Detailed Scheduling and Planning (Lesson 3)

Detailed Scheduling and Planning
Unit 2
UUnit
nit 22
DDetailed
etailed SScheduling
cheduling aand
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PPlanning
lanning
Lesson 3
Materials Planning Information Requirements
Unit 2
© 2004 e - SCP -The Centre for Excellence in Supply Chain Management
No portion of this publication may be reproduced in whole or in part.
The Leading Edge Group will not be responsible for any statements, beliefs, or opinions expressed by the
authors of this workbook. The views expressed are solely those of the authors and do not necessarily
reflect any endorsement by The Leading Edge Training Institute Limited.
This publication has been prepared by E-SCP under the guidance of Yvonne Delaney MBA, CFPIM,
CPIM. It has not been reviewed nor endorsed by APICS nor the APICS Curricula and Certification
Council for use as study material for the APICS CPIM certification examination.
The Leading Edge Training Institute Limited

Charter House
Cobh
Co Cork
Ireland
© Copyright Leading Edge Training Institute Limited ii

Unit 2
Preface............................................................................................................4
Course Description................................................................................................................. 4
Lesson 3 – Materials Planning Information Requirements..............................5
Introduction and Objectives.................................................................................................. 5
Demand ................................................................................................................................... 5
Measuring Inventory Performance ...................................................................................... 7
Maintaining Inventory Data.................................................................................................. 8
Storing Inventory ................................................................................................................. 11
Balancing Stock .................................................................................................................... 13
Master Production Schedule (MPS) ................................................................................... 15
Overview of Information used in Material Planning ........................................................ 17
Summary ............................................................................................................................... 18
Further Reading ................................................................................................................... 18
Review ................................................................................................................................... 19
What’s Next? ........................................................................................................................ 20
Appendix.......................................................................................................21
Answers to Review Questions .............................................................................................. 22
Glossary ........................................................................................................24
© Copyright Leading Edge Training Institute Limited iii

Unit 2
Preface
Course Description
This document contains the third lesson in the Detailed Scheduling and Planning unit, which is
one of five units designed to prepare students to take the APICS CPIM examination. Before
completing the Detailed Scheduling and Planning unit, you should complete the Basics of
Supply Chain Management unit or gain equivalent knowledge. The five units that cover the
CPIM syllabus are:
Basics of Supply Cha in Management
Master Planning of Resources
Execution and Control of Operations
Strategic Management of Resources
Please refer to the preface of Lesson 1 for further details about the support available to you
during this course of study.
This publication has been prepared by E-SCP under the guidance of Yvonne Delaney MBA,
CFPIM, CPIM. It has not been reviewed nor endorsed by APICS nor the APICS Curricula and
Certification Council for use as study material for the APICS CPIM certification examination.
© Copyright Leading Edge Training Institute Limited 4

Unit 2
Lesson 3 – Materials Planning Information Requirements
Introduction and Objectives
This lesson looks at the information needed when calculating inventory requirements. The
importance of such information to the detailed material planning process is examined. The lesson
briefly examines management of engineering changes, order status, and master schedules and the
characteristics required in an effective detailed material planning process, including issues of
traceability of demand. The lesson also looks at effective storage of inventory items.
This lesson revisits in greater depth some concepts introduced in the Basics of Supply Chain
Management unit and introduces new related concepts.
On completion of this lesson you will be able to:
Differentiate between independent and dependent demand
Describe the relationship between inventory and independent or dependent demand
Explain how to calculate inventory turns
Identify ways in which inventory performance may be monitored
Identify principles of part of item identification
Identify the data required on inventory to support the material planning process
Describe various inventory storage methods
Explain the importance of having timely access to up-to-date, accurate and complete data
when making material planning decisions
Demand
Demand is the result of a customer’s needs
or expectations for a product. Demand is Raw Materials
De
termed independent when it arises externally Purchased Components

pe
from customers and is not linked to the Fabricated Components

nd
demand for another parent product.

en
Sub-Assemblies
Dependent demand occurs when demand for
t
an item correlates with demand for another Assemblies
parent item. Demand

For example, a company that makes high Retail Requirements
nt
quality ice cream has a demand for 2000

de
MRO Requirements
litres of vanilla ice cream from its
en
customers. This is independent demand. Service / Replacement Parts

ep
However, in order to sell the 2,000 litres, the Manufactured Finished Goods
Ind
company will require 2,000 tubs. The Wholesale Finished Goods

demand for tubs is totally dependent on the
demand for ice cream.
When demand is tracked over time, it is often possible to discern demand patterns, such as
persistent trends or seasonal dips. These patterns help planners forecast future demand. The type
of demand an item experiences has a direct correlation on the level of inventory for that item and

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for dependent items. The relationship between various patterns and associated inventory levels
are illustrated below:
Stable Demand, No Trend Stable Demand, Positive Trend
90 90
80 80
70 70
60 60
50 Demand 50 Demand
40 Inventory Level 40 Inventory level
30 30
20 20
10 10
0 0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct N o v Dec
Stable Demand, No Trend, Seasonal Stable Demand, Negative Trend
90 90
80 80
70 70
60 60
50 Demand 50 Demand
40 Inventory level 40 Inventory level
30 30
20 20
10 10
0 0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Independent Demand
The number of products that a company must produce is determined by customer orders or
purchases or by sales forecasts. This is independent demand. This demand is recorded in the
master production schedule over the planning horizon.
Independent demand may be derived from:
Customer orders
Forecasts of customer demands
Interplant requirements
Needs of branch warehouses
Requirements for safety stock replenishment
Higher than expected levels of scrap
Lower than expected yields in production
Independent demand can be unpredictable and forecasts of such demand are often wrong. The
level of demand can often exceed the level of sales.
For example, a recent fad for trampolines has caused an
unanticipated increase in demand for such items. Although sales
rise, the toy shops and trampoline manufacturers cannot keep
pace with the sudden rise in demand. As a result, most toy shops
experience trampoline stockouts as they wait for the
manufacturers to replenish stock. Waiting lists for trampolines in
some stores prove that demand has greatly exceeded actual sales.
Because of the unpredictability of independent demand, inventory control techniques such as
economic order quantity (EOQ), reorder points, safety stocks, and statistical analysis, because
they rely on assumptions of steady and continuous independent demand, are unsatisfactory for
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manufacturing inventories of subassemblies, components and raw materials. Material
Requirements Planning (MRP) was developed to address these difficulties.
Dependent Demand
Dependent demand occurs when the demand for an item is derived from the bill of material for
another item. For example, a company that manufactures beds and mattresses experiences
independent demand from its customers for the finished beds. This generates dependent demand
for the components of the bed, such as wadding, upholstery material,
springs, and wooden frames. As demand for these items is dependent on the
demand for beds, requirements for each item does not need to be
independently forecast but can be calculated directly from the forecast
demand for beds.
Only independent demand needs to be forecast. Any dependent demand can be calculated from
the demand figures for the item from which the dependent item is derived. The master
production schedule consists of independent demand items. Material Requirements Planning is
concerned with planning requirements for both dependent and independent demand items.
A given inventory item may be subject to both dependent and independent
demand. For example, Buzz Electronics manufacture a range of speakers.
These speakers may be bought by consumers to augment their existing Hi-
Fi systems. However, the speakers are also integral parts of other products
such as home cinema products and other Hi- fi systems.
Measuring Inventory Performance

When measuring inventory performance, most companies concentrate on three areas:
Inventory investment, measured by the inventory turns ratio
Customer service level, indicated by the percentage of orders filled within required dates
for example
Inventory accuracy
Inventory Turns
Inventory turns or inventory turnover measures the number of times in a given period that a
company reaps back the cost of its average inventory. The formula used to calculate inventory
turns is:
Inventory turnover = Cost of goods sold over a period
Average inventory for the period
For example, if the cost of goods sold for a company is 140,000 and the average inventory for
that period is 70,000, then the inventory turnover is equal to 2. In a typical retail grocery outlet,
the cost of goods sold for a month may be 416000 with an average inventory of 8000, resulting
in an inventory turnover of 52.
The higher the inventory turnover, the lower the level of inventory needed per dollar of cost of
goods sold. Often, inventory turnover is calculated regularly to track from period to period the
inventory performance. The aim is to increase inventory turnover.
Often, companies will use actual month-end inventory levels to determine average inventory.
However, this is not a true average level and may erroneously increase or decrease the inventory

Unit 2
turnover figure. Inventory turns should be based on the company’s annual average inventory
level.
Deviation from Target

The analysis of inventory turns over time provides indication of changes in the levels of
inventory compared to cost of goods sold. Deviation from target is used to measure how far
performance is from target levels and how much improvement is required to reach target. First,
the target inventory turn level must be set by management. It will then be possible to calculate
the deviation from the target level using the following formula:
Inventory Turns Deviation from Target = (Actual Turns – Target Turns) x 100%
Target Turns
By comparing cost of goods sold (CGS) and target average inventory with actual CGS and actual
average inventory, improvements can be measured. The inventory turns deviation from target
should be as close to zero as possible. When inventory turns are equal to target turns, the
inventory turns deviation from target equation will equate to zero.
When the result of the inventory turns deviation from target is a
negative number, the company has failed to make the target. When
the number is positive, the company has beaten its targets. In order
for improvement to occur, companies must set a realistic target and
outline a series of measures or actions that can be undertaken to
reach that target.
Companies that employ JIT manufacturing techniques should constantly review their targets as
they continually strive to improve their processes.
1. Which of the following are characteristics of dependent demand?

A. It originates from customer orders
B. It can be calculated rather than forecast
Review Q C. Types of dependent demand include finished goods and spare parts
D. It occurs when demand for an item is driven by the BOM of another item
Maintaining Inventory Data

Inventory Data and Databases
Inventory systems rely on data that provides information on replenishment, demand, safety stock
requirements and other variables. The performance of inventory information systems may be
measured in terms of database design, timeliness of reports, and data communication.
Databases for inventory do not have to be computerized. They may be maintained manually on
paper systems or card systems. In reality, most companies use some form of computerization to
maintain inventory information, for example spreadsheets, databases, or specially designed
inventory control packages.

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Any inventory database system should maintain the following information for each item in
inventory:
Item identification Item description
Stock location(s) On-hand balances at each stock location
On-order information by due date Reorder and safety stock information
Financial information Usage
Unit of measure Classification of information
Sourcing information Lead time
If the inventory database is to be used as part of an MRP or enterprise resources planning (ERP)
system, it may require extra fields of information. The following paragraphs discuss in more
detail requirements, principles and conventions for designing and maintaining some of the above
information.
Principles of Part or Item Identification

Unique individual part numbers should be assigned to each and every raw material item,
component item, part- finished item, and finished product. Unique numbers avoid uncertainty
about items that may be very similar in appearance or description. When designing a system of
identification codes, the following principles should be adhered to:
Item numbers should be unique . This can cause difficulty when there are engineering
changes. If a change results in revision to a particular part, it should be given a new
identification number to ensure accurate count ing and costing. This may cause confusion
in bills of materials that specify the old number but the new part is to be used.
Only one set of item numbers should be used in an organization. Marketing may use
catalog numbers that are simple and descriptive. Engineering may prefer simple
sequential numbers that are assigned chronologically. It is easier to maintain one system
for everyone.
Responsibility for item number creation should be assigned to a single authority, to
ensure uniformity and uniqueness
Expired part numbers (for parts no longer used) should not be reassigned to new
parts as it may often be necessary to identify the parts further down the line. For example,
if the door catch on a washing machine fails, the customer should be able to order a new
door catch of the same type using the part number.
Item numbers should be concise. This minimizes the chance of error when item
numbers are copied or keyed into computers.
Item numbers should be uniform, containing the same number of characters and with
the same relative positions of alphabetical and numeric portions. A good example is that
of car registration numbers.
Confusing characters should be avoided, for example, using I and 1, 2 and Z, or 0 and
O together may cause confusion due to the similarity in the construction of these figures.
All numeric codes, or all alphabetical codes are less likely to lead to such confusion.

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Item numbers should allow for expansion. As companies grow the number of
inventory items may grow. Restructuring a part item numbering system will lead to
hassle and expense. Therefore, the initial design should allow for future growth.
Significant or Meaningful Identification

A meaningful part number, as well as identifying the part in a system, immediately conveys
some information about that item. For example, ABC Beverages have part numbers for their
freshly squeezed orange and grapefruit juices as follows:
FSO-0250 FSG-1000
FSO-0500 FSG-0500
FSO-1000 FSG-0250
FS refers to freshly squeezed, as opposed to products made from concentrate. The O and the G
refer to the flavour: orange or grapefruit. The numbers after the dash refer to the size of the
container: 1 litre, 500 ml and 250 ml.
The International Standard Book Number (ISBN) system for
numbering books is recognized worldwide. Although initially it
does not appear to be meaningful it follows several conventions
in the assignment of numbers that impart information about each
book: For example, the ISBN of 0-452-26603-3 indicates the
language, the publisher, and the title of the book. The initial zero
indicates that the book is in the English language. The next set of
digits (452) is an identification number for the publisher. The
numbers 26603 are an indicator of the title in the ISBN system
and the final digit is used as a check digit.
Further examples include the identification numbers used in mail order catalogues
where numbers and letters may be used to distinguish size and color and type of
garment:
TR10BLU may indicate a pair of blue size 10 trousers.
The advantages of using meaningful part numbers are:
Increased organizational efficiency
Increased understanding of part numbers, making it easier to work with them and
remember them
It is easier to spot mistakes in codes that refer to size or color
Part numbers are easier to interpret using hyphens or symbols
Non-meaningful part numbers may consist of random or sequential numbers or letters that only
identify rather than describe. The advantages of choosing non- meaningful part numbers are:
Codes are generally shorter and therefore faster to type, write, or check
Codes are usually entirely numeric and therefore faster to type
It is easier to accommodate future growth

Unit 2
2. Which of the following are common methods of measuring inventory
performance?
A. Accuracy of inventory records
B. Inventory Turns
Review Q
C. Level of dependent demand
D. Levels of inventory
Storing Inventory
Bin Examples
Materials in inventory are stored in areas that are often called bins. Each bin should be identified
with a location code, which will be used along with a picking list to help identify the location of
goods that must be retrieved from storage. Locations codes are also used when storing inventory
as it is received. The bin is a metaphorical term and could refer to a vat or tank, a space on a
shelf or on the floor, an outdoor space in a storage lot or a designated segment of a rack.
Bin identification codes are usually meaningful. They are often longer and more complex than
item identification codes.
Requirements for Bin Location Systems

The principles for assigning bin location codes are the same as those for assigning item
identification numbers. In addition, the following guidelines are useful:
Bin location codes should be sequences so
that materials can be gathered in the
shortest possible route
Where there are multiple storage sites, the
location of bin numbers should be
identified
Aisle numbers should be used in location
codes for shelving or racking to help with
the sequencing of pick lists. A typical aisle
numbering arrangement is illustrated here.
Grid arrangements should be used where
cell locations are incorporated into bin
location codes.
Location Methods
There are various methods of associating bin locations with specific inventory items. These
include fixed locations, random locations and zoned locations. Some companies may use a
combination of these methods.
Fixed Location
In dedicated storage or fixed location warehouses, a pre-set place is reserved for every part
number. Spaces are left vacant until parts allocated to the area arrive. In this type of system each

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bin is designated a particular item number. The bin is assigned based on the size or other
physical item characteristic. There are several advantages to the use of fixed locations:
Stockroom items are always in the same place so that stockroom personnel get to know
where regularly used items are located and can quickly retrieve what is needed
Items most frequently used can be located in easily accessible areas near the front of the
stock room
The location strategy is easy to understand
Bin locations can be assigned in such a way as to facilitate the picking of materials
However, the use of fixed locations is often an inefficient use of space: there may not be
sufficient capacity in some bins for the number of items that must be stored, while other bins
may be almost empty for quite a while.
Random Location
In random storage, any new arrival is located in the first suitable place available. Random
storage optimises the use of space. Such systems are only feasible when there are very few items
or when a computer is used to store item locations. Bins are assigned each time a shipment of
items arrives, selected by computer according to the quantity, size of other determining
characteristic of the item. The advantages of random location systems include:
More efficient use of space and handling of variations in stock quantities as more than
one bin can be assigned to the stock
Lot or batch identify can be maintained more easily
Picking orders can be scheduled on a first- in, first-out basis when needed, due to
potential spoilage or corrosion
Random storage can adapt easily to changes in the variety of items stocked
Zoned Location
The most efficient systems use random storage, but within zones which take account of the
location rules. They require the support of a good and reliable IT system.
The warehouse is divided into zones and order pickers work only in the zone assigned to them.
Each zone stores related items, that is, items
needing the same type of storage (for example,
shelving or freezer storage), or items often ordered
together. Each order picker retrieves items from
their assigned zone and brings them to the stage or
marshalling area. Here, the items making up an
order are assembled for shipment. No other order
is handled until all items from each zone have
reached the stage area.
Sometimes an order is moved from zone to zone
rather than from a zone directly to the stage area.
So, an order will be fully assembled by the time it
reaches the stage area.
A zoned locatio n is a good compromise between random and fixed systems. For example,
materials that are suitable for storage outside may be assigned to a lot or yard with random

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placement within that zone. Zones may also be assigned based on physical characteristics, suc h
as flammability, dimension, value, requirement for refrigeration, or risk of theft. The advantages
of zoned systems include:
The ability to group similar items together regardless of size
The possibility of changing the size of the zone if required
The use of physical or virtual (logical) zones is possible
Automatic Storage and Retrieval Systems
With automated storage and retrieval (ASR) systems, items are put
away and retrieved using robotic arms or other automated devices. An
operator keys the required item number and quantity into the computer,
which then directs the robot mechanism to store or retrieve the item.
Some warehouses are completely automated; others make use of
driverless carts following tramlines in the floor. ASR systems generally
make use of random location methods although some may use fixed
locations.
3. Which is the best description of the inventory turns calculation?

A. The ratio of cost of goods sold against target cost of goods sold over a
period is divided by the average inventory for that period
B. The cost of goods sold over a period is divided by the total inventory for
Review Q that period
C. The average inventory for a particular period is divided by the cost of goods
sold over that period
D. The cost of goods sold over a particular period is divided by the average
level of inventory for that period.
Balancing Stock
Scheduled Receipts
A scheduled receipt is an order, previously released to production or to a supplier, which meets
its due date. It may be placed in inventory or sent directly to a production process. A scheduled
receipt must indicate order quantity, date of arrival, and destination of material. Scheduled
receipts are active data maintained by the inventory control system.
Allocations
Some of the inventory on hand may be reserved for specific purposes. Reserved on-hand
inventory is said to be allocated. It may be allocated to a specific work order that has not yet
reached production. Allocations are used to manage expensive items or items in short supply.
Like scheduled receipts, allocations are active data maintained by the inventory control system.
When an order is released to the factory floor it may yet take some days before the inventory
allocated to that order is released from storage. During this time, although the inventory is
physically available in the storage area and therefore on-hand, it is not available for any other use
as it has been allocated to that particular work order. Allocations are uncashed requisitions.

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When someone withdraws the item, the inventory on-hand and allocated inventory amounts will
be reduced by the appropriate amount.
Current Usage Rates

To predict sales, companies must track and forecast usage rates. Forecasting enables a planner to
determine the purchasing and manufacturing needs of the company in a given period. If
customers require delivery in less than the replenishment lead time, demand for parts and
assemblies should also be forecast. Without effective forecasting, excess and obsolete
inventories begin to build. Forecast accuracy must be continually reviewed in order to reach
target inventory levels. To determine usage rates, a company should measure the amount of
product ordered in any given time period, rather than the amount of product shipped. The latter
does not take into account unfulfilled demand due to stockouts or delays.
4. Which type of inventory storage system makes the most efficient use of
warehouse space?
A. Fixed Location
B. Random Location
Review Q
C. Zoned Location
D. Automatic Storage

Unit 2
Master Production Schedule (MPS)
The master production schedule (MPS) lists the items that a company aims to produce and
covers a predefined planning horizon and is a key link in the manufacturing planning and control
chain. It interfaces with marketing, distribution planning, production planning and capacity
planning and drives the MRP system.
Production
Planning
Distribution Resource
Requirements Requirements
Planning Planning
Final Rough-Cut
Assembly MPS Capacity
Schedule Planning
MRP
The MPS data is built from customer orders, sales forecasts, and the production plan. The MPS
must account for material and capacity availability, manufacturing constraints, and company
policies and objectives. The outputs of the MPS form the inputs to detailed scheduling and
planning. Production planning and scheduling may schedule material first, as with MRP, or
begin by scheduling critical and constrained operations first. Either way, the MPS is required.
The MPS may be presented in various forms. Usually the MPS grid looks similar to a
spreadsheet with rows representing sources of MPS requirements and columns representing time
periods. Each individual cell is a time bucket, representing the intersection of the time period
with the item requirement.
The size of the time bucket has a strong influence on the design of the production planning and
scheduling system. Most companies operate with time buckets of one week but some have daily
time buckets. Other companies may use a four week period.

Unit 2
Planning Horizon
The planning horizon is the amount of future time covered by the
master production schedule. To ensure there is enough lead time to
order all necessary components, the planning horizon should be
equal to or greater than the cumulative lead time for the items to be
scheduled. Usually, the planning horizon is much longer. This is to
accommodate component lot sizing, shop floor and capacity
planning, and scheduling for vendors and work centers.
Longer planning horizons look further into the future, making it
possible to identify and avoid future problems and perhaps take
advantage of especially favourable circumstances. For example,
where there is a steady upward trend in demand, the extended
planning horizon may indicate when capacity will be strained or exceeded by demand.
The master production schedule is a rolling operation. Assuming a time bucket of one week, at
any point in time period 1 refers to the current or following week. When the current week
expires, period 2 becomes period 1.
Resolution of Differences
When the initial master plan has been drafted, the total time required by the production schedule
and the available resources must be compared. The capacities of constraining work centers or the
availability of critical material must be looked at. If the available capacity is greater than that
required by the MPS, then the MPS is workable. In other situations, the differences between
available and required capacity must be resolved, either by increasing capacity or reducing the
load. Where it is not possible to increase capacity either by overtime, extra staff, extra work
centers, or subcontracting, then it may be necessary to revise the production schedule.
When differences have been resolved, the planned must measure the effectiveness of the master
production schedule with regard to:
Use of resources: the MPS should make the best possible use of resources and remain
within material and capacity restraints in each period.
Customer Service: The MPS should ensure that due dates will be met and delivery
performance will be acceptable
Cost: The MPs should be economical to implement, without incurring excessive costs
due to overtime, subcontracting, expediting or transportation.
5. Which factors must be taken into consideration when balancing stock?

A. Storage location methods
B. Item identification numbers
Review Q C. Scheduled receipts

D. Allocations

Unit 2
Overview of Information used in Material Planning
Detailed scheduling and planning deals with two main areas of an organization: work capacity
and materials management. It must address conflicting objectives; the need to maintain low
inventory and low cost while ensuring operational efficiency and high levels of customer service.
Customer service may be measured in many ways through observing inventory levels. Inventory
breaks the direct link between material demand and supply, allowing for efficient production. As
independent demand from customers is variable, it must be forecast. Any items that are wholly
dependent on parent items should not be forecast, but rather calculated from the forecast demand
for the parent item.
Inventory performance is measured in terms of inventory investment, inventory record accuracy,
and custome r service. Inventory turns and customer service levels provide quantitative
measurements of inventory performance.
To facilitate inventory management, each item in inventory must be assigned a unique item
number. This number may or may not be meaningful. Item numbers should not be reused by
other items. Additionally, the warehouse or storage space should be organized either into fixed,
random or zoned storage locations. Each ‘bin’ should have a unique identifier and a system
should be used to match bin numbers with the appropriate item numbers.
In preparation for material and capacity planning, the master production schedule must be
devised for an appropriate planning horizon. It must be checked for feasibility and rough-cut
capacity planning should be performed. Further inputs to the material planning process are stock
status, scheduled receipts, and allocations.
Material planning and scheduling systems require accurate, complete and timely data. Any errors
or delays in maintaining data will upset the credibility and efficacy of the material planning and
scheduling results.

Unit 2
Summary
This lesson examined the information required to calculate inventory requirements and the
importance of such information to the detailed material planning process. The lesson also
covered management of engineering changes, open order status, and master schedules and the
traceability of demand, the impact of system action messages, and safety policies.
This lesson examined the information required to calculate inventory requirements and the
importance of such information to the detailed material planning process. The lesson briefly
covered management of engineering changes, order status, and master schedules, the
storage and traceability of demand.
You should be able to:
Differentiate between independent and dependent demand
Describe the relationship between inventory and independent or dependent demand
Explain how to calculate inventory turns
Identify ways in which inventory performance may be monitored
Identify principles of part of item identification
Identify the data required on inventory to support the material planning process
Describe various inventory storage methods
Explain the importance of having timely access to up-to-date, accurate and complete data
when making material planning decisions
Further Reading
Introduction to Materials Management,
JR Tony Arnold, CFPIM, CIRM and Stephen Chapman CFPIM
5th edition, 2004, Prentice Hall
APICS Dictionary
10th edition, 2002
Manufacturing Planning and Control Systems,

Vollmann, T.E.; W.L. Berry; and D.C. Whybark
5th edition, 2004, McGraw-Hill
Production & Inventory Management,

Fogarty, Donald W. CFPIM; Blackstone, John H. JR. CFPIM; and
Hoffmann, Thomas R. CFPIM
2nd edition, 1991, South-Western Publishing Co., Cincinnati, Ohio

Unit 2
Review
The following questions are designed to test your recall of the material covered in
lesson 2. The answers are available in the appendix of this workbook.
6. Any inventory tracking system should maintain unique item identification numbers, item
descriptions, stock locations, item cost information, item lead time and:
A. Balance on hand at each stock location
B. Forecast usage rates
C. The unit of measure for each item
D. Safety stock information
7. Which are guidelines for creating part or item identification codes?

A. Item numbers should be unique
B. To improve speed and efficiency, anyone involved with inventory should be able to
create a new item number
C. Expired part numbers should be reassigned
D. Item numbers should be designed to avoid confusing characters and allow for expansion.
8. Which of the following diagrams illustrates the effect on inventory levels of stable
demand with a negative trend?
A B
C D

Unit 2
What’s Next?
Lesson 2 covered a variety of techniques and tools that can be used to improve forecasting. At
this point you have completed two of the 10 lessons in Unit 1.
You should review your work before progressing to the next lesson which is:
Supply Chain Management Basics – Lesson 3 Master Planning.

Unit 2
Appendix

Unit 2
Answers to Review Questions
1. B and D
Dependent demand for an item occurs when the demand is driven by the BOM of another item.
The demand for that item is therefore dependent on the parent item. For example, in a company
that manufactures a range of mattresses, demand for springs may be driven by demand for
mattresses. Dependent demand does not need to be forecast but can simply be calculated from
the forecast demand for the parent item.
2. B and C
Inventory management performance is generally gauged by tracking inventory turns, customer
service levels, and inventory record accuracy.
3. D
Inventory turns or inventory turnover measures the number of times in a given period that a
company reaps back the cost of its average inventory. The formula used to calculate inventory
turns is:
Inventory turnover = Cost of goods sold over a period
Average inventory for the period
4. B
In random storage, any new arrival is located in the first suitable place available. Random
storage makes more efficient use of space as more than one bin can be assigned to the stock. It
can adapt easily to changes in the variety of items stocked
5. C and D
When balancing stock, the item types and quantities and dates of arrival must be recorded from
scheduled receipts. In addition, inventory that has been reserved for particular orders must be
monitored. It is also important to track and predict item usage rates to ensure more accurate
forecasting and reduce the risk of stockouts.
6. All except B
Inventory management relies on accurate demand, replenishment, safety stock requirements and
other variables. Any inventory database system should maintain the following information for
each item in inventory:
Item identification Item description
Stock location(s) On-hand balances at each stock location
On-order information by due date Reorder and safety stock information
Financial information Usage
Unit of measure Classification of information
Sourcing information Lead time

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7. A and D
The creation of item identification codes should be the responsibility of a single authority within
the company to ensure that item numbers are unique and that there is only one set of item
numbers used throughout the organization. Expired part numbers (for parts no longer used)
should not be reassigned. Item numbers should be concise, uniform, and designed to avoid
confusing characters and allow for expansion.
8. D
The following graphs illustrate the relationship between inventory and various demand patterns,
including seasonal and positive and negative trends.
Stable Demand, No Trend Stable Demand, Positive Trend
90 90
80 80
70 70
60 60
50 Demand 50 Demand
40 Inventory Level 40 Inventory level
30 30
20 20
10 10
0 0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct N o v Dec
Stable Demand, No Trend, Seasonal Stable Demand, Negative Trend
90 90
80 80
70 70
60 60
50 Demand 50 Demand
40 Inventory level 40 Inventory level
30 30
20 20
10 10
0 0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

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Glossary
Term Definition
ABC The grouping of items in a list in order depending on their importance. First,
Classification the items are measured against the critical criteria (for example dollar
volume) and listed in descending order. The top group (usually around 20%)
of items are classed as A items and account for around 50-70% of the
critical measurement. The next 30% or so of items are B items and are
responsible for around 20% of the critical measurement. The rest are C items
and are of least value in terms of the critical measurement.
ABC classification is used to focus management on the most important
items. It is usually applied to inventories, purchasing and sales.
Actual cost The labor, material, and associated overhead costs that are charged against a
job s it moves through the production process
Allocation Items that have been assigned to a particular order and are therefore not
available to use but have not yet been released from the stockroom are said
to be under allocation.
Anticipation Additional inventory above the baseline stock to cover projected sales
inventory increases, planned sales promotions, seasonality, plant shutdowns and
vacations
Automatic Storage A rack inventory storage system that uses automatic equipment to store and
and Retrieval retrieve items.
(ASR) System
Backorder A customer order or commitment to a customer that has not been fulfilled by
the promised date due to inventory stockout.
Bias A consistent deviation from the average, either too high or too low. Bias is
an undesirable trait in forecasts
Buffer A quantity of material waiting for further processing. This may be raw
material, partially completed material in stores, or a work backlog that is
purposely maintained beside a work center.
Carrying cost Cost or carrying inventory. This is defined usually as a percentage of the
monetary value of the inventory per unit of time (usually a year). Carrying
cost depends on the cost of capital invested and on costs of maintaining the
inventory, paying tax on it, insuring it, spoilage, storage space, and
obsolescence.
Consignment A shipment that is handled by a common carrier or the process of a supplier
placing goods at a customer location without receiving payment for the
goods until after they are used or sold
Constraint An element or factor that prevents a system from achieving a higher level of
performance with respect to its goal. Constraints can be physical, such as a
machine center or lack of material, or managerial, as defined in policies or

Unit 2
procedures.
Cumulative lead The longest planned length of time needed to complete a particular activity.
time It may be calculated in MRP by reviewing the lead time for each BOM path
below the item. The longest BOM path is equal to the cumulative lead time
Customer service A measure of a company’s ability to delivery the right product at the right
time to the right place of the required quality and in the desired quantities. In
other words, customer service is the ability of a company to meet the needs
of its customers.
Customer service a measurement of delivery of finished goods performance, usually a
level or ratio percentage such as the number of items or dollars shipped on schedule
during a specified time period, compared to the total that should have been
shipped. In a make-to-order environment it may be measured by the number
of jobs or dollars shipped in a particular period compared with the total
number required.
Cycle The interval of time during which a system or process, periodically returns
to similar initial conditions. It is also the interval of time during which an
event or set of events is completed
Cycle counting An inventory accuracy audit technique. Each inventory item is allocated a
cycle count frequency, usually more frequent for high value or fast moving
items. Each item is counted in isolation at regular intervals throughout the
year as often as specified for each item. Many items may be counted very
working day. Cycle counting is used to identify items in error. This may lead
to research, identification, and elimination of the causes of the errors.
Demand A need for a particular product or component which could come from a
customer order, forecast of market requirements, interplant requirement, or a
request from a branch warehouse for a service part
Demand The need for a product of component. Demand may be generated from
customer orders, forecasts, or internal requests.
Dependent Demand for an item that is wholly influenced by demand for another item.
demand For example, in the manufacture of computer monitors, the demand for the
plastic monitor case will be entirely dependent on the demand for monitors.
Distribution The activities associated with the movement of material, usually finished
goods or service parts from production plant to the customer. Distribution
incorporates functions such as transportation, warehousing, inventory
control, material handling, order administration, location analysis,
packaging, data processing and communications networks.
Economic order Reducing setup time and inventory to the point where it is economical to
quantity (EOQ) produce in batches of one.
Excess inventory Inventory that exceeds the minimum amount required to achieve a desired
throughput rate, or inventory over and above the minimum amount needed
to ensure desired due date performance
Expedite To speed up production orders or purchase orders that are required in a
shorter time than the usual lead time.

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Finished goods or A product sold as a completed item or repair part. This term refers to any
end items item that is subject to a customer order or sales forecast
First-in-first-out A calculation of inventory value that assumes, for the purposes of valuation,
(FIFO) that the oldest inventory will be used first.
Fixed Location A warehouse storage method that assigns parts of the warehouse to
particular items. These fixed locations become familiar to workers, reducing
the need for a locator file.
Fixed order À lot sizing technique in MRP or inventory management that will always
quantity cause an order to be generated for a fixed quantity or multiples of that fixed
quantity, if net requirements for the period are higher than the fixed order
quantity.
Hedge inventory An amount of inventory built up to guard against a particular event that may
or may not occur. Hedge inventories are the result of speculation related to
potential strikes, price increases, government unrest, or other external events
that could severely impair a company’s strategic initiatives.
Inactive inventory Stock that is in excess of consumption within a defined period of time or
stocks of items that have not been used within a defined time frame.
Independent Demand for an item that does not depend on the order of other items.
demand Demand for finished goods, parts required for destructive testing, and
service parts are examples of independent demand.
Independent The demand for an item that is derived from customer orders, forecasts, or
demand internal requirements, and is not dependent on the demand for other items.
Inventory Stocks or items used to support production (raw materials and WIP items),
supporting activities (MRO supplies), and customer service (Finished goods
and spare parts). Demand for inventory may be dependent or independent.
Inventory functions are anticipation, hedge, cycle (lot size), fluctuation
(safety, buffer, or reserve), transportation (pipeline), and service parts.
In the theory of constraints, inventory refers to items purchased for resale
and includes finished goods, WIP and raw materials. In this approach,
inventory is always valued at purchase price and includes no value-added
costs, whereas traditionally, direct labor and overhead costs were attributed
to the items as they went through the production process.
Inventory turns The number of times that an inventory turns over during a year. This is
calculated by dividing the average inventory level into the annual cost of
sales. For example, an average inventory of $600,000 divided into an
average cost of sales of 1,800,000 means that inventory turned over 3 times
during the year.
Inventory turns Also known as inventory turnover, this refers to the number of times an
inventory cycle turns over in a given period of time, usually a year. It is
calculated by dividing the cost of sales over the period by the average
inventory level during that period.
Kanban A JIT production method that uses standard lot sizes. Material is pulled to
the work center according to demand. A Kanban is a card, billboard or sign.

Unit 2
When a work station requires material it sends some form of sign, such as an
empty container, up the chain.
Last-in-first-out A calculation of inventory value that assumes the most recent material
(LIFO) received will be the first to be used. LIFO does not relate to the physical use
of goods. It is required solely for accounting purposes.
Lead time The amount of time required to perform an operation. In logistics, it is the
time between identifying the need for an order and the receipt of that order.
Components of lead time may include order preparation time, queue time,
processing time, and move time, receiving, and inspection time.
Lot-for-lot A lot sizing technique that generates planned orders in quantities equal to
the net requirements in each period.
Maintenance, Items used to support operations and maintenance, including for example
repair, and maintenance supplies, spare parts, consumables used during manufacturing
operating supplies and supporting operations.
(MRO)
Manufacturing The framework in which a manufacturing strategy is developed and
environment implemented. It includes external environmental forces, corporate strategy,
business unit strategy, product selection, process technology, and
management competency. It is often used to refer to whether a company is
make-to-stock, make-to-order, or assemble-to-order.
Master Production A schedule that represents what the company wants to produce, in exact
Schedule (MPS) configurations, amounts, and dates. It is based on the production plan and is
the main input for MRP.
Material A set of techniques that use bill of material information, inventory data, and
requirements the master production schedule to calculate requirements for materials. MRP
planning (MRP) recommends replenishment orders and order dates for materials and helps to
reschedule open orders when due dates and need dates are not in line. MRP
takes the items listed on the MPS and determines the quantity of all
components and materials required to make those items and the dates by
which those materials are required. It explodes the bill of material for each
item, takes into account inventory on hand or on order and offsets the net
requirements by the lead time for each item.
Mean absolute A figure calculated by averaging the sum of the absolute values of each
deviation (MAD) deviation of an actual from an expected figure. This can be used to track the
accuracy of a forecast.
Normal A commonly known statistical distribution pattern where most events are
distribution close to a ‘mean’ and only occasional events stray far from that mean.
Obsolete inventory Inventory that is out of date or no longer required in the manufacturing
process, or made worthless due to the appearance of a better or more
economical alternative
Open order A manufacturing or purchase order that has been released or an unfilled
customer order
Opportunity cost The return on capital that would have resulted had the capital been available
for some purpose other than what it has been used for
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Order point or A predefined inventory level, which if it is higher than the stock on hand and
reorder point stock on order combined, will trigger an action to replenish the stock.
Order Quantity or The amount of an item that is ordered from a supplier or from the plant or is
Lot size issued as a standard quantity to the production process.
Period order A lot-sizing technique which equates the lot size to the net requirements for
quantity a specified number of periods in the future. The number of periods to order
is variable. The order size should equalize the holding costs and ordering
costs for the time interval
Periodic inventory A physical count of all inventory undertaken either monthly, quarterly or
audit annually.
Periodic review A fixed reorder cycle inventory model
Periodic review This is also called fixed reorder cycle inventory model. It is a form of
system independent demand item management in which an order has a fixed
quantity. The reorder point will be large enough to cover the maximum
expected demand during the replenishment lead time.
Planning Horizon The length of time a plan extends into the future. Master schedules typically
cover a minimum planning horizon equal to the cumulative lead time for
product allowing for lot sizing low- level components and capacity changes.
Process cost A system of cost accounting that collects cost by time period and calculates
the average for all units produced during that time period.
Procurement A fussiness function of planning, purchasing, inventory control, traffic,
receiving, incoming inspection, and salvage operations
Product group A number of similar products. Generally they are grouped according to the
process or materials required to make them
Project cost A method of costing used in project-based industries. Each assignment is
costed as a standalone project without reference to other assignments.
Random Location A warehouse storage method that maximizes warehouse space. As items
arrive they are placed in any suitable empty space. A locator file is used to
ensure items can be easily retrieved
Raw material Purchased items or extracted materials that are converted via the
manufacturing process into components and products.
reconciliation Comparison of physical inventory figures with perpetual inventory records
followed by appropriate adjustments to correct the records.
Reserve Material on hand or on order that is assigned to specific future production or
customer orders
Safety stock This is a quantity of stock that is planned for inventory to protect against
fluctuations in demand or supply. In the context of master production
scheduling, the additional inventory and capacity planned as protection
against forecast errors and short term changes in the backlog. Overplanning
can be used to create safety stock. Safety stock is also known as buffer or
reserve stock.

Unit 2
Scheduled Receipt An open order with an assigned due date
Scrap Material outside specifications for which rework is not possible or practical
Seasonality A pattern of demand that repeats from year to year (or other identified
season) where some periods have very high demand compared to others
Service level A desired measure (usually a percentage) of satisfying demand through
inventory or by the current production schedule in time to satisfy the
customers’ requested delivery dates and quantities. In a make-to-stock
environment, level of service is sometimes the percentage of orders picked
complete from stock upon receipt of customer order.
Service parts Parts (modules, components or elements) that are planned to be used without
modification to replace an original part
Shelf life The amount of time an item may be stored before becoming unusable.
Significant An item identification number that comprises elements that can impart
identification characteristics of the inventory item, for example, the source or shape of the
part.
Spare parts or These are modules, components or elements that may be used without
service parts modification to replace an original part
Standard cost An accounting system that determines cost by using set cost units for
estimating the cost of an order. The standard cost is regularly compared
against actual costs.
Stock Items in inventory or stored products / service parts ready for sale, as
distinguished from stores that hold components and raw materials
Stockout A lack of required materials components or finished goods.
Time period safety An amount of safety stock that covers requirements for a set period of time.
stock
Time-phased Similar to MRP planning logic for independent demand items, where gross
order point requirements come from a forecast. The TPOP may be used to plan
(TPOP) distribution center inventories and repair parts. The TPOP approach uses
time periods, allowing for lumpy withdrawal instead of average demand.
Tracking signal A signal used to highlight when the forecasting method is inaccurate. It is
usually the ratio of the cumulative sum of deviations between forecast and
actual values compared to the mean absolute deviation (MAD)
Visual review A simple inventory control system which involves looking at the amount of
system inventory on hand before reordering. It is used for low value items
Work-in-process Also known as work in progress, this refers to products that are in a partial
(WIP) stage of completion throughout the plant. This includes all material from
raw material that has been released for initial processing up to completely
processed material awaiting final inspection and acceptance as finished
product.
Yield The amount of usable output from a process as compared to its input. This is
usually expressed as a percentage of the input.

Unit 2
Zoned Location A warehouse storage method that combines the characteristics of fixed and
random location methods

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termed independent when it arises externally Purchased Components

from customers and is not linked to the Fabricated Components

demand for another parent product.

an item correlates with demand for another Assemblies

parent item. Demand

quality ice cream has a demand for 2000

customers. This is independent demand. Service / Replacement Parts

company will require 2,000 tubs. The Wholesale Finished Goods

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Stable Demand, No Trend, Seasonal Stable Demand, Negative Trend

Measuring Inventory Performance

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Deviation from Target

1. Which of the following are characteristics of dependent demand?

Maintaining Inventory Data

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Principles of Part or Item Identification

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Significant or Meaningful Identification

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Requirements for Bin Location Systems

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3. Which is the best description of the inventory turns calculation?

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Current Usage Rates

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5. Which factors must be taken into consideration when balancing stock?

Review Q C. Scheduled receipts

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Manufacturing Planning and Control Systems,

Production & Inventory Management,

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7. Which are guidelines for creating part or item identification codes?

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Stable Demand, No Trend, Seasonal Stable Demand, Negative Trend

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