I. II. III. IV. V.

Inventory Management Introduction Costs Associated with Inventories Inventory Models for Independent Demand Probabilistic Models and Safety Stock Fixed-Period (P) Systems

a. b. c. d. e. f. g.

Objectives of the Inventory Management Functions of Inventory Types of Inventory ABC Analysis Record Accuracy Cycle Counting Control Service Inventories

a.

b.

c.

Holding Costs costs to keep or carry inventory in stock. Ordering Costs costs of ordering processes Set-up Costs cost to prepare a machine for manufacturing an order

Obsolescence Insurance Extra staffing Interest Pilferage Damage Warehousing Etc.

Category
Housing costs (building rent, depreciation, operating cost, taxes, insurance) Material handling costs (equipment, lease or depreciation, power, operating cost) Labor cost from extra handling Investment costs (borrowing costs, taxes, and insurance on inventory) Pilferage, scrap, and obsolescence Overall carrying cost

Cost as a % of Inventory Value

6% (3 - 10%) 3% (1 - 3.5%) 3% (3 - 5%) 11% (6 - 24%) 3% (2 - 5%) 26%

Supplies Forms Order processing Clerical support Etc.

Clean-up costs Re-tooling costs Adjustment costs Etc.

a. b. c.

Economic Order Quantity Production Order Quantity Model Quantity Discount Model

a. b.

Inclusion of Safety Stocks in the ROP Other Probabilistic Models

Demand is variable and lead time is constant Lead time is variable and demand is constant Both demand and lead time are available

To strike balance between inventory investment and customer service

Stock of materials Stored capacity Examples

Decouple/ Separate Various Parts of the Various Process Decouple the firm from fluctuations in demand and provide a stock of goods that will provide a selection for customers Take advantage of quantity discounts To hedge against inflation and upward price changes

Raw Materials Work-in-process Maintenance/repair/operating Finished-goods

Higher costs

Item cost (if purchased) Ordering (or setup) cost

Costs of forms, clerks wages etc.

Holding (or carrying) cost

Building lease, insurance, taxes etc.

Difficult to control Hides production problems

Divides on-hand inventory into three classifications on the basis of annual dollar volume One has to measure annual demand of each inventory item times the cost per unit.

% Annual $ Usage
100 80 60 40 20 0 0 50

Class A B C

% $ Vol 80 15 5

% Items 15 30 55

A B C
100

Accurate and up-to-date records is very crucial Helps in the decision making

Continuing reconciliation of inventory with inventory records Items are counted, records are verified and inaccuracies are periodically documented

Eliminates shutdown and interruption of production necessary for annual physical inventories Eliminates annual inventory adjustments Trained personnel audit the accuracy of inventory Identification of errors and act on it immediately Maintains accurate inventory records

Good personnel selection RFID & Bar-coding Effective control of all goods leaving in the facility

Oldest and most commonly known inventory-control technique Has a saw-tooth shape graph Has six assumptions

Demand is known, constant and independent Lead time is known and constant Receipt of inventory is instantaneous and complete. Quantity discounts are not possible. The only variable costs are the cost of setting up or placing an order and the holding cost. Stock-outs can be completely avoided if orders are placed at the right time.

Minimum inventory

Inventory Level

Order quantity = Q (maximum inventory level)

Usage Rate

Average Inventory (Q*/2)

Time

Annual Cost
e urv C ost e lC ota urv T C ost C ing ld Ho

Minimu m total cost

Order (Setup) Cost Curve

Optimal Order Quantity (Q*)

Order quantity

Has the formula

2 D S H D Expected Number of Orders= N = Q*

Optimal Order Quantity = Q* = Expected Time Between Orders

=T =

Working Days /Year

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

The level where in the firm will place another order to fill the inventories
Q* Slope = units/day = d ROP (Units)

Inventory level (units)

Lead time = L

Time (days)

Applicable to: (1)when inventory continuously builds up over a period of time after an order has been placed or (2) when units are produced and sold simultaneously

Maxim um invento ry level

Both production and usage take place

Usage only takes place

Inventory Level

Time

Optimal Order Quantity

= Q* = p

2*D*S

H* 1 -

Maximum inventory levelQ* = Setup Cost = D Q *S

1-

d p

( )
d p

0.5 * H * Q 1 Holding Cost =

( )
d p

D = Demand per year S = Setup cost H = Holding cost d = Demand per day p = Production

quantity discount model is simply reduced price (P) for an item when it is purchased in larger quantities. The major trade-off is between reduced product costs and increased holding cost.

Step 1: For each discount, calculate a value for optimal order size Q* Step 2: For any discount, if the order quantity is too low to qualify for the discount, adjust the order quantity upward to the lowest quantity that will qualify for the discount. Step 3: Using the preceding total cost equation, compute a total cost for every Q* determined in steps 1 and 2. If one had to adjust Q* upward because it was below the allowable quantity range, be sure to use the adjusted value for Q*. Step 4: Select Q* that has the lowest total cost as computed in step 3. It will be the quantity that will minimize the total inventory cost.

Answer how much & when to order Allow demand to vary

Follows normal distribution Other EOQ assumptions apply Service level = 1 - Probability of stockout Higher service level means more safety stock
More safety stock means higher ROP

Consider service level & safety stock

Inventory Level Optimal Order Quantit y Reorder Point (ROP)

Frequen cy

Service Level

P(Stockout)

SS ROP

Safety Stock (SS) Place order Lead Time Receive order Time

Answers how much to order Orders placed at fixed intervals

Inventory brought up to Amount ordered varies

target amount

No continuous inventory count

Possibility Example:

of stock-out between intervals P&G representative calls every 2

Useful when vendors visit routinely

weeks

Various amounts (Qi) are ordered at regular time intervals (p) based on the quantity necessary to bring inventory up to target maximum

Q1

Q2 Q3

Target maximum Q4

On-Hand Inventory

Time