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What Is Inventory?
Stock of items kept to meet future demand Purpose of inventory management
how many units to order? when to order?
Types of Inventory
Inputs
Raw Materials Purchased parts Maintenance and Repair Materials Process
Outputs
Finished Goods Scrap and Waste
PROCESS
In Process
Partially Completed Products and Subassemblies (often on the factory floor)
Inventory Level
Demand Rate
Independent
Bad Design
Lengthy Setups
Inefficient Layout
Seasonal or cyclical demand Inventory provides independence from vendors Take advantage of price discounts Inventory provides independence between stages and avoids work stop-pages
Inventory Costs
Carrying cost
cost of holding an item in inventory
Ordering cost
cost of replenishing inventory
Shortage cost
temporary or permanent loss of sales when demand cannot be met
3% (1% - 4%) 3% (3% - 5%) 10% (6% - 24%) 5% (2% - 10%) (15% - 50%)
INVENTORY CONTROL
Inventory control is concerned with minimizing the total cost of inventory. The three main factors in inventory control decision making process are: The cost of holding the stock (e.g., based on the interest rate). The cost of placing an order (e.g., for row material stocks) or the set-up cost of production. The cost of shortage, i.e., what is lost if the stock is insufficient to meet all demand. The third element is the most difficult to measure and is often handled by establishing a "service level" policy, e. g, certain percentage of demand will be met from stock without delay.
Zero Inventory?
Reducing amounts of raw materials and purchased parts and subassemblies by having suppliers deliver them directly. Reducing the amount of works-in process by using just-in-time production. Reducing the amount of finished goods by shipping to markets as soon as possible.
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Inventory Measures
Weeks of Supply
Ford: 3.51 weeks Sears: 9.2 weeks
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ABC CLASSIFICATION
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ABC Classification
The ABC Classification The ABC classification system is to grouping items according to annual sales volume, in an attempt to identify the small number of items that will account for most of the sales volume and that are the most important ones to control for effective inventory management.
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ABC Classification
Class A
5 15 % of units 70 80 % of value
Class B
30 % of units 15 % of value
Class C
50 60 % of units 5 10 % of value
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UNIT COST
$ 60 350 30 80 30 20 10 320 510 20
ANNUAL USAGE
90 40 130 60 100 180 170 50 60 120
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9 8 2 1 4 3 6 5 10 7
$30,600 1 16,000 2 14,000 3 5,400 4 4,800 5 3,900 3,600 6 CLASS 3,000 7 2,400 A 8 1,700 B 9 C $85,400
10
35.9 6.0 $ 60 18.7 5.0 350 16.4 4.0 30 6.3 9.0 80 5.6 6.0 30 4.6 10.0 4.2 % OF TOTAL 18.0 20 VALUE ITEMS 3.5 13.0 10 12.0 9, 8,2.8 2 71.0 320 17.0 1, 4,2.0 3 16.5 510 6, 5, 10, 7 12.5
20
6.0 90 11.0 40 A 15.0 130 24.0 60 30.0 B 100 40.0 % 58.0 180 OF TOTAL QUANTITY 71.0 170 C 83.0 50 15.0 100.0 25.0 60 60.0 120
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Example 10.1
ABC Analysis
Recognizes fact some inventory items are more important than others. Purpose of analysis is to divide all of company's inventory items into three groups: A, B, and C. Depending on group, decide how inventory levels should be controlled.
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Demand is known with certainty and is constant over time No shortages are allowed Lead time for the receipt of orders is constant Order quantity is received all at once
When to order?
Order when inventory falls to the Reorder Point-level R so we will just sell the last item as the new order comes in: R = DL
Q = Number of pieces per order Q* = Optimal number of pieces per order (EOQ) D = Annual demand in units for the Inventory item S = Setup or ordering cost for each order H = Holding or carrying cost per unit per year
An EOQ Example
Determine optimal number of needles to order D = 1,000 units S = $10 per order H = $.50 per unit per year
Q* = Q* =
An EOQ Example
Determine optimal number of needles to order D = 1,000 units Q* = 200 units S = $10 per order H = $.50 per unit per year Expected Demand number of = N = = Order quantity orders
An EOQ Example
Determine optimal number of needles to order D = 1,000 units Q* = 200 units S = $10 per order N = 5 orders per year H = $.50 per unit per year Number of working Expected days per year time between = T = N orders
An EOQ Example
Determine optimal number of needles to order D = 1,000 units Q* = 200 units S = $10 per order N = 5 orders per year H = $.50 per unit per year T = 50 days Total annual cost = Setup cost + Holding cost TC =
D Q* S + H Q* 2
Reorder Point
EOQ answers the how much question The reorder point (ROP) tells when to order
ROP =
=dxL
D d = Number of working days in a year
Safety Stocks
Safety stock
Stockout
an inventory shortage
Service level
probability that the inventory available during lead time will meet demand
Reorder point, R
0 LT Time LT
Q
Reorder point, R
Safety Stock
0 LT Time LT
Probability of a stockout
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= 325.9 m
= 25.9 m