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November 05, 2007

Operations Management Lesson 7 Exercise

Operations Management Lesson 7 Exercise

This lesson is about the “Inventory Management” and “Resources Allocation” that could be managed using tools and theories of ROP, MRP, and ERP.

The right use of these 3 elements has a significant impact upon the profitability of an organization.

For this 7th blog I have chosen a Building Company, analyzing how this company has to manage the stocks or semi worked materials in order to avoid logistic problems or high costs of storage.

Accordingly to the “Pareto Analysis” we can divide the material managed by the company in 3 categories:

-        High value items: represented by finished material to be installed once the building construction ends (i.e. sanitary fixtures, doors, windows, boilers…), around 20% of items that account for 55% of the total annual inventory value

-        Medium value items: represented by semi-manufactured products (i.e. different kind of panels, in order to separate environments, or solar/insulating ones…), around 30% of items that account for 25% of the total annual inventory value.

-        Low value items: represented raw materials (i.e. cement, lime, bolts and screws…), around 50% of items that account for 20% of the total annual inventory value.

Regarding the “Low value items”, company uses ROP method of making order timing decision because material is reordered in a fixed quantity, at specific trigger point, based upon historic data.

Regarding the “High value items”, as company is in a “dependent demand situation”, it uses MRP method. Company has to look at which products are going to be made and has to evaluate the appropriate quantities of end items it needs.

Regarding the “Medium value items”, company can apply ROP or MRP method, depending on the type of material, the seasonal price fluctuation of each component, the job order the company is dealing with.

As per its nature, MRP is quite complex to implement because requires a high number of variables to be used and managed together: gross requirements, scheduled receipts, on hand inventory and planned order releases. Moreover, the MRP element (master production schedule, bill of materials, inventory record files) must be carefully managed, because inaccuracies in data inserting leads to wrong MRP conclusions.


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