unit-iv - operations and the value chain_class

8/13/2019 Unit-IV - Operations and the Value Chain_class

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205-OPERATIONS MANAGEMENT

FACULTY:Dr. CH. VENKATAIAH

B.Tech, MBA, PhDAssociate Professor (Operations, Quality & Project Management)

E-Mail: [email protected]

mailto:[email protected]

mailto:[email protected]



TOPICS TO BE DISCUSSED

3hrs

UNIT-IV: OPERATIONS AND THE VALUE CHAINFACILITIES LOCATION:

Facilities Location-Integral Part of Supply Chain,Impact of Globalization on location decision in anorganization, Location Decision Relevant Factors,Location Planning Methods, Other issues in location

planning.INVENTORY MANAGEMENT:Inventory Planning, Types of Inventory, Costs inInventory Planning, Inventory Control fordeterministic demand-EOQ Model, Continuous Review(Q) System, Periodic Review (P) System, SelectiveControl of Inventories-ABC, XYZ, FSN and VEDClassification.

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FACILITIES LOCATIONUNIT

IV



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Plant Location Methodology: Centre ofGravity (Centroid) Method

• The centroid method is used forlocating single facilities thatconsiders existing facilities, the

distances between them, and thevolumes of goods to be shippedbetween them

• This methodology involves

formulas used to compute thecoordinates of the two-dimensional point that meets thedistance and volume criteriastated above

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Plant Location Methodology: Centroid Method Formulas

C =d V

V x

ix i

i

Where:Cx = X coordinate of centroidCy = X coordinate of centroiddix = X coordinate of the ith locationdiy = Y coordinate of the ith location

Vi = volume of goods moved to or from ithlocation

C =d V

Vyiy i

i

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Plant Location Methodology: Example of Centre ofgravity Method

Question: What is the best location for a new Z-Mobilewarehouse/temporary storage facility considering only distances

and quantities sold per month?

• Centroidmethod example – Several automobile showrooms are

located according to the following gridwhich represents coordinate locations foreach showroom

S ho wroo m No of Z-Mo b ile ss old p e r month

A 1250

D 1900

Q 2300X

Y

A(100,200)

D(250,580)

Q(790,900)

(0,0)

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Plant Location Methodology: Example of Centroid Method(Continued): Determining Existing Facility Coordinates

To begin, you must identify theexisting facilities on a two-dimensional plane or grid anddetermine their coordinates.

X

Y

A(100,200)

D(250,580)

Q(790,900)

(0,0)

You must also have thevolume information on thebusiness activity at theexisting facilities.

S howroom No of Z-Mobile ss old p e r month

A 1250

D 1900

Q 2300

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Plant Location Methodology: Example of Centroid Method (Continued):Determining the Coordinates of the New Facility

C =100(1250) + 250(1900) + 790(2300)

1250 + 1900 + 2300 =

2,417,000

5,450 =x

443.49

C =200(1250) + 580(1900) + 900(2300)

1250 + 1900 + 2300

=3,422,000

5,450

=y627.89

S howroom No of Z-Mobile ss old p e r month

A 1250

D 1900

Q 2300X

Y

A(100,200)

D(250,580)

Q(790,900)

(0,0)

You then compute the new coordinates using the formulas:

Z

New

locationof facilityZ about(443,627)

You then take the coordinates and place them on the map:

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Problem: A manufacturer of washing machines is in the process of locating regionalwarehouses in four geographical locations in south India to serve the markets.The markets are geographically and organizationally split into five segments.Based on the forecasting estimates by the marketing department, it has beenfound that the average monthly demand for the washing machine is 2000, 1500,1200, 2800, and 2500 in each of the market segments. Based on this forecastand other costs including the fixed and variable costs of setting up warehouses,it has been decided to build four warehouses with a capacity to handle monthlyrequirements to the extent of 2900, 2300, 3700 and 1100 units, respectively.Due to the geographical spread of the warehouses and the markets, thetransportation cost per unit is different between these pairs of warehouses andmarket segments. The following table presents the cost of transporting one unit.Identify the most cost-effective way of serving the markets from thesewarehouses.



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INVENTORY MANAGEMENT

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• Inventory System Defined• Inventory Costs• Independent vs. Dependent Demand• Single-Period Inventory Model• Multi-Period Inventory Models: Basic

Fixed-Order Quantity Models• Multi-Period Inventory Models: Basic

Fixed-Time Period Model• Miscellaneous Systems and Issues

OBJECTIVES

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INVENTORY SYSTEM

• Inventory is the stock of any item orresource used in an organization andcan include: raw materials, finishedproducts, component parts, supplies,and work-in-process

• An inventory system is the set ofpolicies and controls that monitor levels

of inventory and determines what levelsshould be maintained, when stockshould be replenished, and how largeorders should be

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PURPOSES OF INVENTORY

1. To maintain independence ofoperations

2. To meet variation in product demand

3. To allow flexibility in productionscheduling

4. To provide a safeguard for variation inraw material delivery time

5. To take advantage of economicpurchase-order size

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INVENTORY COSTS

• Holding (or carrying) costs – Costs for storage, handling,

insurance, etc• Setup (or production change) costs

– Costs for arranging specificequipment setups, etc

• Ordering costs – Costs of someone placing an order,

etc• Shortage costs

– Costs of canceling an order, etc

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E(1)

Independent vs. Dependent Demand

Independent Demand (Demand for the final end-product or demand not related to other items)

DependentDemand(Derived demand

items forcomponentparts,subassemblies,raw materials,

etc)

Finished

product

Component parts

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INVENTORY SYSTEMS • Single-Period Inventory Model

– One time purchasing decision (Example:vendor selling t-shirts at a football game)

– Seeks to balance the costs of inventoryoverstock and under stock

• Multi-Period Inventory Models – Fixed-Order Quantity Models

• Event triggered (Example: running out ofstock)

– Fixed-Time Period Models• Time triggered (Example: Monthly sales

call by sales representative)

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SINGLE-PERIOD INVENTORY MODEL

uo

u

C C

C P

sold beunit willy that theProbabilit

estimatedunderdemandof unit perCostCestimatedoverdemandof unit perCostC

:Where

u

o

P

This model states that we

should continue to increasethe size of the inventory solong as the probability ofselling the last unit added is

equal to or greater than theratio of: Cu/Co+Cu

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SINGLE PERIOD MODEL EXAMPLE

• Our college basketball team is playing in atournament game this weekend. Basedon our past experience we sell on average2,400 shirts with a standard deviation of350. We make $10 on every shirt we sellat the game, but lose $5 on every shirt notsold. How many shirts should we makefor the game?

C u

= $10 and C o

= $5; P ≤ $10 / ($10 + $5) = .667

Z.667 = .432 (use NORMSDIST(.667) or Appendix E)therefore we need 2,400 + .432(350) = 2,551 shirts

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Multi-Period Models:Fixed-Order Quantity Model Assumptions (Part 1)

• Demand for the product is constantand uniform throughout the period

• Lead time (time from ordering toreceipt) is constant

• Price per unit of product is constant

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Multi-Period Models:Fixed-Order Quantity Model Model Assumptions (Part 2)

• Inventory holding cost is basedon average inventory

• Ordering or setup costs areconstant

• All demands for the product willbe satisfied (No back orders areallowed)

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Basic Fixed-Order Quantity Model and Reorder PointBehavior

R = Reorder pointQ = Economic order quantityL = Lead time

L L

Q QQ

R

Time

Numberof unitson hand

1. You receive an order quantity Q.

2. Your start usingthem up over time. 3. When you reach down toa level of inventory of R,you place your next Qsized order.

4. The cycle then repeats.

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COST MINIMIZATION GOAL

Ordering Costs

HoldingCosts

Order Quantity (Q)

COST

Annual Cost of

Items (DC)

Total Cost

QOPT

By adding the item, holding, and ordering coststogether, we determine the total cost curve, which inturn is used to find the Q opt inventory order point thatminimizes total costs

Basic Fixed Order Quantity (EOQ)17-41



Basic Fixed-Order Quantity (EOQ)Model Formula

H2Q

+SQD

+DC=TC

Total Annual =Cost

AnnualPurchaseCost

AnnualOrderingCost

AnnualHoldingCost

+ +

TC=Total annualcostD =DemandC =Cost per unitQ =Order quantityS =Cost of placingan order or setupcostR =Reorder pointL =Lead timeH=Annual holding

and storage costper unit of inventory

D i i h EOQ17-42



Deriving the EOQUsing calculus, we take the first derivative of

the total cost function with respect to Q, andset the derivative (slope) equal to zero,solving for the optimized (cost minimized)value of Q opt

Q =2DS

H =

2(Annual D emand)(Order or Setup C ost)Annual Holding CostOPT

R eorder point, R = d L _

d = average daily demand (constant)

L = Lead time (constant)

_

We also need areorder point totell us when toplace an order

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EOQ Example (1) Problem Data

Annual Demand = 1,000 unitsDays per year considered in averagedaily demand = 365

Cost to place an order = $10

Holding cost per unit per year = $2.50Lead time = 7 daysCost per unit = $15

Given the information below, what are the EOQ andreorder point?

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EOQ Example (1) Solution

Q = 2DSH

= 2(1,000 )(10)2.50

= 89.443 units orOPT90 un i ts

d =1,000 units / year

365 days / year = 2.74 units / day

R eo rder p oin t, R = d L = 2 .7 4u nits / d ay (7d ays) = 1 9.1 8 or _

2 0 u n i ts

In summary, you place an optimal order of 90 units. Inthe course of using the units to meet demand, whenyou only have 20 units left, place the next order of 90units.

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EOQ Example (2) Problem Data

Annual Demand = 10,000 unitsDays per year considered in average dailydemand = 365Cost to place an order = $10Holding cost per unit per year = 10% of costper unitLead time = 10 daysCost per unit = $15

Determine the economic order quantityand the reorder point given the following…

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EOQ Example (2) Solution

Q = 2D SH

= 2(10,000 )(10)1.50

= 365.148 un its , o rO PT3 6 6 u n it s

d =10,000 units / year

365 days / year = 27.397 units / day

R = d L = 27.397 units / day (10 days) = 273.97 or _

2 7 4 u n i ts

Place an order for 366 units. When in the course ofusing the inventory you are left with only 274 units,place the next order of 366 units.

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Fixed-Time Period Model with Safety Stock Formula (P-Model)

order)onitems(includeslevelinventorycurrent=I

t imeleadandreviewover thedemandof deviationstandard=

y probabilitservicespecifiedafordeviationsstandardof numberthe=z

demanddailyaverageforecast=d

daysintimelead=L

reviews betweendaysof numberthe=T

ordered betoquantitiy=q:Where

I-Z+L)+(Td=q

L+T

L+T

q = Average demand + Safety stock – Inventory currently on hand

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Multi-Period Models: Fixed-Time Period Model:Determining the Value of s T+L

T+L di 1

T+L

d

T+L d2

=

Since each day is independent and is constant,

= (T + L)

i

2

• The standard deviation of asequence of random eventsequals the square root of thesum of the variances

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Example of the Fixed-Time Period Model

Average daily demand for a product is

20 units. The review period is 30 days,and lead time is 10 days. Managementhas set a policy of satisfying 96 percentof demand from items in stock. At thebeginning of the review period there are200 units in inventory. The dailydemand standard deviation is 4 units.

Given the information below, how many unitsshould be ordered?

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Example of the Fixed-Time Period Model: Solution (Part 1)

T+ L d 22

= (T + L) = 30 + 10 4 = 25.298

The value for “z” is found by using the Excel NORMSINV function, or as we willdo here, using Appendix D. By adding 0.5 to all the values in Appendix D andfinding the value in the table that comes closest to the service probability, the “z”

value can be read by adding the column heading label to the row label.

So, by adding 0.5 to the value from Appendix D of 0.4599,we have a probability of 0.9599, which is given by a z = 1.75

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Example of the Fixed-Time Period Model: Solution (Part 2)

or644.272,=200-44.272800=q

200-298)(1.75)(25.+10)+20(30=q

I-Z+L)+(Td=q L+T

units645

So, to satisfy 96 percent of the demand,you should place an order of 645 units atthis review period

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Miscellaneous Systems:Bin Systems

Two-Bin System

Full Empty

Order One Bin ofInventory

One-Bin System

Periodic Check

Order Enough toRefill Bin



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ABC Classification System

• Items kept in inventory are not of equalimportance in terms of:

– dollars invested

–

profit potential – sales or usage volume

– stock-out penalties

0

3060

30

60

A

BC

% of$ Value

% ofUse

So, identify inventory items based on percentage of totaldollar value, where “A” items are roughly top 15 %, “B”items as next 35 %, and the lower 65% are the “C” items

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Inventory Accuracy and Cycle Counting

• Inventory accuracy refers tohow well the inventoryrecords agree with physical

count• Cycle Counting is a physical

inventory-taking technique in

which inventory is counted ona frequent basis rather thanonce or twice a year



END OF THE CHAPTER

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unit-iv - operations and the value chain_class

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