Detailed Scheduling and Planning (Lesson 1)

Detailed Scheduling and Planning
Unit 2
UUnit
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DDetailed
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PPlanning
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Lesson 1
Order Planning and Inventory Management
Unit 2
© 2004 e - SCP -The Centre for Excellence in Supply Chain Management
No portion of this publication may be reproduced in whole or in part.
The Leading Edge Group will not be responsible for any statements, beliefs, or opinions expressed by the
authors of this workbook. The views expressed are solely those of the authors and do not necessarily
reflect any endorsement by The Leading Edge Training Institute Limited.
This publication has been prepared by E-SCP under the guidance of Yvonne Delaney MBA, CFPIM,
CPIM. It has not been reviewed nor endorsed by APICS nor the APICS Curricula and Certification
Council for use as study material for the APICS CPIM certification examination.
The Leading Edge Training Institute Limited

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© Copyright Leading Edge Training Institute Limited ii

Unit 2
Preface............................................................................................................4
Course Description................................................................................................................. 4
Target Audience and Pre -Requisite Knowledge ................................................................. 4
Scheduling Lessons and Review Sessions ............................................................................. 4
Online Examinations .............................................................................................................. 5
Frequently Asked Questions ................................................................................................. 5
Mentoring ................................................................................................................................ 5
Supplementary Reference Materials .................................................................................... 5
Lesson 1 – Order Planning and Inventory Management..................................6
Introduction and Objectives.................................................................................................. 6
Inventory Characteristics ...................................................................................................... 6
Inventory Strategy.................................................................................................................. 7
Classification of Inventory ..................................................................................................... 8
Methods of Order Review.................................................................................................... 12
Material Requirements Planning (MRP) ........................................................................... 13
Factors that Influence Lot Sizes.......................................................................................... 18
Order Quantities and Cost Factors .................................................................................... 19
Techniques for Determining Lot Size ................................................................................. 20
Summary ............................................................................................................................... 24
Further Reading ................................................................................................................... 24
Review ................................................................................................................................... 25
What’s Next? ........................................................................................................................ 26
Appendix.......................................................................................................27
Answers to Review Questions .............................................................................................. 28
Glossary ........................................................................................................30
© Copyright Leading Edge Training Institute Limited iii

Unit 2
Preface
Course Description
The aim of this unit is to focus on material and capacity scheduling and planning, explaining
planning systems that strike a balance between the three conflicting objectives of manufacturing:
maximizing customer service while minimizing inventory investment and production costs. It
covers MRP in detail and introduces the material-dominated scheduling planning technique,
which applies to process industries and long-established production plants.
This unit follows on from the ‘Basics of Supply Chain Management’ unit and can be used as part
of your preparation for the American Production and Inventory Control Society (APICS)
Certificate in Production and Inventory Management (CPIM).
The Detailed Scheduling and Planning unit, which comprises 9 lessons, covers:
Order planning and inventory Detailed Capacity Planning
management
Customer service and inventory Supplier Relationships
management
Requirements for material planning Procurement Planning
Using MRP outputs
This document contains the first lesson in the Detailed Scheduling and Planning unit, which is
one of five units designed to prepare students to take the APICS CPIM examination. Before
completing the Detailed Scheduling and Planning unit, you should complete the Basics of
Supply Chain Management unit or gain equivalent knowledge. The five units that cover the
CPIM syllabus are:
Basics of Supply Chain Management
Master Planning of Resources
Execution and Control of Operations
Strategic Management of Resources
Target Audience and Pre-Requisite Knowledge

This course is intended for anyone involved in the supply chain who wishes to further their
understanding of supply chain management and improve their career prospects by gaining a
valuable recognized qualification in the area. It assumes that learners have completed the Basics
of Supply Chain Management unit and have some knowledge of manufacturing organizations.
This unit may be used to prepare for APICS CPIM certification.
Scheduling Lessons and Review Sessions

You should set aside a minimum of 2 hours for each lesson. Throughout this self study course
you will find review questions and exercises. These are designed to optimize your retention of
the material covered by encouraging retrieval of key information. In many cases you will be
required to apply that knowledge in a business context.
© Copyright Leading Edge Training Institute Limited 4

Unit 2
The answers are available in the appendix of this self study guide. The ideal time to check your
work against these answers is just before you start the next section. There are two advantages to
this approach: you can fill in any gaps in your learning and also refresh your memory on the
work covered so far before progressing to new content.
Online Examinations
At regular intervals during your study you can test your progress and understanding by
completing an online examination. The questions provided in the online examination have been
carefully designed by a Fellow of the APICS organization to assess your understanding of the
material covered.
On completion of the examination, you receive feedback of your score.
Frequently Asked Questions

A bank of questions frequently asked by students of CPIM is available on the e-scp website.
These questions have been answered in detail by APICS experts. If you have difficulty
understanding a concept in your self study manuals, the frequently asked questions section
should be your first port of call. The question bank is regularly updated to reflect the issues that
concern students.
Mentoring
You will have access to a highly qualified and experienced Fellow Member of APICS who will
respond to queries you may have on the course material contained in these self-study lessons.
Supplementary Reference Materials

Throughout the self-study lessons, appropriate further reading may be identified. Summaries
containing the key points of some references may be available from the e-scp web site. These
summaries and articles should help to broaden your understanding of the concepts covered in the
lessons and clarify issues with which you have difficulty.

Unit 2
Lesson 1 – Order Planning and Inventory Management
Introduction and Objectives
Inventory is a term used to describe materials stocked by companies that are used in the
production and distribution of their products.
This lesson examines inventory types and classifications, methods of order review, factors
influencing lot sizes, lot sizing techniques, and costs associated with order quantity policies.
These issues affect inventory management, planning and control, and specifically, the inputs to
Material Requirements Planning (MRP).
On completion of this lesson you will be able to:
List types of inventory
Identify the requirements of each type of inventory
Describe the impact of each type of inventory on the planning process
Explain order review methodologies
Apply order review methodologies to various inventory types and inventory strategies
Identify lot-sizing techniques
Explain the effects of order-quantity constraints and modifiers in lot-sizing techniques
Inventory Characteristics
Inventory includes all raw materials, components, subassemblies, supplies required for
production and distribution, and finished goods that are stored by a company. Inventories
contribute to the provision of:
The right items
At the right time
In the right place
Of the right quantity and quality
The ultimate aim of storing inventory is to help meet desired levels of customer service while
minimizing costs and maximizing efficiency.
Any inventory stored by a company will involve some costs to that company. Inventories:
Require capital investment, storage space and insurance
Incur taxes, as they are considered an asset to the company
May be lost, damaged or stolen
May become obsolete
In any business, it is important to ensure that optimum inventory levels are identified and
supported by careful management of policy, procedures and processes to ensure those optimum
levels are met. Inventory levels that are either too high or too low affect cost and profitability as
illustrated in the following table:

Unit 2
High Inventory Levels Insufficient Inventory Levels
Mask inefficient management Increase the risk of production shutdowns
practices Lead to increased stockouts
Compensate for poor forecasting Reduce customer service levels
Hide inaccurate scheduling and Ultimately lead to lost sales and lost
clumsy setup and ordering processes customers
Increase Costs Reduce flexibility and competitiveness
Do not increase profits
Influences on Inventory Policy

A clear policy on inventory levels and management, consistent with overall business goals and
objectives, and with the more specific objectives of marketing, production and finance, is
essential.
Overall inventory levels will be affected by the capacity planning strategy and operations
management strategy.
Work-in-Process (WIP) inventories are affected by the type of manufacturing process
employed, for example, production line or job shop production
Finished goods inventory levels are influenced by distribution structures and methods.
Raw materials and component inventory levels are impacted by purchasing and
production strategies.
Individual inventory items should be examined and controlled by answering the following
questions:
What must be ordered?

What quantity is required?
When is the material required?
How and where will it be stored?
Inventory Strategy
A company’s inventory strategy outlines how inventory investment and customer service levels
are balanced. It sets out average inventory levels, reorder quantity policies, and safety stock
levels. An effective inventory strategy, which is closely aligned with manufacturing strategies
and with supplier strategies, leads to competitive advantage and customer value.
The inventory strategy must deal with:
Customer Service Level
Dependent and independent demand
Demand variability and seasonality
Lead time fluctuation
Requirements of company policy

Unit 2
The inventory strategy should take into account the characteristics of the manufacturing
environment, particularly demand variability, cumulative and marketing lead times. It must also
account for management policies for the treatment of product groups.
Inventory Definition
Inventory may be defined in different ways, depending on your viewpoint. Financially,
inventories are consid ered as asset. However, from a functional viewpoint inventories can too
often become liabilities, costing too much to store, manage, insure, and protect, and always
running the risk of becoming obsolete as manufacturing needs change.
From a manufacturing point of view, inventory refers to items that support production, such as
raw materials, components, WIP inventories, and operating supplies, or other activities needed
during production, such as maintenance and repair, and items that support customer service,
including finished goods and spare parts. Demand for inventory may be dependent or
independent.
From a financial point of view, inventory may be thought of as items purchased for resale
including finished goods, work in process, and raw materials. Often, the purchase price of an
inventory item is usually set as its value, regardless of any value added in terms of direct labor or
overheads.
Classification of Inventory
Inventory may be found throughout the manufacturing and distribution process. Inventory may
be categorized as:
Raw material,
Work-in-Process (WIP),
Finished goods (FG),
Maintenance, repair and operating supplies (MRO).
Sub-Classifications
The above categories can be further broken down using some of the following classifications:
Excess inventory Surplus inventory
Inactive inventory Obsolete inventory
Consignment inventory Vendor- managed inventory
Raw Materials
Raw materials are any material inputs used in a manufacturing
process. These may be true raw materials or the finished goods
of other manufacturing companies. For example, the raw
materials for a furniture-making company are likely to include
various types of wood, nails and screws. These are end products
from other manufacturing industries that use the raw materials
of trees, iron, and steel.

Unit 2
Raw materials are at the lowest level of the Bill of Material (BOM) and usually account for the
longest part of the cumulative lead time.
Raw materials inventories are valued at standard or material cost. This
means the value of the inventory is equal to the amount that was paid for
that material. The raw materials will be withdrawn from stock to have
work performed on them by various classes of labor and equipment during
the production process.
WIP inventory
While materials are moving through the production process, they are referred to as work- in-
process. The amount of work in process varies according to the production process and the
company ethos.
Work-in-process materials are all items at the middle levels of the BOM. For example, the BOM
for a chair may require various lengths of wood from raw materials inventory. However, some
BOM requirements will be sub-assemblies where several raw materials have already been
transformed into an item needed for the manufacture of the chair, such as the chair base, which
might consist of 4 lathe-turned legs held together with glue, screws and braces.
Chair
Chair
100
100
Base
Base Seat
Seat Back
Back
200
200 622
622 500
500
Legs
Legs(4)
(4) Frame
Frame Brace
Brace Supports
Supports(5)
(5)
201
201 629
629 512
512 545
545
Seat
Seat Pad
Pad Arms
Arms(2)
(2)
Braces
Braces(2)
(2) 631
631 570
570
203
Finished Goods
Finished goods are often called end items. The term refers to any completed product or service
part. A finished good is an item that is ready to be sold to a customer, whether that customer is
external, or another division of the same company. Usually finished goods are stored at the
production facility or in warehouses to reduce delivery times.
MRO
MRO inventories are required by most companies. Maintenance inventories, such as spare parts
for machinery, oil, cleaning, and other materials needed for the maintenance of the production
facility are important in that they are needed to support the servicing of machines and therefore
availability and capacity requirements. Maintenance and repair items may range from very low
cost to several thousand dollars per item. The inventory replenishment techniques required for
such inventories are usually visual review, one- for-one replacement, or reorder points.
Operating supplies, such as office and cleaning supplies, are usually low cost. Howeve r, there
may be a wide variety of required items.

Unit 2
Inventory Classification and Time Fences
Depending on the length of time an item has been held in inventory and the level of demand for
that item, it may be classified as operating inventory, excess, surplus, inactive or obsolete.
Exceeds
normal When there
operating is no demand
inventory but This has not for the
may still be May be used been used in inventory
used within within 12 the previous item in the
the planning months but, 12 months product
horizon in hindsight, and is range, it is
should not unlikely to be obsolete and
Inventory Level
have been used in the should be

ordered near future disposed of
in some way
Operating Excess
Inventory Surplus
Inventory Inventory Inactive
Inventory Obsolete
Inventory
(Demand)
Time
Operating Inventory
This is simply inventory that will be used up by the production process as planned. It is usually
set at a level equivalent to a set number of days’ supply, as determined by management. When
the inventory items are expensive, the number of days supply held will be low.
Excess Inventory
Excess inventory is inventory that exceeds the current operational needs and may be planned or
accidental. A company may plan to build excess inventories in anticipation of higher customer
demand later in the season, thus allowing a more level production strategy. Lot sizing rules or
economic order quantity rules may also lead to some excess inventory.
For example, a company manufacturing sun cream has a demand of 10,000
units each week in the months of March and April. However, it produces
13,000 units per week in anticipation of a rise in customer demand from May
onwards as the sun holiday season peaks.
Excess inventory exceeds what is required but still has a reasonable chance of
being used within the planning timeframe.
Surplus Inventory
Surplus inventories are items where the available levels are far in excess of current demand. This
leads to a situation where the supply available will last for longer than the item’s lead time. In
such cases, further manufacture of the item can be put off. Some companies differentiate
between excess and surplus demand based on aging and demand factors.
Inactive Inventory
In terms of finance, inactive inventory is an asset. However, in production terms, it may be a
liability if there is no likelihood of demand for the item. Inactive inventory does not have a value
for manufacturing, materials management, inventory management or customers. It is costly to
maintain and is the result of surplus inventory that has not been used in the last year and is not
likely to be used.

Unit 2
Obsolete Inventory
Obsolete inventory items will never be used or sold at full value as the products the inventory
was intended for have been discontinued. Disposal of obsolete inventory will reduce profit
margins as it is likely to be sold on at much less than it cost to buy and store.
For example, due to a change in building regulations, a company producing
electrical sockets and circuit boards, has had to discontinue one of its domestic
socket products. While some of the subassemblies for the product can be used
in other product lines, the inventory of plastic casing held by the company is
now obsolete as it cannot be used in any other product and has no value for
resale. This plastic casing is obsolete and must be disposed. The cost to the
company will include the cost of purchasing or producing the casing, the cost
of storing and managing the inventory, and the cost of disposing of it.
Consignment Inventory
Consignment inventory is inventory that is available for the customer to use but is still owned by
the supplier until used. The supplier or customer periodically checks the level of inventory, the
inventory is replenished, and the customer is billed accordingly. Alternatively, the company may
pay the supplier on a regular basis according to their usage of the inventory.
Vendor-Managed Inventory
Although similar to consignment inventory, vendor managed inventory differs in some key
respects. It requires that the supplier has a good knowledge of its customer’s demand forecasts
and can therefore predict the amount of product the customer may require. The buyer can make
information such as demand history available to the supplier through EDI. It can also inform the
supplier of activities likely to affect supply such as planned promotions. The supplier assumes
the entire role for planning and replenishment.
For example, A2 B Distribution is involved in distributing refrigerated goods nationwide. As
these goods generally have a short shelf life, maintenance of inventory can be complex.
A2B rely on vendor-managed inventory for many of their products.
They provide the suppliers with a history of demand for their product
along with details of the maximum and minimum amounts of inventory
they wish to store. Each supplier is responsible for ensuring that
demand can be met from the inventory on hand in the distribution
company’s warehouse.
1. Which type of inventory has not been used in the previous year and is
unlikely to be used in the near future?
A. WIP
B. Surplus
Review Q
C. Obsolete
D. Inactive

Unit 2
Methods of Order Review
The ordering technique that is chosen for a particular item sho uld be influenced by a strong
knowledge base and understanding of inventory concepts, mathematical models and formulae.
Order review methodologies use one or more methods to decide on the schedule and quantity of
purchase orders or work orders.
Types of Order Review Methodologies

There are a great many types and combinations of order review methodology ranging from very
simple to more complex methods. The methods to be used will depend on the type of inventory
to be managed. Some of the more common methodologies include:
Material Requirements Planning (MRP)
Reorder points
Time-Phased Order Points
Visual Review
Periodic Review
Kanban
Issues to be Resolved by Order Review Methodologies

Whatever choice is made, the methodology chosen must satisfy requirements by calculating the
following information:
The net demand after accounting for available inventory and scheduled receipts
The available balance, taking into account safety stock, allocations, yield, and scrap
Quantity needed to order after taking into account order constraints and modifiers
Date of order release to ensure sufficient time for procurement and manufacturing
Dates of required order arrival to support required dates.

Unit 2
Material Requirements Planning (MRP)
MRP is a computerized process that calculates entire demand and ordering profiles throughout a
given planning horizon. It is useful in that it can accommodate ordering strategies for parts that
have variable dependent and independent demand profiles.
Dependent demand items are usually components and subassemblies. The demand for these
items is dependent solely on the forecast demand for their parent items. For example, in the Bill
of Materials (BOM) illustrated below, the demand for part 622 (a seat) is dependent on the
demand for its parent item: Chair 100.
Chair
Chair
100
100
Base
Base Seat
Seat Back
Back
200
200 622
622 500
500
Legs
Legs(4)
(4) Frame
Frame Brace
Brace Supports
Supports(5)
(5)
201
201 629
629 512
512 545
545
Seat
SeatPad
Pad Arms
Arms(2)
(2)
Braces
Braces(2)
(2) 631
631 570
570
203
As MRP can accommodate both dependent and independent demand, it enables the planner to
establish plans and controls as needed, either by item group, or individual item, to ensure the
inventory strategy objectives are met.
Characteristics of end-item inventories as compared to raw materials:
End- item demand is based on forecasts and master schedule
Demand is usually lumpy and discontinuous unless scheduled in daily batches. This is
more noticeable at the lower bill of material levels than at the higher ones
Lower level demand can be calculated rather than forecast, if it is dependent on higher
level BOM items
100% service level can be provided for dependent demand items that have sufficient lead
time to meet scheduled requirements with no little or no need for safety stock
Determining the Reorder Point

The reorder point is an inventory level determined by management. When inventory levels fall to
or below the reorder point, a requirement for new stock is triggered.
To calculate the reorder point (ROP), the demand during lead time (DDLT) and the safety stock
(SS) level must be added together.
ROP = DDLT + SS

Unit 2
Assumptions when using Reorder Point
Replenishment order can be released and received before a stockout occurs
There is a steady demand (past demand is an adequate indicator of future demand)
For example, a bakery producing sliced white loaves for distribution to
grocery retail outlets nationwide has determined its reorder point for plain
white flour to be 500 Kg. Demand is fairly steady and not particularly
influenced by seasonality. The 500 KG level is sufficient to cover 2 days of
production. When levels fall to this point another order for flour is issued to
the supplier. Orders are generally received within 24 to 48 hours of placing
the order.
The following graph explains the level of demand and the level of inventory.
Reorder Point
1600
1400
1200
1000 demand
KGs
800 inventory level

600 reorder point
400
200
0
1
10
16
19
22
13
Production Days
During much of the production period, inventory levels carried are far in excess of demand for
the inventory item. Inventory levels reach a peak just after a delivery of the inventory item and
fall steadily, usually to almost zero before another delivery arrives to replenish stocks, causing a
dramatic upturn in inventory levels again. This pattern is repeated, leading to the ‘saw-tooth
effect’ when the inventory levels are plotted on a graph as above.
The reorder point is established by determining the time taken to replenish the stock. In the
example given above, the reorder point is set at 500KG, which leaves enough stock for two days
production. This is enough to cover for the expected time for replenishing supplies which is one
full day.
Where demand is unsteady, using a reorder point can cause difficulties. If demand is greater than
expected, a stock-out may occur while awaiting delivery of the item. If demand is less than
expected, the material will arrive sooner than required and excess inventory will result.
Safety Stock and Reorder Point
A more complete reorder point model builds in safety stock to avoid potential stockouts when
demand is greater than expected. In the following chart, a slight peak in demand results in a
greater than normal drop in inventory levels, using up some of the safety stock. A slight dip in
demand later on helps correct the inventory level.

Unit 2
2000
1800
1600
1400
demand
1200
Safety Stock
1000
reorder point
800
inventory level
600
400
200
0
1
3
5
7
9
11
13
15
17
19
21
23
Time-phased Order Point (TPOP)
Time-phased order point (TPOP) uses time periods and MRP logic to control and manage the
total requirement for an item or group of items. A forecast of demand for each item over the
planning horizon is a required input. Dependent demand can also be input.
TPOP is useful when demand is lumpy. It combines dependent and independent demand in a
time-phased manner. There is no requirement for a steady demand. It is calculated on a period by
period basis as with MRP processing and can be used with MRP, provided independent and
dependent demand are combined in the gross requirements line.
Firstly, the gross requirement for the item must be calculated. Then, TPOP is equal to the
demand during the lead time for both dependent and independent demand items, plus the safety
stock:
TPOP = DDLT (Dependent) + DDLT (independent) + SS
The time-phased order point itself is simply used to determine when one or more orders should
be released. It may vary from one order planning period to the next.
2. The gross requirement for an item is 170 on day 1, 200 on day 2 and 230 on
day 3. The lead time is 3 days and the company requires a safety stock of 200.
What is the TPOP?
A. 400
Review Q B. 600
C. 800
D. 1000
TPOP Example
MRP Record Item 1 2 3 4 5 6 7 8
Technique : TPOP Gross Requirements 50 50 50 50 50 50 50 50
Order Quantity 500 Scheduled Receipts

Allocated Qty 0 Projected Avail. 500 450 400 350 300 250 200 150 600
Safety Stock 125 A Net Requirements

Low Level 1 Planned Order Receipts 500
Lead Time 6wks Planned Order Releases 500

Unit 2
In the MRP record displayed here, the lead time for item A is 6 weeks. The order quantity for the
item is 500 units and there is a requirement to maintain 125 units of safety stock. The projected
available inventory balance for the item at the beginning of the planning period is 500 units.
Using the formula on the previous page, the TPOP will be reached at 425 units (demand during
the lead time is 300 units and the safety stock requirement is 125 units).
The requirement for the item in this example is relatively steady at 50 units per period. During
week 2, the on-hand inventory drops below the TPOP level triggering an order release. This
order arrives in week 8 preventing inventory levels falling below the required safety stock level.
TPOP and Joint Orders

Many companies employ joint ordering or related items. This is a method of replenishment
whereby an order for a group of items is released any time one of those items reaches its reorder
points. This has the advantage of reducing safety stocks as an order is typically placed before all
the items in the group (except for the item that triggered the order) have reached their order
points.
In some cases there are savings to be made by occasionally omitting some of the items from the
joint order. This is because the minor ordering costs associated with the item will be saved as
will the carrying costs for that item over that time period. TPOP can provide a straightforward
estimate of the benefits and costs of omitting any item from a joint order. For example, if a joint
order is usually issued for items X, Y, and Z and the normal time interval between orders is 5
weeks, it makes sense to omit item Z from the joint order in period 1 if a reorder is not needed
until after 5 weeks of that order, in this case week 7 (see table below).
Item X Order costs: $15 Item Cost: $35 Min. Lot Size: 25 units
Item Y Order costs: $10 Item Cost: $50 Min. Lot Size: 25 units
Item Z Order costs: $10 Item Cost: $30 Min. Lot Size: 25 units
Planned Order Releases

Item Past Due 1 2 3 4 5 6 7
X 0 33 0 0 0 0 0 0
Y 0 25 0 0 0 0 25 0
Z 0 0 0 0 0 0 0 30
Table 1 Planned Order Release Beyond the normal time interval
Similarly, if item Z is required before 5 weeks elapse but requirement for item Y will already
have triggered an order in period 3, there is no need to include item Z in the order for period 1.

X 0 33 0 0 0 0 0 0
Y 0 25 0 25 0 0 25 0
Z 0 0 0 0 30 0 0 0
Table 2 Requirement for Z falls within normal time interval but is covered by order triggered by item Y

Unit 2
X 0 33 0 0 0 0 25 0
Y 0 25 0 0 0 0 25 0
Z 0 0 0 0 25 0 0 0
Table 3 Requirement for Z in period 4 is not covered by other orders
Where the requirement for item Z triggers an order before the normal time interval between
orders have elapsed, as in table 3 above, there are three possible options:
Order items X, Y, and Z in period 1 and items X, and Y in period 6.
Order X, and Y in period 1 and 6, and item Z in period 4
Order X and Y in period 1 and X, Y, and Z in period 4.
When taking into account the order costs and item costs, the first option is the least cost option.
Visual Review
In a visual review system, the inventory reordering is determined by physically checking the
amount on hand. This is used for low- value items. Generally a minimum level is established and
when inventory levels reach this point an order is made to replenish to a predetermined
maximum amount. This is known as Min-Max ordering.
For example, Buzz Electronics packs many of its products using polystyrene
packing. When inventory levels drop to three full boxes of packing a replenishment
order is placed. The maximum quantity is 30 full boxes.
Periodic Review
Periodic review (fixed-interval order system, or fixed reorder cycle inventory model) relies on
placing orders as specified intervals. The order quantity will vary depending on the amount
consumed in the previous time period. In the simplest versions the order quantity is equal to the
maximum desired inventory level minus the amount on hand at the time the order is placed. This
assumes that the maximum desired inventory level will be sufficient to cover demand until the
next review.
When the replenishment lead time is greater than the review interval, this model becomes more
complicated.
Kanban
Kanban is simply some type of signal that indicates replenishment is required. The signal may be
an empty bucket, a card held up by an operator, an empty marked space on the factory floor, or a
ticket passed up the production line. The quantity for replacement is usually a fixed order
quantity determined from rate-based MRP.
Take for example, delivery of milk door to door. Generally, the milkman will replace any empty
milk bottles with full bottles.

Unit 2
Factors that Influence Lot Sizes
Lot sizes should be determined to ensure that a company’s inventory investment and customer
service targets are met. This will depend on order quantity constraints and modifiers. Order
constraints are used to confine order quantities between maximum and minimum limits. The
upper limit will generally specify a number of days supply or a dollar value for the order. The
lower limit is set to guard against generating a lot of small orders for inexpensive parts, as this
would increase the cost of ordering per item significantly.
Order modifiers may be used to fine tune the order qua ntities, for example to take advantage of
special offers. Other modifiers include scrap and yield. In certain cases, order modifiers may lead
to order quantities that exceed existing constraints.
Lower Upper
Constraint Constraint
Acceptable Order Quantity

Modifier Modifier
As this exceeds the upper

constraint it is acceptable
only from an order modifer
perspective
Order Constraints
Order constraints are generally set by management and are used to help limit inventory
investment, ordering, and carrying costs. Constraints are established first and take precedence
over modifiers. The following examples explain the use of constraints.
Minimum quantity can be used to meet a supplier minimum, or ensure that at least a
particular price break level is met
The maximum quantity may take into account the amount of available storage or the size
of the transport (for example, a truck that can only carry four pallets).
Minimum dollar limits may be used to avoid surcharges from suppliers when minimum
order value s set by suppliers are not met. For example, if a supplier charges a minimum
of $30 per order, regardless of the order size, the minimum dollar limit should be set to
$30.
Maximum dollar limits may limit inventory investment and days’ supply, or limit certain
items to correspond with authorization levels.
Minimum days’ supply may be used to prevent multiple orders for the same period as can
occur with lot- for- lot orders in a contract environment, or limit the frequency of small
orders which can result in large handling and freight costs
Maximum days’ supply is used to support inventory turns and targets. It is also used
where shelf- life is an issue. For example, a chilled food distributor limits inventory on
hand to a maximum of 3 days to ensure that the shelf life is sufficiently long when the
products reach the supermarket shelf.
Order Modifiers
Constraints take precedence over modifiers. Modifiers are used to fine tune an order quantity as
in the following situations:

Unit 2
A special offer or price break quantity can be ensured on an individual order basis by
setting one of the price break quantities as the supplier minimum for that supplier for the
duration of the discount period
Rounding quantities may be used to meet container multiples or make the numbers more
simple to ease the cycle counting process. For example, an order of 98 units may be
rounded to 100.
Minimum demand quantity recognizes that certain items are subject to large issues. A
minimum demand quantity ensures that no small remnants are left prior to receipt of the
next order for floor stock and other bulk- issue items
An order quantity multiplier (or divisor) is used for process yield or scrap conditions,
which must be accounted for in the starting inventory quantity in order to ensure the
necessary ending quantity. For example, if it is known that scrap during production will
be equivalent to 1%, then 101 units must be ordered where demand indicates a
requirement for 100 units.
Order Quantities and Cost Factors

Economies of scale are generally the basis of lot size calculations as it is usually cheaper to buy
and transport one large quantity than several smaller quantities. The larger the quantity ordered
the fewer number of orders required. This leads to the following advantages:
For purchasing departments, there may be discounts for large orders and transportation
efficiency.
For manufacturing, the availability of large lot sizes means longer production runs are
possible, saving time on setup and changeovers.
However, larger lot sizes mean larger inventories, which will be costly to carry.
Cost of Carrying Inventory

The cost of carrying an inventory item is usually presented as the cost of carrying an item for a
year as a percentage of the total cost of the item .For example, if an item costs $60 but it costs $6
dollars to store and maintain the item for a year, the inventory carrying cost is 10%. This cost is
usually determined by the Finance department.
The costs of carrying the inventory item will take into account:
Storage costs:
The company must be able to store the entire order. Additionally, it may be necessary to
maintain specific environmental conditions of heat, light, or temperature. For example, chilled
foods may cost more to store than ambient products.
Counting, transporting and handling:
Inventory must be moved into and out of storage and must be cycle-counted, all of which
requires manpower and handling.
Risk of obsolescence due to changing requirements or spoilage
The inventory items may deteriorate in storage, be mishandled or misused, leading to the binning
of some of the material. In addition, the manufacturing requirements of the company may change
so that the material is no longer needed in the production process. This means it is obsolete and
of no value to the company.

Unit 2
Insurance and tax
Many businesses must pay taxes on inventory as inventories are seen as assets to a company.
Insurance, although not a large cost, is required to cover for accidental damage. Insurance
premiums increase as inventory levels increase
Theft
Depending on the nature of the product, theft is always a consideration. Foodstuffs, office
supplies, small hand tools etc are desirable and easy targets for petty thieves with access to the
storage facility.
Opportunity Costs
This is often called the cost of capital. Opportunity costs are determined by calculating the rate
of return a company could earn from its best investment opportunities then applying this to the
amount of money tied up in inventory. It assumes that the money could instead be spent on an
alternative investment opportunity.
Shelf Life
This may be a consideration for foodstuffs and medicines. In some cases, particularly with
longer shelf life products such as medicines, resample testing may be employed to possibly
extend the shelf life. In addition, as expiry dates on medicines vary from country to country it
may be possible to sell products that have expired in one country onto another country.
Costs of Placing Orders

The cost of placing an order for replenishment of inventory levels will differ depending on
whether the order is a purchase order to an external supplier or an internal work order to
production. In either case, the cost is generally presented as the cost to place a single order in
dollar terms and will include order requisition and release, and other types of preparation
associated with the order such as setup/tear down, order placing, inspection, accounting,
expediting, follow- up, status checks and order closeout.
Techniques for Determining Lot Size

There are many techniques for determining lot sizes, which can be categorized into economic,
fixed, period, and demand techniques. These categories are further explained below.
Economic Order Quantity

The economic order quantity assumes a steady regular annual demand. This is generally
calculated by determining the average monthly usage rate and multiplying by 12. The monthly
rate must be factored so that short months and long months are equalized. For example, there
may only be 18 productive days in December, compared with 22 in March.
The optimum order quantity is the point at which the carrying cost is more or less equal to the
ordering cost. This is usually the point where the total cost is at a minimum, as can be seen from
the graph below. The vertical line represents the point of balance where total cost is at its lowest.

Unit 2
Comparing Order and Carrying Costs
350
300
250
Cost of Carrying
Cost
200
Cost of ordering
150
Total cost
100
50
0
1 3 5 7 9 11 13 15
Order Quantity
The economic order quantity occurs at this point. It may be calculated as follows:
EOQ =
√ 2AS
IC
A = Annual usage in units

S = Ordering cost in dollars per order
I = Annual carrying cost rate as a decimal of a percentage
C = Unit cost in dollars
Annual usage is usually calculated by multiplying average monthly usage by 12
Cost per order is usually calculated by Finance for purchased items and by engineering
and finance for in- house manufactured items.
The cost of the item is usually a standard cost and the annual carrying cost is usually a
decimal around the 0.24 range that may be converted into a monthly value.
The carrying cost is equal to half the order quantity multiplied by the cost of the item,
times the annual cost to carry.
The order cost is equal to the annual usage divided by the order quantity times the cost
per order.
The total cost is the combined carrying and order costs.
3. If the cost of an item is $1, the cost to order it is $20, the amount used
annually is estimated as 20,000 units and the carrying cost is 25% (or 0.25),
what is the EOQ for that item?
A. 1265
Review Q B. 1789
C. 3578
D. 1,600,000

Unit 2
4. What happens to the EOQ if the carrying cost is reduced to 22%?
A. The EOQ is increased correct
B. The EOQ remains the same
Review Q C. The EOQ is decreased

D. None of the above
Fixed Order Quantity

Fixed order quantities are generally set when whipping, handling or line replenishment issues
materially affect costs. Suppliers receive consistent orders and order quantities but the frequency
of orders varies. In turn, manufacturing receives a consistent flow of materials in standard
quantities.
The quantity of the fixed order may be determined informally or based on an EOQ. In the
following example, a fixed order quantity of 1000 and fixed safety stock of 160 are assumed.
Component Part No: Period

F131 1 2 3 4 5 6 7 8 9
Gross Requirements 260 320 240 520 260 240 370 220 250
Scheduled Receipts
Projected Available 740 480 160 920 400 1140 900 530 300
Net Requirements 80+160 20 (SS) 110
(SS)
Planned Order Receipts 1000 1000 1000

Planned Order Releases 1000 1000
In period 3, the safety stock must be replenished. A further 80 units are needed to meet gross
requirements. In period 5, 20 units of safety stock must be replaced. In both cases, the order
quantity is 1,000 as this is the fixed amount. Order quantities should be reviewed regularly to
ensure changes are taken into account and that the order quantities will contribute to optimum
inventory and order levels.
Period Order Quantity

In period order quantity, the amount of the order is equal to the net requirements for a set number
of periods. The number of planning periods included may be established by the planner or
determined based on the EOQ equation. There are no remnants, as ma y often occur when EOQs
are used. All available inventory is used up within the period.
Lot for Lot

Lot- for- lot replenishment occurs when orders cover the total requirements for a given period.
When using MRP replanning, this period may be a day, a week, or some other specified but
reasonably short time frame.

Unit 2
Companies that order and divide inventory separately for each customer order contract take the
lot for lot technique further again. Project and order for order manufacturers may maintain a
stock of commonly used raw materials and subassemblies. However, the majority of a
customer’s order will be purchased or manufactured for each order as the schedule dictates. To
account for the costs of each order and to eliminate or minimize any residuals, items are obtained
only for each order. This material is allocated for the particular order when it reaches inventory
and is issued against that order number.
No explosion process is required as each item on the BOM is a unique order. If an item appears
in multiple levels of a BOM, those items may be combined but there is no combining across
customer orders. Although the explosion of BOM process is not needed in this approach, MRP is
still useful for the ordering process because:
It maintains all planning and ordering information in one system
The same item may be subject to lot- for- lot ordering for certain types of orders and
regular period or other ordering technique for other orders. For example, a business
contracting work for military uses the same items in commercial business
Residuals may exist due to minimum purchases on other orders or late cancellation of
orders. These will be taken into account automatically in MRP before a new order is
triggered.
5. Which lot sizing technique sets order quant ity equal to the net requirements
for a set number of periods?
A. Periodic Review
B. Lot- for-Lot
Review Q
C. Period Order Quantity
D. Kanban

Unit 2
Summary
This lesson covered inventory types and classifications, methods of order review, factors
influencing lot sizes, lo t sizing techniques, and costs associated with order quantity policies.
At this point, you should be able to:
List types of inventory
Identify the requirements of each type of inventory
Describe the impact of each type of inventory on the planning process
Explain order review methodologies
Apply order review methodologies to various inventory types and inventory strategies
Identify lot-sizing techniques
Explain the effects of order-quantity constraints and modifiers in lot-sizing techniques
Further Reading
Introduction to Materials Management,
JR Tony Arnold, CFPIM, CIRM and Stephen Chapman CFPIM
5th edition, 2004, Prentice Hall
APICS Dictionary
10th edition, 2002
Manufacturing Planning and Control Systems,

Vollmann, T.E.; W.L. Berry; and D.C. Whybark
5th edition, 2004, McGraw-Hill
Production & Inventory Management,

Fogarty, Donald W. CFPIM; Blackstone, John H. JR. CFPIM; and
Hoffmann, Thomas R. CFPIM
2nd edition, 1991, South-Western Publishing Co., Cincinnati, Ohio

Unit 2
Review
The following questions are designed to test your recall of the material covered in
lesson 1. The answers are available in the appendix of this workbook.
6. Which is the most accurate description of vendor-managed inventory?

A. The material inputs used in the manufacturing process, either raw materials or the
finished goods of some other manufacturing company
B. A method of controlling inventory which relies on the customer making demand
information available to the supplier so that the supplier can assume responsibility for
planning and replenishment within the limits set by the customer
C. Inventory that is available for the customer to use but is owned by the supplier until it is
used.
D. Materials moving through the production process
7. Which of these order review methodologies involves the use of replenishment signals
such as cards or empty bins ?
A. TPOP
B. MRP
C. Kanban
D. Reorder Points
8. In which of the following situations might order constraints be set by management?
I. The company wants to take advantage of a quantity discount by setting a
minimum quantity
II. The company wants to avoid supplier surcharges when minimum order levels
are not reached
III. The company wants to round up order quantities to simplify cycle-counting
A. All the above
B. I and II
C. I and III
D. III only
9. The reorder point is equa l to:
A. Demand during lead time added to the safety stock requirement
B. The net requirements for a set number of time periods
C. The order amount at which carrying costs and order costs are optimal
D. The total requirements for material over a given time period

Unit 2
What’s Next?
This lesson covered the role of manufacturing, the characteristics of materials management and
the need for supply chain management.
You should review your work before progressing to the next lesson which is:
Detailed Scheduling and Planning – Lesson 2 - Customer Service and Inventory
Management

Unit 2
Appendix

Unit 2
Answers to Review Questions
1. D
Inactive inventory is the result of surplus inventory that has not been used in the last year and is
not likely to be used. Obsolete inventory will never by used or sold at full value as it is no longer
required in the current product range. WIP inventory is work- in-process inventories that
accumulate during production. Surplus inventory occurs when inventory levels are higher than
current demand.
2. C
The total demand during lead time is 600 units, the safety stock requirement is 200 units,
therefore the TPOP is reached at 800 units.
3. B
The EOQ is equal to the square root of (2 x the annual usage in units x the ordering cost in
dollars per order ) divided by (the annual carrying cost times the unit cost in dollars)
EOQ =
√ 2AS
IC
A = Annual usage in units

S = Ordering cost in dollars per order
I = Annual carrying cost rate as a decimal of a percentage
C = Unit cost in dollars
4. A
The EOQ is increased to approximately 1,906.
5. C
Period Order Quantity lot-sizing technique sets the order amount equal to the net requirements
over a set number of periods. Lot- for-Lot replenishment means that order quantities are set to the
total requirements for a given period. Kanban is an order review methodology that relies on
empty bins or other signals to trigger replenishment. Periodic review is another order review
methodology that relies on placing orders at specified intervals. The calculation of the order
quantity varies depending on the exact method used. The simpler versions set the order quantity
equal to the maximum desired inventory level minus the amount of inventory on hand at the time
of placing the order.
6. B
Vendor- managed inventory involves a close relationship between supplier and buyer where the
supplier is made aware of demand history and buyer forecasts and assumes total responsibility
for the planning and replenishment of an inventory item. Consignment inventory is provided for
the customer’s use but remains the property of the supplier until it is used. Periodic review of the
level of inventory aids in billing and replenishment. WIP inventory is generated during
manufacture and raw materials are the initial material inputs (either true raw materials or the

Unit 2
finished goods of another manufacturer) used in the manufacturing process. Raw materials are at
the lowest level of the BOM.
7. C
The Kanban methodology makes use of some type of signal to indicate when replenishment is
required. It uses a fixed order quantity. For example, an empty bin passed upstream indicates the
requirement for a new bin full of material.
8. B
Order constraints are used to help limit inventory investment, ordering and carrying costs. They
take precedence over order modifiers and may be used to set minimum quantities to take
advantages of quantity price breaks or avoid small order surcharges from suppliers. Order
modifiers are usually more moderate in effect and also more temporary. They are used to fine-
tune order quantities. For example, an order modifier might be set to ensure orders are rounded
up to the nearest 10 units so that cycle counting is simplified.
9. A
The reorder point is a level set by management for an inventory item. When stocks of that item
fall to or below the reorder point a requirement for replenishment of that item is triggered. The
reorder point is usually set at a level that ensures production can continue during the lead time
for the replenishment order without using up safety stock. This is calculated by determining the
demand during lead time and adding the required safety stock amount.

Unit 2
Glossary
Term Definition
Carrying cost Cost or carrying inventory. This is defined usually as a percentage of the
monetary value of the inventory per unit of time (usually a year). Carrying
cost depends on the cost of capital invested and on costs of maintaining the
inventory, paying tax on it, insuring it, spoilage, storage space, and
obsolescence.
Cycle counting An inventory accuracy audit technique. Each inventory item is allocated a
cycle count frequency, usually more frequent for high value or fast moving
items. Each item is counted in isolation at regular intervals throughout the
year as often as specified for each item. Many items may be counted very
working day. Cycle counting is used to identify items in error. This may lead
to research, identification, and elimination of the causes of the errors.
Demand A need for a particular product or component which could come from a
customer order, forecast of market requirements, interplant requirement, or a
request from a branch warehouse for a service part
Distribution The activities associated with the movement of material, usually finished
goods or service parts from production plant to the customer. Distribution
incorporates functions such as transportation, warehousing, inventory
control, material handling, order administration, location analysis,
packaging, data processing and communications networks.
Economic order Reducing setup time and inventory to the point where it is economical to
quantity (EOQ) produce in batches of one.
Fixed order À lot sizing technique in MRP or inventory management that will always
quantity cause an order to be generated for a fixed quantity or multiples of that fixed
quantity, if net requirements for the period are higher than the fixed order
quantity.
Independent Demand for an item that does not depend on the order of other items.
demand Demand for finished goods, parts required for destructive testing, and
service parts are examples of independent demand.
Inventory Stocks or items used to support production (raw materials and work- in-
process items), activities that support production (operating supplies,
maintenance and repair), and customer service (finished goods and spare
parts).
Inventory turns The number of times that an inventory turns over during a year. This is
calculated by dividing the average inventory level into the annual cost of
sales. For example, an average inventory of $600,000 divided into an
average cost of sales of 1,800,000 means that inventory turned over 3 times
during the year.
Lot-for-lot A lot sizing technique that generates planned orders in quantities equal to the
net requirements in each period.

Unit 2
Order point or A predefined inventory level, which if it is higher than the stock on hand and
reorder point stock on order combined, will trigger an action to replenish the stock.
Order Qua ntity or The amount of an item that is ordered from a supplier or from the plant or is
Lot size issued as a standard quantity to the production process.
Periodic review This is also called fixed reorder cycle inventory model. It is a form of
system independent demand item management in which an order has a fixed
quantity. The reorder point will be large enough to cover the maximum
expected demand during the replenishment lead time.
Safety stock This is a quantity of stock that is planned for inventory to protect against
fluctuations in demand or supply. In the context of master production
scheduling, the additional inventory and capacity planned as protection
against forecast errors and short term changes in the backlog. Overplanning
can be used to create safety stock. Safety stock is also known as buffer or
reserve stock.
Service level A desired measure (usually a percentage) of satisfying demand through
inventory or by the current production schedule in time to satisfy the
customers’ requested delivery dates and quantities. In a make-to-stock
environment, level of service is sometimes the percentage of orders picked
complete from stock upon receipt of customer order.
Stockout A lack of required materials components or finished goods.
Two -bin system A type of fixed order system in which inventory is carried in tow bins. A
replenishment quantity is ordered when the first bin is empty. During the
replenishment lead time, material is used from the second bin. When the
material is received, the second bin, which contains a quantity to cover
demand during the lead time plus some safety stock, is refilled and the
excess is put into the working bin. AT this time, stock is drawn from the first
bin until it is empty again. The bins may be metaphorical only.
Unit cost Total labor, material, and overhead cost for one unit of production.
Work-in-process Also known as work in progress, this refers to products that are in a partial
(WIP) stage of completion throughout the plant. This includes all material from raw
material that has been released for initial processing up to completely
processed material awaiting final inspection and acceptance as finished
product.
Inventory Stocks or items used to support production (raw materials and WIP items),
supporting activities (MRO supplies), and customer service (Finished goods
and spare parts). Demand for inventory may be dependent or independent.
Inventory functions are anticipation, hedge, cycle (lot size), fluctuation
(safety, buffer, or reserve), transportation (pipeline), and service parts.
In the theory of constraints, inventory refers to items purchased for resale
and includes finished goods, WIP and raw materials. In this approach,
inventory is always valued at purchase price and includes no value-added
costs, whereas traditionally, direct labor and overhead costs were attributed
to the items as they went through the production process.

Unit 2
Customer service a measurement of delivery of finished goods performance, usually a
level or ratio percentage such as the number of items or dollars shipped on schedule
during a specified time period, compared to the total that should have been
shipped. In a make-to-order environment it may be measured by the number
of jobs or dollars shipped in a particular period compared with the total
number required.
Seasonality A pattern of demand that repeats from year to year (or other identified
season) where some periods have very high demand compared to others
Lead time The amount of time required to perform an operation. In logistics, it is the
time between identifying the need for an order and the receipt of that order.
Components of lead time may include order preparation time, queue time,
processing time, move time, receiving, and inspection time.
Manufacturing The frame work in which a manufacturing strategy is developed and
environment implemented. It includes external environmental forces, corporate strategy,
business unit strategy, product selection, process technology, and
management competency. It is often used to refer to whether a company is
make-to-stock, make-to-order, or assemble-to-order.
Cumulative lead The longest planned length of time needed to complete a particular activity.
time It may be calculated in MRP by reviewing the lead time for each BOM path
below the item. The longest BOM path is equal to the cumulative lead time
Product group A number of similar products. Generally they are grouped according to the
process or materials required to make them
Raw material Purchased items or extracted materials that are converted via the
manufacturing process into components and products.
Work-in-process A product or products in various stages of completion throughout the plant.
(WIP) This includes all material from raw material that has been released for
processing, up to completely processed material that is awaiting final
inspection and approval as finished goods.
Maintenance, Items used to support operations and maintenance, including for example
repair, and maintenance supplies, spare parts, consumables used during manufacturing
operating supplies and supporting operations.
(MRO)
Finished goods or A product sold as a completed item or repair part. This term refers to any
end items item that is subject to a customer order or sales forecast
Spare parts or Hese are modules, components or elements that may be used without
service parts modification to replace an original part
Anticipation Additional inventory above the baseline stock to cover projected sales
inventory increases, planned sales promotions, seasonality, plant shutdowns and
vacations
Hedge inventory An amount of inventory built up to guard against a particular event that may
or may not occur. Hedge inventories are the result of speculation related to
potential strikes, price increases, government unrest, or other external events

Unit 2
that could severely impair a company’s strategic initiatives.
Cycle The interval of time during which a system or process, periodically returns to
similar initial conditions. It is also the interval of time during which an event
or set of events is completed
Buffer A quantity of material waiting for further processing. This may be raw
material, partially completed material in stores, or a work backlog that is
purposely maintained beside a work center.
Reserve Material on hand or on order that is assigned to specific future production or
customer orders
Service parts Parts (modules, components or elements) that are planned to be used without
modification to replace an original part
Excess inventory Inventory that exceeds the minimum amount required to achieve a desired
throughput rate, or inventory over and above the minimum amount needed to
ensure desired due date performance
Inactive inventory Stock that is in excess of consumption within a defined period of time or
stocks of items that have not been used within a defined time frame.
Obsolete Inventory that is out of date or no longer required in the manufacturing
inventory process, or made worthless due to the appearance of a better or more
economical alternative
Consignment A shipment that is handled by a common carrier or the process of a supplier
placing goods at a customer location without receiving payment for the
goods until after they are used or sold
Material A set of techniques that use bill of material information, inventory data, and
requirements the master production shceudle to calculate requirements for materials. MRP
planning (MRP) recommends replenishment orders and order dates for materials and helps to
reschedule open orders when due dates and need dates are not in line. MRP
takes the items listed on the MPS and determines the quantity of all
componenets and materials required to make those items and the dates by
which those materials are required. It explodes the bill of material for each
item, takes into account inventory on hand or on order and offsets the net
requirements by the lead time for each item.
Time-phased Similar to MRP planning logic for independent demand items, where gross
order point requirements come from a forecast. The TPOP may be used to plan
(TPOP) distribution center inventories and repair parts. The TPOP approach uses
time periods, allowing for lumpy withdrawal instead of average demand.
Periodic review A fixed reorder cycle inventory model
Visual review A simple inventory control system which involves looking at the amount of
system inventory on hand before reordering. It is used for low value items
Kanban A JIT production method that uses standard lot sizes. Material is pulled to
the work center according to demand. A Kanban is a card, billboard or sign.
When a work station requires material it sends some form of sign, such as an
empty container, up the chain.

Unit 2
Scheduled receipt An open order with an assigned due date
Open order A manufacturing or purchase order that has been released or an unfilled
customer order
Stock Items in inventory or stored products / service parts ready for sale, as
distinguished from stores that hold components and raw materials
Scrap Material outside specifications for which rework is not possible or practical
Yield The amount of usable output from a process as compared to its input. This is
usually expressed as a percentage of the input.
Constraint An element or factor that prevents a system from achieving a higher level of
performance with respect to its goal. Constraints can be physical, such as a
machine center or lack of material, or managerial, as defined in policies or
procedures.
Procurement A fussiness function of planning, purchasing, inventory control, traffic,
receiving, incoming inspection, and salvage operations
Opportunity cost The return on capital that would have resulted had the capital been available
for some purpose other than what it has been used for
Shelf life The amount of time an item may be stored before becoming unusable.
Period order A lot-sizing technique which equates the lot size to the net requirements for
quantity a specified number of periods in the future. The number of periods to order
is variable. The order size should equalize the holding costs and ordering
costs for the time interval

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The Leading Edge Training Institute Limited

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Target Audience and Pre-Requisite Knowledge

Scheduling Lessons and Review Sessions

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Frequently Asked Questions

Supplementary Reference Materials

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Influences on Inventory Policy

What must be ordered?

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have been used in the should be

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Types of Order Review Methodologies

Issues to be Resolved by Order Review Methodologies

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Determining the Reorder Point

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800 inventory level

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Technique : TPOP Gross Requirements 50 50 50 50 50 50 50 50

Order Quantity 500 Scheduled Receipts

Safety Stock 125 A Net Requirements

Lead Time 6wks Planned Order Releases 500

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TPOP and Joint Orders

Planned Order Releases

Planned Order Releases

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Acceptable Order Quantity

As this exceeds the upper

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Order Quantities and Cost Factors

Cost of Carrying Inventory

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Costs of Placing Orders

Techniques for Determining Lot Size

Economic Order Quantity

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A = Annual usage in units

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Review Q C. The EOQ is decreased

Fixed Order Quantity

Component Part No: Period

Planned Order Receipts 1000 1000 1000

Period Order Quantity

Lot for Lot

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Manufacturing Planning and Control Systems,

Production & Inventory Management,

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6. Which is the most accurate description of vendor-managed inventory?

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A = Annual usage in units