ch21 guan cm aise ppt

8/10/2019 Ch21 Guan Cm Aise Ppt

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COST MANAGEMENT

Guan Hansen Mowen

COPYRIGHT 2009 South-Western Publishing, a division of Cengage Learning.Cengage Learning and South-Western are trademarks used herein under license. 1

Chapter 21

Inventory Management: EconomicOrder Quantity, JIT, and the Theoryof Constraints


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Study Objectives

1. Describe the just-in-case inventorymanagement model.

2. Discuss just-in-time (JIT) inventorymanagement.

3. Explain the basic concepts ofconstrained optimization.

4. Define the theory of constraints, and tellhow it can be used to manage inventory.


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Just-in-Case InventoryManagement

Three types of inventory costs can be readilyidentified with inventory:

The cost of acquiring inventory.

The cost of holding inventory. The cost of not having inventory on hand when

needed.


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Ordering Costs: The costs of placing andreceiving an order.

Examples: Clerical costs, documents, insurance forshipment, and unloading.

Setup Costs: The costs of preparing equipmentand facilities so they can be used to produce aparticular product or component.

Examples: Setup labor, lost income (from idledfacilities), and test runs.


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Stock-Out Costs: The costs of not havingsufficient inventory.

Examples: Lost sales, costs of expediting (extra setup,transportation, etc.) and the costs of interruptedproduction.

Carrying Costs: The costs of carrying inventory.Examples: Insurance, inventory taxes, obsolescence,opportunity cost of capital tied up in inventory, and

storage.


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Economic Order Quantity

TC = PD/Q + CQ/2


Where

TC= The total ordering (or setup) and carrying cost

P= The cost of placing and receiving an order (or thecost of setting up a production run)

Q= The number of units ordered each time an order isplaced (or the lot size for production)

D= The known annual demand

C= The cost of carrying one unit of stock for one year


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Economic Order Quantity illustrated

AssumeP = $40 per orderD = 25,000 units

C = $2 per unit

EOQ = 2DP C

= (2 25,000 50) $2

= 1,000,000

= 1,000


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Reorder point = rate of usage lead time

= 4 100 = 400 un its

An order should be placed when inventory drops to400 units.

When to Order or Produce

Example: Assume that the average rate of usage is100 parts per day. Assume also that thelead time is 4 days. What is the reorder

point?


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Demand Uncertainty and Reordering

To avoid running out of parts, organizations oftenchoose to carry safety stock (extra inventorycarried to serve as insurance against fluctuations in

demand).

Example: If the maximumusage of the VCRpart is 120 units per

day, the averageusage is 100 unitsper day, and the leadtime is four days, thesafety stock is 80.

Maximum usage 120Average usage (100)

Difference 20Lead time 4Safety stock 80



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JIT Inventory Management

JIT reduces the costs of acquiring inventory toinsignificant levels by

Drastically reducing setup time Using long-term contracts for outside purchases

Carrying costs are reduced to insignificant levelsby reducing inventories to insignificant levels.

Setup and Carrying Costs: The JIT Approach


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Avoidance of Shutdown: the JIT approach

Total preventive maintenance

to reduce machine failures

Total quality control To reduce defective parts

The Kanban system

To control production


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The Kanban systemis responsible forensuring that the necessary products areproduced in the necessary quantities at

the necessary time. A card system is used to monitor work in

processA withdrawal Kanban

A production Kanban

A vendor Kanban


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Managing discounts and price increases

Traditional: holding inventories

JIT: negotiate long-term contracts

Vendors

Careful selection; consider more than price

Close to production facility

Establish more extensive supplierinvolvement


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JIT Limitations

Patience in implementation is needed.

Time is required. JIT may cause lost sales and stressed

workers.

Production may be interrupted due to anabsence of inventory.


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Basic Concepts ofConstrained Optimization

Every firm faces limited resources andlimited demand for each product.

External constraints (e.g., market demand)

Internal constraints (e.g., machine or labortime availability)

Constrained optimizationis choosing the

optimal mix given the constraints faced bythe firm.


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Linear Programming

Example: Two products, X and Y,provide contributionmargins of $300 and$600, respectively.

The objective is to

maximize totalcontribution margin.

The objective function:Z = $300X + $600Y


A method that searches among possible solutions untilthe optimal solution is identified


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Linear Programming



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Internal cons traints:

X+Y 80X + 3Y 1202C + Y 90

External cons traints:

X 60

Y 100

Linear Programming

X+Y 80

X + 3Y 120

2C + Y 90

X 60

Y 100

X 0

Y 0


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A 0 0 $ 0

B 0 40 24,000

C 30 30 27,000

D 45 0 13,500

Linear Programming

Corner Point X-Value Y-Value Z = $300X + $600Y

C is the optimal solution!



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Theory of Constraints

Measures of Systems Performance

Throughput* The rate at which an organization generates money

through sales

Inventory The money the organization spends in turning

materials into throughput

Operating expenses

The money the organization spends in turninginventories into throughput

Sales Unit-level-Rev Var ExpTime

*Throughput =


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Five-Step Method for Improving Performance

Identify an organizations constraints.

Exploit the binding constraints.

Subordinate everything else to the decisionsmade in Step 2.

Elevate the organizations binding constraints.

Repeat the process as a new constraintemerges to limit output.


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COST MANAGEMENT

Guan Hansen Mowen

COPYRIGHT 2009 South-Western Publishing, a division of Cengage Learning.Cengage Learning and South-Western are trademarks used herein under license. 31

End Chapter 21

ch21 guan cm aise ppt

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