Chap011 - Inventory Management

11-1
Inventory Management
Operations Management
William J. Stevenson
8th edition
11-2
CHAPTER
11
Inventory
Management
McGraw-Hill/Irwin
Operations Management, Eighth Edition, by William J. Stevenson

Copyright 2005 by The McGraw-Hill Companies, Inc. All rights
11-3
Inventory: a stock or store of goods
Dependent Demand
C(2)
B(4)
D(2)
Independent Demand
E(1)
D(3)
F(2)
Independent demand is uncertain.

Dependent demand is certain.
11-4
Types of Inventories
Raw materials & purchased parts
Partially completed goods called

work in progress
Finished-goods inventories
(manufacturing firms)
or merchandise
(retail stores)
11-5
Types of Inventories (Contd)
Replacement parts, tools, & supplies
Goods-in-transit to warehouses or customers
11-6
Functions of Inventory
To meet anticipated demand
To smooth production requirements
To decouple operations
To protect against stock-outs
11-7
Functions of Inventory (Contd)
To take advantage of order cycles
To help hedge against price increases
To permit operations
To take advantage of quantity discounts
11-8
Objective of Inventory Control
To achieve satisfactory levels of customer

service while keeping inventory costs within
reasonable bounds
Level of customer service
Costs of ordering and carrying inventory
11-9
Effective Inventory Management
A system to keep track of inventory
A reliable forecast of demand
Knowledge of lead times
Reasonable estimates of
Holding costs
Ordering costs
Shortage costs
A classification system
11-10 Inventory Management
Inventory Counting Systems
Periodic System
Physical count of items made at periodic
intervals
Perpetual Inventory System

System that keeps track
of removals from inventory
continuously, thus
monitoring
current levels of
each item
11-11
Inventory Counting Systems (Contd)

Two-Bin System - Two containers of
inventory; reorder when the first is empty
Universal Bar Code - Bar code
printed on a label that has
information about the item
to which it is attached
0
214800 232087768
Key Inventory Terms

Lead time: time interval between ordering
and receiving the order
Holding (carrying) costs: cost to carry an
item in inventory for a length of time,
usually a year
Ordering costs: costs of ordering and
receiving inventory
Shortage costs: costs when demand exceeds
supply
ABC Classification System

Figure 11.1
Classifying inventory according to some

measure of importance and allocating control
efforts accordingly.
A - very important
B - mod. important
C - least important
High
Annual
$ value
of items
A
B
C
Low
Few
Many
Number of Items
Cycle Counting
A physical count of items in inventory
Cycle counting management
How much accuracy is needed?
When should cycle counting be performed?
Who should do it?
Economic Order Quantity Models
Economic order quantity model
Economic production model
Quantity discount model
Assumptions of EOQ Model
Only one product is involved
Annual demand requirements known
Demand is even throughout the year
Lead time does not vary
Each order is received in a single delivery
There are no quantity discounts
The Inventory Cycle
Figure 11.2
Q
Quantity
on hand
Profile of Inventory Level Over Time
Usage
rate
Reorder
point
Receive
order
Place Receive
order order
Lead time
Place Receive
order order
Time
Total Cost
Annual
Annual
Total cost = carrying + ordering
cost
cost
TC =
Q
H
2
DS
Q
Cost Minimization Goal

Figure 11.4C
Annual Cost
The Total-Cost Curve is U-Shaped

Q
D
TC H S
2
Q
Ordering Costs
QO (optimal order quantity)
Order Quantity
(Q)
Deriving the EOQ

Using calculus, we take the derivative of the
total cost function and set the derivative
(slope) equal to zero and solve for Q.
Q OPT =
2DS
=
H
2(Annual Demand)(Order or Setup Cost)

Annual Holding Cost
Minimum Total Cost

The total cost curve reaches its minimum
where the carrying and ordering costs are
equal.
Q OPT =
2DS
=
H
2(Annual Demand)(Order or Setup Cost)

Annual Holding Cost
Economic Production Quantity (EPQ)

Production done in batches or lots
Capacity to produce a part exceeds the parts
usage or demand rate
Assumptions of EPQ are similar to EOQ
except orders are received incrementally
during production
Economic Production Quantity Assumptions

Only one item is involved
Annual demand is known
Usage rate is constant
Usage occurs continually
Production rate is constant
Lead time does not vary
No quantity discounts
Economic Run Size
Q0
2DS
p
H p u
Total Costs with Purchasing Cost

Annual
Annual
Purchasing
+
TC = carrying + ordering cost
cost
cost
Q
H
TC =
2
DS
Q
PD
Total Costs with PD

Cost
Figure 11.7
Adding Purchasing cost
doesnt change EOQ
TC with PD
TC without PD
PD
EOQ
Quantity
Total Cost with Constant Carrying

Costs
Figure 11.9
Total Cost
TCa
TCb
Decreasing
Price
TCc
CC a,b,c
OC
EOQ
Quantity
When to Reorder with EOQ Ordering
Reorder Point - When the quantity on hand

of an item drops to this amount, the item is
reordered
Safety Stock - Stock that is held in excess of

expected demand due to variable demand
rate and/or lead time.
Service Level - Probability that demand will

not exceed supply during lead time.
Determinants of the Reorder Point

The rate of demand
The lead time
Demand and/or lead time variability
Stockout risk (safety stock)
Safety Stock
Quantity
Figure 11.12
Maximum probable demand

during lead time
Expected demand
during lead time
ROP
Safety stock reduces risk of
stockout during lead time
Safety stock
LT
Time
Reorder Point
Figure 11.13
The ROP based on a normal
Distribution of lead time demand
Service level
Risk of
a stockout
Probability of
no stockout
Expected
demand
0
ROP
Quantity
Safety
stock
z
z-scale
Fixed-Order-Interval Model
Orders are placed at fixed time intervals
Order quantity for next interval?
Suppliers might encourage fixed intervals
May require only periodic checks of
inventory levels
Risk of stockout
Fixed-Interval Benefits
Tight control of inventory items
Items from same supplier may yield savings
in:
Ordering
Packing
Shipping costs
May be practical when inventories cannot be

closely monitored
Fixed-Interval Disadvantages
Requires a larger safety stock
Increases carrying cost
Costs of periodic reviews
Single Period Model
Single period model: model for ordering of

perishables and other items with limited
useful lives
Shortage cost: generally the unrealized

profits per unit
Excess cost: difference between purchase

cost and salvage value of items left over at
the end of a period
Single Period Model
Continuous stocking levels
Identifies optimal stocking levels
Optimal stocking level balances unit shortage

and excess cost
Discrete stocking levels
Service levels are discrete rather than

continuous
Desired service level is equaled or exceeded
Operations Strategy
Too much inventory

Tends to hide problems
Easier to live with problems than to eliminate
them
Costly to maintain
Wise strategy
Reduce lot sizes
Reduce safety stock

Chap011 - Inventory Management

Uploaded by

Document Information

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

Chap011 - Inventory Management

Uploaded by

Copyright:

Available Formats

11-1

Operations Management, Eighth Edition, by William J. Stevenson

Inventory: a stock or store of goods

Independent demand is uncertain.

Raw materials & purchased parts

Partially completed goods called

Types of Inventories (Contd)

Replacement parts, tools, & supplies

Goods-in-transit to warehouses or customers

To meet anticipated demand

To smooth production requirements

To protect against stock-outs

Functions of Inventory (Contd)

To take advantage of order cycles

To help hedge against price increases

To take advantage of quantity discounts

Objective of Inventory Control

To achieve satisfactory levels of customer

Level of customer service

Costs of ordering and carrying inventory

Effective Inventory Management

A system to keep track of inventory

A reliable forecast of demand

Knowledge of lead times

11-10 Inventory Management

Inventory Counting Systems

Perpetual Inventory System

Inventory Counting Systems (Contd)

11-12 Inventory Management

Key Inventory Terms

11-13 Inventory Management

ABC Classification System

Classifying inventory according to some

11-14 Inventory Management

A physical count of items in inventory

Cycle counting management

How much accuracy is needed?

When should cycle counting be performed?

Who should do it?

11-15 Inventory Management

Economic Order Quantity Models

Economic order quantity model

Economic production model

Quantity discount model

11-16 Inventory Management

Assumptions of EOQ Model

Only one product is involved

Annual demand requirements known

Demand is even throughout the year

Lead time does not vary

Each order is received in a single delivery

There are no quantity discounts

11-17 Inventory Management

The Inventory Cycle

Profile of Inventory Level Over Time

11-18 Inventory Management

11-19 Inventory Management

Cost Minimization Goal

The Total-Cost Curve is U-Shaped

11-20 Inventory Management

Deriving the EOQ

2(Annual Demand)(Order or Setup Cost)

11-21 Inventory Management

Minimum Total Cost