, etc.), the impact on other commitments and the amount of increased inventory investment by delaying parts of the schedule already partially completed.Management objectives and policies• : A well functioning Sales and Operations Planning system will improve the ability to achieve objectives and follow policies. But it often also highlights the potential for changing policies to better meet the objectives. Such opportunities include:

Make-to-stockversusmake-to-orderversusfinish-to-order,byproduct- line or individual productTarget inventory levels- Amount- Level in the structure- Desired backlogs, lead times and customer service levels- Level labour loads- Seasonal build-ups- New product introductions.-

Style of the meeting: Several key approaches should be encouraged to maximize thebenefitsofthisprocess.Firstthevariousfunctionsshouldavoidblameplacingand competitiveness. This causes defensiveness and less than optimal cooperation. The focus should be on how to change or better achieve future plans or forecasts, not on penalizing poor prior predictions.


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Second, the focus should be on future months’ plans (generally 3 or more months into the future). Short termplans are very difficult and costly to alter. It ismanagement’s job to deal with the uncertainty of the future, and change forecasts and plans far enough in advance to better avoid short term emergencies.

Third, a firm rule should be enforced forbidding time to be spent on “post-mortems”astowhyaparticularcustomerorderwasmissed.Themeetingshoulddeal only with overall rates of shipment and production. Individual issues should bediscussedoutsidethismeeting.Specificsshouldbediscussedonlyifthereispotential impact on meeting future plans.

Finally, this process and the meeting should evolve to the point where middle managementidentifiesproblemsandformulatessuggestedsolutionsbeforethemeeting, so that top management’s time can be preserved for only evaluating andapprovingtheproposals.A“pre-meetingmeeting”ofmiddlemanagement(manufacturing, materials, marketing, design, finance, etc.) often proves fruitful.

Final resultAgoodsalesandoperationsplanningprocesscanstarttoproducebenefitsevenbefore full MRP is operational. It provides a single set of company numbers, maintained monthly and expressed at a summary level appropriate for top management review.

Good sales and operations plans provide ready answers to:- Why have inventory levels changed?- Why have customer service levels changed?-Whyhasprofitabilitychanged?

All of these questions can be tied back to performance versus the plans and forecasts, and the changes made to them. Price, cost and volume variances, from both a sales and a manufacturing viewpoint, are easily visible.

This process fosters an approach of Executive Consensus in running the business as opposed to one of functional selfishness and competitiveness between manufacturing,materials,marketing,design,financeandsoon.

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SummaryThere are four simple tools for effective presentations, viz., Determination •of style, determination of core information, knowledge of surrounding area and usage of humour. Planning of a presentation is a vital step to achieve the objectives of any •presentation.Stepstobeconsideredwhileplanningapresentationareasfollows:define•objectives, analyse the audience, organise one’s thoughts, state sub-points, statethebenefits,deliverhandouts,developvisualaids,mainideapreview/review sentence, develop introduction, develop conclusion.Formal sales and operations planning provides a single set of numbers and •a routine process to ensure that top management’s objectives and plans are realistic and accurately reconciled to the detailed scheduling done in a company. The top executives and heads of all functional areas in the company must participate in this process, along with scheduling and marketing personnel.Gettingstartedfirstrequireseducation.Thenextstepsincludedefiningfamilies•and formats, preparing pilot data, developing a policy and meeting agenda andfinally,beginningthemonthlymeetings.There are several keys to effectively implementing this process including: •defining the horizon,maintaining a rolling forecast/sales plan, convertingbookings to shipment forecasts/plans etc while maintaining several key rules of style in making the meetings and the whole process effective.Thefinalresultisplans,andaprocesstomaintainthem,thatallfunctions•commit to and can be held accountable for.

ReferencesFreedman, E.,• Making Effective Presentations [Online] Available at: <http://www.pa-lawfirmconsulting.com/pdfs/marketing/MAKING_EFFECTIVE_PRESENTATIONS.pdf> [Accessed 12 July 2011].Dougherty, J. D.,• Getting Started with Sales & Operations Planning [Online] Available at: <http://www.partnersforexcellence.com/artoth01.htm> [Accessed 12 July 2011].About.com. • How to Create a Powerful Sales Presentation [Online] Available at: <http://sbinfocanada.about.com/od/salesselling/a/presentationkr.htm> [Accessed 12 July 2011].Mandel, S., Gerould, P., & Mapson, R., 1994. T• echnical Presentation Skills: A Practical Guide for Better Speaking [Online] Available at: <http://site.ebrary.com/lib/utspune/search.action?p00=Technical+Presentation+Skills+%3A+A+Practical+Guide+for+Better+Speaking&search=Search+ebrary>. [Accessed 12 July 2011].


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Recommended ReadingRizvi, A. M., 2005. • Effective Technical Communication, Tata McGraw-Hill Education.Lauer, D. L., 1997. • CommunicationPower: Energizing YourNonprofitOrganization, Jones & Bartlett Learning, p. 208.Palmatier, G. E., Crum, C., 2003• . Enterprise Sales and Operations Planning: Synchronizing Demand, Supply and Resources for Peak Performance, J. Ross Publishing, p. 266.

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Self Assessment The ________of one’s presentation comes across in the speaking manner, in 1. the tone of voice and body language.

style a. core informationb. advancec. conclusiond.

________ is one of the most powerful tools at one has at his disposal.2. Humoura. Styleb. Confidencec. Knowledged.

The P-I diagram describes the relationship between persuasive and _________3. presentations.

objectivea. effectiveb. informativec. competitived.

__________are usually placed in the body of the presentation.4. Benefitsa. Valuesb. Needsc. Sub-pointsd.

Good _________ always return to material in the introduction of the 5. presentation.

plansa. conclusions b. salesc. operationsd.

A _________plan should be stated in units.6. productiona. businessb. operationsc. salesd.


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Which of the statements is false?7. Effective speakers have learned to build from the centre of their speech a. outward.Introductions are often generated by what goes into the body.b. Things like the size of the audience, location of the presentation, etc., do c. notinfluencetheorganisation.All of professionals have their own area ofd. specialisation.

Which of the statements is false?8. The important thing is that the humour should feel forced rather than a. natural.A little humour makes the whole session better for the audience as well as b. the presenter not too much of it.Humourcanbeusedformanythings–ithelpstoconnectwiththeaudiencec. on a deep, subconscious level.Humour is one of the underlying emotions common to everyone, from d. presidents to the common layman.

Which of the statements is false?9. Presentation skills are often overlooked by many professionals in the a. greater scheme of career development. Effective speech is the only presentation skill.b. Usage of computer technology such as PowerPoint or WebEx widely used c. to communicate has become a boon for the managers.Promoting cooperation between sections of the company, displaying high d. standards of professionalism helps to respond to customers needs.

Using the P-I diagram helps to determine the_________.10. objectivea. informationb. reportc. statusd.

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Chapter V

Master Scheduling

Aim


definemasterproductionscheduling(MPS)•

explain the time interval and planning horizon for MPS•

identify the aim of master production scheduling•

Objectives


enlist the guidelines for master scheduling•

introduce the concept of MPS time horizon•

discuss the role of master production schedule•

Learning outcome


explain the functions of master production schedule•

enlist the objectives of master production schedule•

enu• merate the principles of master scheduling


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5.1 IntroductionTheMasterSchedulemaintainsanimportantpositionasagatewayintheflowof information between Master Planning activities such as business, demand and production planning. It also involves the detail planning and execution of daily business operations. The Master Schedule’s primary purpose is to translate the strategic initiatives of top management into workable day-to-day actions. This results in making and shipping the products to customers, providing service in order to earn their satisfaction. The operations management chart describes the relationships between three important processes which are master planning, Detailed planning and planning execution. It supports these three processes in the information system represented by the bills of material,inventory, process/routings and other important data bases. It holds all the processes together like linkages and its feedback loops show theflowof information between eachfunctionalarea.Themeasureforfindingouttheeffectivenessofthetotalprocessis performance measurement.

Most companies would recognise the importance of the Master Schedule in the total scheme of an effective Operations Management system. The Master Schedule is likely to be least understood and used. Somehow the data shows that most companies have not fully understood the importance of Master Scheduling. They do not realise the critical impact it has on the total effectiveness of their planning andscheduling—andultimatelytheirperformanceinservicingthecustomer.

5.1.1 Master Production Scheduling The master production scheduler (MPS) maintains a schedule which eventually becomes a set of planning numbers that drives Material Requirements Planning. It representswhatthecompanyplanstoproduceexpressedinspecificconfigurations,quantities, and dates. A statement of demand represented by the Master Production Schedule is not a sales forecast.

The master production schedule must take into account the forecast, the production plan, and other important considerations such as backlog, availability of material, availability of capacity, and management policies and goals. In other words Master Schedule is a presentation of demand, forecast, backlog, the MPS, the projected hand inventory, the available-to-promise quantity.

The Master Production Schedule (MPS) sets the short range planning horizon inwhichthequantityofeachenditem(finishedproduct)istobecompletedineach time period (week or month or quarter). Reviewing market forecasts, orders, inventory levels, facility loading and capacity information are the information used to develop master production schedules.

The MPS is a plan for future production of end items over a short-range planning horizon that usually spans from a few weeks to several months. It is considered as an important link between marketing and production.

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TheMPSdefine precisely the required quantity per period for eachfinishedproduct. The time bucket is usually the week and the time horizon up to 3-6 months or a least twice the longest product lead time.

The MPS is used as a reference for the customer service. The effective MPS will give information to plan and control manufacturing.

TheMPS is established fromfirm’s customer orders, sales forecasts and•finishedgoodstocklevels.Itaimsatthefollowing:

Anticipate the customer demand per product (forecast) �Distribute Sales & Operations Planning (S&OP) families into parts for �each periodInput quantity to produce and set deadlines for each product �Follow current sales versus forecasts �Insure the required customer service level while maintaining a low stock �levelInform the customer service department on the available-to-promise (ATP) �quantity for a given product

The production plan is broken into product families for the master production •schedule. Then production is planned based on demand forecasts provided by marketing department. Order promises can also be made against planned production. This job falls •tomarketing cell and is referred to as “consuming” the Inventory.Whenmore product has been promised than that will be produced, marketing and operations must work together to develop a strategy to meet customer requirements. This can take the form of many options including; subcontract, allow overtime, increase capacity through equipment acquisition, expand facilities,increasingstaffinglevels,improveprocesses,etc.

5.1.2 Objectives of Master Production Scheduling An effective MPS helps in keeping the customer delivery promises. In today’s competitive world, delivery in time is a very important factor, which contributes towards the formation of the image of the company, and its working on the customer’s minds.

An effective MPS acts as a basis for the utilisation of the capacity of the plant to a good level and also helps in resolving the trade- offs that usually occur in between production and marketing. With the help of the master production schedule, one can establish production schedule for the models of the products and one can also get the schedule input for the materials requirements planning process, along with the schedule that is used by order processing.

The objectives of MPS can be listed as under:•Maintaining the inventories at the desired level by making optimum use �of the resources that are available with the company.


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Setting up due dates for the availability of the end items. This requires �provision of the required information regarding resources and also thematerials –which act as the supporting pillars of the aggregateplanning.Achieving the desired level of customer service. �Setting particular schedules for the production of the parts and the �components that are used as the inputs to materials requirements planning in the end items.

5.1.3 Functions of Master Production ScheduleTheMPSformalisestheproductionplanandconvertsitintospecificmaterialand capacity requirements. Then in each job, viz., labour, material and equipment is assessed. Then, the MPS derives the entire production and inventory system by setting production targets and responding to feedback from all downstream operations. It is the beginning of all short-range production planning. From the MPS, Material Requirement Planning (MRP) develops short-range schedules for producing parts. These go into the end items in every work centre of the production system. The MRP develops short-range plans for purchasing the raw materials and components that are required to produce the products.

Translating aggregate plans• : The aggregate plan sets the level of operations that roughly balances market demands with the material, labour and equipment capabilitiesofthefirm.Theaggregateistranslatedintospecificnumberofendproductstobeproducedinspecifictimeperiods.Productsaregroupedintoeconomicallotsizesthatcanrealisticallyloadthefirm’sfacilities.TheMPSrepresentsamanufacturingplanofwhatthefirmintendstoproduce.However,itisnottheforecastofwhatthefirmhopestosell.Evaluating alternative master schedules• : Master scheduling is done on a trialanderrorbasis.Usageofcomputerhelps in trial-fittingofalternativeMPscan.DetailedmaterialandcapacitycanbederivedfromthefirmMPS,which is required. Generating material requirements• : The MPS is the prime input to the MRP-1 system. The MRP-1 system provides for purchasing or manufacturing the necessaryitemsinsufficienttimetomeetthefinalassemblydatesspecifiedbased on the MPS for end products. Generating capacity requirements• : Capacity needs arise for manufacturing the components in the required time schedule to meet the requirements of end products as per MPS. Capacity requirement planning is based on the MPS whichshouldreflectaneconomicusageoflabourandequipmentcapacities.Capacity requirements if found inadequate will require master schedules to be revised.Facilitating information processing• : By controlling the work load of work centres, the MPS determines the delivery schedules for end products both for make-to-stock and make-to order items.

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It co-ordinates capabilities, financial resources, supplying labour, other•management information (for carrying inventory), personnel and marketing policies for maintaining valid priorities: The absolute or relative priorities for variousjobstobecompletedshouldreflectthetrueneeds.Thismeansthatthe due date and the ranking of jobs should correspond with the time and the order is actually needed. When customers’ change their orders or materials get scrapped sometimes, either the components are not actually needed or end items cannot be produced because of shortage of some materials, it is necessarythattheMPSshouldbemodifiedtoreflectthischange. • Effectively utilizing the capacity: By specifying the end item requirements over a time period, the MPS establishes the load and utilization parameters for labour and equipment (i.e., shifts worked or overtime or idle time).

5.1.4 Time Interval and Planning Horizon for MPS The time interval used (for example, weekly, monthly, or quarterly) type, volume and component lead times of the products being produced depends upon the time horizon covered by the MPS. It also depends upon product characteristics and lead times. The time horizon may vary from a few weeks to a year or more and should encompass the lead times for all purchased and assembled components.

5.1.5 Time Fences in Master Production Schedules MPS can be divided into four sections, each section separated by a point of time calleda‘timefence’.Thefirstsectionincludesthefirstfewweeksofthescheduleand is referred to as ‘frozen’, the second section of a few weeks is referred to as ‘firm’,thethirdsectionisreferredtoas‘full’andthelastsectionofafewweeksis referred to as ‘open’.

Frozen

Firm

Full

Open Time Fence

Fig. 5.1 Four sections of time fence


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Frozen• : It means that this early part of the MPS cannot be changed except under extraordinary circumstances and only with authorisation from the highest levels in the organisation. It is not desirable to change this section of MPS because it would be costly to reverse the plans to purchase materials and produce the parts that go into the products belonging to this section of MPS. Firm• : It means that changes can occur in this situations section of MPS but only in exceptional.Full• : It means that all of the available ‘production capacity has been allocated to orders. Changes in this section of the schedule can be made and production costs will be only slightly affected but the effect on customer satisfaction is uncertain. Open• : It means that not all of the production capacity has been allocated and in this section of MPS, new orders are ordinarily slotted.

5.1.6 Guidelines for Master Scheduling Although master scheduling depends on the type of demand (i.e., orders) and the planning horizon, the following guidelines are widely applied.

Work from an aggregate production plan. •Schedule common modules when possible. •Loadfacilitiesrealisticallyforecastversusfirm.•Release orders on a timely basis. •Monitor inventory levels closely reschedule as required.•

5.1.7 Updating of MPS The MPS is usually updated weekly, i.e., after one week has passed, one week is taken off the front , end of the MPS, one week is added on to the back end and the demands for the whole MPS are estimated anew. The early part of the MPS tends to be dominated by actual on hand customer orders, whereas, the latter part of the schedule tends to be dominated by forecasts. In the middle of the schedule the demand estimate is a combination of actual orders and forecasts.

5.1.8 MPS in Produce-to-stock and Produce-to-order FirmsMasterschedulingproceduresdifferaccordingtowhetherafirmisaproduce-to-stock or produce-to-order production system.

The elements of the MPS that are affected by the type of production system •are:

Demand management �Lot-sizing �Number of products to be scheduled (product-mix) �

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Produce-to-order system• : In produce-to-order system, the focus in demand management is on customer orders. The MPS is worked out based on the back-log of customer orders and product demand forecasts may not be used. The lot size and the number of products to be produced on an order are determined by the customer order. For example, if a customer orders 100 numbers of a particular product, 100 numbers of the products will be produced on that order. This approach to lot sizing is called lot-far-lot (LFL). Because produce-to-orderfirmshavemanyproductdesigns,thenumberofproductsandordersthathave to be placed in the MPS is high and much effort is required to prepare the MPS.Produce-to-stock firms• :Inproduce-to-stockfirms,theordersforproductscome mainly from warehouse orders within the company. These orders are based on forecasts of future demand from many customers. Hence, forecasts playanimportantroleindemandmanagementinproduceto-stockfirms.Thelotsizesofordersinproduce-to-stockfirmsdependoneconomics.Abalancemust be struck between the set up costs of production and costs of carrying the inventory of the products in determining the economic lot sizes in produce-to-stockfirms.Becauseproduce-to-stockfirmsproduceonlyafewstandardproduct designs, the effort required to prepare the MPS is relatively less than inproduce-to-orderfirms.

5.1.9 Length of Planning Horizon of MPS The planning horizon in master scheduling may vary from a few weeks in some firmstomorethanayearinothers.Thedominantfactorindecidingthelengthof planning horizon is that the planning horizon should at least equal the longest cumulative lead time required for the end product.

Cumulative lead time is the amount of time to get the materials in from suppliers, produce all the parts and assemblies, get the end item assembled and ready for shipment and deliver it to the customers. The end product with the maximum cumulative lead time determines the least amount of time that a planning horizon should span.

5.2 Identify the Components Necessary to Develop a Master Production Schedule (MPS)According to the bill of material, the MPS could be at different level.

TheideaistodefinetheMPSlevelwheretherearefewercomponents:•Low finished products variety but lots of components � :MPSatfinishedproduct level.High finished products variety but few components � : MPS at component level.


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But there can be a finished goods variety due to intensive customer •personalization or customization, but a fewer components to assemble and high raw material variety. In this case we have multiple MPS levels:

Finished goods MPS �Planned BOM with probability by components (or component types) in �order to forecast the sub-assembly items to launch per period

PDP 1

PDP 2

Finished Products

Components

Sub componentsRaw materials

Fig. 5.2 Planned BOM

Finished goods

Component A

Option A2Option B1 Module M2 Module M3

Fig. 5.3 Multiple MPS Levels(http://www.logisitik.com/learning-center/the-master-production-schedule.

html)

Percentage or ratios are used to plan for components on a make-to-stock •mode.Here,weseethatthefinishedgoodsalesforecastswillbeat80%withoption B1 and at 60% with module M2 but in all cases the component A is always required.

5.2.1 Available-To-Promise (ATP)The ATP represents the products manufactured on stock and available for customer orders. This encompasses all what can be sold without modifying the MPS. The ATPisatoolforthecustomerservicetoacceptornotanorderandtogiveafirmpromise to the customer.

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Production level

Firm ordersTime

Available To Promise

Fig. 5.4 Available To Promise

5.2.2 MPS time horizonAs stated before the minimum time horizon is twice the manufacturing lead time in order to being able to plan. In most cases, planning is done for a full quarter. Butthishorizonissplitinto2areas:firmandplannedzone.

Firm zone•Thefirmzonecorrespondstofirmcustomerorders,usuallynotnegotiable �ormodifiable.Onlythemanufacturingmanagerisallowedtoacceptanychange or modify it. We also called it the frozen horizon where all orders are frozen, in term of start date or quantity.Thegoalofthisfirmhorizonistopreventanybullwhipeffectorchaotic �variability that will disorganise the production lines and lower its efficiency.TheMRP-2statesthatthefirmhorizonshouldbeequaltotwicethelongest �manufacturing lead time, as when we’re getting close to the manufacturing leadtime,anychangeiscriticalsinceitleadstodisorderinallshopfloorscheduling.

Forecast zone•Overthefrozenhorizon,theorderscanstillbemodifiedoratleastare �negotiable. Change of customer orders is also still possible (options or customisation) but any change is subjected to manufacturing manager.

MPS ExampleLet’sbuildanMPSfor8weeks,fedwithforecastsandfirmorders.Batch size = 50 unitsManufacturing Leadtime = 1 periodSafety Stock = 20 unitsThefirst2weeksisthefrozenhorizon.


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Week 1 2 3 4 5 6 7 8Sales forecasts 110 100 90 90 80 110 60 110Sales orders 120 100 60 50 40 10 0 0Inventory 200 80 30 40 50 20 60 50 40MPS due date 50 100 100 50 150 50 100MPS start date 50 100 100 50 150 50 100Available to Promise 30 70 120 130 270 320 420

Table 5.1 MPS Table

In Firm horizon: Inventory and ATP are calculated from sales orders only.Inventory[P]=Inventory[P-1]+MPS_due_date[P]–sales_orders[P]The ATP is calculated between two consecutive MPS_due_date not null, initial value is equal to the initial inventory one.

In Forecast horizon:Inventory is calculated from max (sales_orders,forecasts) in order to take into account theforecastsInventory [P] = Inventory [P-1] + MPS_due_date[P] – Max(sales_orders[P];forecast[P])---The ATP is calculated from sales orders only (otherwise no ATP concept)The ATP is calculated between 2 consecutive MPS_due_date not nullATP [next MPS>0] = ATP [last_value] + Sum (MPS_due_date)- Sum (sales_orders)

5.2.3 The Four FundamentalsOne of the most important things is that a manufacturing enterprise not only gets demand and supply in balance but also keep them in balance. Balancing demand and supply is essential to running a business well. The balancing must occur atboththetotalvolumelevelandatthedetailedmixlevel.Theidentifiedfourfundamentals are: demand and supply, volume and mix.

Demand and Supply•Demand refers to the products that the organisation is being asked to �provide by the customers in the market which are expressed in customer orders, sales forecasts, distribution centre replenishment, interplant transfers. Supply refers to the resources available to meet the demand available in �the market: materials, manpower, machinery, other production capacity, suppliers and their capacity, testing, storage space, and money.

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A happy and harmonious situation would be when the demand and supply �are in balance. When there is an imbalance in demand and supply it can cause lots of problems. If demand greatly exceeds supply, bad things can happen like customer service suffers. The company can’t meet product expectation of its customers when they want it. Customer lead times stretch out as the order backlog start building up. Business is lost as customers fetch other competitors in the market.Costs increase as unplanned overtime goes up. Premium freight rises �as incoming materials and outbound products are expedited. Purchase price variances become unfavourable, as the company pays more to get the materials it needs. Quality often gets comprised with as the company strivesgreatlytogetproductshipped.Specificationsgetcompromisedorwaived. Temporary subcontracting yields a less robust product. Material from alternate suppliers often does not meet the standards as expected by the customers in the market. Performance deteriorates on three fundamental attributes: cost, quality �and delivery owing to demand exceeding supply. Business is lost while costs go up. The bottom line in business takes a hit. Similarly, when supply substantially exceeds demand bad things can also �happen like deals and promotions become more frequent in order to get the products moving in the market. Inventories increase while carrying costsriseandcashflowcanbecomeaproblem. Production rates are cut. Volume variances become unfavourable. Layoffs �are a possibility and morale of the staff suffers. People in the plant slow downandefficiencynumbersstarttodropslowly.Supply exceeds demand and the company is stuck with lower margins, �higher costs, a cash crunch and there is a possibility of layoffs. Sometimes it can be a good thing as it also depends on where the imbalance lies. For example, if projected future demand exceeds current supply and if the company can economically add more capacity by the time it’s needed. If demand is growing then business is good. On the other hand, when changes in demand are not anticipated soon enough then it leads to problems. Therefore, a process that can predict future imbalances soon enough to rectify them is very important. A sign of success is when an organisation is focusing on problems of �imbalance some months into the future and not being consumed with day-to-day crisis. The name of the game is to get demand and supply in balance and to keep them there. Balancing demand and supply should have processes in place to do it. Corrections should be done early no matter if the errors are small or big.


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Volume and Mix•The other two fundamentals are volume and mix. The differences between �the two can be summed up in short. Volume refers to groupings, such as productfamilies,productionresources,andthelike.Mixreferstospecificproducts, items or customer orders. The volume question would be quantity based and the mix question would �be category based. Volume deals with aggregate rates of sales, production, and so on. Mix is about sequence and timing. Volume is the big picture whereas mix would be the details. �

SupplyDemand

Volume

Mix

Fig. 5.5 Four Fundamentals

Demand and supply must be balanced at both the volume and the mix levels �or the results will be unhappy customers, layoffs, too much inventory and so on Shipping product to customers with world-class reliability and speed �requires that all four of these elements be well managed and controlled.

5.3 Describe and Develop the Master Schedule (MS)Master Scheduling is a business process designed to balance demand and supply at the detailed and mix level. Master Scheduling is primarily a decision-making process, performed by an individual called the Master Scheduler. It is people-centred where in the computer’s role is to support the people in their decision-making activities.

The output from this process is known as the Master Production Schedule, •which is the anticipated build schedule for specific products (or parts ofproducts) and customer orders. The Master Schedule is usually time-phased. It extends for a number of weeks into the future. It is typically expressed in weekly time increments or smaller.The MPS is a vehicle for implementing the production plan. The master •schedule states what will be produced when it will be produced and in what quantityitwillbeproduced.Themasterscheduledealswithspecificenditems,

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usuallyfinishedgoodsormajorsubassemblies.Theproductionplanisstatedinperiods,monthsandquarters.Themasterscheduleassignsspecificdatestoitems within those periods. The objective in developing the master production schedule is to create a schedule which supports the following:

Support the business plan �Follows the company policy �Meets all demands �Minimises inventory �Optimises resource usage �And is achievable �

5.3.1 Inputs to MPS As we saw earlier, the mission of Sales & Operations Planning (S&OP) is to balance demand and supply at the aggregate volume level. It’s a monthly process, operating in both units and dollars and it involves both executive management and middle management people.

S&OPhasbeencalled“top“management’shandleonthebusiness”because•it enables the executive group to determine, ahead of time, the desired rates of sales and production and the target levels of inventories and order backlogs and then to manage the business proactively to hit those plans. S&OP forms a linkagebetweentheBusinessPlan(theannualfinancialplan,thebudget)andthe downstream processes of Master Scheduling, MRP, Supplier Scheduling, and Plant Scheduling. This linkage is vital. When it’s absent, there is a disconnect between the business plan (authorised by top management and representingtheircommitmenttotheboardofdirectorsorthecorporateoffice)and the Master Schedule, which drives activities day-to-day and week-to-week ontheshippingdock,theplantfloorandthereceivingdock.One of the primary outputs from Sales & Operations Planning is the production •plan or operations plan. This represents the levels of production, both internally and outsourced, authorised by top management and designed to meet the forecast, inventory targets and so on. This production plan, therefore, representsthe“marchingorders”forthemasterscheduler.S/hemustinsurethatthe sum of the individual items in the master schedule equals the production plan, within a few percentage points, plus or minus. To do so it closes the loop between the Business Plan and the company’s daily and weekly activities. To do otherwise results in the disconnect, with all of the potential for problems that it implies.

5.3.2 Outputs of MPS Master Scheduling impacts a number of functions. Some are explained as below:

Demand Management:• The Master Schedule is the source of customer order promising and, thus, there exists a strong connection between demand management and its function. The inventory levels, future production and


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existing commitments to customers contained in the master schedule show the people in customer order entry; the feasibility of promising incoming orders forspecificproducts,quantitiesandshipdates.Material Requirements Planning:• The start dates for producing products, as specifiedinthemasterschedulebecome“needdates”forthecomponentsandraw materials required to make the products. MRP calculates when more of these items will be needed, and how much and then alerts the appropriate Plant Scheduling:• The Master Schedule is typically expressed in daily or weekly time periods and specifieswhen products need to be started andcompleted. In most plants, more detail is needed: what time of day or what shift to start various jobs, what to run in what sequence, when to take changeovers, and what jobs to run on which machines and so forth. This is known by several interchangeable terms like Plant Schedule, the Finishing Schedule or the Final Assembly Schedule and it show a greater level of detail than the master schedule.Supplier Scheduling• : The supplier scheduling process represents a departure from the traditional approach of preparing purchase requisitions, purchase orders, change orders and so on. It involves providing the suppliers with time-phased schedules of what will be needed and when.Financial Planning:• Master scheduling uses data in units, viz., each, thousands, gallons, litres, and pounds. As we’ll see, it needs lots of data: forecasts, customer orders, inventory balances, inventory projections, production schedules, and more. Remember, as we saw earlier, it’s possible to translate theseoperationalnumbers intofinancial terms, tobeused forfinancialplanning.Thiscanyieldverysolidprojectionsoffutureshipments,finished goods inventory levels, production volumes, andmuchmore inmonetary terms.

5.3.3 MPS Terminology The most general format of MPS table is as follows:

Part number ..................Lead time .......................Lot size ............................

Periods

1 2 3 4 5 6 7 8

ForecastInventory on handProjected availableMaster production scheduleEnding Inventory

Table 5.2. Format of MPS Table

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Forecast• : It is the sum of all forecast of items that is sales forecast, customer orders, spare parts requirements , service part demand etc. It shows the requirement of these items during that period. Projected available: • It is the total available balance after satisfying the need in the current period. It can be calculated from the relation:

Projected available = on hand inventory +MPS – forecast

MPS• : It gives the schedule for the in coming periods.

5.3.4 Misconception about MPS Some of the common misconceptions of MPS are as follows:

It is not the sales forecast, but it is the statement of production.•It is not the control technique but it facilites in decision making.•It is the planning process not the execution. •It is applied to only those items that are liable for production.•It cannot be expressed in monetary terms.•Itisforenditemsandnotforthefinalassembly.•

5.3.5 The Logic of Master ScheduleThe Master schedule is planned base on the aggregate production plan. A typical masterschedulewillalwaysreflectalistofwhatfinalproductsaretobeproduced(front-end)ordelivered(back-endordersfulfilment)ineachweek(oreachdayfor JIT business). This also includes which production sites or if it is a shared production output from different plants if there are capacities constrains. For master scheduling process to be put to work, the scheduler converts the existing demandforecastintofirmcustomerdemandbyinputtingtheordersonthemasterschedule.Thelogicbehindthisassumptionisthattheforecasthastobefilledupby real customer orders to the forecasted level each week. The master scheduler publicises this demand plan and is responsible for making all the weekly schedules achievable.


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WeeksPlant WK

01WK02

WK03

WK04

WK05

WK06

WK07

WK08

WK09

WK10Prod-

uctsProduct 2400A

Plant A 3000 4000 2000 2000 4000 3000 1000 3000 4000 2000

Product 2400C

Plant A - 2000 - 1500 1500 - 2000 2000 - 1500

Plant B - 1000 - 2500 2500 - 3200 3200 - 1500

Sub Total - 3000 - 2500 2500 - 3200 3200 - 1500

Product 950

Plant A 1800 - - - 2500 - - - - 2500

Product 950D - - - - - - - - - -

Table 5.3 MPS Table(Source <http://vbautomation.110mb.com/INVENTORY%20MGMT/mrp.

htm#MPS>)

The above table shows an example of a master schedule with family of products, scheduled for weekly production output for 10 weeks into the future. This is a simple conventional example to demonstrate the logic behind master scheduling which is based on ERP systems.

In cases when actual orders that are received in certain weeks exceed the demand forecast, it is normal practice to change and revise the master schedule. For example, product 2400A is forecasted at 3000pc in week 01, and if the total customer orders received for week 01 is, say 3500pc, that additional 500pc has tobefulfilledfromtheforecastinweek02.Insuchcasewhencustomeractualdemand exceeds the forecast for the week, the master scheduler has several options to decide:

provide a later delivery date to the customer and face a possibility of this •customer cancelling the ordercancel delivery order already picked for other less important customer and •re-allocate available on-hand balance to this customerreschedule and overload the revised forecast (this will cause panic buying and •straining your suppliers’ capacity plan and turnaround time)increasing capacity by scheduling overtime work•

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Thelastoptionisusuallymoreefficientandlistedasmostrecommendedbecausethe company inventory policy will usually allows some percentage of upside planningonboththefinishedproductslevel(say10%)andalsoonthecomponentslevel (say 25%). Such practice provides material buffer as the safety stock to short-term schedule changes, and allow to cushion against the increase in real customer demand that exceeds the forecasted plan in any week. Important customers who are unhappy could be pleased.

Product 2400A Safety Stock level 1000

Week Forecast Scheduled Receipts

Stock–on hand

Planned order receipts

Projected Available

Planned Order Release

52 500 50001 3000 5000 2500 250002 4000 5000 3500 3500 500003 2000 1500 150004 2000 5000 4500 4500 500005 4000 500 500 500006 3000 -2500 5000 250007 1000 -3500 150008 3000 -6500 5000 350009 4000 -10500 5000 450010 2000 -12500 2500

Table 5.4 Scheduling planned order release for Product 2400A base on Master Schedule (considering fixed order qty of 5000pc and lead time of 4

weeks)(Source< http://vbautomation.110mb.com/INVENTORY%20MGMT/mrp.

htm#MPS>)

The above table shows you the logic of determining when the Planned Supply Orders should be released base upon the weekly forecast in master schedule.The firstthreecolumns(forecast,scheduledreceipts,andstockon-hand)showthecurrent situation, whereas the last three columns (planned order receipts, projected available, and planned order release) show what has to be done in order to meet the demand forecast. With a four-week supply lead time, the planned order release has to precede the planned order receipt by four weeks. If a safety stock level is set, say 1000pc, the stock on-hand balance can trigger a planned order receipt at the safety stock level instead of waiting until stock out and negative stock balance. In this case, a safety stock level of 1000 would mean that the initial projected available on-hand of 500 would be too low by end of week 05.


http://vbautomation.110mb.com/INVENTORY MGMT/mrp.htm#MPS

http://vbautomation.110mb.com/INVENTORY MGMT/mrp.htm#MPS

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5.3.6 Twelve Principles of Master SchedulingImplementation of any production plan makes master scheduling a vital link in any manufacturing system. There are twelve principles in master scheduling which are described below:

The sum of the master schedule must be equal to the production plan. i. Measurement must be established to ensure that this principle is not violated. It is understood that the realistic MPS is equal to the material and the capacity. The unconstrained sales forecasts are no longer the driving force in any priority planning process like it used to be earlier.The sales forecast should not be clubbed with the material requirement ii. planning. By placing MPS between sales forecasts and material requirement planning, this could be achieved. The master schedule should be created at the product level that provides iii. greatest flexibility andbest control.The restriction placedonmasterschedulethatisconfinedtoenditemsisnotfeasible.A rough cut capacity analysis should be done either at the production iv. plan or master schedule level before going in to material requirement planning.Ascheduleisrunagainstaproductloadprofileandcreationof a resource requirement plan.The time fences should not only be real but it should be agreed upon v. byall functions.Forgreaterflexibility and control accessibility, timefences should be in order to meet the requirement of manufacturing and marketing.The master scheduler must have a control of the master schedule within the vi. planning time fence and the computer cannot change it automatically.The master schedule which has items due of the past should be eliminated. vii. It is absolutely necessary to reschedule all past which are due and those thatappearontheMPSline.Thisisduetothedefinitionwhichstatesthat the material and capacity required to support due master schedule are past due.Consume the MPS with customer order as they are received. Consumption viii. is accomplished by determining the units the company has available to promise (ATP).The planning for safety stock in assembles to order should be done in the ix. firstunsoldperiod.Thisistoaddresstheforecasterrorassociatedwiththe production plan. In order to get the protection against the inevitable forecast error it may be advantageous to plan safety stock product.The master production schedule should be established as the company’s x. games plan and agreed upon by the marketing and manufacturing. The master schedule can and always becomes the company’s game plan once the agreement is reached and accountability is established.The responsibility must be assigned and the master scheduler held xi. responsible for creation, execution and maintenance and monitoring.

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The management must understand, support and commit to the above xii. principles. Management must insist that the MPS should be workable and it should be changed after careful consideration has been to the impact of the change and the alternatives available.

5.3.7 Importance of Master Scheduling in Production Plan MPS is considered a very vital link in any manufacturing system. Its implementation acts a vehicle to the production plan. MPS is considered as an important tool for both manufacturing and marketing where it is used to satisfy the needs of the market by effective utilisation of manufacturing resources. Master schedule uses the information from various functions to state how much to produce and when toproducesothatthecustomerdemandismetatthepre-definedservicelevel.Master Production schedule is the outcome of disaggregation. It provides the basic framework for manufacturing decision making. It is a statement of production.

The basic goal of MPS can be stated as satisfying the customers’ needs by •utilising the company’s resources. It can be represented in the simplest form asshowninthefigurebelow:

Supply = Demand

Fig. 5.6 Matching demand through MPS

The demand (marketplace) is determined from the sales forecast, customer orders, service part orders, internal customer orders and special orders. While the supply comes from the manufacturing resources (men, machine, material and money) it is anticipated built in schedule for the production of end items within a given horizon of time.

Thereisaneedtobalancethetwo.APICSdefinesMasterSchedulingasthe•masterproductionscheduleisalineonthemasterschedulegridthatreflectsthe anticipated build schedule for those items assign to the master scheduler. The master scheduler maintains this schedule, and in turn, it becomes a set of planning numbers that drivers material requirements planning. It represents what the companyplans to produce expressed in specific configurations,quantities, and dates. The master production schedule is not a sales item forecast that represents a statement of demand.


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The master production schedule must take into account the forecast, the •production plan, and other important considerations such as backlog, availability of material, availability of capacity, and management policies andgoals.AnotherwayofdefiningMPSistoconsideritasthelistingofenditems which are to be produced, the quantity of each item to be produced and when they are to be produced.Amoredetailedandconceptualiseddefinitionofmasterscheduleis:Amaster•schedule is a realistic, detailed, manufacturing plan in which all possible demands are considered and put upon the manufacturing facilities. The definitioncouldbefurtherexplainedindetailas:

Realistic: � MPS has to be realistic as it is a link between manufacturing andmarketing.Ifitisrealisticthetwothingsareachieved–satisfactionof market demand and utilisation of resources.Detailed: � It is a detailed planwhich specifieswhich items are to beproduced and at what point of time. A master schedule must be maintained with a high level of accuracy in terms of part numbers, quantities and the time periods.Manufacturing plan: � Master production schedule uses the sales forecast and other demands. It is then transferred to detailed production plan. It represents the way one wants to manufacture and not sell the product. A sales forecast is a very valuable tool to help and develop the master schedule. It is not directly transferrable .There is many things to be considered before developing the master schedule.

All possible demands considered: There are many types of demands that •must be considered in developing the master schedule which are mentioned below:

Sales forecast �Customer orders �Interplant requirements �Service plant demand �Plant capacity �Product lead times �Inventory planning �

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SummaryThe Master Schedule’s primary purpose is to translate the strategic initiatives •of top management into workable day-to-day actionsA statement of demand represented by the Master Production Schedule is not •a sales forecastThe master production schedule (MPS) sets the short range planning horizon •inwhichthequantityofeachenditem(finishedproduct)istobecompletedin each time period (week or month or quarter)Fourofthemostimportantthingsinamanufacturingenterprise–Demand•and Supply , Volume and Mix.An effective MPS acts as a basis for the utilisation of the capacity of the plant •to a good level and also helps in resolving the trade- offs that usually occur in between production and marketing.The time interval used (for example, weekly, monthly, or quarterly) type, •volume and component lead times of the products being produced depends upon the time horizon covered by the MPSMPS can be divided into four sections, each section separated by a point of •time called a ‘time fence’Master Scheduling is a business process designed to balance demand and •supply at the detailed and mix level. Master Scheduling is primarily a decision-making process, performed by an •individual called the Master Scheduler.MPS is considered as an important tool for both manufacturing and marketing •where it is used to satisfy the needs of the market by effective utilisation of manufacturing resources

ReferencesAswathappa, K. B. & Shridhara, K., 2010. P• roduction and Operations Management [Online] Available at: <http://site.ebrary.com/lib/utspune/docDetail.action?docID=10416187&ppg=262&p00=master%20scheduling>. [Accessed 10 July 2011].Logistik, • The Master Production Schedule (MTS) [Online] Available at: <http://www.logisitik.com/learning-center/the-master-production-schedule.html>. [Accessed 10 July 2011].Beasle• y, J K., OR-Notes [Online] Available at: <http://people.brunel.ac.uk/~mastjjb/jeb/or/masprod.html>. [Accessed 10 July 2011].Master Scheduling Overview: Chapter 1 • [Online] Available at: <http://rastahl.fatcow.com/Master%20Scheduling%20Chapter%201.pdf>. [Accessed 10 July 2011].


http://people.brunel.ac.uk/~mastjjb/jeb/jeb.html

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Recommended ReadingProud, J F., 2007. • Master Scheduling: A Practical Guide to Competitive Manufacturing, 3rd. ed., John Wiley and Sons, p.657.Wallace, T. Y., Stahl, R. A., 2003. • Master Scheduling in the 21st Century: For Simplicity, Speed, and Success - Up And Down the Supply Chain, T. F. Wallace & CO, p.204.Toomey, J. W., 2000. Inventory • Management: Principles, Concepts and Techniques, Springer, p.228.

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Self Assessment

MPS is considered a very vital link in any __________system.1. manufacturinga. marketingb. forecastingc. in-housed.

The Master Schedule is typically expressed in __________time periods.2. monthlya. daily b. yearlyc. fortnightlyd.

What refers to the resources available to meet the demand available in the 3. market?

Supplya. Productionb. Manufacturec. Materiald.

Which of these is not an element of the MPS that are affected by the type of 4. production system?

Demand management a. Lot-sizing b. Product-mixc. Planning horizond.

The lot size and the number of products to be produced on an order are 5. determined by the________.

customer ordera. forecastb. government policiesc. managementd.

The time bucket is usually the week and the time horizon up to 3-6 months 6. or a least ______the longest product lead time.

thricea. twiceb. halfc. one-fourthd.


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The MPS is the prime input to the ___________.7. MRP-2 systema. MRP-3 systemb. MRP-1 systemc. MRP-4 systemd.

MPS can be divided into _________-sections.8. foura. twob. threec. fived.

Which of the statements is false?9. Capacity needs arise for manufacturing the components in the required a. time schedule to meet the requirements of end products as per MPS.CapacityrequirementplanningisbasedontheMPSwhichshouldreflectb. an economic usage of labour and equipment capacities. Capacity requirements if found adequate will require master schedules to c. be revised.MPS is considered effective in nature helps in keeping the customer d. delivery promises.

Which of the statements is false?10. The Master Production Scheduler (MPS) maintains this schedule, and in a. turn, it becomes a set of planning numbers that drives material requirements planning.A statement of demand is represented by the master production schedule b. is a sales forecast.Master schedule is a presentation of demand, forecast, backlog, the MPS, c. the projected on hand inventory, the available-to-promise quantity.The Master production schedule sets the short range planning horizon in d. whichthequantityofeachenditem(finishedproduct)istobecompletedin each time period (week or month or quarter).

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Chapter VI

Future Planning Topics

Aim


introduce the concept of inventory optimisation•

discuss the emerging trends in inventory management•

explain the inventory modelling technology•

Objectives


identify the emerging topics in planning•

study the future of inventory management in the era of E-Commerce•

understand the concept of just-in-time and kanban•

Learning outcome


understand the inventory optimisation technologies•

describe the modelling demand behaviour•

evalu• ate traditional and advanced demand modelling approach


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6.1 Identify and discuss emerging topics in planningInventory is often where the biggest costs are hidden in businesses. This is alsothefirstreasonforchoosinginventorymanagement.Firstofallstocksareresponsible for a large part of the total working capital costs: up to about one third. Inventorycostsalsorepresentasignificantcomponentof total logisticscosts.Consequently,thebiggestbenefitscanbegainedbyreducingthesecosts(usingERP according to the expectations). Working capital invested in stocks could also have been a very useful resource if it could have been used otherwise. Thus, from a company-perspective, capital invested in stocks is a ‘useless’ waste of money. Cost reductions are required by the market in order to keep offering competitive productsandservices;reducingtheworkingcapitalcostsusingmoreefficientinventory management is one way to achieve this goal.

Secondlystocksareasourceforrisks.Forexample,stockmaycatchfire,canbe stolen, damaged or may decay over time. Consequently these events might influencetheproductionprocessandcouldevencauseittostopandordersaredelivered too late accordingly. If stock levels are lower the related risks will also be reduced. Risks caused by maintaining stocks are again related to costs, because stocks have to be stored securely and have to be protected against these risks, which cost money.

A third reason to focus on inventory (management) is because inventory costs are some of the easiest to identify and reduce when attacking supply chain problems. Budgets are often under pressure and costs have to be reduced to keep up with the competition. Accordingly, working capital costs will have to be reduced; optimising internal logistics is a way to do this in a relatively easier manner. ERP is presumed to enable stock reductions and thus as a consequence able to reduce related costs and risks. Inventory management aims to control materials andrelatedcostsandfinance.

6.2 Emerging Trends in Inventory ManagementSo far, we have assumed that inventory holding is indispensable and thus we arefindingwaystooptimisetheinventoryholdingthroughseveralmodels.Thisvery basic assumption is questioned that leads to several interesting alternative of inventory management techniques. Two important reasons for holding raw materials are:

Toavoidpricefluctuations.•Ensure that the delay in the arrival of materials does not affect the production •process.

Alternative strategies for holding raw materials to mitigate the price volatility includeenteringintoalong-termsupplycontractatafixedpriceortakingupposition in futures market. The objective of ensuring smooth production process can be achieved by the following ways:

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Dealing with multiple supply sources. •Built-in strict penalty clauses in the purchase orders.•To compensate the loss sustained for emergency buying. •Adopting just-in-time.•

The reasons for holding inventory in the form of work-in-process are complex production process, economic batch processing up to a stage of production and insurance against sudden breakdown in the manufacturing process. It is not possible to overcome all the technology related problems but attempt can be made to bring a new technology that speeds up the production process or changes the production process. Some of the components can be outsourced so that there is no need to produce the quantity in bulk to achieve economies of scale.

Another Japanese technique called Kanbans is useful to cut down the work-in-process since under this system, a production department produces the required product only when demand is made by the user system. Investments in plant and machinery and improving maintenance system would take away the need for holding stocks against sudden breakdown. Finished goods inventory is maintained toensureimmediatedeliveryoftheproduct.Itmaybedifficulttomakecustomerswait or require them to give an advanced schedule of consumption for many consumer products. However, this can be attempted in industrial goods and high value consumer goods.

For example, companies like BPL have a system of taking advance from the customers to supply television after certain period and customers are suitably compensated for waiting period. Promoting internet based ordering system would definitelygivealeadtimetothemanufacturerand,thus,avoidholdingfinishedgoods inventory. Industrial customers can be motivated to enter into a long-term purchase order by offering discounts or better credit terms. It is possible to access the production schedule of the industrial customers on a continuous basis and produce accordingly.

In recent times, the concepts such as vendor development, supply chain, and so on, are emerging techniques that allow exchange of information between the suppliers and users with an objective of bringing down overall cost of inventory and at the same time ensuring smooth production process. However, many of the concepts we have discussed so far are likely to become outdated soon if the current growth rate in the information technology is maintained. The expansion ofinternetservicesande-commercewilldefinitelycreateanewbusinessworldin which we may not have shops or malls. Most of the agencies dealing between customers and producers may not exist.

Producers may also offer product with individual preferences and bargain for a lead time to deliver the product. Industrial marketing is also likely to see major changes and at some point of time JIT, Kanbans, supply-chain, vendor development, etc. will become basic techniques for businesses. A sure way of tackling uncertainty is free exchange of information online, which is not only feasible but will also become a norm in the near future.


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6.2.1 Inventory Optimization (IO)Inventory Optimisation (IO) is an application of a range of latest techniques and technologies for improving inventory visibility, control, and management across an extended supply network. IO techniques apply rigorous and discrete analysis to analyse inventory performance. Then this analysis is used to identify product specificchanges to inventory stockingand replenishmentpolicies, to identifythesupplynetworkconfiguration,ortocorrelateinventoryinvestmentstoitemrevenueorprofitgeneration.

"Optimised inventoryplanning comes into its own— in thedowneconomy,users seeking to reduce costs still look to cut the inventories to the bone. They are showing interest in optimised inventory planning to reduce inventories across the overall supply chain, including service parts. Inventory levels and placement to support required customer service levels are no longer a by-product of SCP, but instead the key output of these specialised planning applications."

Ontheplanningside,akeyinventoryoptimisationtechniqueisprofit-drivenanalysis,wheretheprofitfromeachindividualproductcontributionisranked,aParetodistributionisdevelopedtoseparatehighprofitproducts;andinventoryholding policies are adjusted to cut inventory on low ranked products and increase inventory on high ranked products, resulting in intelligently applied net inventory reduction.

6.2.2 Inventory Optimization (IO) TechnologiesA key inventory optimisation technology is the IO engine. IO engines reveal opportunities to cut inventory by analysing inventory performance holistically- looking at data from across the extended supply network. IO engines identify ‘smarter’ inventory holding rules and replenishment policies that increase overall supplychainplanningaccuracy.“Smarter”typicallymeansapplyingthesepoliciesat a more discrete level, such as at an item/ stock keeping location combination level instead of just at the item level.

IO engines characterise supply network uncertainty present in a variety of specificstepsorlinksinmanufacturinganddistributionprocessusingadvancedmathematical (non- linear, algorithmic, and so on) models that are then solved to identify optimal inventory policies, stocking locations or quantities. The uncertainties addressed by IO engines include: demand uncertainty (or forecast error), cycle time variability and replenishment lead tome variability. The output of running an IO engine is fed back to ERP, constraint based planning or other discreteplanningsystems,adjustinginventorypoliciesasafinitelevel.

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“ Classic” Inventory

Management

“Advanced” Inventory

Management

InventoryOptimisation

Advantage of Inventory Optimisation over prior

methods

Material Requirements Planning (MRP)

Constraint based planning (APS)

IO Engine

Better characterisation •demand uncertainty and lead time variability. Advanced modelling •integrates with MRP and APS

Days of Supply rules for setting inventory levels

ABC Classification

Profit-DrivenAnalysis

Rationalizes inventory •with minimal impact onrevenue/profit

Cycle countingMaterials Management Systems

Closed loop planning and analytics with inventory control via exception management

Provides more •predictable control overmaterialflowsEnables faster re- •configurationofsupply chain Supports smoother •absorption and handling of unexpected supply or demand swing impact

No control over production Scheduling

Resorts to chase the techniques

Optimises considering production and transportation batches

Better synchronisation •between production and dispatch.

Table 6.1 Different types of inventory management and control techniques

6.2.3 Just In Time (JIT)In the new philosophy of the coordinated supply chain and the globalisation of business, traditional inventory management schemes have been changed. The key to successfully managing a supply chain is to plan and control the inventories as an integrated concept. There is an interesting trend emerging in the inventory management.


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The mathematics of inventory management is changing from traditional quantitative methods to more qualitative approaches. The 21st century supply chains calls for lower inventory levels and reduced working capital. In this spirit, the experience ofthepastfewdecadesisencouragingtheadoptionofamoreflexibleapproach,called the Just- in-Time method (JIT).

The Just in Time method represents a philosophy on manufacturing whose objective is to eliminate all sources of waste; from designing the product to its delivery to the customer, including inventories. The basics principle of JIT is to produce the right quantity of a product, when it is needed at each stage of the production process, in minimum lead time. Inventory is not needed or is at least minimised. A necessary component for the achievement of this goal is the implementation of the Kanban system production control. In this system, cards are used to initiate the production of parts and in order to controlimmediatematerialflowbetweenworkstations;theup-streamstation(theserver)receivesticketcallsforsmallfixedquantitiesfromadown-streamuser(the client). On sending the supplies, a production Kanban is generated requesting the previous upstream server to supply a replacement quantity. By doing this, thewholeoperationissynchronisedtothefinalassemblystage.Anemployeeparticipation and involvement strategy is required to ensure quality, and changes in work practices leads to elimination of waste.One of the major requirements for successful implementation of JIT is that setup costs associated with lot production must be reasonably small. A reduction in the setup times is therefore one of the main goal in effective implementations of the JIT system.

6.2.4 The Future of Inventory Management in the Era of E-CommerceIn the last few years the internet has emerged as an important medium of commerce. The use of the internet and the evolution of e-business have dramatically affected the way products are bought and distributed. Inventory management remains a critical factor of great concern for organisation as they plan their e-business future. E-inventory management is the true barrier of entry to e-commerce.

Nowadays, business and manufacturing units of Modern Corporation are decentralised and multistage production is dominating the scene. Inventory planninginthesesystemsiscomplicatednotonlybecauseofmulti-levelflowsofinventory and products but also because data are distributed at different locations dynamically while units are interacting with each other. In order to manage inventory for a company which spreads over large territories, e- management is essential.

In an e- inventorymanagement,where orders are defined and transmittedelectronicallyandwhereinventoryreviewmustbedoneonthefly,coordinationofthe distributed data to satisfy local requirements and to achieve global optimality is impossible without the help of communication tools such as Electronic Data

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Interexchange (EDI) and bar-coding. E-Toys for example have in some cases hourly reviews of placed orders and makes inventory decisions based on these.Theuseofbar-codingelectronicscanningandothershopfloordatacollectionimplies that status recording is carried out in real time and stock records are completely up to date. Processing and material handling are being networked to management control systems in order to create integrated manufacturing systems. In response to such needs, computer software companies developed comprehensive inventory management modules and systems. These new packages include many features, designed to help distributors to effectively manage inventory.

6.3 Inventory Modelling TechnologyThework on the subject of “Inventorymodelling” started around 1920 andhadagreatincreaseafterWorldWarII.Mostofitwasstructuredandfinalisedat the beginning of the sixties. The resulting models constitute what can be called“traditionalscientificinventorytheory”,whichstillisthebasisformanycommercial packages.

These models contain very gross approximations, some very well known, other not explicitly mentioned, but rather easy to spot. Nevertheless, very little has beendone in the lastfiftyyears to improve theway inventorybehaviourhasmodelled to increase the very low degree of adherence with the real world. On the contrary,somefurthersimplificationsweresuggested(seeGraham,1987)which,unfortunately, had some partial acceptance among practitioners and vendors of low-profilecommercialpackages.

A few years ago, some vendors realised the inadequacy of their models, especially on the treatmentofslowmoving items,so theyadded“patches” todealwiththisproblem,likeCroston’smethod(1970)oritsderivation.Thisfixedthemostapparentflawswithoutsolvingtheproblem(forexampleMercia-Finmatica,SAP-APO).Eventhefewvendorsthatarenowsellingsome“inventoryoptimization”functionalityhaveatbestupgradedtheirinventorymodelstobemore“complete”andclosertothe1968“state-ofthe-art”.Yetwecan’tbelievethatyoucanfindan optimal global inventory solution in a complex supply chain, when the basic descriptions of the stock-to-service relationships are unreliable.

6.3.1 Modelling Demand BehaviourA reliable stock-to-service curve is strongly influencedby the quality of theassumptions made about the demand probability distribution. The need for higher service levels, together with a trend toward smaller replenishment lot sizes, requirestheright-endtailoftheprobabilitydistributiontobesufficientlyreliableeven for high values of x. And this must also be true for slow to medium movers, which become more and more important in the product mix, due to product proliferation and the evolution of distribution network. The common approach to“demandmodelling”isstillbasedonsometraditionalassumptions,whicharegetting increasingly inadequate.


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The traditional, common approach:•The demand history is only considered in terms of quantity, totally ignoring �customer order lines.The main focus is on forecast accuracy, with very little attention given to �the“stochastic”components.The probability distribution of demand is directly derived from the �distribution of the forecast errors.The probability distribution of demand is generally assumed to be �“normal”.In the rare cases in which other probability distributions are available, �besidesthe“normal”,itisdifficulttofindwhichfitsbest.The presence of a limited number of probability distribution functions �creates huge instability in switching from one to another (dramatic step changes in safety stock).

Advanced“DemandModelling”ismorerealisticandassuresmoreaccurate•results:

The demand history is collected and analysed both in terms of quantity �and customer order lines, in order to better model the shape of the demand probability distribution.Themain focus is on the “stochastic” component that is the “full” �probability distribution of demand, from which the forecast is derived almost as a by-product.The demand probability distributions (order lines per period, quantity per �order line, quantity per period) are derived from history in a coordinated fashion, which also allows detecting the additional variability potentially introduced by the forecasting model itself.A wide variety of demand behaviours can be modelled, ranging from �very fast movers to lumpy demand items, through a unique, proprietary, probability distribution function.

Suchdistributionfunctioncanassumeaninfinitenumberofshapesdepending•on a certain number of relevant parameters, allowing to manage any item in any stage of its life cycle with a self-adapting, seamless model, which guarantees an excellent degree of stability in all related parameters (safety stock in particular).

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SummaryInventorycostsrepresentasignificantcomponentoftotallogisticscosts.•Cost reductions are required by the market in order to keep offering competitive •productsandservices;reducingtheworkingcapitalcostsusingmoreefficientinventory management is one way to achieve this goal.Twoimportantreasonsforholdingrawmaterialsare:toavoidpricefluctuations•and ensure that the delay in the arrival of materials does not affect the production process.Japanese technique called • Kanbans is useful to cut down the work-in-process since under this system, a production department produces the required product only when demand is made by the user system. Inventory Optimisation (IO) is the application of a range of latest techniques •and technologies for improving inventory visibility, control, and management across an extended supply network. Akeyinventoryoptimisationtechniqueisaprofit-drivenanalysis,wherethe•profitofeachindividualproductisranked.A key inventory optimisation technology is the IO engine. IO engines reveal •opportunities to cut inventory by analysing the inventory performance holistically- looking at data from across the extended supply network. The Just in Time method represents a philosophy on manufacturing whose •objective is to eliminate all sources of waste; from designing the product to its delivery to the customer, including inventories. Inventory management remains a critical factor of great concern for •organisation as they plan their e-business future. E-inventory management is the true barrier of entry to e-commerce.Areliablestock-to-servicecurveisstronglyinfluencedbythequalityofthe•assumptions made about the demand probability distribution.

References supplychainsoftware, 2010. • Beyond Inventory Optimization Episode 1: Why Inventory Optimization [Video online] Available at: < http://www.youtube.com/watch?v=yECatv1n2Zo> [Accessed 27 July 2011].nptelhrd, 2008. • Lecture - 39 Inventory Modelling [Video Online] Available at: < http://www.youtube.com/watch?v=os6pOCOSeg4> [Accessed 27 July 2011].Sherbrooke, C., 2004. • Optimal Inventory Modelling of Systems: Multi-Echelon Techniques, 2nd ed., SpringerMarquez, A., 2010. • Dynamic Modelling for Supply Chain Management: Dealing with Front-end, Back-end and Integration Issues. SpringerBeamon, B. & Kotleba, S., 2006. • Inventory modelling for complex emergencies in humanitarian relief operations [pdf] Available at: <http://faculty.washington.edu/benita/paper18.pdf> [Accessed 27 July 2011].


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Service Optimizer 99+’s Inventory Mix Optimization and how it relates •to SAP SCM [pdf] Available at: <http://www.toolsgroup.com/images_us/how_service_optimizer_99_relates_to_SAP_SCM.pdf> [Accessed 27 July 2011].

Recommended ReadingMuller, M., 2011. • Essentials of Inventory Management, 2nd ed., AMACOM.Piasecki, D., 2009. • Inventory Management Explained: A focus on Forecasting, Lot Sizing, Safety Stock, and Ordering Systems. Ops Publishing.Chikan, A., 1992. • Current Trends in Inventory Research: A Selection of Papers Presented at the Sixth International Symposium on Inventories, Budapest, August, 1990. Elsevier Science Ltd.

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Self AssessmentWhich of the following is an important inventory optimisation technology?1.

IO inventorya. IO engineb. IO manufacturingc. IO designd.

__________inventory is maintained to ensure immediate delivery of the 2. product.

Finished goodsa. Raw materialb. Equipmentsc. Resourcesd.

Which of the following statements is false?3. One of the major requirements for successful implementation of JIT is that a. the setup costs associated with lot production must be reasonably small. Inventory management remains a critical factor of great concern for b. organization as they plan their e-business future. E-inventory management is the true supporter of entry to e-commerce.c. Investments in plant and machinery and improving maintenance system d. would take away the need for holding stocks against sudden breakdown.

Inventory management aims to control _______and related costs and 4. finance.

stocksa. businessb. costc. materialsd.

What does EDI stand for?5. Electrical Data Inter-exchangea. Electronic Data Investmentb. Electronic Data Inter-exchangec. Electronic Design Inter-exchanged.


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Which of the following statements is true?6. Stocks are a source for investments.a. Investments in plant and machinery and improving maintenance system b. would help in holding the stocks against sudden breakdown. Industrial customers can be motivated to enter into a long-term purchase c. order by offering discounts or better credit terms.Theexpansionofinternetservicesande-commercewilldefinitelycreated. a new business world in which we will have shops and malls.

__________based ordering system gives a lead time to the manufacturer and 7. thusavoidholdingfinishedgoodsinventory.

Interneta. Businessb. Servicesc. Inventoryd.

Investments in plant and machinery and improving maintenance system would 8. take away the need for _______stocks against sudden breakdown.

holdinga. removingb. purchasingc. improvingd.

Areliablestock-to-servicecurveisstronglyinfluencedbythequalityofthe9. assumptions made about the _______probability distribution.

servicea. productb. demandc. supplyd.

The mathematics of inventory management is changing from traditional 10. ______methods to more qualitative approaches.

quantitativea. managementb. distributionc. qualityd.

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Case Study I

Organisation Background: Thefirmwasaleadingconsumerproductscompanydealingincosmeticsandpersonalcareproductswithitsheadofficelocatedoverseas.Thecompanyhadasupply chain network of 3 factories with bonded stock rooms (BSR) attached for despatch to the depots and 35 depots for servicing distributors. Goods move from the factory to the BSR. BSR despatches stocks to Mother CFAs (depot). Other depots receive stocks from the Mother depot and sell them to distributors.

Key Concerns for the Company To reduce inventory level at the BSR and depots. •To improve inventory accuracy at stocking points including both BSRs and •depots.To identify the damaged stocks across the chain and initiate action in a timely manner.

Focus of StudyA study was completed focusing on the

Inventory-related issues at BSRs and depots. These included: •Inventory holding as a proportion of sales �Practices employed for track goods in the warehouse �Proportion of fast and slow moving stocks to the total inventory �Linkages of factory dispatches to BSR with patterns of BSR dispatches �to depots Accuracy of inventory records especially of fast selling lines �

Demand Planning process. The study looked at: •Forecast Accuracy and process of reviewing and revising forecasts �Level of safety stock at each location combined with process to review �and reset the same Linkages of forecasts and consequent despatches with relevant available �closing stocks at depots

Findings Key Business Indicators

Total average inventory holding at BSRs was 8.2 weeks of sales •Average inventory holding at the depots was 6.5 weeks of sales •Depots were holding High inventory of old/withdrawn stocks •Damaged stocks for a long time (over 3 months) •Book and physical stocks had discrepancy of over 30% •


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ConclusionsHigh Inventory Levels• : Inventory levels were very high across the distribution chain on account of:

Sales and despatch forecasts that were not in line with actual primary / �secondary sales Therewas no process to periodically review and refine theAnnual �Forecasts, in line with market feedback Stocking across all points in the distribution chain was driven by a �push-oriented system that did not have provisions to be tuned to market requirements Actualsafetystocksmaintainedatdepotsweresignificantlyhigherthat �target safety stocks agreed at the beginning of the year. No system was in place to monitor and correct the same during the year �Stock allocation from depots was manual. Orders received from distributors �were manually processes and no process was in place to automatically collate orders and allocate stocks

• High Levels of Old / Withdrawn / Damaged / Slow-moving stocks: Dead stocks were allowed to accumulate in the system mainly because:

There was an absence of visibility into inventory details across stocking �points The process to monitor and act on dead stocks was not adhered to �Records of slow-moving / old / withdrawn / damaged stocks were �not maintained methodically at the stocking points. Records were inaccurate. Communication of details of dead stocks to the relevant teams was based on �manuallyfiledreportswhichwastime-takingandopentoerrorInaccuracyin inventory records: The organisation did not have a clear policy on periodic reconciliation of �physical stock with book records Inaccuracies grew over time, compounded with process failure on �accounting for dead stocks

Action Steps Advised and Undertaken Process Improvements

Bin card system was implemented for each rack at the CFAs and the delivery •staff was trained in relevant bind card maintenance practices.A process to regularly reconcile physical and book stocks using the cycle-•count process was mandated.AnITsolutionwasidentifiedandimplementedforAccountingtheCyclecount•process, providing MIS on deviations and accounting the adjustment notes Computing the forecast using consolidated orders, with factoring for •promotions and

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Seasonality•Calculating safety stock level based on number of weeks of sales target•Facilitating communication of closing stock data from BSR and depots to •logistics departmentFacilitating communication of damaged and un-saleable stock quantity to •commercial Department•Automatically allocating stocks using FIFO principle at the depots •Demand planning and forecasting were made a periodic activity using the •above IT solution to align forecasting with market orders and actual sales. The process of setting safety stocks at depots was made periodic and dynamic, based on updated sales data. Norms were set to act on damaged / old and other dead stocks. Clear action •steps were laid down to liquidate or destroy these stocks. Responsibility and accountability were set to in the organisation to monitor and authorise activities in this regard based on visibility provided by the IT solution.

Benefits: The organisation achieved an inventory record accuracy (book stocks correctly •reflectingphysicalstocks)of95%within2months.The company achieved (Within 2 Planning cycles i.e. 2 Months) •

Stock level reduction �From 8.2 weeks to 5.5 weeks at the BSR -

From 6.5 weeks to 4 weeks at the depots which included Dam-- aged Inventory

Reduction in stock Value holding across the supply chain -

Transparency of saleable and damaged stocks quantities across the supply �chain resulting in more accurate demand planning, stock allocation and production. Better management of damaged and un-saleable stocks: �

Sales realisation on salvaging and selling damaged stocks at a - discounted price

Timely destruction of unusable and potentially harmful products-

Timely action on transport, handling, stock management and - product development fronts to reduce damages

Reduction in proportion of old and damaged stocks; Facilitation of ensuring •fresher stocks in the market. This was achieved mainly by reducing inventory levels across the chain and also by better stock management at the depots.


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(Source: Forum, Best Practices in Inventory Management [Online] available at < http://forumcentral.sify.com/athena/login/casestudyinventory.pdf> [Accessed on 1August 2011])

Questions:Explaintheorganisationalbackgroundofthefirmandtheirconcerns?1. Answer: Thefirmisaleadingconsumerproductscompanydealingincosmeticsandpersonalcareproductswithitsheadofficelocatedoverseas.Thecompanyhad a supply chain network of 3 factories with bonded stock rooms (BSR) attached for despatch to the depots and 35 depots for servicing distributors. Goods move from the factory to the BSR. BSR despatches stocks to Mother CFAs (depot). Other depots receive stocks from the Mother depot and sell them to distributors.High Inventory Levels• : Inventory levels were very high across the distribution chain on account ofsales and despatch forecasts that were not in line with actual primary / secondary sales There was no process to periodically review and refinetheAnnualForecasts,inlinewithmarketfeedbackStockingacrossallpoints in the distribution chain was driven by a push-oriented system that did not have provisions to be tuned to market requirements Actual safety stocks maintainedatdepotsweresignificantlyhigherthattargetsafetystocksagreedat the beginning of the year. No system was in place to monitor and correct the same during the year Stock allocation from depots was manual. Orders received from distributors were manually processes and no process was in place to automatically collate orders and allocate stocks High Levels of Old / Withdrawn / Damaged / Slow-moving stocks• : Dead stocks were allowed to accumulate in the system mainly because: There was an absence of visibility into inventory details across stocking points The process to monitor and act on dead stocks was not adhered to .Records of slow-moving / old / withdrawn / damaged stocks were not maintained methodically at the stocking points. Records were inaccurate. Communication of details of dead stockstotherelevantteamswasbasedonmanuallyfiledreportswhichwastime-taking and open to error. Inaccuracy in inventory records• : The organisation did not have a clear policy on periodic reconciliation of physical stock with book records Inaccuracies grew over time, compounded with process failure on accounting for dead stocks.

Whatstepsweretakentoaddresstheconcernsofthefirm?2. Answer:Bin card system was implemented for each rack at the CFAs and the delivery staff was trained in relevant bind card maintenance practices. A process to regularly reconcile physical and book stocks using the cycle-count process was mandated

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AnITsolutionwasidentifiedandimplementedforthefollowing:Accounting the Cycle count process, providing MIS on deviations and •accounting the adjustment notes Computing the forecast using consolidated orders, with factoring for •promotions and seasonalityCalculating safety stock level based on number of weeks of sales target•Facilitating communication of closing stock data from BSR and depots to •logistics departmentFacilitating communication of damaged and un-saleable stock quantity to •commercial Department. Automatically allocating stocks using FIFO principle at the depots.Demand planning and forecasting were made a periodic activity using the •above IT solution to align forecasting with market orders and actual sales. The process of setting safety stocks at depots was made periodic and dynamic, based on updated sales data.

Norms were set to act on damaged / old and other dead stocks. Clear action steps were laid down to liquidate or destroy these stocks. Responsibility and accountability were set to in the organisation to monitor and authorise activities in this regard based on visibility provided by the IT solution.

Whatbenefitswereachievedbythefirm?3. Answer The organisation achieved an inventory record accuracy (book stocks correctly reflectingphysicalstocks)of95%within2months.Thecompanyachieved(Within 2 Planning cycles i.e. 2 Months) Stock level reduction •

From 8.2 weeks to 5.5 weeks at the BSR �From 6.5 weeks to 4 weeks at the depots which included Damaged �Inventory Reduction in stock Value holding across the supply chain �

Transparency of saleable and damaged stocks quantities across the supply •chain resulting in more accurate demand planning, stock allocation and production. Better management of damaged and un-saleable stocks: •

Sales realisation on salvaging and selling damaged stocks at a discounted �price Timely destruction of unusable and potentially harmful products �Timely action on transport, handling, stock management and product �development fronts to reduce damages

Reduction in proportion of old and damaged stocks; Facilitation of ensuring •fresher stocks in the market. This was achieved mainly by reducing inventory levels across the chain and also by better stock management at the depots


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Case Study II

OrthoRehab Improves Inventory Management with BlackBerryOrthoRehab provides an advanced technology called Continuous Passive Motion (CPM) that helps post operative patients exercise limbs and joints to promote faster healing.Managingtheirinventory–morethan17,000piecesofequipment–wasproving ineffective with their current paper-based method. Paperwork was lagging by two to four weeks behind service and support, leaving the company unsure of where its equipment was and slowing down their billing processes.

In 2003, they looked at leveraging their current BlackBerry® solution for management into thefield.ThefieldsolutioninvolvedbarcodescanningwithBlackBerry handhelds, deployedwithFlowfinityForms, an electronic formsapplication. Eachof the173OrthoRehabfieldworkerswasequippedwithalaser scanner tethered to a BlackBerry handheld, so CPM units could be instantly scanned, electronically recorded at patient sites and the information relayed wirelessly to the corporate headquarters. The company received compelling ROI, such as:

A reduction in inventory tracking paperwork and an increase in accurate •reporting.Moreefficiencyinseparatingbillingandinventorytracking.•Financial losses reduced by $250,000/year in unreported losses.•Increased employee productivity and enhanced patient care.•Reduced administrative work in updating the master database.•

OrthoRehab had always tracked its inventory using a paper-based process. Their Patient Service Representatives manually completed a form every time one of the company’s CPM units were transferred to a patient, hospital or clinic. The form was faxed to regional or corporate centres, where it was transferred to an electronic billing database. With more than 17,000 pieces of equipment in rotation at all times, paperwork lagged two to four weeks behind services. The lack of precision meant 2,000 to 3,000 devices could show up missing during an inventory period, costing the company both time and money.

Investigating a wireless solution In 2001, OrthoRehab began looking for a better way, with electronic tracking through another mobility solutions provider. A limited roll out tested a combined PDA and scanner. The results were unimpressive. With a battery life of less than one day, and the need to synch the device to a desktop computer, the company found the solution was not meeting its goals. The price also proved prohibitive, at $1,500 per device.

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“Wejustwantedtocomeupwithawayforinventorytoberecordedelectronicallyeverytimeitwastouched,”saysBrianTower,DirectorofInformationTechnology.“Iwasalsotryingtoseparateinventoryfrombilling.Becausethetwohadbeenjoinedforsolong,itwashavinganegativeeffectonourrevenue.”

In 2003, already using BlackBerry for senior levels of management, they realized thesolutioncouldalsobeusedinthefield.“Wefiguredoutthatwecouldtakeinformation from a device, communicate it to the BlackBerry handheld and then bringitintoourdatabase,”saysTower.

A wireless inventory tracking solution was built on the BlackBerry handheld, with atetheredscanner,usingaFlowfinityapplicationfortrackingandforms.Thesystem would run over AT&T’s GSM/GPRS network. BlackBerry could offer its well-documented superior battery life, giving mobile workers a reliable solution at a competitive price per handheld. BlackBerry push technology meant that fieldworkerswerealwaysonline,receivingimportantdatainclosetoreal-time,rather than having to dial-up or synch up handhelds at the end of the day. All of this was enabled on the BlackBerry Enterprise Server™.

Seamless integrationMinimal time was required for system integration, largely because the Java™ platform used with BlackBerry is engineered for ease of deployment across multiple systems. It took a developer only one month to integrate the new solution withtheexistingMicrosoft.NETsystem.TowerandhisteamusedFlowfinityForms, a data collection application, to develop electronic versions of the original paper forms.

No custom programming was required to make these forms digital and the software wasup-and-runningwithin72hours.Eachofthe173fieldworkers–includingPatientServiceRepresentativesandsalesrepresentatives–wasgivenaBlackBerryhandheld with a laser-tethered scanner. The user simply scanned the barcode on the CPM units at the patient site. They then input data into a simple form on their BlackBerry handheld, which was wirelessly sent to corporate headquarters, where itwasenteredintothebillingsystem.“Thesecondthatwesentthehandheldsoutthere,itreallyincreasedeveryone’seffectiveness,”saysTower.

OrthoRehab can now see where their inventory is at-a-glance and which patients have been set up with CPM units. Improved inventory tracking has increased the accountabilityofindividualregionaloffices.Theelectronicformsandbarcodescanning eliminated human errors (a major concern for health care providers), such as illegible information or having product serial numbers recorded incorrectly. Before, OrthoRehab found itself relying on billing to track the movement of their inventory.


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Withmuchoftheirinventorygoingunreportedbecauseoftheinefficienciesofthesystem, they were losing revenue. They now estimate saving $250,000 annually with their new wireless solution. The billing process is faster, accurate and inventorycanbetrackedup-to-the-minute.“Comparedtowhatwewerelosing,”saysTower,“it’spracticallyano-brainerasfarashowquickwe’regoingtopickup our investment. The solution was both a necessity and an investment well worth making.”Inaddition,BlackBerryhashelpedimprovesecurity.

Under HIPPA, companies like OrthoRehab must follow certain guidelines when transmitting patient data to ensure the patient’s privacy. Under the old system, confidential informationwas faxedoverphone lines,whichdonotguaranteesecurity. With Triple DES encryption, OrthoRehab is now able to securely communicatepatientdata.Thegreatestbenefitshavecertainlybeenfeltatthebottom line. Now that OrthoRehab can track its inventory better, they can alsoorderitmoreeffectively.“Ifwecanobtaingoodsatalowercostandgetinventorytosomebodymorequickly,thenthebottomlineisfeltbyeveryone,”says Tower.

Unexpected benefitsButtherewerespin-offbenefitsthatOrthoRehabdidn’texpect.“BlackBerryhasbecomethenormforourorganisationnow,”saysTower.“Whenfieldworkersrealised that so much of what they do on a day-to-day basis could be rolled up inthislittledeviceandhowmuchmoreefficienttheycouldbe,thenafewheadsstartedtoturn.”

In fact, 80 percent of OrthoRehab’s 225 staff uses BlackBerry on a regular basis. Productivity has improved because of the integrated features of a BlackBerry handheld–mobileemailaccess,phoneandcalendaring.“Beforeweprettymuchlivedanddiedbycellphonesandpagers,”saysTower.

“Ifpeoplehadtochecktheire-mail,theywouldrunintotheirlocalofficesandconnect via some type of remote access.”Email accessibility onBlackBerryhandhelds has even helped Patient Service Representatives locate patients’ houses more easily. Locating an address used to require a phone call and a fax back withdirectionsfromaregionaloffice.Thiscouldresultinlostproductivityasemployees stood at fax machines waiting for paperwork to come through.

Now,repsgoonlineandfindthedirectionsthemselvesontheirhandhelds.“Justthatkindofthingaloneisknockingofftwohoursaday,”saysTower.“Foryears,thefieldwaspushingustosupplythemwithlaptops,”saysTower.“ButwithBlackBerry,theyalreadygetemailandcalendar.Sothepushbackfromthefieldfor laptops became almost nil and we could retire the need for that program and expense.”

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The FutureEveryone at OrthoRehab is excited about the opportunities that have opened up as a result of the wireless solution. They now have a list of potential new applications. The next project they’ve planned is to transfer their patient agreement form from paper to a wireless application. Tower and his team are working to recreate this form on the BlackBerry handheld, which will eventually allow them to easily transfer the information to their database.

Other forms that are candidates for this kind of process include insurance information, co-pays and evenphysicianprescriptions. “Wehave just starteddownthisroadandtherearesomanyopportunitiesaheadofus,”saysTower.“Whateverweconsolidateandget intoaformontheBlackBerryhandheldisgoingtobeawinforus.”TheBenefitsWhileOrthoRehabhasdiscoveredexcellentfinancialROI, theyhaveequallyenjoyedtheunexpectedbenefitsoftheirnewwirelesssolution,including:

A reduction in inventory tracking paperwork and an increase in accurate •reportingBillingandinventorytrackingseparatedforgreaterefficiency•Financial losses reduced by $250,000/year in unreported losses•Increased employee productivity and improved patient care•Reduced administrative work in updating the master database•Expedited processes enables more rapid billing•Greater employee morale and more communication between mobile and •officeemployees.

(Source: OrthoRehab Improves Inventory Management with BlackBerry [Online]Available at<http://www.blackberry.com/products/pdfs/Orthorehab_CS.pdf> [Accessed 1 August 2011].)

Questions:How OrthoRehab improved its inventory management with Blackberry? 1. Explain.WhatweretheunexplainedbenefitsofusingBlackberryinOrthoRehab?2. How the usage of BlackBerry led to system integration within OrthoRehab?3.


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Case Study III

AmajorUScorporationidentifiesacashflowproblem.Furtheranalysisrevealsthat inventory levels are high and turns are below most major competitors. In addition, a technology change and a proliferation of models amplify the issue.

Thecorporategoalisareductionofinventoryacrosstheorderfulfilmentprocessin excess of 50% with no negative impact on service levels. Customer feedback reveals that a key to customer satisfaction is on time delivery and any deviation from promised dates has a negative impact on customer satisfaction.

Course of action:Abaseline of the existing order fulfilment process is conducted. It quicklyhighlightssomekeyleveragepointsintheorderfulfilmentprocess.Furthermore,it becomes apparent that much of the current inventory is present due to internally generated variation versus customer driven order variation.

Following the baseline activity various process changes are modelled to verify their impact on inventory levels and service levels. Real world constraints are taken into account prior to deciding on the appropriate changes. Simulations are conducted to verify the appropriateness of the analytical models using actual process data.

As a result the following changes are made to accomplish the goals.ImplementationofaPullSystemfortheorderfulfilmentprocess.Thispull•system spans from supplier through manufacturing, logistics to the customer. ThepreviousorderfulfilmentprocesswasmanagedviaanMRPIIsystem.Determination of inventory levels using economic and statistical methods in •an integrated approach.Implementation of appropriate inventory management models to minimise •costgivenvariousrealworldconditionsinthesupplychain(flowproduction,batchproduction,re-manufacturedpartsinflowetc.).Revisionoftheplanningprocesstosupporttheorderfulfilmentprocess.•Training of analysts to determine the appropriateness of forecast models.•Reduction of internally generated variation through organisational changes •to reduce tampering.Application of statistical methods.•

Managementofthenewprocessissignificantlylessresourceintensivethantheoriginal process. Changes in volume are easily accomplished due to the simplicity oftheneworderfulfilmentprocess.Inventoryisreducedandservicelevelstocustomers are improved.

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Results:Inventory reduction post full implementation: > $20,000,000

(Sources: Sixsigmasystems, Overview of Six Sigma Systems projects [Online] Available at <http://www.sixsigmasystems.com/case_studies.htm#Case1 > [Accessed 1 August 2011].)

Questions What problem did the US corporation face and what was the course of action 1. taken?What was implemented to achieve the goals?2. What was the result achieved by the Corporation?3.


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Biblography

References:Demand Media, Joseph C., • Factors That Can Lead to Poor Inventory Control [Online] Available at: <http://smallbusiness.chron.com/factors-can-lead-poor-inventory-control-1146.html> [Accessed 14 July 2011].IBM, • Recovering from an inventory failure, [Online] Available at <http://publib.boulder.ibm.com/infocenter/ltfsle/cust/index.jsp?topic=%2Fcom.ibm.storage.hollywood.doc%2Fltfs_troubleshooting_inventory_failure.html>[Accessed 14 July 2011].Leansixsigmasource,• 2009, RUN CHART: What Is a Run Chart? [Video Online] Available at <http://www.youtube.com/watch?v=HYVbBTIsHX0> [Accessed 14 July 2011].Murray M., 2010, • Materials Management with SAP ERP: Functionality and TechnicalConfiguration,3rd ed., Sap Press. MMurray, M., • Sales and Operations Planning, [Online] Available at : <http://logistics.about.com/od/tacticalsupplychain/a/sandop.htm> [Accessed 7 July 2011].Vollmann T., Berry W., Whybark, D. C., and Jacobs F. R., 2004. • Manufacturing Planning and Control for Supply Chain Management, 5th ed., McGraw-Hill/Irwin.Wasp Barcode, 2011, • What is Inventory Control RF - Wasp Barcode [Video Online] Available at <http://www.youtube.com/user/WaspBarcode?v=BawIqMZxggA&feature=pyv>[Accessed 14 July 2011].About.com. • How to Create a Powerful Sales Presentation [Online] Available at: <http://sbinfocanada.about.com/od/salesselling/a/presentationkr.htm>. [Accessed 12 July 2011].

Aiello J. L., 2007.• Rightsizing Inventory (Resource Management), Auerbach Publications.Aswathappa, K. B. and Shridhara, K., 2010. P• roduction and Operations Management [Online] Available at: <http://site.ebrary.com/lib/utspune/docDetail.action?docID=10416187&ppg=262&p00=master%20scheduling>. [Accessed 10 July 2011].Beasle• y, J K., OR-Notes [Online] Available at: <http://people.brunel.ac.uk/~mastjjb/jeb/or/masprod.html> [Accessed 10 July 2011].BeckySavage, 2008.LIFO Vs FIFO [Video Online ] Available at :<http://www.•youtube.com/watch?v=ExNsFh0_39s> [ Accessed 4 July 2011]Bose, C.D., 2006. • Inventory Management, PHI Learning Pvt. Ltd.Demand Solutions, 2008. • How to Execute a Successful Sales & Operations Planning Process [Video Online] Available at :< http://www.youtube.com/watch?v=bIMjU4yjeT4> [Accessed 7 July 2011].

http://people.brunel.ac.uk/~mastjjb/jeb/jeb.html

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Dougherty, J. D., • Getting Started with Sales & Operations Planning [Online] Available at: <http://www.partnersforexcellence.com/artoth01.htm> [Accessed 12 July 2011].FEMA, Resource Management [Online]Available at :<http://www.fema.gov/•emergency/nims/ResourceMngmnt.shtm>[Accessed 4 July 2011].Freedman, E., • Making Effective Presentations [Online] Available at: <http://www.pa-lawfirmconsulting.com/pdfs/marketing/MAKING_EFFECTIVE_PRESENTATIONS.pdf>. [Accessed 12 July 2011].Goldratt, E.M., 1999.Theory of Constraints, North River Press•IE Group, 2011,Sales & Operations Planning Summit [Online] Available •at :<http://www.theiegroup.com/SOP/Overview.html> [Accessed 7 July 2011].Logistik, • The Master Production Schedule (MTS) [Online] Available at: <http://www.logisitik.com/learning-center/the-master-production-schedule.html> [Accessed 10 July 2011].Mandel, S., Gerould, P. and Mapson, R., 1994. • Technical Presentation Skills: A Practical Guide for Better Speaking [Online] Available at: <http://site.ebrary.com/lib/utspune/search.action?p00=Technical+Presentation+Skills+%3A+A+Practical+Guide+for+Better+Speaking&search=Search+ebrary>. [Accessed 12 July 2011]Martensson, H.,2007. • The Chain Theory [Video Online] Available at :< http://www.youtube.com/watch?v=FbX9kQa-_eQ> [Accessed on 07 July 2011]Master Scheduling Overview: Chapter 1 • [Online] Available at: <http://rastahl.fatcow.com/Master%20Scheduling%20Chapter%201.pdf> [Accessed 10 July 2011].MicrosoftOffice,• Forecast inventory levels with Moving Average analysis, [Online]Availableat:<http://office.microsoft.com/en-us/excel-help/forecast-inventory-levels-with-moving-average-analysis-HA001086480.aspx> [Accessed 5.July.2011]Muller, M., 2003. • Essentials of inventory management, AMACOM Div American Mgmt Assn. • Pomscm,2009. Forecasting [Video Online] Available at :< http://www.youtube.com/watch?v=YYspDbriCF8>[Accessed 5.July.2011]. • Thetravhischool,2010. Delphi Method I [Video online]Available at :< http://www.youtube.com/watch?v=FFfKOSTftcs&feature=related> [Accessed 5.July.2011].Tmforum, • Resource Inventory Management [Online] Available at :<http://www.tmforum.org/ResourceInventoryManagement/2556/home.html> [Accessed 4 July 2011].University of Guelph, • Forecasting [Online] Available at :<http://www.uoguelph.ca/~dsparlin/forecast.htm#SIMPLE%20MOVING%20AVERAGE [Accessed 5 July 2011].


http://www.youtube.com/user/pomscm



http://www.youtube.com/user/thetravhischool

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Walker, M., 2008.• Inventory Management-Introduction [Video Online] Available at :<http://www.youtube.com/watch?v=qkZQxXJuqKo>[Accessed 1 July 2011].Wallace, T. F. and Stahl, R. A., 2008. • Sales and Operations Planning: The How-to Handbook, 3rd ed.,T.F. Wallace & Co.Zipkin, P. H., 2000. • Foundations of Inventory Management, McGraw-Hill Irwin

Recommended ReadingAgrawal, A., 2009, • Customizing Materials Management with SAP ERP Operations, Sap Press.Bragg, S.M.,2011. • Inventory Best Practices,2nd,ed.,Wiley Dougherty, J. and Gray, C., 2006.• Sales & Operations Planning - Best Practices: Lessons Learned, Trafford PublishingPalmatier, G. E. and Crum, C., 2003• . Enterprise Sales and Operations Planning: Synchronizing Demand, Supply and Resources for Peak Performance, J. Ross Publishing, p.266.Inc. Oliver Wight International, 2005.The Oliver Wight Class A Checklist for •Business Excellence (The Oliver Wight Companies), 6th ed., Wiley Kelle• r, G., 2010, Production Planning and Control with SAP ERP, 2nd ed.Larry D. Lauer, 1997. • CommunicationPower:EnergizingYourNonprofitOrganization, Jones & Bartlett Learning, p.208.Mercado, E.C.,2007. • Hands-On Inventory Management (Resource Management), Auerbach PublicationsPiasecki, D.J., 2003. • Inventory Accuracy: People, Processes, & Technology, Ops PubProud, J F., 2007. • Master Scheduling: A Practical Guide to Competitive Manufacturing, 3rd ed., John Wiley and Sons, p.657.Rizvi, A. M., 2005. • Effective Technical Communication, Tata McGraw-Hill Education.Silver, • E. A., Pyke, D.F and Peterson, R., 1998.Inventory Management and Production Planning and Scheduling, 3rd ed., Wiley.Singh, H., 2009. • A Practical Guide for Improving Sales and Operations Planning, Supply Chain Consultants.Tersine, R. J., 1993. Principles• of Inventory and Materials Management, 4th ed., Prentice Hall.Toomey, J. W., 2000. Inventory • Management: Principles, Concepts and Techniques, Springer, p.228.Viale, J. D., 1996. • Crisp Basics of Inventory Management: From Warehouse to Distribution Center, Crisp Learning.

http://www.amazon.com/s/ref=ntt_athr_dp_sr_2?_encoding=UTF8&sort=relevancerank&search-alias=books&field-author=Gerhard%20Keller

http://www.amazon.com/Edward-A.-Silver/e/B001KDYIZY/ref=ntt_athr_dp_pel_1

http://www.amazon.com/s/ref=ntt_athr_dp_sr_2?_encoding=UTF8&sort=relevancerank&search-alias=books&field-author=David%20F.%20Pyke

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Wallace, T. Y. and Stahl, R. A., 2003. • Master Scheduling in the 21st Century: For Simplicity, Speed, and Success - Up And Down the Supply Chain, T. F. Wallace & CO, p.204.Wild ,T., 2002. • Best Practice in Inventory Management, 2nd ed., Butterworth-Heinemann.


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Self Assessment Answers

Chapter Ia1. b2. c3. d4. a5. b6. c7. d8. a9. b10.

Chapter IIa1. b2. c3. d4. d5. a6. a7. a8. a9. a10.

Chapter IIIa1. b2. c3. c4. a5. b6. d7. d8. d9. c10.

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Chapter IVa1. a2. c3. a4. b5. a6. c7. a8. b9. a10.

Chapter Va1. b2. a3. d4. a5. b6. a7. a8. c9. b10.

Chapter VId1. a2. a3. b4. d5. a6. c7. d8. a9. d10.


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