Inventory Management

 

12.	Inventory Management
	Inventory is the stock of items kept by an organisation to meet internal or external customer demand (Russell and Taylor, 2009). The type of inventory management system employed is determined by the nature of the demand for the goods and services on the organisation. Demand can be classified into two categories; dependent and independent.
	12.1.	Dependent Demand
		A dependent demand item has a demand which is relatively predictable because it is dependent on other factors. Thus a dependent demand item can be classified has having a demand that can be calculated as the quantity of the item needed to produce a scheduled quantity of an assembly that uses that item.
	12.2.	Independent Demand
		Independent demand is when demand is not directly related to the demand for any other inventory item. Usually this demand comes from customers outside the company and so is not as predictable as dependent demand. Because of the unknown future requirements of customers, forecasting is used to predict the level of demand. A safety stock if then calculated to cover expected forecast error. Independent demand items can be finished goods or spare parts used for after sales service.
	12.3.	Types of Inventory Generally inventory is classified as either raw materials, work-in-progress (WIP) or finished goods. The proportion between these inventory types will vary but it is estimated that generally 30% are raw materials, 40% are work in progress and 30% finished goods. The location of inventory can be used to define the inventory type and its characteristics. There are various definitions of inventory types including the following :
		-	Buffer/Safety This is used to compensate for the uncertainties inherent in the timing or rate of supply and demand between two operational stages.
		-	Cycle If it is required to produce multiple products from one operation in batches, there is a need to produce enough to keep a supply while the other batches are being produced.
		-	Anticipation This includes producing to stock to anticipate a increase in demand due to seasonal factors. Also speculative policies such as buying in bulk to take advantage of price discounts may also increase inventory levels.
		-	Pipeline/Movement This is the inventory needed to compensate for the lack of stock while material is being transported between stages. e.g. the time taken in distribution from the warehouse to a retail outlet.
	12.4.	Inventory Decisions The main concern of inventory management is the trade-off between the cost of not having an item in stock against the cost of holding and ordering the inventory. A stock-out can either be to an internal customer in which case a loss of production output may occur, or to an external customer when a drop in customer service level will result. In order to achieve a balance between inventory availability and cost the following inventory management aspects must be addressed of volume - how much to order and timing - when to order.
	12.5.	The Economic Order Quantity (EOQ) Model The Economic Order Quantity (EOQ) calculates the inventory order volume which minimises the sum of the annual costs of holding inventory and the annual costs of ordering inventory. The model makes a number of assumptions  including :
		-	Stable or Constant Demand
		-	Fixed and identifiable ordering cost
		-	The cost of holding inventory varies in a linear fashion to the number of items held
		-	The item cost does not vary with the order size
		-	Delivery lead time does not vary
		-	No quantity discounts are available
		-	Annual demand exists
	These assumptions have led to criticisms of the use of EOQ in practice. The assumption of one delivery per order, and then the use of that stock over time increases inventory levels and goes against a JIT approach. Also annual demand will not exist for products with a life-cycle of less than a year. However the EOQ approach still has a role in inventory management in the right circumstances and if its limitations are recognised Using the EOQ each order is assumed to be of Q units and is withdrawn at a constant rate over time until the quantity in stock is just sufficient to satisfy the demand during the order lead time (the time between placing an order and receiving the delivery). At this time an order for Q units is placed with the supplier. Assuming that the usage rate and lead time are constant the order will arrive when the stock level is at zero, thus eliminating excess stock or stock-outs. The order quantity must be set at a level which is not too small, leading to many orders and thus high order costs and not too large leading to high average levels of inventory and thus high holding costs. The annual holding cost is the average number of items in stock multiplied by the cost to hold an item for a year. If the amount in stock decreases at a constant rate from Q to 0 then the average in stock is Q/2.
	12.6.	The Re-Order Point (ROP) Model The EOQ model tells us how much to order, but not when to order. The Reorder point model identifies the time to order when the stock level drops to a predetermined amount. This amount will usually include a quantity of stock to cover for the delay between order and delivery (the delivery lead time) and an element of stock to reduce the risk of running out of stock when levels are low (the safety stock). The previous economic order quantity model provides a batch size that is then depleted and replenished in a continuous cycle within the organisation. Thus the EOQ in effect provides a batch size which the organisation can work to. However this assumes that demand rates and delivery times are fixed so that the stock can be replenished at the exact time stocks are exhausted. Realistically though both the demand rate for the product and the delivery lead-time will vary and thus the risk of a stock-out is high. The cost of not having a item in stock when the customer requests it can obviously be costly both in terms of the potential loss of sales and the loss of customer goodwill leading to further loss of business.
		12.6.1.		Safety Stock and Service Level Safety stock is used in order to prevent a stock-out occurring. It provides an extra level of inventory above that needed to meet predicted demand, to cope with variations in demand over a time period. The level of safety stock used, if any, will vary for each inventory cycle, but an average stock level above that needed to meet demand will be calculated. To calculate the safety stock level a number of factors should be taken into account including : -       cost due to stock-out -       cost of holding safety stock -       variability in rate of demand -       variability in delivery lead time It is important to note that there is no stock-out risk between the maximum inventory level and the reorder level. The risk occurs due to variability in the rate of demand and due to variability in the delivery lead time between the reorder point and zero stock level. The reorder level can of course be estimated by a rule of thumb, such as when stocks are at twice the expected level of demand during the delivery lead time. However to consider the probability of stock-out, cost of inventory and cost of stock-out the idea of a service level is used. The service level is a measure of the level of service, or how sure, the organisation is that it can supply inventory from stock. This can be expressed as the probability that the inventory on hand during the lead time is sufficient to meet expected demand (e.g. a service level of 90% means that there is a 0.90 probability that demand will be met during the lead time period, and the probability that a stock-out will occur is 10%. The service level set is dependent on a number of factors such as stockholding costs for the extra safety stock and the loss of sales if demand cannot be met.
	12.7.	The ABC Inventory Classification System Normally a mix of fixed-order-interval and fixed order quantity inventory systems are used within an organisation. When there are many inventory items involved this raises the issue of deciding which particular inventory system should be used for a particular item. The ABC classification system sorts inventory items into groups depending on the amount of annual expenditure they incur. This will depend on both the estimated number of items used annually multiplied by the unit cost. To instigate a ABC system a table is produced listing the items in expenditure order (with largest expenditure at the top), and showing the percentage of total expenditure and cumulative percentage of the total expenditure for each item. By reading the cumulative percentage figure it is usually found, following Pareto’s Law, that 10-20% of the items account for 60-80% of annual expenditure. These items are called A items and need to be controlled closely to reduce overall expenditure. This often implies a fixed quantity system with perpetual inventory checks or a fixed-interval system employing a small time interval between review periods. It may also require a more strategic approach to management of these items which may translate into closer buyer-supplier relationships. The B items account for the next 20-30% of items and usually account for a similar percentage of total expenditure. These items require fewer inventory level reviews than A items. A fixed order interval system with a minimum order level may be appropriate here. Finally C items represent the remaining 50-70% of items but only account for less than 25% of total expenditure. Here much less rigorous inventory control methods can be used, as the cost of inventory tracking will outweigh the cost of holding additional stock. It is important to recognise that overall expenditure may not be the only appropriate basis on which to classify items. Other factors include the importance of a component part on the overall product, the variability in delivery time, the loss of value through deterioration and the disruption caused to the production process if a stock-out occurs.

Project Management

 

11.	Project Management A project is an interrelated set of activities with a definite starting and ending point, which results in a unique outcome for a specific allocation of resources (Krajewski et al., 2010). The complexity of the project will increase with the size and number of activities within the project. Extensive planning and co-ordination activities are required for larger projects to ensure that the project aims are met. Examples of projects include installing an IT system, building a bridge or introducing a new service or product to the market.
	11.1.	Project Management Activities The project management process includes the following main elements :
		11.1.1	Feasibility Analysis This step involves evaluating the expected cost of resources needed to execute the project and compare these to expected benefits. At the start of the project a plan of the resources required to undertake the project activities is constructed. If there is a limit on the amount of resources available then the project completion date may have to be set to ensure there resources are not overloaded. This is a resource-constrained approach. Alternatively the need to complete the project by a specific date may take precedence. In this case an alternative source of resources may have to be found, using subcontractors for example, to ensure timely project completion. This is called a time-constrained approach. Once a plan has been constructed it is necessary to calculate estimates for the time and resources required to undertake each activity in the project. Statistical methods should be used when the project is large (and therefore complex) or novel. This allows the project team to replace a single estimate of duration with a range within which they are confident the real duration will lie. This is particularly useful for the early stage of the project when uncertainty is greatest. The accuracy of the estimates can also be improved as their use changes from project evaluation purposes to approval and day to day project control. The PERT approach allows optimistic, pessimistic and most likely times to be specified for each task from which a probabilistic estimate of project completion time can be computed.
		11.1.2.	This stage estimated the amount and timing of resources needed to achieve the project objectives. The project management method uses a systems approach to dealing with a complex task in that the components of the project are broken down repeatedly into smaller tasks until a manageable chunk is defined. Each task is given its own cost, time and quality objectives. It is then essential that responsibility is assigned to achieving these objectives for each particular task. This procedure should produce a work breakdown structure (WBS) which shows the hierarchical relationship between the project tasks.
		11.1.3.	Control This stage involves the monitoring the progress of the project as it executes over time. This is important so that any deviations from the plan can be addressed before it is too near the project completion date to take corrective action. The point at which the project progress is assessed is termed a Milestone. The type of project structure required will be dependent on the size of the team undertaking the project. Projects with up to six team members can simply report directly to a project leader at appropriate intervals during project execution. For larger projects requiring up to 20 team members it is usual to implement an additional tier of management in the form of team leaders. The team leader could be responsible for either a phase of the development or a type of work. For any structure it is important that the project leader ensures consistency across development phases or development areas as appropriate. For projects with more than 20 members it is likely that additional management layers will be needed in order to ensure that no one person is involved with too much supervision.\ The two main methods of reporting the progress of a project are by written reports and verbally at meetings of the project team. It is important that a formal statement of progress is made in written form, preferably in a standard report format, to ensure that everyone is aware of the current project situation. This is particularly important when changes to specifications are made during the project. In order to facilitate two-way communication between team members and team management, regular meetings should be arranged by the project manager. These meetings can increase the commitment of team members by allowing discussion of points of interest and dissemination of information on how each team’s effort is contributing to the overall progression of the project.
	11.2.	Network Analysis This section describes the major stages in the construction of the critical path method (CPM) and program evaluation and review (PERT) project networks. The stages in network analysis are now outlined.
		11.2.1.	Identifying Project Activities In order to undertake network analysis it is necessary to break down the project into a number of identifiable activities or tasks. This enables individuals to be assigned responsibility to particular tasks which have a well-defined start and finish time. Financial and resource planning can also be conducted at the task level and co-ordinated by the project manager who must ensure that each task manager is working to the overall project objectives and not maximising the performance of particular task at the expense of the whole project. Activities consume time and/or resources. The first stage in planning a project is to break down the project into a number of identifiable activities with a start and end. Performance objectives of time, cost and quality can be associated with each activity. The project is broken down into these tasks using a work breakdown structure. This is a hierarchical tree structure which shows the relationship between the tasks as they are further sub-divided at each level.
		11.2.2.	Estimating Activity Durations The next stage is to retrieve information concerning the duration of the tasks involved in the project. The can be collated from a number of sources, such as documentation, observation, interviewing etc. Obviously the accuracy of the project plan will depend on the accuracy of these estimates. There is a trade-off between the cost of collecting information on task duration’s and the cost of an inaccurate project plan.
		11.2.3.	Identifying Activity Relationships It is necessary to identify any relationships between tasks in the project,. For instance a particular task may not be able to begin until another task has finished. Thus the task waiting to begin is dependent on the former task. Other tasks may not have a dependent relationship and can thus occur simultaneously. Critical path diagrams are used extensively to show the activities undertaken during a project and the dependencies between these activities. Thus it is easy to see that activity C for example can only take place when activity A and activity B has completed. Once a network diagram has been constructed it is possible to follow a sequence of activities, called a path, through the network from start to end. The length of time it takes to follow the path is the sum of all the durations of activities on that path. The path with the longest duration gives the project completion time. This is called the critical path because any change in duration in any activities on this path will cause the whole project duration to either become shorter or longer. Activities not on the critical path will have a certain amount of slack time in which the activity can be delayed or the duration lengthened and not affect the overall project duration. The amount of slack is a function of the difference between the path duration the activity is on and the critical path duration. By definition all activities on the critical path have zero slack. It is important to note that there must be at least one critical path for each network and there may be several. There are two methods of constructing critical path diagrams, Activity on Arrow (AOA) were the arrows represent the activities and Activity on Node (AON) were the nodes represent the activities. The issues involved in which one to utilise will be discussed later. The following description on critical path analysis will use the AON method.
		11.2.4.	Drawing the Network Diagram For the activity-on-node notation each activity task is represented by a node with the following format. Thus a completed network will consist of a number of nodes connected by lines, one for each task, between a start and end node. Calculating the Earliest Start/Finish times (forward pass) From the duration of each task and the dependency relationship between the tasks it is possible to estimate the earliest start and finish time for each task as follows. You move left to right along the network, forward through time.
			1.	Assume the start (i.e. first) task begins at time = 0
			2.	Calculate the earliest finish time where :  Earliest Finish = Earliest Start + Duration Calculate the earliest start time of the next task where:- Earliest Start = Earliest Finish of task immediately before If there is more than one task immediately before take the task with the latest finish time to calculate the earliest start time for the current task. Repeat steps 2 and 3 for all tasks Calculating the Latest Start/Finish times (backward pass) It is now possible to estimate the latest start and finish time for each task as follows. You move right to left along the network, backward through time.
				1.	Assume the end (i.e. last) task end time is the earliest finish time (unless the project end time is given).
				2.	Calculate the latest start time where : - Latest Start = Latest Finish - Duration Calculate the latest finish time of the previous task where:- Latest Finish = Latest Start of task immediately after.
				If there is more than one task immediately after take the task with the earliest start time to calculate the latest finish time for the current task. Repeat steps 2 and 3 for all tasks Calculating the slack/float times The slack or float value is the difference between the earliest start and latest start (or earliest finish and latest finish) times for each task. To calculate the slack time
				1.	Slack = Latest Start - Earliest Start OR Slack = Latest Finish - Earliest Finish
				2.	Repeat step 1 for all tasks. Identifying the Critical Path Any tasks with a slack time of 0 must obviously be undertaken on schedule at the earliest start time. The critical path is the pathway connecting all the nodes with a zero slack time. There must be at least one critical path through the network, but there can be more than one. The significance of the critical path is that if any node on the path finishes later than the earliest finish time, the overall network time will increase by the same amount, putting the project behind schedule. Thus any planning and control activities should focus on ensuring tasks on the critical path remain within schedule.
		11.2.5.	Identifying Schedule Constraints - Gantt Charts Although network diagrams are ideal for showing the relationship between project tasks, they do not provide a clear view of which tasks are being undertaken over time and particularly how many tasks may be undertaken in parallel at any one time. The Gantt chart provides an overview for the Project Manager to allow them to monitor project progress against planned progress and so provides a valuable information source for project control. To draw a Gantt Chart manually undertake the following steps :
			-	Draw a grid with the tasks along the vertical axis and the time-scale (up to the project duration) along the horizontal axis.
			-	Draw a horizontal bar across from the task identifier along the left of the chart starting at the earliest start time and ending at the earliest finish time.
			-	Indicate the slack amount by drawing a line from the earliest finish time to the latest finish time.
		11.2.6.	Project Crashing The use of additional resources to reduce project completion time is termed crashing the network. This involves reducing overall indirect project costs by increasing direct costs on a particular task. One of most obvious ways of decreasing task duration is to allocate additional labour to a task. This can be either an additional team member or through overtime working. To enable a decision to be made on the potential benefits of crashing a task the following information is required.
			-	The normal task duration
			-	The crash task duration
			-	The cost of crashing the task to the crash task duration per unit time
			The process by which a task is chosen for crashing is by observing which task can be reduced for the required time for the lowest cost. As stated before the overall project completion time is the sum of the task durations on the critical path.