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12.1 Learning Outcomes:
•
Describe the concept of operations functions, supply chain strategy, process selection,
forecasting, capacity planning, production forecast methods and schedule operations.
•
Define different perspectives and knowledge of process-flow analysis, process design
solutions, lean system, quality controls, Inventory control system and green systems.
•
Apply knowledge and skills to optimize production objective of maximizing profits
using qualitative and quantitative techniques in related areas of operations
management.
•
Demonstrate process-flow analysis, process design solutions, operations strategies,
Inventory Control System and customer services in the business operation.
12.2 Action Required:
Read the following chapter of your Textbook.
Chapter 13 and Chapter 14
12.3 Test your Knowledge (Question):
•
What is a Project?
•
Discuss the various types of Inventory and Demand.
12.4 Instructions
•
•
Answer both questions in test your knowledge section.
Post your answer in the discussion board using the discussion link below (Week12:
Interactive learning Discussion)
Chapter 13:
Project Planning and Scheduling
McGraw-Hill Education
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13-1
Chapter 13 Learning Objectives
▪LO 13.1 Explain the nature of tradeoffs among the three objectives of project
management.
▪LO 13.2 Describe the four activities included in project management.
▪LO 13.3 Distinguish the advantages and disadvantages of a network over a Gantt
chart for project scheduling.
▪LO 13.4 Calculate the ES, EF, LS, LF for an example network.
▪LO 13.5 Explain the significance of the critical path and slack.
▪LO 13.6 Calculate the cost of crashing a network by one or two days.
▪LO 13.7 Contrast and compare the use of constant-time and CPM networks.
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13-2
What is a Project?
“A temporary endeavor undertaken to create a unique
product/service/result.” – Project Mgmt Institute (PMI)
Unique item or event; often a single unit.
Begins and ends; not ongoing activity.
Work often done on-site.
Resources (materials, labor) are brought to the project.
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13-3
Examples of Projects
•Building construction
•NASA mission
•New product introduction
•Fund-raising campaign
•Start-up or shutdown of a
plant
•Research & Development
•Movie making
•Manufacture of aircraft,
ships, and large machines
•Computer system design
•Teaching a course
•Auditing accounts
•Installation of equipment
•Designing an advertising
campaign
•Planning a military invasion
Planning for a large
fund-raising gala is
managed as a project.
HIZIR KAYA/123RF
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13-4
Objectives and Tradeoffs
Stay on
schedule
Stay on
budget
Meet
performance
outcomes
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13-5
Project Management Activities & Decisions
Planning
Scheduling
Closing
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13-6
Planning Activities & Decisions
Identify the project customer
Establish the end product/service
Set project objectives
Estimate total resources and time required
Decide on the form of project organization
Make key personnel appointments
Define major tasks required
Establish a budget
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13-7
Scheduling Activities & Decisions
Develop a detailed work-breakdown structure
Estimated time required for each task
Sequence tasks in proper order
Develop a start/stop time for each task
Develop detailed budget for each task
Assign tasks to people, subcontractors, etc.
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13-8
Example:
Work Breakdown Structure (Figure 13.1)
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9
Control Activities and Decisions
Monitor actual time, cost, and performance
Compare planned to actual figures
Determine whether corrective action is needed
Evaluate alternative corrective actions
Take appropriate corrective actions
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13-10
Closing Activities and Decisions
❑ Finish all work
❑ Close contracts
❑ Pay all accounts payable
❑ Turn the project over to the owners
❑ Reassign personnel and equipment
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13-11
PMI – Body of Knowledge
Integration Management
Project Management
Institute topics to
understand for
certification as a
Project Manager.
Scope Management
Schedule Management
Cost Management
Quality Management
Resource Management
Communications Management
Risk Management
Procurement Management
Stakeholder Management
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13-12
Scheduling Methods
Gantt Chart
◦ Bar charts
◦ Does not show interdependencies of activities
◦ Visual & easy to understand
Network Method
◦ Graphs or networks
◦ Shows precedence relations
◦ More complex, difficult to understand, and costly than Gantt charts
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13-13
Gantt Chart Project Example (Figure 13.2)
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13-14
Constant-Time Networks
Activity times assumed to be constant
Activities represented by nodes
Arrows show precedence relationships
Notation used to calculate start and finish times:
◦ ES(a) =
◦ EF(a) =
◦ LS(a) =
◦ LF(a) =
early start of activity A (constrained by predecessors)
early finish of activity A (constrained by early start time)
late start of activity A (constrained by late finish time)
late finish of activity A (without delaying successors)
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13-15
Example:
Write a Business Report (Table 13.4)
Activity
Description
Immediate
Predecessors
A
Decide topic & scope
None
1
B
Collect data
A
2
C
Search the Internet
A
3
D
Write the report
B and C
5
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Duration
in Days
13-16
Network Diagram:
Write a Business Plan (Figure 13.3)
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13-17
Forward Pass:
Write a Business Plan (Figure 13.4)
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13-18
Calculating ES, EF, LS, LF, Completion Time
Forward Pass:
ES (a) = 0 for the starting activities
EF (a) = ES(a) + t(a)*
ES (a) = Max [EF(all predecessors of a)]
Project completion time = Max [EF(all ending activities)]
Backward pass:
LF (a) = Min [LS(all successors of a)]
LS (a) = LF(a) – t(a)*
* t(a) denotes the duration of activity a
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13-19
Forward and Backward Pass:
Write a Business Plan (Figure 13.5)
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13-20
Critical Path
Critical Path = longest path in the network
◦ All activities for which ES=LS and EF=LF
◦ Duration of critical path is equal to the project completion time
◦ Any delay on critical path delays the project
(unless ‘corrective actions’ are taken)
◦ Critical path in example (on previous slide) is A-C-D
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13-21
Slack
Slack time = time a path may be delayed without
delaying the project
Paths not on the critical path have slack.
Slack = LS – ES = LF – EF
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13-22
Precedence and Times
for Opening a New Office (Table 13.5)
Activity
Description
Immediate
Predecessors
Activity
Time
Computed
Slack
None
1
0
1
Lease the site
2
Hire the workers
1
5
0
3
Arrange for furnishings
1
1
1
4
Install furnishings
3
2
1
5
Arrange for phones
1
1
3
6
Install the phones
4, 5
1
1
7
Move into the office
2, 6, 4
2
0
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13-23
Network:
Open a New Office (Figure 13.6)
1 6
2
5
1 6
0 1
1
1
0 1
1 2
5
1
4 5
4 5
6
1
5 6
1 2
3
1
2 3
2 4
4
2
3 5
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6 8
7
2
6 8
ES EF
LS LF
13-24
Critical Path Method
Critical Path Method (CPM)
Developed to start-up/shutdown plants.
Activity times can be compressed by spending more $.
Requires single time estimate for each activity.
Looks at time/cost trade-offs:
◦ Normal activity time
◦ Normal cost
◦ Crash time
◦ Crash cost
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13-25
Time-Cost Relationship in CPM (Figure 13.8)
Cost
Crash
cost
Normal
cost
Crash
time
Normal
time
Time
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13-26
Use of Project Management Concepts
Scheduling is only part of a complete approach to project
management.
Trade-off between sophistication and cost of methods.
Choice between constant-time, CPM or more advanced
techniques.
Choice of project management software packages.
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13-27
Example:
Carlsbad Desalination Plant
This plant provides fresh water to the
San Diego County Water Authority. The
project cost $1 billion for the plant,
pipelines, and upgrades to existing
facilities.
A variety of project management tools
were necessary to manage the long and
detailed construction schedule – 2500
workers contributed 1.5 million hours.
For additional details on this project,
see the Operations Leader box in the
textbook.
Reed Kaestner/Getty Images
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28
Chapter 13 Summary
▪LO 13.1 Explain the nature of tradeoffs among the three objectives of project
management.
▪LO 13.2 Describe the four activities included in project management.
▪LO 13.3 Distinguish the advantages and disadvantages of a network over a Gantt
chart for project scheduling.
▪LO 13.4 Calculate the ES, EF, LS, LF for an example network.
▪LO 13.5 Explain the significance of the critical path and slack.
▪LO 13.6 Calculate the cost of crashing a network by one or two days.
▪LO 13.7 Contrast and compare the use of constant-time and CPM networks.
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13-29
Questions for Discussion
•How is taking a class similar to managing a project?
•Review the example of work breakdown structure for a banquet.
Define the categories for a project such as making a movie.
•What are the tradeoffs between the budget and schedule for a
project?
•In the Project Mgmt Institute Body of Knowledge, the newest
category is stakeholder management. Who are the stakeholders?
•In your own words, explain the difference between early and late
start times. Same for early and late finish times.
•Why is the critical path important? Why is slack important?
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30
Chapter 14:
Independent Demand Inventory
McGraw-Hill Education
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14-1
Chapter 14 Learning Objectives
▪LO 14.1 Define inventory types and the purpose of inventory.
▪LO 14.2 Explain the costs incurred by inventory.
▪LO 14.3 Differentiate between independent and dependent demand.
▪LO 14.4 Calculate the economic order quantity and identify the underlying
assumptions.
▪LO 14.5 Compute the parameters for a continuous review and periodic review
inventory control system.
▪LO 14.6 Explain how continuous and periodic review systems are used in practice.
▪LO 14.7 Describe how inventory and service level are related.
▪LO 14.8 Define vendor managed inventory (VMI) and the ABC system.
▪LO 14.9 Solve advanced inventory problems (chapter supplement).
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14-2
Definitions
Inventory
A stock of materials used to facilitate production or satisfy customer demands.
Types of inventory
◦ Raw materials, purchased parts (RM)
◦ Work in process (WIP)
◦ Finished goods (FG)
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14-3
Inventory Management Technologies
▪ Bar coding
▪ Point of sale (POS) data
▪ Radio-frequency identification (RFID)
Target is an Operations Leader in
using technology and point-of-sale
(POS) data for inventory management.
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artzenter/Shutterstock
14-4
Materials-Flow Process (Figure 14.1)
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14-5
Water Tank Analogy for Inventory
Inventory Level
Supply Rate
Inventory Level
Demand Rate
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14-6
Purpose of Inventories
To protect against uncertainties – demand, supply, lead
times, schedule changes
◦ Safety stock
To allow economic production and purchase
◦ Cycle inventory
To cover anticipated changes in demand/supply
◦ Anticipation inventory
To provide for transit
◦ Pipeline inventory
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14-7
Costs of Inventory (1 of 2)
Item cost
◦ Expressed as cost per unit or SKU
◦ Quantity discounts possible
Ordering (or setup) cost
◦ Paperwork, data entry, worker time for ordering
◦ Worker time for setup, downtime
◦ Transportation costs
◦ Typically a fixed cost per order (or setup)
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14-8
Costs of Inventory (2 of 2)
Carrying (or holding) cost
◦ Cost of capital (market rate or internal rate of return)
◦ Cost of storage (space, insurance, taxes)
◦ Cost of obsolescence, deterioration, and loss (shrinkage)
◦
◦
Estimated U.S. average is 35% of SKU cost per year.
Businesses often use cost of capital (under-estimate of true costs).
Stockout cost
◦ Back order costs (expressed as a fixed cost per backorder)
◦ Lost income
◦ Customer dissatisfaction; loss of future sales
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14-9
Types of Demand
Independent demand (this chapter)
◦ Finished goods, spare parts
◦ Demand comes from the market, independent of other items
◦ Requires forecasting
Dependent demand (Chapter 15)
◦ Components/parts of the finished (parent) products
◦ Demand is a known function of (parent) independent demand items
◦ Calculate, instead of forecast
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14-10
Demand Patterns (Figure 14.4)
A pattern plus random
influences
‘Lumpy’ due to
production lots
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14-11
Economic Order Quantity (EOQ)
Answers question: “How much should we order?”
▪ Used for independent demand items.
▪ Objective is to find order quantity (Q) that minimizes total cost
(TC) of managing inventory.
▪ Must calculate for each SKU.
▪ Widely used and very robust (i.e., works well in a variety of
situations, even when its assumptions do not perfectly hold).
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14-12
EOQ Assumptions
1. Demand rate is constant, recurring, and known.
2. Lead time is constant and known.
3. No stockouts allowed.
4. Items are ordered or produced in a lot or batch,
and the lot is received all at once.
5. Costs are constant:
Unit cost (no quantity discounts).
Carrying cost is constant per unit.
Ordering (setup) cost per order.
6. Item is a single product or SKU; demand not influenced
by other items.
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14-13
EOQ Lot Size Intuition
There is a trade-off between ordering frequency (i.e., order size) and
the inventory level.
◦ Frequent orders (small lot sizes) lead to a lower average inventory level,
i.e., higher total ordering costs and lower total holding costs.
◦ Less frequent orders (large lot sizes) lead to a higher average inventory level,
i.e., lower total ordering costs and higher total holding costs.
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14-14
EOQ Inventory Levels (Figure 14.5)
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14-15
Notation in EOQ Calculation
D=
Demand rate, units per year
S=
Cost per order or setup cost, dollars per order
C=
Unit cost, dollars per unit
i=
Carrying rate, percent of dollar value per year
Q=
Lot size, units
TC =
Sum of ordering cost & carrying cost, dollars per year
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14-16
Cost Equations in EOQ
Ordering cost per year = SD/Q
(cost per order) x (orders per year)
Carrying cost per year = iCQ/2
(annual carrying rate) x (unit cost) x (average inventory level)
Total annual cost (TC) = SD/Q + iCQ/2
(total ordering cost per year) + (total carrying cost per year)
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14-17
Total Cost of Inventory (Figure 14.6)
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14-18
EOQ Formula
At the EOQ:
ordering costs = holding costs
S*(D/Q) = iC*(Q/2)
EOQ =
Note: Although we use annual costs, any time period can be used. Just be
consistent throughout the equation! The same is true for currencies.
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14-19
15-19
EOQ Example
Demand = 10 cases/week
S = $12/order
i = 30% per year
C = $80/case
EOQ = (2SD)/iC
= (2*12*10*52) / (.3*80)
= 22.8 cases/order
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14-20
EOQ Example
Demand = 10 cases/week
S = $12/order
i = 30% per year
C = $80/case
TC = ordering cost + holding cost
= SD/Q + iCQ/2 = 12*520/22.8 + .3*80*22.8/2
= 273.68 + 273.60 = $547.28/year
If ordering 22 cases/order, TC = $547.64
If ordering 23 cases/order, TC = $547.30
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14-21
EOQ Example
Total Inventory Cost
800
Dollars
600
400
200
40
36
32
28
24
21
17
13
0
Order Size
Total cost curve is quite flat near
the optimal EOQ. Order size need
not be exactly the EOQ to get cost
advantages.
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14-22
Continuous Review (Q) System
▪ Relax assumption of constant demand.
Demand is assumed to be random.
▪ Check inventory position each time there is demand
(i.e., continuously).
▪ If inventory position drops below Reorder point,
place an order for the EOQ.
▪ Also called fixed-order-quantity or Q system.
(fixed order size is EOQ)
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14-23
Continuous Review (Q) System (Figure 14.7)
R = Reorder point
Q = Order quantity
L = Lead time
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14-24
Continuous Review (Q) System
Amount to order = EOQ
Order when inventory position = Reorder point
R = Reorder point
m = mean demand during lead time
s = safety stock
Reorder point is independent of EOQ!
EOQ tells how much to order.
Reorder point tells when to order.
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14-25
Service Level
When demand is random, reorder point must account for
desired service level (fill rate).
s = safety stock
z = safety factor
= standard deviation in demand during lead time
Service level can be defined several ways:
◦ Probability all customer orders are filled while waiting for supply order to arrive.
◦ Percentage of demand filled from stock.
◦ Percentage of time item is on hand.
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14-26
Probability Distribution of Demand
over Lead Time (Figure 14.8)
m = mean demand
R = Reorder point
s = safety stock
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14-27
Periodic Review (P) System
▪ Review inventory position at fixed interval (P).
▪ For example, bread delivery truck visits grocery stores
on same days each week.
▪ Inventory brought up to a Target level.
▪ Order quantity varies according to demand.
▪ Also called fixed-order-interval system or P system.
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14-28
Periodic Review (P) System (Figure 14.9)
T = target level
L = lead time
Q = order quantities
P = time between orders (period)
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14-29
Periodic Review (P) System
P = time between orders
T = target inventory level
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14-30
P System Service Level
Safety stock must cover a longer interval: (P + L)
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14-31
Service Level versus Inventory Level
(Figure 14.10)
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14-32
Using P and Q System in Practice
❑ Use P system when orders must be placed at
specified intervals.
❑ Use P systems when multiple items ordered from
the same supplier (joint-replenishment).
❑ Use Q system for expensive items; P for
inexpensive.
❑ P requires more safety stock (and is more likely
to stockout) since the system cannot
respond quickly to increased demand.
❑ Either may be more costly:
P in safety stock, Q in monitoring costs.
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14-33
P and Q Systems at Home
P system: You go to the grocery store on the same day every week.
“What will we need for the next week?”
◦ P carries more inventory and is more likely to run out since it cannot respond
quickly to increases in demand.
Q system: You go to the grocery store each time you need something.
“What do we need?”
◦ Q may require more unplanned trips to the store.
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14-34
Vendor Managed Inventory (VMI)
▪ Supply chain management initiative
shifting responsibility for managing
inventory stocks to vendors (suppliers).
▪ Vendor must have access to buyer’s
demand forecast and inventory records.
▪ Managed through contractual
arrangement.
See the Operations Leader
box in the textbook for
how P&G, maker of Tide,
uses VMI to improve
supply chain performance.
▪ Supply chain partners share cost savings
of collaboration.
Roberto Machado Noa/Contributor/Getty Images
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14-35
ABC Inventory Management
Based on Pareto concept (80/20 rule) and total usage in dollars
of each item.
Classification of A, B, and C items based on usage.
Purpose is to set effort priorities to manage different SKUs, i.e.,
to allocate scarce management resources.
Proportion
of items
Proportion
of value
A
B
C
A
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B
C
14-36
ABC Inventory Classification
A items: 20% of SKUs, 80% of dollars
B items: 30% of SKUs, 15% of dollars
C items: 50% of SKUs, 5% of dollars
Three classes is arbitrary; could be any number.
Percentages are approximate.
Danger:
◦ Dollar use may not reflect importance of a particular SKU! Some firms
classify critical but low value items as A.
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14-37
Annual Usage of Items by Dollar Value (Table 14.4)
Item
1
2
3
4
5
6
7
8
9
10
Total
Annual
usage (units) Unit cost
5,000 $ 1.50
1,500
8.00
10,000
10.50
6,000
2.00
7,500
0.50
6,000
13.60
5,000
0.75
4,500
1.25
7,000
2.50
3,000
2.00
Dollar
% of total
usage
dollar usage
$
7,500
2.9%
12,000
4.7%
105,000
41.2%
12,000
4.7%
3,750
1.5%
81,600
32.0%
3,750
1.5%
5,625
2.2%
17,500
6.9%
6,000
2.4%
$ 254,725
100.0%
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14-38
ABC Chart for Table 14.4
45.0%
40.0%
A
C
B
100.0%
Percent Usage
35.0%
30.0%
80.0%
25.0%
60.0%
20.0%
15.0%
40.0%
10.0%
20.0%
Cumulative % Usage
120.0%
5.0%
0.0%
0.0%
3
6
9
2
4
1
10
8
5
7
Item No.
Percentage of Total Dollar Usage
Cumulative Percentage
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RESERVED.
14-39
Chapter 14 Summary
▪LO 14.1 Define inventory types and the purpose of inventory.
▪LO 14.2 Explain the costs incurred by inventory.
▪LO 14.3 Differentiate between independent and dependent demand.
▪LO 14.4 Calculate the economic order quantity and identify the underlying
assumptions.
▪LO 14.5 Compute the parameters for a continuous review and periodic review
inventory control system.
▪LO 14.6 Explain how continuous and periodic review systems are used in practice.
▪LO 14.7 Describe how inventory and service level are related.
▪LO 14.8 Define vendor managed inventory (VMI) and the ABC system.
▪LO 14.9 Solve advanced inventory problems (chapter supplement).
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14-40
Questions for Discussion
•Why do firms have inventory?
•Why are different methods used to manage independent and
dependent demand inventory items?
•Ordering (or setup) and carrying (or holding) costs are generally seen
as tradeoffs. Explain this in your own words.
•Review the assumptions of the EOQ model. Why is each of them
important in this calculation?
•How would you decide between using a Q system or a P system?
•What inventory items have you observed being stocked by the
supplier (vendor managed inventory)?
•Considering ABC inventory classification, what types of raw materials
do you think would be A items? B items? C items?
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