---
# System prepended metadata

title: Supply Chain - Week 2 Notes
tags: [MGT8803]

---

# Medium Term Decisions - Week 2 


## 🧭 Emoji Legend (Note Formatting Guide)
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---

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</details>

## 🧭 Table of Contents
[TOC]

# 🖊️ Video Lessons

## 🧩 Lean Operations - M9L1

**Learning Objectives:**
* Discuss the origin and philosophy of Lean
* Describe the most common tools and techniques in Lean

### 🔸 What is the Philosophy of Lean?

* Elimination of waste
* Originated with Toyota

The core philosophy is the elimination of waste. <font color="#F7A004">A common misconception is that Lean views inventory as waste due to becoming obsolete or deterioration.</font>

### 🔹 Success Story

![image](https://hackmd.io/_uploads/rkiTct5alg.png)

An unnamed U.S. company's numerical successes pre and post Lean implementation!

**💡 Note:** This provides backend information for showing how Lean improves a company's manufacturing processes and metrics.

### 🔸 5 Principles of Lean

![image](https://hackmd.io/_uploads/HJrB2K9aee.png)

The idea is to keep implementing this continuously. 

1. Identify Value
* **💡 Note:** Value is defined by the ++customer++, not by you.
2. Map the Value Steam (ValueStreamMapping or VSM)
* VSM is the exercise of mapping out product flow and information flow.
* The idea is to identify areas where no value is being added (AKA waste).
3. Create Flow (5S)
* 5S is a tool of creating flow: creating an orderly and clean environment.
4. Establish Pull (Kanban)
* Lean is a ++Pull++ system.
5. Seek Perfection (Kaizen)
* Improve operations/processes.

<font color="#F7A004">This is a high-level view of Lean to establish understanding.</font>

## 🧩 <font color="#45B1E8">“Push”</font> vs. <font color="#5FA777">“Pull”</font> - M9L2

**Learning Objectives:**
* Explain the use of Kanban in Lean
* Discuss <font color="#45B1E8">“Push”</font> vs. <font color="#5FA777">“Pull”</font>

### 🔹 Where did Toyota get the idea for Kanban?

Piggly Wiggly - Using cards on a shelf to know when to restock items on the shelf

### 🔸 <font color="#45B1E8">“Push”</font> vs. <font color="#5FA777">“Pull”</font>

![image](https://hackmd.io/_uploads/H13PG9qTgl.png)

In a <font color="#45B1E8">“Push”</font> environment, the idea is to <font color="#45B1E8">“Push”</font> raw material through the processes front to back/start to finish.

In a <font color="#5FA777">“Pull”</font> environment, the idea is to flow information from the back to front/finish to start and to signal prior processes to produce based on need.

### 🔹 <font color="#45B1E8">“Push”</font> System

* Every work maximizes own output, making as much product as possible.
* Focuses on keeping individual operators and workstations busy
* Volumes of defective work may be produced
* Throughput time will increase and work-in-process (WIP) increases
* Line bottlenecks and inventories of unfinished products will occur
* Hard to respond to special orders and order changes due to long throughput time

**💡 Takeaway:** The main issue of a <font color="#45B1E8">“Push”</font> system is that product effectively sits at inventory points (bottlenecks).

### 🔹 <font color="#5FA777">“Pull”</font> System

* Production lion is controlled by the last operation, Kanban cards control WIP
* Controls maximum WIP and eliminates WIP accumulating at bottlenecks
* Keeps materials busy, not operators
* Operators only work when there is a signal to produce
* If a problem arises, there is no slack in the system
* Throughput time and WIP are decreased
* Faster reaction to defects and less opportunity to create defects

**💡 Takeaway:** Prevents the collection of WIP at bottlenecks by only pulling inventory as needed. Due to lack of slack in the system, issues flow both upstream and downstream of the affected process.

### 🔹 Kanban Example

![image](https://hackmd.io/_uploads/ryo_ccc6xe.png)

1. Work Center B will withdraw items from storage and place a withdrawal Kanban card with the quantity.
2. Work Center A will receive a production Kanban card to produce the necessary quantity to fill storage.

---

## 🧩 Sales & Operations Planning (S&OP) - M9L3

**Learning Objectives:**

* Assess both internal and external mechanisms to match supply with demand

### 🔸 Main Idea

* Translate business plans into rough labor schedules and production plans
* How do we match up demand (from Sales) with supply (from Supply Chain)?
* Given an aggragated (meaning collected altogether) demand forecast, how can we minimize the total costs over the planning horizon through Production, Inventory and Workforce levels?

### 🔹 Production Plan Inputs

![image](https://hackmd.io/_uploads/rkBECicagg.png)

**Internal**
* Current Physical Capacity - How much could we produce in a timeperiod?
* Current Workforce - How much can the workers currently do?
* Inventory Levels - Current vs where we need to get to?
* Activities Required for Production - Any other activities?

**External**
* External Capacity - What are the sources and how much?
* Competitors' Behavior
* Raw Material Availability - Readily available?
* Market Demand
* Economic Conditions - Recession? Growing Economy?

**💡 Takeaway:** Combining all of these factors contributes to the creation of a Production Plan.

### 🔹 Common Internal Strategies (Supply Chain)

**Recall:** A company's goal is always to match supply with demand.

So, what are some of the internal strategies a company's supply chain group can use to match supply with demand?

* Hire and Fire
* Temporary Workers
* Overtime/reduced hours
* Subcontracting
* Excess Inventory
* Large Backlogs
* Change Production Rates

All of these stategies influence supply by either increasing or decreasing it to meet demand.

### 🔹 Common External Strategies (Sales)

* Price Change
* Promotions
* Advertising
* “Bundled” or “Packaged” offerings
* Turn down orders
* Pre-Orders/Reservations

All of the strategies influence demand by either increasing or decreasing it to meet supply.

---

## 🧩 Inventory Management - M9L4

**Learning Objectives:**

* Examine the benefits and costs to inventory
* Outline the key decisions in Inventory Management

### 🔸 What is Inventory?

* ++Inventory++: The raw material, component parts, work-in-process, or finished goods that are held at a location in the supply chain.

![image](https://hackmd.io/_uploads/HyM-N3caxl.png)

### 🔹 Some Things to Consider

Why would a company want to keep stock of raw material, WIP or finished goods? Why does it matter?

* Inventory is one of a companies biggest assets ($$$ invested in)
* US investment in inventory is over $1.25 Trillion and accoutns for almost 25% of GNP

### 🔹 Benefits of Inventory

Why do companies keep stock?

* Hedge against uncertain demand
* Hedge against uncertain supply (unreliable suppliers)
* Economize on ordering costs (bulk savings)
* Smoothing 

### 🔹 Costs of Inventory

There has to be a costs of inventory that keeps companies from holding it indefinitely.

* Holding Costs 
    * Expenses associated with store inventory such as insurance, security, warehouse, cooling, etc.
* Obsolescence
* Spoilage
* Rework
* Shrinkage
* Opportunity Costs

### 🔸 Key Inventory Management Decisions

**HOW MUCH** should we order?

**WHEN** should we order more?

---

## 🧩 Inventory Management - M9L5

**Learning Objectives:**

*Explain Economic Order Quantity and its use in Inventory Policy (How much?)
*Explain Reorder Points and its use in Inventory Policy (When?)

### 🔹 HOW MUCH Should We Order?

![image](https://hackmd.io/_uploads/BywNn2cTlx.png)

**Variables and Assumptions:**

* Demand is known and constant: **D** units/yr
* Known ordering cost, **S**, and immediate replenishment
* Annual holding cost of average inventory is **H** per unit
* Assuming Ordering and Inventory costs are the only relevant costs

Total Cost = Ordering Cost + Inventory Cost

* Ordering Cost = (# orders/yr) x (cost/order)
* Inventory Cost = (avg. inventory) x (holding cost/yr)

Consider the following chart where we order in batches of Q:

![image](https://hackmd.io/_uploads/B1-Ran56ge.png)

Thus at any point in time our average inventory is $\frac{Q}{2}$.

### 🔹 Cost Elements

**Ordering Cost** = (# orders/yr) x (cost/order)

$$
\text{Ordering Cost} = \frac{D}{Q} \times S
$$

**Inventory Cost** = (avg. inventory) x (holding cost/yr)

$$
\text{Inventory Cost} = \frac{Q}{2} \times H
$$

Graphically, these formulas look like:

![image](https://hackmd.io/_uploads/rkt_-p5Tex.png)

### 🔸 Economic Order Quantity = HOW MUCH

If we set **Ordering Cost** equal to **Holding Cost**:

$$ 
\frac{D}{Q} \times S = \frac{Q}{2} \times H 
$$

Then solve for Q (Q* is where **Ordering Cost** equals **Holding Cost**):

$$
\text{EOQ or }Q^* = \sqrt{\frac{2SD}{H}}
$$

### 🔸 WHEN Should We Order More?

![image](https://hackmd.io/_uploads/SkFMmp96xl.png)

Notice, we must consider LEAD TIME from the supplier to determine the appropriate ordering point.

$$ 
ROP = \overline{d} \times L 
$$

### 🔸 Putting HOW MUCH and WHEN Together as an Inventory Policy

* Monitor inventory level
* When the inventory level drops to ROP, replace an order for Q* more.

$$
ROP = \overline{d} \times L \quad\quad \text{EOQ or }Q^* = \sqrt{\frac{2SD}{H}}
$$ 

---

## 🧩 Inventory Management Sample Problem

**Learning Objective:**
Use basic inventory management metrics to determine when to order more and how much to order.

### 🔹 Suppose Buzz Owns a Used Car Lot called Buzzlot

* Sold 5,000 cars last year
* When going to Auto Auctions, it takes 10 days get new cars from the auction to his used car lot
* It costs $15,000 per shipment to deliver a batch of cars to his used car lot
* It cost Buzz $500 per car pear year on his lot

#### 🔹 Determine Buzz's ROP

$$ 
ROP = \overline{d} \times L 
$$

* $\overline{d} = \frac{5000 \: \text{cars}}{365 \: \text{days}} = 13.6986 \: \text{cars/day} \; \text{→ 14 cars/day}$ 
* $L=10 \: \text{days}$

$$
ROP = 14 \: \text{cars/day} \: \times 10 \: \text{days} = 140 \: \text{cars}
$$

#### 🔹 Determine Buzz's EOQ or Q*

$$
\text{EOQ or }Q^* = \sqrt{\frac{2SD}{H}}
$$

* $S = 15,000 \: \text{per shipment}$
* $D = 5,000 \: \text{cars per year}$
* $H = 500 \: \text{per car per year}$

$$
\text{EOQ or }Q^* = \sqrt{\frac{2 \times 15,000 \times 5,000}{500}} = 547.72 →548 \: \text{cars}
$$

### 🔸 Buzz's Recommended Inventory Management Policy

* Go to the auction and buy more cars when you have: **140 cars left on the lot**
* When at the auction, buy: **548 cars when at the auction**

This balances the cost of ordering more cars with the cost of holding them to give the lowest total cost solution.

# ❓ Self-Assessment Questions

1. What is the Philosophy of Lean?

Elimination of Waste.

2. (T/F) In a traditional push system, throughput time will usually increase as work-in-process increases.

True.

3. Which of the following is one of the differences between a push and a pull system?

A push system keeps operators and materials busy, while a pull system keeps operators idle and materials busy

4. (T/F) In a pull system the production line is controlled by the first operation.

False.

5. Which of the following is NOT a characteristic of a PULL system?

Focuses on keeping individual operators and workstations busy

6. Which of the following is a common internal strategy to match supply with demand?

Sub-Contract

7. Which of the following is a common external strategy to match supply and demand?

Product Promotions

8. John’s Used Motorcycle Emporium wants to decide the best order size when ordering more motorcycles. They have estimated annual demand for their vehicles at 1,000 units. John’s cost to carry one motorcycle is $100 per year per unit and he estimates that each order costs $25 to place. Using EOQ, how many should John order each time?

* $S = 25 \: \text{per shipment}$
* $D = 1,000 \: \text{motorcycles per year}$
* $H = 100 \: \text{per motorcycle per year}$

$$
\text{EOQ or }Q^* = \sqrt{\frac{2 \times 25 \times 1000}{100}} = 22.36 →23 \: \text{motorcycles per order}
$$

9. Demand for a special Japanese kimono at Kimberly’s dress shop has been constant at 400 kimonos a month. It costs Kimberly $40 to place an order for more from the manufacturer and she estimates it costs her $10 per year per kimono in holding costs. If she wanted to balance the costs of carrying with the cost of ordering more, how many should she order each time from the manufacturer?

* $S =  40\: \text{per shipment}$
* $D = 400 \times 12 = 4,800\: \text{kimonos per year}$
* $H = 10 \: \text{per kimono per year}$

$$
\text{EOQ or }Q^* = \sqrt{\frac{2 \times 40 \times 4,800}{10}} = 195.959 →196 \: \text{kimonos per order}
$$

10. Rob's Exotic But Cheap Motors, a used car dealership, sold 8,280 cars last year and typically buys his cars from automobile auctions. The lead time from auction to delivery on Rob's car lot is 12 days and his order costs are $20,000 per shipment. Auctions are held daily (assume 360 times a year). Rob's average annual holding cost is $700 per car. Also assume that Rob expects to sell another 8,280 cars this year. Using this information develop an inventory policy for Rob (ROP and EOQ). Choose from the best answer below.

* $S = 20,000 \: \text{per order}$
* $D = 8,280 \: \text{cars per year}$
* $H = 700 \: \text{per car per year}$

$$
\text{EOQ or }Q^* = \sqrt{\frac{2 \times 20,000 \times 8,280}{700}} = 687.8538 →688 \: \text{cars per order}
$$

* $\overline{d} = \frac{8,280 \: \text{cars}}{360 \: \text{days}} = 23 \: \text{cars/day}$ 
* $L=12 \: \text{days}$

$$
ROP = 23 \: \text{cars/day} \: \times 12 \: \text{days} = 276 \: \text{cars}
$$

11. Continuing with Rob's Exotic But Cheap Motors, at the end of the year, Rob's total sales were 7,920 cars, 330 cars fewer than his forecast. In planning for the following year Rob decided to be more scientific in his approach to forecasting demand. After reviewing about 20 years of sales data, Rob realized that his demand approximated a normal distribution with a mean 7,950 cars with a standard deviation of 280 cars. Rob also decided to set a service level of 90% in stock.  Assuming that Rob's ordering cost and holding costs remained at $20,000 and $700 respectively, what should be Rob's ROP and Order Quantity. In this question calculate and choose the most appropriate ROP from the options provided.

HINT: The z-value for a 90% service level is 1.29. 

* $\overline{d} = \frac{7,950 \: \text{cars}}{360 \: \text{days}} = 22 \: \text{cars/day}$ 
* $SS = z \: \times \: \sigma_d \: \times \: \sqrt{L}$
    * $\sigma_d = \frac{280}{\sqrt{360}} = 14.7573 \: \text{cars/day}$
* $L = 12 \: \text{days}$

$$
ROP = (\overline{d} \: \times \: L) \: + \: z \: \times \: \sigma_L \: \times \: \sqrt{L}
$$
$$
ROP = (22 \: \times \: 12) \: + \: 1.29 \: \times \: 14.7573 \: \times \: \sqrt{12} = 331 \: \text{cars}
$$

12. Concluding with Rob's Exotic But Cheap Motors, what will be the new EOQ? Choose the best answer from the options below.

* $S = 20,000 \: \text{per order}$
* $D = 7,950 \: \text{cars per year}$
* $H = 700 \: \text{per car per year}$

$$
\text{EOQ or }Q^* = \sqrt{\frac{2 \times 20,000 \times 7,950}{700}} = 674 \: \text{cars per order}
$$

13. DJ’s drone outlet wants to decide the lowest cost order size when ordering more drones from their manufacturer. Annual demand for their drones is at 1,000 units. the cost to carry one drone is $.50 per year per unit and DJ estimates that each order costs $10 to place. To minimize inventory costs, how many should DJ order each time?

* $S = 10 \: \text{per order}$
* $D = 1,000 \: \text{drones per year}$
* $H = .50 \: \text{per drone per year}$

$$
\text{EOQ or }Q^* = \sqrt{\frac{2 \times 10 \times 1,000}{.50}} = 200 \: \text{drones per order}
$$

14. A company that markets portable EKG machines to hospitals uses EOQ to control inventory costs. Demand used to be 1,000 machines per year and it costs $10 to place an order. Holding cost is $.50. Demand has recently changed to 100 machines per month. How much would EOQ change?

* $S = 10 \: \text{per order}$
* $D = 1,000→1,200 \: \text{machines per year}$
* $H = .50 \: \text{per machine per year}$


$$
\text{EOQ or }Q^* = \sqrt{\frac{2 \times 10 \times 1,200}{.50}} = 219 \: \text{machines per order}
$$

$$
\text{EOQ or }Q^* = \sqrt{\frac{2 \times 10 \times 1,000}{.50}} = 200 \: \text{machines per order}
$$

$$
219 \: - \: 200 = 19
$$

---

# 🎒 Synchronous Class (10/08/2025)

### 🔹 Inventory Policy Decisions

#### 🔹 When do we Reorder More (Safety Stock and ROP)

Safety stocks reduces the probability of a stock out.

$$
\text{Safety Stock}=\text{z} \: \times \:  \sigma_d \: \times \: \sqrt{L}
$$

$$
\sigma_d = \frac{\sigma}{\sqrt{t}}
$$

* Where $\sigma$ is standard deviation and $t$ is the annual period in days

**Example:**
* Average Demand = 15 units/day
* Lead Time = 2 days
* Std Dev = 5 unis
* Service Level = 90% (10% Stockout)
* z = 1.28 

$$
ROP = (15 \: \times \: 2) \: + \: (1.28 \: \times \: 5 \: \times \: \sqrt{2})
$$

### 🔹 Paper and More Cases

Discussion: A vending machine uses an periodic order quantity system. You replenish on fixed time intervals but the quantity can vary.
* Uses an order up to quantity

