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Chapter12
Inventory
management
Slide12.2
Inventorymanagement
Direct
Design
Inventory
management
Operations
management
Develop
Deliver
Figure12.1Thischaptercoversinventorymanagement
Slack,Brandon-JonesandJohnston,Operations Management PowerPoints on the Web,7theditionNigelSlack,AlistairBrandon-JonesandRobertJohnston2014
Slide12.3
Keyoperationsquestions
In Chapter 12 Inventory planning and control Slack et
al. identify the following key questions
What is inventory?
Why should there be any inventory?
How much should be ordered?
When should an order be placed?
How can inventory be controlled?
Slide12.4
Inventorymanagement
Inventory is created to compensate for the differences in timing
between supply and demand
Inventory
accumulating
Time
Inventory
reducing
Inventory
Out-flow(rate of demand
from output process)
Time
Figure12.2Inventoryiscreatedtocompensateforthedifferencesintimingbetweensupplyanddemand
Slack,Brandon-JonesandJohnston,Operations Management PowerPoints on the Web,7theditionNigelSlack,AlistairBrandon-JonesandRobertJohnston2014
Slide12.5
Examplesofinventory
Process,
operationor
supplynetwork
Hotel
Inventories
Physicalinventories
Queuesofcustomers
Informationin
databases
Fooditems,drinks,
toiletitems
Hospital
Creditcard
application
process
Computer
manufacturer
Atcheckinandcheck Customerdetails,
out
loyaltycardholders,
cateringsuppliers
Dressings,disposable Patientsonawaiting
Patientmedical
instruments,blood
list,patientsinbed
records
waitingforsurgery,
patientsinrecovery
wards
Blankcards,form
Customerswaitingon Customerscreditand
letters
thephone
personalinformation
Componentsfor
assembly,packaging
materials,finished
computersreadyfor
sale
Customerswaitingfor
deliveryoftheir
computer
Customersdetails,
supplierinformation
Table12.1Examplesofinventoryheldinprocesses,operationsorsupplynetworks
Slack,Brandon-JonesandJohnston,Operations Management PowerPoints on the Web,7theditionNigelSlack,AlistairBrandon-JonesandRobertJohnston2014
Slide12.6
Somereasonstoavoidinventories
Physicalinventories
Cost
Tiesupworkingcapital
andtherecouldbehigh
administrativeand
insurancecosts
Requiresstoragespace
Space
Quality
Operational/
organizational
Inventories
Queuesofcustomers
Digitalinformationin
databases
Primarilytime-costtothe Costofset-up,access,
customer,i.e.wastes
updateand
customerstime.
maintenance
Requiresareasfor
Requiresmemory
waitingorphonelinesfor capacity.Mayrequire
heldcalls
secureand/orspecial
environment
Maydeteriorateovertime, Mayupsetcustomersif
becomedamagedor
theyhavetowaittoo
obsolete
long.Maylose
customers
Mayhideproblems(see Mayputunduepressure
leansynchronization
onthestaffandso
Chapter15)
qualityiscompromised
forthroughput
Datamaybecorrupted
orlostorbecome
obsolete
Databasesneed
constantmanagement;
accesscontrol,
updatingandsecurity
Table12.2Somereasonstoavoidinventories
Slide12.7
Somewaysinwhichphysicalinventorymaybereduced
Reasonfor
holdinginventory
Asaninsurance
against
uncertainty
Tocounteracta
lackofflexibility
Example
Safetystocksforwhen
demandorsupplyisnot
perfectlypredictable
Cyclestocktomaintainsupply
whenotherproductsarebeing
made
Totakeadvantage Suppliersoffertimelimited
ofrelativelyshort- speciallowcostoffers
termopportunities
Howinventorycouldbe
reduced
Improvedemandforecasting
Tightensupply,e.g.through
servicelevelpenalties
Increaseflexibilityof
processes,e.g.byreducing
changeovertimes(see
Chapter11)
Usingparallelprocesses
producingoutput
simultaneously(see
Chapter7)
Persuadesupplierstoadopt
everydaylowprices(see
Chapter13)
Table12.3Somewaysinwhichphysicalinventorymaybereduced
Slide12.8
Somewaysinwhichphysicalinventorymaybereduced
(Continued)
Reasonfor
Example
holdinginventory
Toanticipate
Buildupstocksinlow
futuredemands
demandperiodsforusein
highdemandperiods
Toreduceoverall Purchasingabatchof
costs
productsinordertosave
deliveryandadministration
costs
Tofillthe
processing
pipeline
Itemsbeingdeliveredto
customer
Howinventorycouldbereduced
Increasevolumeflexibilityby
movingtowardsachase
demandplan(seeChapter11)
Reduceadministrationcosts
throughpurchasingprocess
efficiencygains
Investigatealternativedelivery
channelthatreducetransport
costs.
Reduceprocesstimebetween
customerrequestanddispatch
ofitems
Reducethroughputtimeinthe
downstreamsupplychain(see
Chapter13)
Table12.3Somewaysinwhichphysicalinventorymaybereduced(Continued)
Slack,Brandon-JonesandJohnston,Operations Management PowerPoints on the Web,7theditionNigelSlack,AlistairBrandon-JonesandRobertJohnston2014
Slide12.9
Inventoryhasasignificanteffectonreturnonassets
Abilityto
supplyfrom
stock
Returnon =
Assets
Profit
Totalassets
Obsolescence,
damage,loss
RevenuesCosts
Storage
costs
Ordering
costs
Workingcapital+Fixedassets
Amountyou
owesuppliers
Amount
customersowe
you
Costof
funding
inventory
Figure12.4Inventorymanagementhasasignificanteffectonreturnonassets
Slide12.10
Inventoryprofileschartthevariationininventorylevel
Steadyand
predictable
demand(D)
Order
quantity=Q
Slope=demandrate
Inventorylevel
Averageinventory
=Q
2
Q
D
Time
Instantaneousdeliveriesatarateof D perperiod
Q
Figure12.5Inventoryprofileschartthevariationininventorylevel
Slide12.11
Twoalternativeinventoryplanswithdifferentorder
quantities(Q)
Inventorylevel
Demand(D)=1,000itemsper
year
400
PlanA
Q=400
Averageinventory
forplanA=200
PlanB
100 Q=100
Averageinventory
forplanB=50
Time
0.1yr
0.4yr
Figure12.6Twoalternativeinventoryplanswithdifferentorderquantities(Q)
Slide12.12
Traditionalviewofinventory-relatedcosts
400
350
300
Costs
250
Totalcosts
200
150
Holdingcosts
100
Ordercosts
50
Economicorder
quantity(EOQ)
50
100
150
200
250
300
350
400
Orderquantity
Figure12.7Graphicalrepresentationoftheeconomicorderquantity
Slack,Brandon-JonesandJohnston,Operations Management PowerPoints on the Web,7theditionNigelSlack,AlistairBrandon-JonesandRobertJohnston2014
Slide12.13
Inventorylevel
Cycleinventoryinabakery
Deliver
B
Deliver
C
Deliver
A
ProduceB ProduceC
Deliver
B
Deliver
C
Time
Figure12.3Cycleinventoryinabakery
Slide12.14
Inventoryprofileforgradualreplacementofinventory
Inventorylevel
Order
quantity
Q
Slope=P D
Slope=D
Q
P
Time
Figure12.8Inventoryprofileforgradualreplacementofinventory
Slide12.15
Inventory
level
Inventoryplanningallowingforshortages
Time
Shortages
Slide12.16
There-orderpoint
Demand(D)=100itemsperweek
Inventorylevel
400
Orderquantity(Q)=400
Re-orderlevel
300
Re-orderpoint
200
100
0
Orderleadtime
Time
Figure12.11Re-orderlevel(ROL)andre-orderpoint(ROP)arederivedfromtheorderleadtime
anddemandrate
Slide12.17
Safetystock(s)helpstoavoidstock-outswhendemand
and/ororderleadtimesareuncertain
Inventorylevel
Re-orderlevel(ROL)
Distributionof
lead-time
usage
Q
d1
d2
S
t2
t1
Time
Figure12.12Safetystock(s)helpstoavoidstock-outswhendemandand/ororderleadtimeare
uncertain
Slide12.18
Theprobabilitydistributionsfororderleadtimeand
demandratecombinetogivethelead-timeusage
distribution
0.4
Probability
Probability
0.4
0.3
0.2
0.1
0
1 2 3 4 5
Orderleadtime
0.3
0.2
0.1
0
Probability
0.4
0.3
0.2
0.1
0
100199
120299
600699
700799
Figure12.13Theprobabilitydistributionsfororderleadtimeanddemandratecombinetogivethe
lead-timeusagedistribution
Slack,Brandon-JonesandJohnston,Operations Management PowerPoints on the Web,7theditionNigelSlack,AlistairBrandon-JonesandRobertJohnston2014
Slide12.19
Aperiodicreviewapproachtoordertimingwith
probabilisticdemandandleadtime
Qm
Inventorylevel
Q1
T0
Q2
T1
T2
t1
tf
Q3
T3
t2
tf
Time
t3
tf
Figure12.14Aperiodicreviewapproachtoordertimingwithprobabilisticdemandandleadtime
Slide12.20
Apapermerchantmustgetitsinventoryplanningand
controlright
Figure12.10Theroleofthepapermerchant
Slack,Brandon-JonesandJohnston,Operations Management PowerPoints on the Web,7theditionNigelSlack,AlistairBrandon-JonesandRobertJohnston2014
Slide12.21
Paretocurveforstockeditems
Percentageofvalueofitems
100
90
80
70
60
50
40
30
ClassA
items
ClassB
items
ClassC
items
20
10
10
20
30
40
50
60
70
80
90
100
Percentageoftypesofitems
Figure12.16Paretocurveforitemsinawarehouse
Slide12.22
Inventoryclassificationsandmeasures
ClassAitemsthe
20%orsoofhighvalueitemswhich
accountforaround
80%ofthetotal
stockvalue
ClassBitemsthe
next30%orsoof
medium-valueitems
whichaccountfor
around10%ofthe
totalstockvalue
ClassCitemsthe
remaining50%orso
oflow-valueitems
whichaccountfor
aroundthelast10%
ofthetotalstock
value
Slide12.23
CriticismoftheEOQapproach
If the true costs of stock holding are taken into account, and if the cost of ordering (or
changeover) is reduced, the economic order quantity (EOQ) is much smaller
Revised
holding
costs
Costs
Revisedtotal
costs
Originaltotal
costs
Original
holdingcosts
Originalorder
costs
Revised
EOQ
Original
EOQ
Revisedorder
costs
Orderquantity
Figure12.9Ifthetruecostsofstockholdingaretakenintoaccount,andifthecostofordering(or
changeover)isreduced,theeconomicorderquantity(EOQ)ismuchsmaller
Slack,Brandon-JonesandJohnston,Operations Management PowerPoints on the Web,7theditionNigelSlack,AlistairBrandon-JonesandRobertJohnston2014
Slide12.24
TheTwo-binandThree-binsystemsofreordering
Two-binsystem
Bin1
Bin2
Itemsbeing Reorderlevel
+safety
used
inventory
Three-binsystem
Bin1
Bin2
Bin3
Itemsbeing
used
Reorder
level
inventory
Safety
inventory
Figure12.15Thetwo-binandthree-binsystemsofre-ordering
Slide12.25
Chapter12end-of-chaptercase
supplies4medics.c
om
Source:ALRF(ImagemoreCo.,Ltd)
Slide12.26
supplies4medics.com
Questions
Prepare a spreadsheet-based ABC analysis of usage value.
Classify as follows:
A-Items: top 20% of usage value
B-Items: next 30% of usage value
C-Items: remaining 50% of usage value
Slide12.27
supplies4medics.com(Continued)
Sample
number
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Catalogue
reference
number*
11036
11456
11563
12054
12372
12774
12979
13063
13236
13454
13597
13999
14068
14242
14310
14405
14456
14675
14854
24943
DisposableAprons(10pk)
Ear-loopMasks(Box)
DrillType164
IncontinencePadsLarge
150mlSyringe
RectalSpeculum3Prong
PocketOrganiserBlue
OxygenTraumaKit
ZincOxideTape
DualHeadStethoscope
Disp.LatexCatheter
Roll-upWheelchairRamp
WashCleneTube
CervicalCollar
HeadWedge
Three-WheelScooter
NeonatalTrach.Tube
MouldableStripPaste
SequentialComp.Pump
ToiletSafetyFrame
Sales unit
cost
(Euro)
2.40
3.60
1.10
3.50
11.30
17.40
7.00
187.00
1.50
6.25
0.60
152.50
1.40
12.00
89.00
755.00
80.40
10.20
430.00
25.60
Last 12
months
Sales
(units)
100
6,000
220
35,400
430
65
120
40
1,260
10
3,560
12
22,500
140
44
14
268
1,250
430
560
Inventory as
at last year
end
(units)
0
120
420
8,500
120
20
160
2
0
16
12
44
10,500
24
2
5
6
172
40
18
Re-order
Quantity
(units)
10
1,000
250
10,000
100
20
500
10
50
25
20
50
8,000
20
10
5
100
100
50
20
*Referencenumbersareallocatedsequentiallyasnewitemsareaddedtocatalogue.
**Allquantitiesareinsalesunits(e.g.item,box,case,pack).
Table12.10Representativesampleof20catalogueItems
Slide12.28
Sample
#
19
Unit
Cost
430.00
Annual
Sales
430
3.50
13
2
Classification
A
%ofUV
Inventory
184,900
Cum
UV
184,900
41.33
40
35,400
123,900
308,800
69.02
8,500
29,750
12.5
1.40
22,500
31,500
340,300
76.06
10,500
14,700
24.3
3.60
6,000
21,600
361,900
80.89
1,200
4,320
10.4
SubTotal
UV
361,900
Inventory Inventory
Value
Turns
17,200
65,970
5.49
Stock
weeks
4.8
9.5
17
80.40
268
21,547
383,447
85.70
482
1.2
20
25.60
560
14,336
397,783
88.91
18
461
1.7
18
10.20
1,250
12,750
410,533
91.76
172
1,754
7.2
16
755.00
14
10,570
421,103
94.12
3,775
18.6
SubTotal
59,203
6,473
9.15
5.7
187.00
40
7,480
428,583
95.79
374
2.6
11.30
430
4,859
433,442
96.88
120
1,356
14.5
15
89.00
44
3,916
437,358
97.75
178
2.4
11
0.60
3,560
2,136
439,494
98.23
12
0.2
1.50
1,260
1,890
441,384
98.65
0.0
12