Fixed Time Order Inventory Systems

Slide presentation by Steven Cheney Final project for Operations Management 345 Boise State University

Instructor: Dr.Tom Foster

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Inventory Control Systems

1. Fixed quantity re-order inventory system. Re-order quantities are predetermined, and the reorder takes place when predetermined low levels of inventory are reached.

The re-order date varies.

2. Fixed time re-order inventory system. The re-order date is predetermined and an order is placed once a consistent passage of time occurs. Orders are given and received consistently.
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The re-order quantity varies

Fixed Time Re-order System

Ideal for use in:
Smaller businesses with single or a low number of vendors and or lower volume sales.

Small to medium retail. Restaurants. Job shop manufacturing. Light industry. Construction. Service firm.
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Advantages of Fixed Time Re-order System

Ideal fixed re-order and distribution dates can be negotiated with vendor and distributor to ensure desired management of inventory.

Inventory levels can be minimized during low demand periods easily.

Communication between a small number of vendors or with a wholesaler is consistent and reliable. Wholesale distributors may have salespersons who place orders for the retailers, eliminating inventory costs.
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Different Applications
Business start ups.
Can negotiate and determine ideal re-order intervals.

Low volume retail and job shop.

Low number of vendors, custom quantity ordering, with strict scrutiny.

Larger volume retail and job shops.

Utilizing of ABC method of prioritizing inventory management and minimizing inventory expenses.

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Determine Order Interval

In a business start up, Vendor and wholesale distributors may negotiate with a small firm in regards to ordering and distribution dates. Changing or establishing ideal order intervals may be a great way to improve quality in an existing firm.
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Order Interval Determination

For Multiple Items

The economic order interval can be obtained by minimizing the total annual cost. Neglecting stock out cost, the formulation is:

Total annual cost = (purchase cost) + (order cost) + (holding cost)

The minimum cost order is obtained by taking the first derivative of the total annual cost with respect to the order interval (T) and setting it equal to zero.

Ri = annual requirement for item i. Pi = purchase cost of item i. N = total number of joint order items. C = order cost for the joint order C = order cost associated with each individual item. T = order interval in years. F = annual holding cost as a fraction of purchase cost. 3/31/2013

Formula

Difficulties in Order Intervals

It is not common for a business start up to have access to the information required to determine the optimal re-order interval dates. Managerial experience and adequate market exposure is the best way to determine re-order dates in start ups. Wholesalers and vendors should also be able to provide valuable input when determining a re-order schedule.

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How It Works:
Fixed Time Re-order Inventory
Inventory levels are high Merchandise is in stock

Demand for good

Is stock higher than demand?

No
Lost Sale

Yes

Has Fixed Time re-order period arrived?

Determin stock position qty on hand + qty on order - back orders

Compute order quanity

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Place re-order

Fixed Time Re-order

Lag time

Order Quantity Lag time

Declining Inventory levels Declining Inventory Levels

L T

L Fixed Re-order Time

L T

Fixed Time to re-order (such as every five days)

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Low Inventory Costs! High Inventory Control!

?

Quantity levels are quickly adjusted for fluctuating demand. Inventory management and ordering are monitored only on order days, eliminating daily supervision of inventory. Seasonal demand and demand trends are difficult to forecast. Each inventory items demand is analyzed on a routine basis by a department manager.
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ABC Fixed Time Re-order Intervals

Demand for a large variety of goods with different values vary significantly.
ABC classification system divides inventory

into three different groups.

1. Close inventory control (continuous). 2. Moderate inventory control (less stringent). 3. Low scrutiny inventory control (periodic review).

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ABC Classification

The first step in ABC classification is to associate each class with a different dollar valuation. The next step is to determine the inventory scrutiny level to be assigned for each classification.

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Why ABC classification?

Typically the majority of a firms profit comes from a small number of items in inventory, and sometimes these items are sold in large volume.
Moderately profitable items need less inventory scrutiny

Low profitable inventory requires little management, minimizing inventory costs.

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Perfect Example
Russs Trusses

Ruses trusses is a large truss producer/construction company that purchases truss kits and the kits are custom assembled to engineered specifications. They are used by the firm in construction or sold to outside construction companies. Ruses trusses utilizes an ABC classification inventory management system. It is beneficial because one employee supervises all inventory of materials.
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Russs Trusses
ABC Inventory System

Russ Jr. Re-orders class A kits every day from vendor A direct over the internet.
He orders class B kits once a week from vendor B via fax machine. Wholesaler C comes one a month to do the inventory of C kits and re-orders. The salesperson tries to sell different new items to Russ Sr.

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Russs Trusses
Annual Inventory Value and Consumption
Kit
Section 1 Section 2 Secton 3 Top Kit Bottom Kit Side Kit R Side Kit S Extendor R Extendor S Sundry Kit

Unit Cost
$60.00 $350.00 $30.00 $80.00 $30.00 $20.00 $10.00 $320.00 $510.00 $20.00 $1,430.00

Consumption
90 40 130 60 100 180 170 50 60 120

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Contribution to Value

Compute each items percentage of total value and quantity.

Q x P = Value for item

Value for item / total value = % of total value

Then rank the inventory in terms of % of total value.

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ABC Inventory Classification Russs Trusses

Kit Section 1 Section 2 Secton 3 Top Kit Bottom Kit Side Kit R Side Kit S Extendor R Extendor S Sundry Kit Annual Cost $ $ $ $ $ $ $ $ $ $ $ 30,600.00 16,000.00 14,000.00 5,400.00 4,800.00 3,900.00 3,600.00 3,000.00 2,400.00 1,700.00 85,400.00 % Inv. Value 35.9 18.7 16.4 6.3 5.6 4.6 4.2 3.5 2.8 2 100% % (Inv volume- Qty) 6 5 4 9 6 10 18 13 12 17 100% Classification Reorder A A A B B B B C C C Daily Daily Daily Weekly Weekly Weekly Weekly Montly Montly Montly

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Classification Results
Classification Kits Class A Class B Class C

Profit $ Volume of Use 71% 20.70% 8.30% 15% 25% 60%

Sectional Kits 1,2,3 Top and Bottom Kits Extendors and Nail Kits

Class A items provide >71% to profit and are reviewed each day. Class B items provide approximately 20.7% to profit and are reviewed weekly. Items that contribute <8.% of profit are automatically ordered once a month by the wholesaler, at no cost to Ruses Trusses.
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Fixed Time Re-order Inventory

Limited

applications such as:

Small retail where demand is seasonal and it

fluctuates greatly. Great for simple inventory systems and floor level inventory management applications. Perfect for job shop applications where inventory is limited and seldom reviewed.
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Practical

Limitations of Fixed Time

Not suited for large SKU counts. Requires daily to weekly manual supervision in various departments. Generally less automation than fixed quantity re-order system. Focuses on minimum inventory which may promote stock outs.
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Practical

Advantages of Fixed time

Quickly adjusts to variations in demand. Utilizes services provided by vendors at no cost to the firm. Assures minimum inventory when needed. Minimizes inventory labor and costs. Allocates resources where needed. Establishes good relationships with distributors.

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Sources Referenced

Richard J. Tersine, Principles of Inventory and Materials Management, third edition, North-Holland , New York. 1988. R. Fetter, Decision Models for Inventory Management, Ann Arbor London, 1978 Roberta S. Russel, Bernard W. Taylor 3rd, Operations Management, third edition, Prentice Hall, Inc. Upper Saddle River, New Jersey. 2000

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