Ch12 - Inventory

Operations Management
Inventory Management Chapter 12

12-1
2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
What is Inventory?
Stock of materials Stored capacity
1995 Corel Corp.
1984-1994 T/Maker Co. 1995 Corel Corp.
1984-1994 T/Maker Co.
12-2
Types of Inventory
Raw material Work-in-progress Maintenance / repair / operating supplies Finished goods
12-3
The Material Flow Cycle
12-4
The Functions of Inventory

To decouple or separate various parts of the production process To provide a stock of goods that will provide a selection for customers To take advantage of quantity discounts To hedge against inflation and upward price changes
12-5
Disadvantages of Inventory
Higher costs
Interest or opportunity costs Holding (or carrying) costs storage, handling, taxes, insurance, shrinkage Ordering (or setup) costs
Risk of deterioration or obsolescence Hides production problems
Yield / scrap variations Unscheduled downtime
Total cost = 20% - 40% of inventory value / year

12-6
Pressures on inventory
Pressure for lower inventory
Inventory investment Inventory holding cost
Pressure for higher inventory

Customer service Other costs related to inventory
12-7
Different Views of Inventory

Demand Type
Independent Dependent
Types of Inventory
Cycle Pipeline Safety Stock Anticipation
Process stage
Raw Material Work in Process Finished Goods
Annual $ Volume
A B C
Other
Maintenance / Repair Operating Supplies
12-8
How Is Inventory Created?

Cycle Inventory result of lot size
Q+0 Average cycle inventory = 2
Pipeline Inventory in transit

Pipeline inventory = DL = dL
Safety Stock Anticipation Inventory
Types of Inventory
Cycle Pipeline Safety Stock Anticipation
12-9
Inventory Calculations
We use 70 hypodermic needles a week. We buy them in lots of 280. It takes three weeks for order handling and shipment.
Cycle inventory = Q/2 = 280/2 = 140 needles
Pipeline inventory = DL = dL = (70 needles/week)(3 weeks) = 210 drills

12-10
Inventory Worksheets
Inventory Reduction Tactics

Cycle inventory
Pipeline inventory Safety Stock
Reduce lot size

Reduce lead time Reduce uncertainties
Anticipation inventory
Various
12-11
ABC Analysis
Divides on-hand inventory into three classes on the basis of annual dollar volume A, B, and C
$ volume = Annual demand x Unit cost Develop class A suppliers more Maintain tighter physical control of A items Forecast A items more carefully
Annual $ Volume
Policies based on ABC analysis

A B C
12-12
ABC Analysis
% Annual $ Usage 100
80 60 40 20 0 0 50 100 % of Inventory Items
12-13
Class A B C
% $ Vol 80 15 5
% Items 20 30 50
A
B
Inventory Models for Independent Demand

Fixed order-quantity models
Economic order quantity Production order quantity Quantity discount
Help answer the inventory planning questions!
Probabilistic models Fixed order-period models

1984-1994 T/Maker Co.
12-14
EOQ Economic Order Quantity

Objective: minimize (ordering cost + holding cost)
Assumptions:

Known and constant demand Known and constant lead time Instantaneous receipt of material No quantity discounts Only ordering / setup cost and holding cost No stockouts
12-15
Inventory Usage Over Time

Usage Rate
Q
Inventory Level
Q 2
Average Cycle Inventory
Time
12-16
EOQ Model How Much to Order?

Annual Cost
Minimum total cost

Ordering (Setup) Cost
Optimal Order Quantity (Q*)

12-17
Order quantity (Q)
Why Holding Costs Increase

More units must be stored if more are ordered
Purchase Order Description Qty. Microwave 1
Order quantity
12-18
Why Ordering Costs Decrease

Cost is spread over more units
Example: You need 1000 microwave ovens
1 Order (Postage $ 0.33)
1000 Orders (Postage $330)
Purchase Order Purchase Order Purchase Order Purchase Order Qty. Description Qty. Description Qty. Description Qty. 1 Microwave Description Microwave Microwave 11 Microwave 1
Order quantity
12-19
EOQ Model When to Order

Inventory Level
Q*
Average Cycle Inventory
Reorder Point (ROP)
Time
Lead Time
12-20
EOQ Model Equations

Optimal Order Quantity Expected Number of Orders
2 D S H =N = D Q* = Q* =
Expected Time Between Orders
=T =
Working Days
/ Year
d =
D
Working Days / Year
ROP = d L
D = Demand per year S = Setup (order) cost per order H = Holding (carrying) cost d = Demand per day L = Lead time in days
12-21


1984-1994 T/Maker Co.
12-22
POQ Production Order Quantity

Answers how much to order and when to order Allows partial receipt of material
Other EOQ assumptions apply
Suited for production environment

Material produced, used immediately Provides production lot size
Lower holding cost than EOQ model
12-23
EOQ POQ Model

Both production and usage take place Usage only takes place
Maximum inventory level

Inventory Level
Time
12-24


1984-1994 T/Maker Co.
12-25
Quantity Discount Model

Answers how much to order & when to order Allows quantity discounts
Trade-off is between lower price & increased holding cost

Discount Number 1 Discount Quantity 0 to 999 Discount (%) No discount Discount Price (P) $ 5.00
2
3
1,000 to 1,999
2,000 and over
12-26
4
5
$ 4.80
$ 4.75
Quantity Discount How Much to Order
12-27


1984-1994 T/Maker Co.
12-28
Probabilistic Models
Answer how much & when to order Allow demand to vary
Frequency
Service Level
P(Stockout)
Consider service level & safety stock

Service level = 1 Probability of stockout Higher service level means more safety stock More safety stock means higher ROP
12-29
Probabilistic Models - When to Order?

Inventory Level
Frequency
Service Level
P(Stockout)
SS ROP
Reorder Point (ROP)
Safety Stock (SS)

Lead Time Place order
12-30
Time Receive order



1984-1994 T/Maker Co.
12-31
Fixed Period (P) Systems

Answers how much to order Orders placed at fixed intervals

Inventory brought up to target amount Amount ordered varies Possibility of stockout between intervals Example: Office Max representative calls every week
No continuous inventory count
Useful when vendors visit routinely
12-32
Inventory in a Fixed Period System

Various amounts (Qi) are ordered at regular time intervals (p) based on the quantity necessary to bring inventory up to target maximum
Target maximum
Q1
On-Hand Inventory
Q2
Q3 p p p
Q4
Time
12-33
Comparison of Q and P Systems

Continuous Review System (Q)
A system designed to track the remaining inventory of an item each time a withdrawal is made, to determine whether it is time to replenish
Periodic Review System (P)

A system in which an items inventory position is reviewed periodically rather than continuously
12-34
Comparison of Q and P Systems

Continuous Review System (Q)
Individual review frequencies Possible quantity discounts Lower, less-expensive safety stocks
Periodic Review System (P)

Convenient to administer Orders may be combined Inventory position only required at review
12-35
Inventory Measures
Average inventory = $2 million Cost of goods sold = $10 million 52 business weeks per year
Average inventory value Weekly sales (at cost) $2 million = = 10.4 weeks ($10 million)/(52 weeks)
Weeks of supply =
Inventory turns = =
Annual sales (at cost) Average inventory value $10 million = 5 turns/year $2 million
12-36
Summary
Functions of inventory
Inventory enables value creation for many processes
Costs of inventory Different views of inventory Inventory reduction tactics ABC and EOQ are traditional tools used to manage inventory still used in many circumstances Continuous review system (Q) for high-value parts; Periodic review system (P) for some low value parts Weeks of Supply and inventory turns are widely-used measures of inventory
12-37

Ch12 - Inventory

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Ch12 - Inventory

Uploaded by

Copyright:

Available Formats

Operations Management

Inventory Management Chapter 12

1984-1994 T/Maker Co. 1995 Corel Corp.

1984-1994 T/Maker Co.

2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

The Material Flow Cycle

2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

The Functions of Inventory

2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Risk of deterioration or obsolescence Hides production problems

Yield / scrap variations Unscheduled downtime

Total cost = 20% - 40% of inventory value / year

Pressure for higher inventory

2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Different Views of Inventory

How Is Inventory Created?

Pipeline Inventory in transit

Safety Stock Anticipation Inventory

Pipeline inventory = DL = dL = (70 needles/week)(3 weeks) = 210 drills

Inventory Reduction Tactics

Reduce lot size

2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Policies based on ABC analysis

Inventory Models for Independent Demand

Help answer the inventory planning questions!

Probabilistic models Fixed order-period models

2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

EOQ Economic Order Quantity

Inventory Usage Over Time

Average Cycle Inventory

2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

EOQ Model How Much to Order?

Minimum total cost

Optimal Order Quantity (Q*)

Order quantity (Q)

2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Why Holding Costs Increase

Purchase Order Description Qty. Microwave 1

Purchase Order Description Qty. Microwave 1000

Why Ordering Costs Decrease

1000 Orders (Postage $330)

EOQ Model When to Order

Reorder Point (ROP)

EOQ Model Equations

Expected Time Between Orders

Inventory Models for Independent Demand

Help answer the inventory planning questions!

Probabilistic models Fixed order-period models

2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

POQ Production Order Quantity

Other EOQ assumptions apply

Suited for production environment

Lower holding cost than EOQ model

2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

EOQ POQ Model

Maximum inventory level

2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Inventory Models for Independent Demand

Help answer the inventory planning questions!

Probabilistic models Fixed order-period models

2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Quantity Discount Model