Causes of Delays in Supply Process

In the current conditions, the use of ABC analysis techniques is carried out through computerized automated inventory management systems. However, in some enterprises that do not have the conditions to automate inventory management, ABC analysis is carried out manually, although it takes more time, it will bring certain benefits.

In addition to relying on the annual value of reserves for grouping, other criteria are also considered such as:

- Changes in forecasting techniques;

- Supply issues;

- Quality of stock;

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- Prices of stock items...

These standards may change the location of stocks. The classification of stocks is the basis for establishing separate control policies for each type of stock.

In inventory management, ABC analysis has the following effects:

- The capital resources used to purchase group A goods are more needed than group C goods, so there needs to be appropriate investment priority in group A management.

- Group A goods need priority in arrangement, inspection and control of physical items. Establishing accurate reports on group A must be done regularly to ensure safety in production.

- In forecasting reserve demand, we need to apply different forecasting methods for different groups of goods. In which, group A needs to be forecasted more carefully than other groups.

- Thanks to ABC analysis techniques, the level of warehouse staff is constantly increasing, because they regularly perform inspection and control cycles for each group of goods.

8.2. Just-in-time (JIT) inventory

8.2.1. Concept of just-in-time inventory

Stocks in the production and supply system are intended to guard against possible contingencies during the production and distribution process. To ensure optimal efficiency in production and business, businesses around the world, especially Japanese businesses, have applied the Just in Time supply model.

Just-in-time inventory is the minimum amount of inventory needed to keep the production system running normally. With the method of organizing supply and just-in-time inventory, people determine quite accurately the quantity of each type of inventory at each time to ensure that goods are delivered to the place of demand at the right time, promptly so that the operation of any place is continuous (Not too early and not too late).

To achieve just-in-time inventory, production managers must find ways to reduce variations caused by internal and external factors of the production process.

8.2.2. Causes of delays in the supply process

There are many reasons for delays or untimely delivery of materials and goods, including:

- Causes related to labor, equipment, and supply sources: not meeting requirements, resulting in products that do not meet standards, or the quantity produced is not enough for the shipment to be delivered.

- Incorrect product and technology design.

- Production departments carry out manufacturing before there are technical drawings or detailed designs.

- Not sure about customer requirements.

- Establishing relationships between stages is not tight.

- The supply system does not ensure the correct requirements of the reserve (causing loss, damage)...

All of the above causes cause changes that affect the amount of reserves in the stages of the business production process of the enterprise.

8.2.3. Solutions to reduce reserves in stages

- Reducing initial inventory: Initial inventory represents the link between the production process and the supply source. Effective approaches to reducing initial inventory are to find ways to reduce the supply variability in quantity, quality, and delivery time.

- Reduce the amount of unfinished products on the production line: If the production cycle can be reduced, this amount of inventory will be reduced. To do this, it is necessary to carefully examine the structure of the production cycle.

- Reduce tools and spare parts: This type of reserve serves the need to maintain, preserve and repair machinery and equipment. This need is relatively difficult to determine accurately. Tools and spare parts are reserved to ensure 3 requirements: maintenance, repair, replacement. Only some types of this activity can be calculated accurately, while some types must use forecasting methods.

- Reduce finished product inventory: finished product inventory comes from customer demand at a certain time. Therefore, if we accurately predict customer demand, we will reduce this type of inventory.

In addition, to achieve the right amount of stock, the administrator needs to find ways to reduce incidents, reduce hidden variations inside, this is an extremely important job in production management. The basic problem to achieve the right time requirement

The point of manufacturing is to produce small lots of goods according to predetermined standards. Reducing lot sizes is a fundamental aid in reducing inventory and inventory costs.

When consumption remains constant, average reserves are determined as follows:

In there:

Q max + Q min

(8.1)

𝑄: Average stock; Q max : Maximum stock; Q min : Minimum stock.

One of the solutions to minimize the amount of stock is to only transfer the stock to where there is real demand, not to where there is no demand yet. Such a transportation system is called the Kaban system by the Japanese.

8.3. Reserve models

When studying reserve models, we need to answer two key questions:

- What quantity of goods in each order has the lowest cost?

- When to place order?

To answer the above 2 questions for different cases, we examine the following 5 models in turn:

8.3.1. Economic Order Quantity (EOQ) Model

The EOQ model was proposed and applied in 1915, and is still used by most businesses today. The inventory control technique based on this model is very easy to apply. The important assumptions of the model are:

- Demand must be known in advance and constant;

- Must know in advance the time from placing an order until receiving the goods and that time remains constant;

- The quantity of goods in each order is made in one shipment and is made at a predetermined time;

- Only consider 2 types of costs: storage costs and ordering costs;

- Inventory shortages do not occur at all if orders are filled correctly. With the above assumptions, the diagram representing the EOQ model is shown in Figure 8.2.

Figure 8.2: EOQ model

In there:

Q* : Quantity of an order (Maximum stock Q max = Q*).

0 : Minimum reserve level (Q min = 0).

Q=Q*

∶ is the average reserve.

0A = AB = BC is the time from receipt of goods until the goods of a reserve batch are used up.

With this model, inventories will decrease at a constant rate because demand does not change over time.

a. Determine the basic parameters of the EOQ model

The objective of most inventory models is to minimize the total inventory cost. With the above assumptions, there are two types of costs that change when inventory levels change. These are the holding cost (C lk ) and the ordering cost (C dh ), while the purchasing cost (C mh ) does not change. The relationship between these costs can be illustrated in Figure 8.3.

Figure 8.3: Cost types of the EOQ model

In there:

C dh : Order cost curve. C lk : Inventory cost curve. TC : Total inventory cost curve.

Q * : Optimal stock quantity (Optimal order quantity).

From the above model we have:

TC = C dh + C lk (8.2)

In there:

Or TC = Q x S + 2 x H (8.3)

D : Demand for inventory in a period. Q : Quantity in an order.

S : Cost of placing an order.

H: Cost of storing 1 unit of inventory in 1 period.

We will have the optimal order quantity (Q * ) when the total cost is minimum. To have TC min then TC ' Q = 0.

DS H 2DS

We have: TC' = - + => Q =

Q 2 2 H

So Q * = 2DS

H (8.4)

For example: A company specializing in manufacturing cars must use steel plates with a demand of 1000 plates/year. The ordering cost is 100,000 VND/order. The storage cost is 5,000 VND/plate/year. Determine the optimal order quantity?

The optimal order quantity is determined as follows:

Q * = 2DS = 2(1,000)(100,000)

H 5,000 = 200 (sheets)

Thus we can determine the desired orders in a year and the average interval between two orders.

The desired order quantity is determined as follows:

Q = =

Q ∗

1000

200 = 5 (orders/year)

The interval between two orders (T) is calculated by the following formula:

Number of working days in a year (N)

T =

Desired order quantity (O đ )

(8.5)

Assuming the company works 300 days a year, the gap between two orders will be:

300

T = 5 = 60 days

Total inventory cost is calculated as follows:

TC = x S +

Q ∗

2 x H

In the above example, the total cost of inventory is:

TC =

1,000

200 x 100,000 +

200

2 x 5,000 = 1,000,000 VND

b. Determine the reorder point (ROP)

In the EOQ inventory model, we assume that the receipt of an order is done in one shipment. In other words, we assume that the firm will wait until the inventory is depleted before placing an order and will receive it immediately. However, in reality, the time from placing an order to receiving the goods can be several hours or even as long as months. Therefore, the reorder point (ROP) decision is determined as follows:

Reorder point: ROP = dx L (8.6) Where:

L: Time from order to receipt of goods (Leading time). d: Daily consumer demand for inventory.

d =

In there:

(8.7)

D: Demand for inventory in a period N: Number of production days in a year

Represent ROP on the following diagram:

Figure 8.4: ROP model

For example: Dong Tien Electronics Company has a demand for T512 wire of 8,000 units/year. Working time in a year is 200 days. Waiting time for goods is 3 days.

8,000

The reorder point will be: ROP = 200 x 3= 120 units

If the business accepts a safety stock (insurance stock), the reorder point will add this safety stock.

8.3.2. Production Order Quantity (POQ) Model

The production order quantity model is applied in cases where the quantity of goods is delivered continuously, the goods are accumulated gradually until the order quantity is fully assembled. This model is also applied in cases where the enterprise both produces and sells or the enterprise produces its own materials for use. In these cases, it is necessary to pay attention to the daily production level of the manufacturer or the supply level of the supplier.

In the POQ model, the assumptions are basically the same as the EOQ model, the only difference is that the goods are delivered in multiple shipments. Using the same method as the EOQ, the optimal order quantity Q * can be calculated .

If we call:

Q : Order quantity;

P: Production level (Daily supply level); d: Daily demand;

H: Cost of storing 1 unit of inventory for 1 year;

t : Production time to have enough quantity for 1 order (or supply time). The POQ model is shown in Figure 8.5.

Figure 8.5: POQ model

In this model:

Reserve level

max =

Total number of units supplied (produced) during period t

Total number of units

- used in

time t

(8.8)

That is: Q max = Pt – dt

On the other hand Q = Pt, so: t = P

Substitute the formula for calculating the maximum reserve level into the formula:

Q max

= P Q

- d QQ. (1 - d )

P =

So C lk = 2 (1 -

d D

) H and C have the following equations : x S

To find the optimal order quantity Q *, we also apply the same method as in the EOQ model and find:

2DS

Q =d

H(1 - P )

(8.9)

For example: Company A specializes in manufacturing spare parts at a rate of 300 units/day. This type of spare part is used 12,500 units/year and the company works 250 days/year. The storage cost is 20,000 VND/unit/year, the cost of ordering each time is 300,000 VND. How much is the production order quantity?

Apply the formula:

In which: d = 12,500 / 250 = 50

P = 300

D = 12,500

S = 300,000

H = 20,000

2DS

Q =d

H(1 - P )

2 x 12,500 x 300,000

Instead we have: Q * == 671 units

20,000(1 - 50 )

300

8.3.3. Shortage of stock (BOQ) model

In the above two models of stockpiling, we do not accept that there is a shortage of stock throughout the entire stockpiling process. In reality, there are many cases where the enterprise intends to have a shortage because if it maintains an additional unit of stock, the loss cost is greater than the value gained. The best way in this case is for the enterprise to not stock more goods from the efficiency point of view.

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