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Operations Management

Chapter 9
Inventory Management
Capacity
Management Direct

Supply Network
Management
Inventory Operations
Management
management
Design Develop

Production Deliver
Planning and
Control

Lean
Synchronization
Key operations questions

• What is inventory and why its necessary?


• What are the dis/advantages of holding
inventory?
• Ways of reconciling capacity and demand
• How much inventory should an operation hold?
• When should an operation replenish its inventory?
• What are different classifications of inventory?
Inventory is created to compensate for the differences in
timing between supply and demand

Rate of supply from


input process

Rate of demand from


Inventory output process

Input Output
process process

Inventory: An item or product kept inInventory


stock for future use having certain cost
value. : Stored accumulation of resources in a transformation system.
Reasons for holding an Inventory

Simultaneous
operations
Different
stages at
different
Random schedules
demand
Coping with
planned
fluctuations

Cope with
transportation
? delays
Holding an Inventory: Disadvantages

Risk of
damage/
Working
loosing
capital

Administr
ative cost
Valuable
Insurance
space
cost

Obsolete

?
Ways of reconciling capacity and demand

Demand Demand Demand

Capacity Capacity Capacity

Demand
Level capacity Chase demand
management
Ways of reconciling capacity and demand (cont’d)

How do you cope with


fluctuations in demand?

Absorb Adjust output Change


demand to match demand
demand
Level capacity Demand
management
Chase demand
Types of Inventory
Buffer inventory:
To compensate for unexpected demand

Cycle inventory:
To cope with operational inability to produce simultaneously

Decoupling inventory:
To allow different stages to operate at different speeds and
different schedules

Anticipation inventory:
To cope with planned fluctuations in supply and demand

Pipeline inventory:
To cope with transportation delays in supply network
A multi-echelon inventory system

Garment
manufacturers
Cloth Regional
manufacturers warehouses
Yarn Retail
producers stores
 How much to order?

 When to Order?

 Different forms of classifying the Inventory.


Economic Order Quantity
400

350

300

250 Total costs


Costs

200

150 Holding costs

100
Order costs
50 Economic
order quantity
(EOQ)
50 100 150 200 250 300 350 400
Order quantity
Inventory profiles chart the variation in inventory level

Steady and
predictable
Order demand Slope = demand rate (D)
quantity = Q (D)

Average
Inventory level

=Q
inventory
2

Q Time
D

Instantaneous deliveries at a rate D per period


Q
of
 Average inventory: Q/2

 Time interval between deliveries= Q/D

 Frequency of deliveries=D/Q
Holding cost= holding cost/unit* avg. inventory
=Ch*Q/2

Ordering cost= Ordering cost*no. of orders per


period
=Co*D/Q

Total cost=Holding cost+ Ordering cost


Total cost=Holding cost+ Ordering cost
Ct=ChQ/2+CoD/Q

The objective of inventory management


Minimise the total cost

dct/dQ=diff. (ChQ/2)+diff. (CoD/Q)

For quantity Q meeting the minimum cost criteria


dct/dQ=0

2 2𝐶𝑜𝐷
0=Ch/2-CoD/Q Q* (EOQ)=
𝐶ℎ
Economic Order Quantity…important formula’s

Economic Order Quantity


2𝐶𝑜𝐷
Q* (EOQ)= (Square root is for whole equation
𝐶ℎ

Time interval between the orders= EOQ/D

Order Frequency= D/EOQ per period


A TV manufacturer want to predict the best quantity of picture tubes to
purchase in order to save on total expenses for assembling a TV.
He has received the orders for 2000 units for this year. The cost of the picture
tube is £40/each. Every time he orders the picture tubes, a fixed ordering/setup
cost of £100 is incurred.
The holding cost per unit of picture tube is 20% of the product cost. Calculate
the EOQ, time interval and order frequency

Economic Order Quantity Time interval between the


orders= 223.60/2000
2𝐶𝑜𝐷 =0.112 per year= 40.80 days
Q* (EOQ)=
𝐶ℎ

2∗100∗2000 Order Frequency= D/EOQ per


= period
0.20∗40
=2000/223.60=8.94
400000
=
8

EOQ=223.60 units
Inventory Classifications: ABC
A way of categorising inventory items by cost and usage:

• Class A items have the highest value


• 20% by Quantity, 80% by Value
• e.g. motor car engines or gearboxes

• Class B items would have less value


• 25 -30% by Quantity, 10 - 15% by Value
• e.g. motor car seats or wheels

• Class C items would have least value


• 50-55% by Quantity, 5 -10% by Value
• e.g. motor car electrical fixings, cables, switches etc.
Inventory classifications and measures

Class B items – the


Class A items – the next 30% or so of
20% or so of high- medium-value items
value items which which account for
account for around around 10% of the
80% of the total total stock value.
stock value.

Class C items – the


remaining 50% or so
of low-value items
which account for
around the last 10%
of the total stock
value.
Pareto curve for stocked items

100
Percentage of value of items

90
80
70
60
50
40 Class A Class B Class C
30 items items items

20
10

10 20 30 40 50 60 70 80 90 100
Percentage of types of items
Inventory Classifications: FSN
A way of categorising inventory items by its rate of sale:

• Fast moving inventory


• e.g. Milk bottles in supermarket

• Slow moving inventory


• e.g. TV sets in supermarket

• No moving inventory
• Cassettes in supermarket
Inventory Classifications: VED
A way of categorising inventory items by its importance:

• Vital
• e.g. car engines or gearboxes

• Essential
• e.g. Steering wheel

• Desirable
• e.g. Floor mats
Exam Hint

• Why is inventory necessary?

• What are advantages and disadvantages of


holding an inventory?

• What are different types of inventory?

• What are different forms of inventory


classification?

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