Powerpoint managing quality

September 26, 2025 Claire B 0 Comments

1. How would you identify categories about which to collect information from your customers. For example, specify, categories that describe possible causes or types of defects?

2. How will you gather data and calculate the frequency of observations in each category for an appropriate time period?

3. How will you sort your categories in descending order based on your percentages?

4. Present your data graphically and identify the vital few categories that account for most of the variation.

5. 8 – 10 slides excluding cover and reference page

6. Two outside sources

7. MLA format – examples and sources to use.

Attached: example pptx, sources(chapter 6-7).

MANAGING QUALITY

Pareto Analysis

➢ Pareto Analysis is a decision-making tool to help compare and fix problems strategically.

➢ It uses the Pareto Principle which is the 80/20 rule.

➢ Named after Italian economist Vilfredo Pareto

Identify List Of Problems

Some ways I could collect information from my customers would be:

-Anonymous Complaints

-Feedback Forms

-Customers Surveys

-Employee organizational recommendations

Why Did This Problem Occur?

To understand why these problems in the company occurred you would need to think to the root of the problem.

Scoring

➢ You could assign a number to each problem based on its negative impact, in a descending order. Defects should be organized from highest to lowest priority. The defects with the highest priority are resolved first.

Sorting

➢ You would sort all similar problems together and calculate a collective score. Once you have gotten a total the highest score will be resolved first to provide a higher return.

Restaurant Example:

Ex: Restaurant Customers reason to leave

Bad Service 40

Horrible Food 35

To Expensive 15

Long waits to be seated 57

Long waits for food 29

Total 176

Pareto Diagram Example

Results

➢ From the above graphs show what 80% of the problem is bad service and long seating waits, and the horrible food. So those to problems should be the first to be fixed.

Extra Information

The Pareto Analysis has multiple benefits depending on the kind of project.

It helps to identify problems to help complete a task.

Be careful not to look over small hurdles that could multiply over time.

This analysis also does not factor the seriousness of the problem only the quantity

References

https://corporatefinanceinstitute.com/resources/knowledge/strate gy/pareto-analysis/

https://www.geeksforgeeks.org/advantages-and-disadvantages-of- pareto-chart/

https://corporatefinanceinstitute.com/resources/knowledge/strategy/pareto-analysis/

https://www.geeksforgeeks.org/advantages-and-disadvantages-of-pareto-chart/

prior written consent of McGraw-Hill Education.

Chapter 6

Managing Quality

prior written consent of McGraw-Hill Education.6-2

Learning Objectives

6-1 Explain what the concepts of product quality and quality management entail.

6-2 Explain the roles that operations and other functional managers play in determining product quality.

6-3 Apply the core values and typical practices associated with quality management.

6-4 Perform a cost of quality analysis.

6-5 Apply the Six Sigma DMAIC approach to quality improvement.

6-6 Compare and contrast various quality standards and certification programs.

prior written consent of McGraw-Hill Education.6-3

Learning Objective 6-1

Brand Turnaround at Hyundai—What Hyundai Did

1. Increased the number of workers on the quality control team from 100 to more than 850.

2. Instituted mandatory seminars for all workers on the importance of quality.

3. Invoked the direct involvement of its CEO in twice- monthly meetings comparing Hyundai quality with that of its rivals.

4. Made capital investments in problem areas, including $30 million invested in a computer center to test electronic systems.

prior written consent of McGraw-Hill Education.6-4

Learning Objective 6-1

Brand Turnaround at Hyundai—Results of Changes

1. Brand loyalty for Hyundai surpassed that of Honda and Toyota to take the No. 1 spot.

2. Five Hyundai cars among Cars.com’s “Best Bets” for safety, reliability, and fuel efficiency.

3. Sonata and Genesis models made Hyundai a strong competitor in the luxury market, where excellent quality is imperative.

4. In 2018 Hyundai and its sister company Kia averaged 122 and 124 problems per 100 vehicles, which placed them in the top 10 for car quality.

prior written consent of McGraw-Hill Education.6-5

Learning Objective 6-1

Quality Definitions

• Product Quality: fitness for consumption in meeting customers’ needs and desires

• Design Quality: match between designed features and customer requirements

• Conformance Quality: meeting design specifications

• Quality Management: organizationwide quality focus

prior written consent of McGraw-Hill Education.6-6

Learning Objective 6-1

Dimensions of Quality for Goods and Services

• Quality

– Performance

– Features

– Reliability

– Durability

– Conformance

– Aesthetics

– Support/responsiveness

– Perceived quality

prior written consent of McGraw-Hill Education.6-7

Learning Objective 6-2

Functional Influences on Product Quality (1 of 3)

Table 6-2 Functional Influences on Product Quality

Functional Personnel Decisions and Activities with Potential Impact on Product

Quality

Marketing managers

Choices of market to pursue and product features to offer

Design of advertising and other programs that communicate product attribute to customers

Development of new product testing programs

Sales managers

Setting of sales targets

Interactions with customers

Interpretations of customers’ needs and desires

Product engineers

Design of product specifications, service elements, dimensional tolerances, etc.

Design of product prototyping procedures

Process engineers

Design of manufacturing and service processes

Choices of technology and associated capabilities and capacity limits

Design of quality assurance tests and procedures

prior written consent of McGraw-Hill Education.6-8

Learning Objective 6-2

Functional Influences on Product Quality (2 of 3)

Table 6-2 Functional Influences on Product Quality

Functional Personnel Decisions and Activities with Potential Impact on Product

Quality

Finance and accounting managers

Setting of restrictions for equipment purchases

Establishing goals for utilization of facilities and working capital

Design of measures used to assess efficiency and productivity

Human resources managers

Design of hiring criteria and training and development programs

Setting of compensation schemes and incentives

Manufacturing and service operations managers

Design and execution of processing procedures

Design of work policies

Interactions with customers

Management of facilities and equipment

Scheduling of work

prior written consent of McGraw-Hill Education.6-9

Learning Objective 6-2

Functional Influences on Product Quality (3 of 3)

Table 6-2 Functional Influences on Product Quality

Functional Personnel Decisions and Activities with Potential Impact on

Product Quality

Supply managers

Description of purchase requirements

Selection of suppliers

Establishment of contracts and associated incentives and penalties

Management of and interactions with suppliers

Logistics managers

Selection of transportation providers

Development of tracking and other information systems

Design of packaging, storage, and material handling processes

Management of and interaction with transportation providers

prior written consent of McGraw-Hill Education.6-10

Learning Objective 6-2

Student Activity (1 of 3)

Ask a marketing professor, a supply chain operations professor, a finance professor, and an engineering professor to give you their definitions of product quality. Compare and contrast the definitions you receive.

prior written consent of McGraw-Hill Education.6-11

Learning Objective 6-3

Quality Thought Leaders (1 of 2)

• Deming

– Holistic view of responsibility for quality

– Variability as source of most problems

– Importance of customer

• Juran

– Broadened definition of quality

– Focus on change management

– Cost of quality analysis

prior written consent of McGraw-Hill Education.6-12

Learning Objective 6-3

Quality Thought Leaders (2 of 2)

• Crosby

– Quality is free

– Zero defects

– Focus on incremental change

• Imai

– Kaizen system of continuous improvement

– Intense process-oriented view

– Heavy dependence on frontline worker insights

– Emphasis on worker training and development

prior written consent of McGraw-Hill Education.6-13

TQM: A “Total” View of Quality

Total Quality Management (TQM): an integrated business management strategy aimed at embedding awareness of quality. The word total has important connotations:

1. A product’s quality is determined by customer’s acceptance and use

2. Quality management is a total, organizationwide activity, rather than a technical task

3. Quality improvement requires a total commitment from all employees

Learning Objective 6-3

prior written consent of McGraw-Hill Education.6-14

Learning Objective 6-4

Cost of Quality (COQ)

• Prevention Costs

– Costs associated with preventing defects and limiting failure and appraisal costs (e.g., training, improvement projects, data gathering, analysis)

• Appraisal Costs

– Costs associated with inspection to assess quality levels (e.g., staff, tools, training, etc.)

• Internal Failure Costs

– Costs from defects found before delivery to the customer (e.g., rework, scrap, etc.)

• External Failure Costs

– Costs associated with defects found after delivery to customer (e.g., warranty, recall, etc.)

prior written consent of McGraw-Hill Education.6-15

Learning Objective 6-4

Inverted View of Management

Figure 6-1 Traditional versus Quality Management View of Organizational Structure

prior written consent of McGraw-Hill Education.6-16

Learning Objective 6-4

TQM Values and Success Factors

Table 6-4 TQM Values and Success Factors

Values that Characterize TQM Factors Affecting the Success of TQM

Holistic view of product quality and its impacts Strong, charismatic leadership

Emphasis on customer requirements

Trust between labor and management

Extended process view of operations

Crisis situation or compelling reason for change

Emphasis on prevention rather than inspection

Adequate resourcing of training and improvement projects

Disdain for variability Clear, well communicated, uncomplicated change process

Data-based decision making (not opinion-based)

Unquestionable success of early efforts

Employee empowerment

Top management support

Supplier involvement

Continuous improvement

prior written consent of McGraw-Hill Education.6-17

Quality Goes Digital

• Walmart is using the Internet of Things and blockchain to provide visibility of food quality

• Digital developments are changing the cost of quality by raising the cost of external failures

• Using social media, one can post experiences to be read by many viewers

Learning Objective 6-4

prior written consent of McGraw-Hill Education.6-18

Student Activity (2 of 3)

Search various social media sites and see if you can find posts that address the four different costs included in the cost of quality framework. What is interesting about these postings? How would these postings affect you as a potential customer?

Learning Objective 6-4

prior written consent of McGraw-Hill Education.6-19

Learning Objective 6-5

Guiding Methodologies: PDCA

Figure 6-2 PDCA in Action

Plan: identify problem and actions for improvement

Do: implement formulated plan

Check: monitor results

Act: take corrective action and institutionalize changes

prior written consent of McGraw-Hill Education.6-20

Learning Objective 6-5

Guiding Methodologies: Six Sigma (1 of 3)

• Six Sigma: quality improvement through elimination of defects and variation

• Standard Deviation: statistical measure of variation

prior written consent of McGraw-Hill Education.6-21

Learning Objective 6-5

Guiding Methodologies: Six Sigma (2 of 3)

Table 6-5 How Quality Relates to Sigma

Sigma Level Defects per Million

Units

2σ 308,770

3σ 66,810

4σ 6,209

5σ 233

6σ 3.4

prior written consent of McGraw-Hill Education.6-22

Learning Objective 6-5

Guiding Methodologies: Six Sigma (3 of 3)

prior written consent of McGraw-Hill Education.6-23

Student Activity (3 of 3)

For a candy such as M&Ms, identify the important critical-to-quality characteristics. How would you measure these characteristics objectively? Which of these measures pertain to the physical product itself? Which of these measures relate to the packaging or the services surrounding the good?

Learning Objective 6-5

prior written consent of McGraw-Hill Education.6-24

Learning Objective 6-5

Guiding Methodologies: DMAIC

DMAIC example: See the cough drop production DMAIC example in your text

• Define: determine critical-to-quality (CTQ) characteristics from customer’s perspective

• Measure: gather data on CTQ processes

• Analyze: determine cause of defects

• Improve: modify processes

• Control: ensure improvements are maintained

prior written consent of McGraw-Hill Education.6-25

Learning Objective 6-6

Guiding Methodologies: ISO 9000

• ISO 9000: internationally accepted standards for business quality management systems

• ISO 9000 requires:

– fulfilling the customer’s quality requirements, and

– meeting applicable regulatory requirements, while

– enhancing customer satisfaction, and

– achieving continuous improvement of its performance in pursuit of these objectives

http://www.iso.org

prior written consent of McGraw-Hill Education.6-26

Learning Objective 6-6

The ISO 9001: 2015 Certification Structure (1 of 3)

Table 6-6 The ISO 9001: 2015 Certification Structure

Section Focus/Description

4 Context of the organization

4.1 Understanding the organization and its context.

4.2 Understanding the needs and expectations of interested parties.

4.3 Determining the scope of the quality management system.

4.4 Quality management system and its processes.

5 Leadership

5.1 Leadership and commitment.

5.2 Policy.

5.3 Organizational roles, responsibilities, and opportunities.

6 Planning

6.1 Actions to address risks and opportunities.

6.2 Quality objectives and planning to achieve them.

6.3 Planning of changes.

prior written consent of McGraw-Hill Education.6-27

Learning Objective 6-6

The ISO 9001: 2015 Certification Structure (2 of 3)

Table 6-6 The ISO 9001: 2015 Certification Structure

Section Focus/Description

7 Support

7.1 Resources.

7.2 Competence.

7.3 Awareness.

7.4 Communication.

7.5 Documented information.

8 Operation

8.1 Operational planning and control.

8.2 Requirements for products and services.

8.3 Design and development of products and services.

8.4 Control of externally provided processes, products, and services.

8.5 Production and service provision.

8.6 Release of products and services.

8.7 Control nonconforming outputs.

prior written consent of McGraw-Hill Education.6-28

Learning Objective 6-6

The ISO 9001: 2015 Certification Structure (3 of 3)

Table 6-6 The ISO 9001: 2015 Certification Structure

Section Focus/Description

9 Performance evaluation

9.1 Monitoring, measurement analysis, and evaluation.

9.2 Internal audit.

9.3 Management review.

10 Improvement

10.1 General

10.2 Nonconformity and corrective action.

10.3 Continual improvement.

prior written consent of McGraw-Hill Education.6-29

Managing Quality Summary

1. Quality management strives to achieve superior quality.

2. It is important to integrate quality management into the firm’s strategic activities.

3. Formal certifications confirm that a firm’s major processes have been documented and followed.

4. Many firms use award guidelines to assess the performance of their quality management systems.

5. Service quality management must take into consideration the interpersonal interactions of service providers and customers.

6. Core TQM values are the critical aspects to make quality improvement a success.

prior written consent of McGraw-Hill Education.

Chapter 7

Managing Inventories

prior written consent of McGraw-Hill Education.7-2

Learning Objectives

7-1 Define the different types and roles of inventory in the supply chain.

7-2 Explain the financial impact of inventory on firm performance.

7-3 Explain and compute asset productivity and customer service–related measures of inventory performance.

7-4 Calculate inventory policy parameters to minimize total acquisition cost in continuous review, periodic review, and single period models.

7-5 Determine the cost of a company’s service level policy.

7-6 Explain the advantages and disadvantages of different inventory location strategies.

7-7 Describe practical techniques for inventory planning and management.

prior written consent of McGraw-Hill Education.7-3

Learning Objective 7-1

Inventory at PolyCorp

Inventory:

• When do I order?

• How much do I order?

• Where do I deploy the inventory?

prior written consent of McGraw-Hill Education.7-4

Learning Objective 7-1

Types of Inventory

• Raw materials and component parts: items that are bought from suppliers to use in the production of a product

• Work in process inventory: inventory that is in the production process

• Finished goods inventory: items that are ready for sale to customers

• MRO inventory: maintenance, repair, and operating supplies

prior written consent of McGraw-Hill Education.7-5

Learning Objective 7-1

Roles of Inventory

• Balancing supply and demand: decouples differences in supply and demand requirements

• Buffers against uncertainties: variation in supply and demand are managed with buffer (safety) stock

• Enabling economies of buying: price discounts or reduced shipping costs

• Enabling geographic specialization: supply and demand locations vary

prior written consent of McGraw-Hill Education.7-6

Types of Stock

• Cycle Stocks: inventory repeatedly produced/ordered and used to fill demand

• Seasonal Stocks: additional inventories produced in advance of seasonal peak demands or held after seasonal peak supplies

• Buffer (or Safety) Stock: extra inventory held to guard against uncertainty in demand or supply

• Speculative Stock: stock purchased or produced to hedge against future price increases or shortages

Learning Objective 7-1

prior written consent of McGraw-Hill Education.7-7

Learning Objective 7-1

Student Activity (1 of 6)

Each of the uses of inventory described has a particular cause. For example, safety stock is needed because managers are uncertain about demand or supply. For each inventory type, list the cause(s) and how each cause could be reduced or eliminated, thereby reducing the need for inventory.

prior written consent of McGraw-Hill Education.7-8

Learning Objective 7-2

Financial Impact of Inventory

Carrying (Holding) Costs Ordering and Setup

Costs Stockout Costs

• Opportunity cost (including cost of capital)

• Storage and warehouse management

• Taxes and insurance • Obsolescence, spoilage, and

shrinkage • Materials handling, tracking,

and management

• Purchased items: placing and receiving orders

• Made items: change- over between items

• Lost sales or customer loyalty

• Expediting • Schedule disruption

prior written consent of McGraw-Hill Education.7-9

Learning Objective 7-2

Student Activity (2 of 6)

Using your library’s electronic databases or a Web browser, find three articles that describe specific companies and their efforts to reduce inventory. Summarize the different reasons given for the desire to reduce inventory.

prior written consent of McGraw-Hill Education.7-10

Measures of Inventory Performance: Inventory Turnover (1 of 2)

Inventory Turnover: ratio between average inventory on hand and level of sales

= Cost of goods sold/Average inventory at cost

= Net sales/Average inventory at selling price

= Unit sales/Average inventory in units

Learning Objective 7-3

prior written consent of McGraw-Hill Education.7-11

Learning Objective 7-3

Measures of Inventory Performance: Inventory Turnover (2 of 2)

Advantages of high turnover:

• “Fresh” inventory from high sales

• Reduced risk of obsolescence or need to mark down

• Reduced total carrying costs

• Lower asset investment and higher productivity

Dangers of high turnover:

• Stockouts may mean lower sales

• Increased costs from missing quantity requirements

• Increased purchasing, ordering, and receiving time, effort, and cost

prior written consent of McGraw-Hill Education.7-12

Learning Objective 7-3

Measures of Inventory Performance: Inventory Turnover—Example 7-2

Suppose a firm has an annual cost of goods sold of $500 million and its average inventory level during the year is $80 million at cost. What is the firm’s inventory turnover?

Inventory turnover =

= Cost of goods sold/Average inventory level

= $500/$80

= 6.25 turns

Or, in terms of days

= 365 days/6.25 times

= 58.4 days

prior written consent of McGraw-Hill Education.7-13

Learning Objective 7-3

Measures of Inventory Performance: Days of Supply, Service Level, Stockouts

• Days of Supply: length of time operations can be supported with inventory on hand

• Service Level: ability to meet customer demand without a stockout

• Stockout: no inventory is available

prior written consent of McGraw-Hill Education.7-14

Measures of Inventory Performance: Days of Supply—Example 7-3

Suppose there are currently 2,000,000 finished automobiles sitting in dealer or manufacturing facility lots. If expected sales of automobiles are 25,000 units per day, how many days of supply are there?

= Current inventory/Expected daily sales

= 2,000,000/25,000

= 80 days

Learning Objective 7-3

prior written consent of McGraw-Hill Education.7-15

Student Activity (3 of 6)

Choose three companies that are competitors in an industry of interest to you. Find their most recent annual reports and compute and compare their inventory turnover ratios. Explain the financial and marketing implications of the differences in inventory turnover rates for each of the three companies.

Learning Objective 7-3

prior written consent of McGraw-Hill Education.7-16

Learning Objective 7-4

Inventory Management Systems (1 of 2)

• Independent Demand: demand for an item is beyond control of the organization

• Dependent Demand: demand for an item is driven by demand for another item

prior written consent of McGraw-Hill Education.7-17

Learning Objective 7-4

Inventory Management Systems (2 of 2)

• Continuous Review Model: inventory is constantly monitored to decide when a replenishment order needs to be placed

• Periodic Review Model: management system built around checking and ordering inventory at some regular interval

prior written consent of McGraw-Hill Education.7-18

Total Acquisition Costs (1 of 2)

• Total Acquisition Cost: sum of all relevant annual inventory costs

– Holding Costs: associated with storing and assuming risk of having inventory

– Ordering Costs: associated with placing orders and receiving supply

Learning Objective 7-4

prior written consent of McGraw-Hill Education.7-19

Total Acquisition Costs (2 of 2)

TAC = annual ordering cost + annual carrying cost

TAC = Co (D/Q) + UCi * Q/2

N = D/Q

I = Q/2

Where:

N = orders per year I = average inventory level

D = annual demand Co= order cost

Q = order quantity U = unit cost

Ci = % carrying cost per year

Learning Objective 7-4

prior written consent of McGraw-Hill Education.7-20

Total Acquisition Costs—Example 7.4

If we need 3,000 units per year at a unit price of $20 and we order 500 each time, at a cost of $500 per order, with a carrying cost of 20 percent, what is the TAC?

N = D/Q = 3000/500 = 6 orders per year

I = Q/2 = 500/2 = 250 average inventory

TAC = ordering cost + carrying cost

= Co (D/Q) + (UCi )(Q/2)

= $50 (3000/500) + ($20 × 20%) × (500/2)

= $1,300

Where:

N = D/Q Q = 500 I = Q/2

U = $20 D = 3,000 Co = $50 Ci = 20%

Learning Objective 7-4

prior written consent of McGraw-Hill Education.7-21

Total Acquisition Costs—Example 7.5

If we need 3,000 units per year at a unit price of $20 and we order 200 each time, at a cost of $500 per order, with a carrying cost of 20 percent, what is the TAC?

N = D/Q = 3000/200 = 15 orders per year

I = Q/2 = 200/2 = 100 average inventory

TAC = ordering cost + carrying cost

= Co(D/Q) + (UCi)(Q/2)

= $50(3000/200) + ($20 × 20%) × (200/2)

= $1,150

Where:

N = D/Q Q = 200 I = Q/2

U = $20 D = 3,000 Co = $50 Ci = 20%

Learning Objective 7-4

prior written consent of McGraw-Hill Education.7-22

Total Acquisition Costs Comparison

Figure 7-1 Trexoid Inventory Saw-Tooth Diagram: Order Quantity 500

Figure 7-2 Trexoid Inventory Saw-Tooth Diagram: Order Quantity 200

Learning Objective 7-4

prior written consent of McGraw-Hill Education.7-23

Learning Objective 7-4

Economic Order Quantity (EOQ) (1 of 4)

• Economic Order Quantity (EOQ): minimizes total acquisition costs; points at which ordering costs and carrying costs are equal

EOQ = 2DC

UC i

D = Annual Demand

C 0

= Ordering cost

U =Unit cost

C i =Holding cost

prior written consent of McGraw-Hill Education.7-24

Learning Objective 7-4

Economic Order Quantity (EOQ) (2 of 4)

Example 7-6

If we need 3,000 units per year at a unit price of $20, at a cost of $50 per order with a carrying cost of 20 percent, what is lowest TAC order quantity?

EOQ = 2DC

UC i

= 2´3000´50

20´20%

=273.86 =274

D = 3,000

C 0

= $50

U = $20

C i = 20%

prior written consent of McGraw-Hill Education.7-25

Learning Objective 7-4

Economic Order Quantity (EOQ) (3 of 4)

Example 7-6

If we need 3,000 units per year at a unit price of $20, at a cost of $50 per order with a carrying cost of 20 percent, what is lowest TAC order quantity?

3000/274 = 10.948, rounded to 11. Average inventory will be 137 units.

TAC = Order cost + Inventory carrying cost = 11($50) + 137($20)(.2) = $550 + $548 = $1,098

prior written consent of McGraw-Hill Education.7-26

Learning Objective 7-4

Economic Order Quantity (EOQ) (4 of 4)

Figure 7-3 EOQ Cost Trade-Offs

prior written consent of McGraw-Hill Education.7-27

Learning Objective 7-4

Reorder Point (1 of 2)

• Reorder Point: minimum level of inventory that triggers a replenishment

• When to order:

ROP = d( ) t d = average demand per time period

t = average supplier lead time

prior written consent of McGraw-Hill Education.7-28

Reorder Point (2 of 2)

Example 7-7 If you use 10 units per day, and the lead time for resupply is 9 days, how low can your inventory get before placing a new order?

ROP = d( ) t = 9´10

= 90

d =10

t = 9

Learning Objective 7-4

prior written consent of McGraw-Hill Education.7-29

EOQ Extensions

Assumptions underlying EOQ:

• No quantity discounts

• No lot size restrictions

• No partial deliveries

• No variability

• No product interactions

Learning Objective 7-4

prior written consent of McGraw-Hill Education.7-30

Quantity Discounts

Determining best price break quantity:

• Identify price breaks/lot size restrictions

• Calculate EOQ for each price/lot size

• Evaluate viability of each option

• Calculate TAC for each option

• Select best TAC option

Learning Objective 7-4

prior written consent of McGraw-Hill Education.7-31

Learning Objective 7-4

Total Acquisition Costs

TAC+C 0

è ç

ø ÷+UC

è ç

ø ÷+UD

C 0

= Ordering cost

D = Annual demand

Q = Order quantity

U =Unit cost

C i =Holding cost

prior written consent of McGraw-Hill Education.7-32

Total Acquisition Costs—Without Price Discount

Example 7-8

If we need 3,000 units per year at a unit price of $20, at a cost of $50 per order with a carrying cost of 20 percent, what is TAC with a Q=1,000?

Where:

C 0

= $50 D = 3,000 Q =1,000

U = $20 C i = 20%

TAC =C o

è ç

ø ÷+UC

è ç

ø ÷+UD

= $50 3,000

274

è ç

ø ÷+$20´ 20%

274

è ç

ø ÷+$20´3,000

= $61,095.45

Learning Objective 7-4

prior written consent of McGraw-Hill Education.7-33

Learning Objective 7-4

Total Acquisition Costs—With Price Discount

Example 7-8

If we need 3,000 units per year at a unit price of $19, at a cost of $50 per order with a carrying cost of 20 percent, what is TAC with a Q=1,000?

Where: C 0

= $50 D = 3,000 Q =1,000

U = $19 C i = 20%

TAC =C o

è ç

ø ÷+UC

è ç

ø ÷+UD

= $50 3,000

1,000

è ç

ø ÷+$19´ 20%

1,000

è ç

ø ÷+$19´3,000

= $59,050

TAC at unit cost $20= $61,095.45, new price saves

$2,045.45

prior written consent of McGraw-Hill Education.7-34

Student Activity (4 of 6)

Think about several instances where you have bought a larger quantity of an item than you would normally buy. What factors influenced you to do so? Explain how those factors relate to the discussion of EOQ and TAC.

Learning Objective 7-4

prior written consent of McGraw-Hill Education.7-35

Learning Objective 7-4

Production Order Quantity (1 of 2)

Production Order Quantity: most economical order quantity when units become available at rate produced

 

  

 −

d UC

DC Q

2 0

D = Annual demand

C o

= Ordering cost

C i =Holding cost

U =Unit cost

d = daily rate of demand

p = daily rate of production

prior written consent of McGraw-Hill Education.7-36

Learning Objective 7-4

Production Order Quantity (2 of 2)

Example 7-9

Q p

= EOQ

D = 500,000

C 0

= $2,000

C i = 25%

U = $10

d = 2,000

p = 5,000

Economic Production Size:

Q p

= 2DC

C i U 1-

è ç

ø ÷

= 2´500,000´$2,000

25%´$10 1- 2,000

5,000

è ç

ø ÷

= 36,514.84

= 36,515

Length of Production Days:

=Q p

= 36,515 5,000 =7.3 days

prior written consent of McGraw-Hill Education.7-37

Production Order Quantity—Example 7-9

Consider the manufacturer of the Trexoid video games you have been ordering for your store. The manufacturer expects annual demand from all retailers to be 500,000 units of Trexoid games. It receives orders from retailers for, on average, 2,000 units per day (250 days per year). To change from production of another game to production of Trexoid requires a setup cost of $2,000. Once production of Trexoid units begins, it can produce 5,000 units per day. The cost to produce a unit of Trexoid is $10. Finally, the manufacturer has determined that its inventory carrying cost is 25 percent annually. The fundamental question to answer is how many units of Trexoid should be ordered in each production run? It is also useful to know the length of the production run in days.

Qp= production order quantity (the same concept as EOQ)

D = annual demand = 500,000

Co= setup cost (the same concept as ordering cost in EOQ) = $2,000

Ci = annual inventory carrying cost percentage = 25%

U = unit cost = $10

d = daily rate of customer demand = 2,000

p = daily rate of production = 5,000

Learning Objective 7-4

prior written consent of McGraw-Hill Education.7-38

Student Activity (5 of 6)

Verify the difference between the Qp quantity and the EOQ. You can do that by using the standard EOQ formula and assuming that all items produced arrive simultaneously.

Learning Objective 7-4

prior written consent of McGraw-Hill Education.7-39

Standard Deviation of Demand During Lead Time (1 of 2)

Variation can occur in both demand rates and lead times

s ddlt

= ts 2

d + d 2s

s ddlt

= standard deviation of demand during lead time

t = average lead time

s d

= standard deviation of demand

d = average demand

s t = standard deviation of lead time

Learning Objective 7-4

prior written consent of McGraw-Hill Education.7-40

Standard Deviation of Demand During Lead Time (2 of 2)

Example 7-10 Average demand is 10 units per day with standard deviation of 1.5, and lead time of 10 days with standard deviation of 2.5 days.

days 2.5

dayper 10

units 1.5

days 10



( ) ( ) units 25.4=

222

5.2105.19

22  d

d tddlt

Learning Objective 7-4

prior written consent of McGraw-Hill Education.7-41

Determining Service Levels (1 of 2)

Service Level Policy: determining the acceptable stockout risk level

SS =s ddlt

SS = safety stock

z = standard deviations needed for service level

s ddlt

= standard deviation of demand during lead time

Learning Objective 7-5

prior written consent of McGraw-Hill Education.7-42

Learning Objective 7-5

Determining Service Levels (2 of 2)

Example 7-11 Standard deviation of demand during lead time is 25.4 units, and acceptable stockout level is 5 percent (95 percent service level). From the z table = 1.65

SS = zs ddlt

=1.65´ 25.4

= 42 units

Safety stock carrying cost:

$19´42 units´20%=$159.60 year

prior written consent of McGraw-Hill Education.7-43

Learning Objective 7-5

Standard Deviations and Probabilities

Table 7-2 Standard Deviations and Probabilities

Number of Deviations Required

Probability of Being in Stock

Probability of Stockout

1 84.13% 15.77%

1.04 85 15

1.28 90 10

1.65 95 5

1.96 97.5 2.5

2.0 97.72 2.28

2.33 99 1

3.0 99.86 0.14

prior written consent of McGraw-Hill Education.7-44

Learning Objective 7-5

Cost Related to Service Levels

Table 7-3 Cost Related to Trexoid Service Levels

Std. Deviations of Safety Stock

Probability of in Stock

Probability of Stockout

Safety Stock Required

Safety Stock Inventory Carrying

Cost

1 84.13% 15.77% 25 $ 95.0

1.04 85 15 26 98.8

1.28 90 10 33 125.4

1.65 95 5 42 159.6

1.96 97.5 2.5 50 190.0

2.0 97.72 2.28 51 193.8

2.33 99 1 59 224.2

3.0 99.86 0.14 76 288.8

prior written consent of McGraw-Hill Education.7-45

Learning Objective 7-5

Relationship between Inventory Investment and Product Availability

Figure 7-4 Relationship between Inventory Investment and Product Availability

prior written consent of McGraw-Hill Education.7-46

Learning Objective 7-5

Revisiting ROP and Average Inventory

Example 7-12 Considering uncertainty

ROP = reorder point

d = average lead time

t = average demand

SS = safety stock

Q = order quantity

ROP = d ´ t( ) + SS

average inventory = Q

2 + SS

ROP = 10´9( ) +42 =132 units

average inventory = 1000

è ç

ø ÷+42=542

prior written consent of McGraw-Hill Education.7-47

Periodic Review Model (1 of 3)

Order Interval: fixed time between inventory review; on-hand level is unknown during this uncertainty period

UP =Uncertainty period

OI = Order interval

t = lead time

d = average daily demand

z = standard deviations of safety stock desired

s ddup

= standard deviation of demand during

the uncertainty period

A= inventory on hand

UP =OI + t

Q = d UP( ) + zs ddup

– A

Learning Objective 7-5

prior written consent of McGraw-Hill Education.7-48

Learning Objective 7-5

Periodic Review Model (2 of 3)

Example 7-13 Orders are placed every 30 days and average lead time is 9 days. Standard deviation of demand is 1.5 units.

UP =Uncertainty period

OI =30 days

t = 9 days

s d

=1.5 units

UP =OI + t

= 30+9 =39 days

s ddup

= UP( )s d

= 39( ) 1.52( ) = 9.37

prior written consent of McGraw-Hill Education.7-49

Learning Objective 7-5

Periodic Review Model (3 of 3)

Example 7-14 There are currently 105 units in stock.

UP =39 days

OI =30 days

t = 9 days

d =10 units

z = 95%=1.65

s ddup

= 9.37

A =105

( )

( ) ( )

units 301=

−+=

10516390

10537.965.13910

AzUPdQ ddup

prior written consent of McGraw-Hill Education.7-50

Learning Objective 7-5

Single Period Inventory Model (1 of 2)

Single Period Inventory Model: items are ordered once, and have little leftover value (newsvendor problem)

Target Service Level: probability of meeting all demand for an item

C stockout

=Unit selling price -Unit cost

C overstock

=Unit cost +Disposal cost -Salvage value

1- TSL( ) Cstockout( ) = TSL C overstock( )

TSL = C stockout

C stockout

+C overstock

prior written consent of McGraw-Hill Education.7-51

Learning Objective 7-5

Single Period Inventory Model (2 of 2)

Example 7-15

Units cost $10 and sell for $30, unsold units have no value, and there is no disposal or salvage value.

C stockout

=Unit selling price -Unit cost

C overstock

=Unit cost +Disposal cost -Salvage value

TSL = C stockout

C stockout

+C overstock

C so

= $30-$10 = $20

C os

= $10+0-0 = $10

TSL = $20

$20+$10 = .667

prior written consent of McGraw-Hill Education.7-52

Impact of Location on Inventory Requirements (1 of 2)

Square Root Rule: estimate of impact of changing the number of locations on quantity of inventory held

SS n

= N n

N e

´ SS e

SS n

= system safety stock for the new number of locations

N n

= total number of new locations

N e =number of existing locations

SS e = system safety stock for the number of existing locations

Learning Objective 7-6

prior written consent of McGraw-Hill Education.7-53

Impact of Location on Inventory Requirements (2 of 2)

Example 7-16 A single warehouse currently has 1,000 units of safety stock. How much is needed if a second warehouse is added?

410,1

1000 1

1000

=

SS N

N SS

locations ofnumber

new the ofstock safety

Learning Objective 7-6

prior written consent of McGraw-Hill Education.7-54

Inventory Related to Number of Locations

Figure 7-5 Inventory Related to Number of Locations

Learning Objective 7-6

prior written consent of McGraw-Hill Education.7-55

Learning Objective 7-6

Managing Inventory

• Managing Cycle Stock: reducing lot sizes

• Managing Safety Stock: using ABC analysis and reducing lead time

• Managing Locations: balance inventory, lead time, and service levels

• Implementing Inventory Models: matching management system to specific items

prior written consent of McGraw-Hill Education.7-56

Managing Inventory: ABC Analysis

• ABC Analysis: ranking inventory by importance

• Pareto’s Law: small percentage of items have a large impact on sales, profit, or importance to a company

Figure 7-6 ABC Classification of Inventory

Learning Objective 7-6

prior written consent of McGraw-Hill Education.7-57

Learning Objective 7-7

Inventory Information Systems and Accuracy

• Inventory Record Accuracy

– Cycle Counting: inventory is physically counted on

a routine schedule

prior written consent of McGraw-Hill Education.7-58

Managing Inventory Across the Supply Chain (1 of 2)

Bullwhip Effect: variation increases upstream in the supply chain (from consumer to manufacturers)

Figure 7-7 The Bullwhip Effect: An Example

Learning Objective 7-7

prior written consent of McGraw-Hill Education.7-59

Managing Inventory Across the Supply Chain (2 of 2)

• Supplier-Managed Inventory (SMI): the vendor is responsible for managing inventory for the customer

– Vendor monitors and replenishes inventory balances

– Customer saves holding costs

– Vendor has higher visibility of inventory usage

• Collaborative Planning, Forecasting, and Replenishment (CPFR): supply chain partners sharing information

Learning Objective 7-7

prior written consent of McGraw-Hill Education.7-60

Blockchain

• Blockchain: a decentralized, distributed, and public digital ledger used to record transactions across many computers

– Provides visibility and prevents distortion of data

Learning Objective 7-7

prior written consent of McGraw-Hill Education.7-61

Student Activity (6 of 6)

Find a YouTube video (there are many) that describes blockchain and gives an example of its use.

Learning Objective 7-7

prior written consent of McGraw-Hill Education.7-62

Managing Inventories Summary

1. There are multiple types of inventory.

2. Inventory fulfills multiple roles.

3. Inventory is an asset, and has multiple costs.

4. An inventory policy determines how much and when to order.

5. Continuous systems monitor on-hand inventory levels.

6. Safety stock levels are linked with service levels.

7. Periodic review systems count inventory at specific intervals.

8. Number of storage locations impacts inventory levels.

9. Managers should work to reduce inventory requirements.

10. Each item must have a unique identification and accuracy.

11. Bullwhip effect occurs when a small change in demand results in a large change up the supply chain.

12. Vendor-managed inventory may reduce bullwhip effect and overall inventory levels.

Share:

Categories:

Homework Answsers / Business & Finance / Management

Queen Essays

Powerpoint managing quality

Order a similar assignment, and have writers from our team of experts write it for you, guaranteeing you an A