Summary: Production

Read the summary and the most important questions on production

• 8 Lecture 7

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• Why do we stock materials?

  1. Variability and seasonality of the demand
  2. Financial reasons
  3. Variability of the performance of our productive process
  4. Service specifications of our suppliers

• Is stocking material free?

  No

• What are some components of stocking costs?

  1. Maintenance cost
     
     • If we have our own warehouses, we have to spend money on their maintenance.
  2. Hiring cost
     
     • If we don't have our own warehouses, we have to pay for hiring storage facilities.
  3. Deterioration of the material cost
     
     • Fragile products could be broken, leading to additional costs.
  4. Robbery cost
     
  5. Expiration/obsolescence cost
     

• How do you measure uncertainty for all the products in the company?

  - identify the articles management wants to pay attention to
  - hierarchize according to the value for the company
  - create logical groups
  - adjust according to the company needs

• What is the formula of the safety stock?

  SS = K * Davg * stdv LT
  K = desired service level
  Davg = Demand everage
  stdv(symbool)LT = Standard deviation of lead time

• When do we need more safety stock?

  - management wants to be more conservative because there are large costs associated with stockouts
  - Replenishment lead-times are longer
  - Replenishment lead-times are more uncertain/variable
  - Average demand rate is higher
  - Daily demand is more uncertain/veriable

• When do longer average lead-times lead to higher safety stock requirements?

  - when picking a supplier or a process, favor one with shorter lead times
  - Negotiate shorter lead-times even if it means paying slightly extra - you will make your money back by reductions in safety stock
  - Many companies greatly stress this but reduction in safety stock is at the consumer while lead time reduction is up to the supplier! - Can benefits be shared?

• When does the reduced variability in lead-times means lower safety stocks?

  - When choosing between suppliers or processes, favor one that guarantees consistent lead-times
  - It might be better to pick a supplier/process with a slightly longer lead-time or slightly higher cost, if there is less uncertainty and more consistency with respect to lead-time you will still come out ahead in terms of lower safety stock
  - build incentives into contracts that reward consistent lead times and penalize large variations
  - many good companies greatly stress short, consistent leadtimes from their suppliers

• What is the formula of rotation? And what does it measure?

  Measures the quality of our service
  
  Rotation = (items sold in a period (units or euro))/(average of units stocked in a period (units or euro))

• What is important if you want to have a high rotation in the products?

  - Less risk of obsolesces, expiration or broken goods
  - Less logistics costs
  - Less fixed capital