Operation Management

BITS Pilani Abhishek Maiti

Pilani Campus
 BITS Pilani
Pilani Campus

<MBAZG526/QMZG526, Operation
Management>
Lecture No. 11
Inventory Models
Prepared by Prof. Abhishek Maiti for the use of the students of Operation Management

• Independent Demand Model.

• Dependent Demand Model. ( Will be deal later in Dependent

Demand Management)

BITS Pilani, Pilani Campus

Dependent Demand
Prepared by Prof. Abhishek Maiti for the use of the students of Operation Management

• Dependent demand” means the demand for one item is related

to the demand for another item.

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MRP
Prepared by Prof. Abhishek Maiti for the use of the students of Operation Management

• Materials Requirement planning (MRP) : A dependent

demand technique that uses a bill-of-material, inventory,
expected receipts, and a master production schedule to
determine material requirements.

BITS Pilani, Pilani Campus

Prepared by Prof. Abhishek Maiti for the use of the students of Operation Management

Source: Heizer, Render, Muckson

BITS Pilani, Pilani Campus

IPO of MRP
Prepared by Prof. Abhishek Maiti for the use of the students of Operation Management

Source: Heizer, Render, Muckson

BITS Pilani, Pilani Campus

Master Production Schedule
Prepared by Prof. Abhishek Maiti for the use of the students of Operation Management

• Master production schedule (MPS) : A timetable that specifies

what is to be made (usually finished goods) and when.

Source: Heizer, Render, Muckson

BITS Pilani, Pilani Campus

Bill of Materials (BOM)
Prepared by Prof. Abhishek Maiti for the use of the students of Operation Management

• Bill of material (BOM) : A listing of the raw materials, parts,

components, assembly, sub-assembly, their description, and
the quantity of each required to make one unit of a product.

• Product structure tree : A visual depiction of the requirements

in a bill of materials, where all components are listed by levels.

BITS Pilani, Pilani Campus

Bill of Materials (BOM)
Prepared by Prof. Abhishek Maiti for the use of the students of Operation Management

Source: Operation Management by William J Stevenson

BITS Pilani, Pilani Campus

Bill of Materials (BOM)
Prepared by Prof. Abhishek Maiti for the use of the students of Operation Management

• Modular Bills : Bills of material organized by major

subassemblies or by product options.

• Planning bills : Material groupings created in order to assign

an artificial parent to a bill of material; also called “pseudo”
bills.

• Phantom bills : Bills of material for components, that exist

only temporarily; they are never inventoried.

BITS Pilani, Pilani Campus

Bill of Materials (BOM)
Prepared by Prof. Abhishek Maiti for the use of the students of Operation Management

• Low-level coding : Restructuring the bill of materials so that

multiple occurrences of a component all coincide.

BITS Pilani, Pilani Campus

Inventory Records
Prepared by Prof. Abhishek Maiti for the use of the students of Operation Management

• Inventory records: It includes information on the status of each

item by time period.

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Purchasing Data
Prepared by Prof. Abhishek Maiti for the use of the students of Operation Management

• Knowledge of outstanding orders exists as a by-product of well-

managed purchasing and inventory-control departments is known
as purchasing order outstanding.

• Lead time : In purchasing systems, the time between recognition

of the need for an order and receiving it; in production systems, it
is the order, wait, move, queue, setup, and run times for each
component.

BITS Pilani, Pilani Campus

IPO of MRP
Prepared by Prof. Abhishek Maiti for the use of the students of Operation Management

Source: Heizer, Render, Muckson

BITS Pilani, Pilani Campus

Terminology
Prepared by Prof. Abhishek Maiti for the use of the students of Operation Management

• Gross requirements : Total expected demand for an item or raw

material in a time period.

• Scheduled receipts : Open orders scheduled to arrive from

vendors or elsewhere in the pipeline.

• Projected on hand : Expected amount of inventory that will be

on hand at the beginning of each time period.

• Net requirements : The actual amount needed in each time

period.

BITS Pilani, Pilani Campus

Terminology
Prepared by Prof. Abhishek Maiti for the use of the students of Operation Management

• Planned-order receipts : Quantity expected to be received by

the beginning of the period in which it is shown.

• Planned-order releases : Planned amount to order in each time

period.

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Formula
Prepared by Prof. Abhishek Maiti for the use of the students of Operation Management

• The quantities that are generated by exploding the bill of

materials are gross requirements.

BITS Pilani, Pilani Campus

Class Exercise
Prepared by Prof. Abhishek Maiti for the use of the students of Operation Management

DEVELOPING A PRODUCT STRUCTURE AND GROSS

REQUIREMENTS

• Speaker Kits, Inc., packages high-fidelity components for mail

order.

• Components for the top-of-the line speaker kit, “Awesome”

(A), include 2 Bs and 3 Cs.

• Each B consists of 2 Ds and 2 Es.

• Each of the Cs has 2 Fs and 2 Es.

BITS Pilani, Pilani Campus

Class Exercise
Prepared by Prof. Abhishek Maiti for the use of the students of Operation Management

• Each F includes 2 Ds and 1 G.

• The demand for 50 Awesome Speaker Kits.

BITS Pilani, Pilani Campus

Solution
Prepared by Prof. Abhishek Maiti for the use of the students of Operation Management

Source: Heizer, Render, Muckson

BITS Pilani, Pilani Campus

Solution
Prepared by Prof. Abhishek Maiti for the use of the students of Operation Management

Source: Heizer, Render, Muckson

BITS Pilani, Pilani Campus

Class Exercise
Prepared by Prof. Abhishek Maiti for the use of the students of Operation Management

BUILDING A GROSS REQUIREMENTS PLAN

• Each Awesome speaker kit requires all the items in the product
structure for A. Lead times are shown in Table.

• We construct the gross material requirements plan with a

production schedule that will satisfy the demand of 50 units of
A by week 8.

• Assembly and Production.

BITS Pilani, Pilani Campus

Prepared by Prof. Abhishek Maiti for the use of the students of Operation Management

Source: Heizer, Render, Muckson

BITS Pilani, Pilani Campus

Solution
Prepared by Prof. Abhishek Maiti for the use of the students of Operation Management

• If you want 50 units of A at week 8, you must start assembling

A in week 7.

• Thus, in week 7, you will need 100 units of B and 150 units of
C. These two items take 2 weeks and 1 week, respectively, to
produce.

• Production of B, therefore, should start in week 5, and

production of C should start in week 6.

BITS Pilani, Pilani Campus

Class Exercise
Prepared by Prof. Abhishek Maiti for the use of the students of Operation Management

DETERMINING NET REQUIREMENTS PLAN

• Speaker Kits, Inc., now wants to construct a net requirements
plan.

• The gross requirement remains 50 units in week 8, and

component requirements are as shown in the product structure

Source: Heizer, Render, Muckson

BITS Pilani, Pilani Campus
Solution

Source: Heizer, Render, Muckson

BITS Pilani, Pilani Campus

Solution

Source: Heizer, Render, Muckson

BITS Pilani, Pilani Campus

Prepared by Prof. Abhishek Maiti for the use of the students of Operation Management

Any Question

BITS Pilani, Pilani Campus

MRP Management
Prepared by Prof. Abhishek Maiti for the use of the students of Operation Management

• MRP Dynamics.

• MRP Limitations.

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MRP Dynamics
Prepared by Prof. Abhishek Maiti for the use of the students of Operation Management

• The inputs to MRP frequently change.

• Frequent changes in an MRP system is called System Nervousness.

• Two tools are particularly helpful when trying to reduce MRP system
nervousness.

• Time fences : A means for allowing a segment of the master schedule to be

designated as “not to be rescheduled.”

• Pegging: In material requirements planning systems, tracing upward the bill

of material from the component to the parent item.

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MRP Limitation
Prepared by Prof. Abhishek Maiti for the use of the students of Operation Management

• Cannot be applicable in Make-to-Order environment.

• MRP is considered an infinite scheduling technique.

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Lot Sizing Techniques
Prepared by Prof. Abhishek Maiti for the use of the students of Operation Management

• Lot for Lot : A lot-sizing technique that generates exactly what

is required to meet the plan.

• Lot Sizing with EOQ : A lot-sizing technique that generates

Economic Order Quantity.

• Lot Sizing for POQ : An inventory ordering technique that

issues orders on a predetermined time interval, with the order
quantity covering the total of the interval’s requirements.

BITS Pilani, Pilani Campus

Lot for Lot
Prepared by Prof. Abhishek Maiti for the use of the students of Operation Management

Source: Heizer, Render, Muckson

BITS Pilani, Pilani Campus

Solution
Prepared by Prof. Abhishek Maiti for the use of the students of Operation Management

• The holding cost is zero as there is never any end-of-period

inventory.

• But seven separate setups (one associated with each order)

yield a total cost of

• $700. (Holding cost = 0 × 1 = 0; ordering cost = 7 × 100 =

700.)

BITS Pilani, Pilani Campus

Lot Sizing with EOQ
Prepared by Prof. Abhishek Maiti for the use of the students of Operation Management

• With a setup cost of $100 and a holding cost per week of $1,
Speaker Kits, Inc., wants to examine its cost with lot sizes
based on an EOQ criteria.

Source: Heizer, Render, Muckson

BITS Pilani, Pilani Campus

Lot Sizing with EOQ
Prepared by Prof. Abhishek Maiti for the use of the students of Operation Management

Source: Heizer, Render, Muckson

BITS Pilani, Pilani Campus

Lot Sizing with POQ
Prepared by Prof. Abhishek Maiti for the use of the students of Operation Management

• With a setup cost of $100 and a holding cost per week of $1,
Speaker Kits, Inc., wants to examine its cost with lot sizes
based on an POQ criteria.

BITS Pilani, Pilani Campus

Lot Sizing with POQ
Prepared by Prof. Abhishek Maiti for the use of the students of Operation Management

• Ten-week usage equals a gross requirement of 270 units;

therefore, average weekly usage equals 27, and, we know the
EOQ is 73 units.

• Therefore:

• POQ interval = EOQ/Average weekly usage = 73/27 = 2.7, or

3 weeks.

BITS Pilani, Pilani Campus

Prepared by Prof. Abhishek Maiti for the use of the students of Operation Management

Source: Heizer, Render, Muckson

BITS Pilani, Pilani Campus

Comparison
Prepared by Prof. Abhishek Maiti for the use of the students of Operation Management

Source: Heizer, Render, Muckson

BITS Pilani, Pilani Campus

MRP-II
Prepared by Prof. Abhishek Maiti for the use of the students of Operation Management

• A system that allows, with MRP in place, inventory data to be

augmented by other resource variables; in this case, MRP
becomes material resource planning .

BITS Pilani, Pilani Campus

Closed Loop MRP
Prepared by Prof. Abhishek Maiti for the use of the students of Operation Management

• A system that provides feedback to the capacity plan, master

production schedule, and production plan so planning can be
kept valid at all times.

• Load report : A report showing the resource requirements in a

work center for all work currently assigned there as well as all
planned and expected orders.

BITS Pilani, Pilani Campus

Smoothing the Load
Prepared by Prof. Abhishek Maiti for the use of the students of Operation Management

Source: Heizer, Render, Muckson

BITS Pilani, Pilani Campus

Tactics for Smoothing the
Load
Prepared by Prof. Abhishek Maiti for the use of the students of Operation Management

• Overlapping, which reduces the lead time, sends pieces to the

second operation before the entire lot is completed on the first
operation.

• Operations splitting sends the lot to two different machines

for the same operation.

• Order splitting, or lot splitting , involves breaking up the

order and running part of it earlier (or later) in the schedule.

BITS Pilani, Pilani Campus

Class Exercise

• Kevin Watson, the production planner at Wiz Products, needs to

develop a capacity plan for a work center.

• He has the production orders shown below for the next 5 days.

• There are 12 hours available in the work cell each day. The parts
being produced require 1 hour each.

Source: Heizer, Render, Muckson

BITS Pilani, Pilani Campus

Solution
Prepared by Prof. Abhishek Maiti for the use of the students of Operation Management

Source: Heizer, Render, Muckson

BITS Pilani, Pilani Campus

Prepared by Prof. Abhishek Maiti for the use of the students of Operation Management

Any Question

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MRP in Services
Prepared by Prof. Abhishek Maiti for the use of the students of Operation Management

• Restaurants.

• Hospitals

• Hotels

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Example

Source: Heizer, Render, Muckson

BITS Pilani, Pilani Campus

DRP
Prepared by Prof. Abhishek Maiti for the use of the students of Operation Management

• Distribution resource planning (DRP) : A time-phased stock

replenishment plan for all levels of a distribution network.

BITS Pilani, Pilani Campus

ERP
Prepared by Prof. Abhishek Maiti for the use of the students of Operation Management

• Enterprise resource planning (ERP) : An information system

for identifying and planning the enterprise wide resources
needed to take, make, ship, and account for customer orders.

• Enterprise resource planning (ERP) is software that allows

companies to (1) automate and integrate many of their
business processes, (2) share a common database and business
practices throughout the enterprise, and (3) produce
information in real time.

BITS Pilani, Pilani Campus

ERP

Source: Heizer, Render, Muckson

BITS Pilani, Pilani Campus

ERP

Source: Operation Management by William J Stevenson

BITS Pilani, Pilani Campus

Further Reading / References

1. Operation Management by Jay Heizer, Barry Render & Chuck Munson—

Chapter 14

2. Operation Management by William J Stevenson—Chapter 12

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Any Question

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THANK YOU

BITS Pilani, Pilani Campus