INVENTORY MANAGEMENT – PART II Ms. Biba S. Kavass

1. INVENTORY MANAGEMENT – PART IIMs. Biba S. Kavass

2. TN CCTE State Standards • Logistics and Transportation #4: ... Discuss the application of key concepts such as Just-in-Time (JIT) strategy, lean dynamics, and Kanban systems.

3. Inventory Control • Lean operationssupply the customer with exactly what the customer wants when the customer wants it, without waste, through continuous improvement. Lean operations are driven by workflow initiated by the “pull” of the customer’s order. • Just-in-time (JIT)is an approach of continuous and forced problem solving via a focus on throughput and reduced inventory. • Toyota Production System (TPS), with its emphasis on continuous improvement, respect for people, and standard work practices, is particularly suited for assembly lines

4. Issues Addressed by Lean Operations • Eliminate waste • Remove Variability • Improve Throughput

5. Eliminate Waste • Overproduction: Producing more than the customer orders or producing early (before it is demanded) is waste. • Queues/Waiting: Idle time, storage, and waiting are wastes (they add no value). • Transportation: Moving material between plants or between work centers and handling it more than once is waste. • Inventory: Unnecessary raw material, work-in-process (WIP), finished goods, and excess operating supplies add no value and are wastes. • Motion: Movement of equipment or people that adds no value is waste. • Overproduction: Work performed on the product that adds no value is waste. • Defects: Returns, warranty claims, rework, and scrap are wastes.

6. PROJECT: Eliminate Waste at Cordova High School • DIRECTIONS: • Working with a partner, investigate and report on ways to eliminate waste at Cordova High School for all 7 areas of waste in Lean Operations. • You will need to conduct 3 interviews – 1 administrator, 1 guidance counselor, and 1 teacher – first, create an interview worksheet so that all parties are asked the same questions. • Report must be typed and presented to class. Report format and software is your choice. • Assignment is worth 100 points (Project Presentation Rubric)

7. Remove Variability Variability - any deviation from the optimum process that delivers a perfect product on time, every time Sources of variability are: • Poor processes that allow employees and suppliers to produce improper quantities or non-conforming units • Inadequate maintenance of facilities and processes • Unknown and changing customer demands • Incomplete or inaccurate drawings, specifications, and bills of material

8. Improve Throughput Rate at which units move through a process – longer in process costs accumulate and competitive advantage is lost Manufacturing Cycle Time – time between the arrival of raw materials and shipping of finished product – improve throughput if drive down this time Technique to increase throughput – Pull System • Pulls a unit to where it is needed just as it is needed - by pulling material through the system in very small lots—just as it is needed—waste and inventory are removed. As inventory is removed, clutter is reduced, problems become evident, and continuous improvement is emphasized. Removing the cushion of inventory also reduces both investment in inventory and manufacturing cycle time.

10. Just-in-Time (JIT) • Developed in Japan by Toyota to reduce the costs of carrying inventory • Materials are made available just in time for the next link in the supply chain to use them • Advantages of JIT are increased efficiency, reduced waste, reduced storage space, and freed up cash for other purposes • A disadvantage of JIT is when products arrive late, or products are not available when they should be. The lack of product on hand would mean sales could be lost

12. Question: How is McDonald’s Assembly Line an Example of JIT?

13. Reading: JIT at Arnold Palmer Hospital Orlando’s Arnold Palmer Hospital, founded in 1989, specializes in treatment of women and children and is renowned for its high-quality rankings (top 10% of 2000 benchmarked hospitals), its labor and delivery volume (more than 14,000 births per year), and its neonatal intensive care unit (one of the highest survival rates in the nation). But quality medical practices and high patient satisfaction require costly inventory—some $30 million per year and thousands of SKUs. With pressure on medical care to manage and reduce costs, Arnold Palmer Hospital has turned toward controlling its inventory with just-in-time (JIT) techniques.

14. Kanban System看板 (card or sign in Japanese) In their effort to reduce inventory, the Japanese use systems that “pull” inventory through work centers. They often use a “card” to signal the need for another container of material—hence the name kanban. The card is the authorization for the next container of material to be produced. Typically, a kanban signal exists for each container of items to be obtained. An order for the container is then initiated by each kanban and “pulled” from the producing department or supplier. A sequence of kanbans “pulls” the material through the plant. In the kanban system, each shipment of parts used in making a product comes with a kanban, or card. Allows arrivals at a work center to match the processing time.

15. Today’s Use of Kanban The system has been modified in many facilities so that even though it is called a kanban, the card itself does not exist. In some cases, an empty position on the floor is sufficient indication that the next container is needed. In other cases, some sort of signal, such as a flag or rag, alerts that it is time for the next container.

16. Activity: Let’s Make Pizza • Draw out the process flow to make a Pepperoni Pizza – include all materials needed • Incorporate Kanban into your process flow

18. Toyota Production System (TPS) Components of TPS: • Continuous Improvement • Kaizen - focus on continuous improvement • Kaizen Event - members of a work cell or team meet to develop improvements in the process • Respect for People • Employees are empowered. They are empowered not only to make improvements, but also to stop machines and processes when quality problems exist. • Standard Work Practice • Lean requires that activities, connections, and flows include built-in tests (or poka-yokes) to signal problems. When a problem or defect occurs, production is stopped. Japanese call the practice of stopping production because of a defect, jidoka .

19. How Toyota Changed the Way We Make Things https://www.youtube.com/watch?v=F5vtCRFRAK0

20. CASE STUDY: Toyota Lean Operations Toyota Motor Corporation, with $250 billion in annual sales of over 9 million cars and trucks, is one of the largest vehicle manufacturers in the world. Two Lean techniques, just-in-time (JIT) and the Toyota Production System (TPS), have been instrumental in its growth. Toyota, with a wide range of vehicles, competes head-to-head with successful, long-established companies in Europe and the U.S. Taiichi Ohno, a former vice president of Toyota, created the basic framework for two of the world’s most discussed systems for improving productivity, JIT and TPS. These two concepts provide much of the foundation for Lean Operations. ASSIGNMENT DIRECTIONS Read over the case study and analyze the figures. Then prepare a written summary on Toyota’s use of lean operations—including JIT and TPS. Assignment is worth 100 points.

21. Forecasting Organizations use three major types of forecasts in planning future operations: • Economic forecasts address the business cycle by predicting inflation rates, money supplies, housing starts, and other planning indicators. • Technological forecasts are concerned with rates of technological progress, which can result in the birth of exciting new products, requiring new plants and equipment. • Demand forecasts are projections of demand for a company’s products or services. These forecasts may use recent point-of-sale (POS) data, retailer-generated reports of customer preferences, and any other information that will help to forecast with the most current data possible. Demand-driven forecasts drive a company’s production, capacity, and scheduling systems and serve as inputs to financial, marketing, and personnel planning. In addition, the payoff in reduced inventory and obsolescence can be huge.

22. Forecasting Approaches Quantitative Analysis – use a variety of mathematical models that rely on historical data and/or associative variables to forecast demand Qualitative Analysis – incorporates such factors as the decision maker’s intuition, emotions, personal experiences, and value system in reaching a forecast

23. Moving Averages Model A forecasting model that computes a forecast as the average of demands over a number of immediate past periods.

24. Example - Moving Averages

25. Moving Averages Practice • ON YOUR OWN: • Sale of hair dryers at the Walgreens Store in Cordova, TN, over the past 4 months have been 100, 110, 120, and 130 units (with 130 being the most recent sales). • Develop a moving average forecast for next month, using these techniques: • 3-month moving average • 4-month moving average

26. Exponential Smoothing A moving average approach that applies exponentially decreasing weights to each demand that occurred farther back in time. The basic exponential smoothing formula can be shown as follows: New forecast = Last period’s forecast + α (Last period’s actual demand − Last period’s forecast) where α is a weight, or smoothing constant, chosen by the forecaster, that has a value greater than or equal to 0 and less than or equal to 1.

27. Example – Exponential Smoothing

28. Practice – Exponential Smoothing On Your Own:

29. Answer Key – Exponential Smoothing

30. Linear Regression Analysis Straight-line mathematical model to describe the functional relationships between independent and dependent variable • Ft = a + bt • Where • a = intercept • b = slope • t = leading indicator variable

31. Example - Linear Regression Analysis Suppose that you manage a small ice cream shop. People tend to like to buy ice cream on hot days, so you suspect that each day’s high temperature might be a good predictor of ice cream sales. Using the linear regression formula with temperature as the leading indicator variable, the slope and the intercept are: a = -21.1 b = 2.6 per degree F t = high temperatures for next 3 days are 82, 84, and 87 degrees Solution: Ft = a + bt = -21.1 +(2.6 x 82) = 190.5 lbs. Ft + 1 = a + bt = -21.1 +(2.6 x 84) = 195.6 lbs. Ft + 2 = a + bt = -21.1 +(2.6 x 87) = 203.4 lbs.

32. Practice - Linear Regression Analysis On Your Own: Using the linear regression formula with trend as the leading indicator variable, the slope and the intercept are: a = 114.2 b = 1.5 per period t = trend for next 3 days are 17, 18, and 19

33. ACTIVITY: Demand Forecasting Worksheet Complete the Demand Forecasting Worksheet