Chap 13 Inventory Management

(1)

Chapter 13 Chapter 13

Inventory

Management

(2)

Independent Demand Independent Demand A A B(4) B(4) C(2)C(2) D D((22) ) EE((11)) D(3)D(3) F(2)F(2) Dependent Demand Dependent Demand

(3)

Types of Inventories Types of Inventories

•

• Raw materials & purchased partsRaw materials & purchased parts

•

• Partially completed goods calledPartially completed goods called

work in progress

•

• Finished-goods inventoriesFinished-goods inventories

–

– ((manufacturing manufacturing firmsfirms))

or merchandise

(

(4)

Types of Inventories (Cont’d) Types of Inventories (Cont’d) •

• _{Replacement parts, tools, & supplies}_{Replacement parts, tools, & supplies}

•

• _{Goods-in-transit to warehouses or}_{Goods-in-transit to warehouses or}

customers

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Functions of Inventory Functions of Inventory

•

• To meet anticipated demandTo meet anticipated demand •

• To smooth production requirementsTo smooth production requirements •

• To decouple components of theTo decouple components of the production-distribution

production-distribution •

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Functions of Inventory (Cont’d) Functions of Inventory (Cont’d)

•

• To take advantage of order cyclesTo take advantage of order cycles

•

• To help hedge against price increasesTo help hedge against price increases

or to take

or to take advantage of quantityadvantage of quantity

discounts

•

(7)

•

• _{A system to keep track of inventory}_{A system to keep track of inventory}

•

• A reliable forecast of demandA reliable forecast of demand

•

• _{Knowledge of lead times}_{Knowledge of lead times}

•

• Reasonable estimates of Reasonable estimates of

–

– Holding costsHolding costs

–

– Ordering costsOrdering costs

–

– _{Shortage costs}_{Shortage costs}

•

• _{A classification system}_{A classification system}

Effective Inventory Management Effective Inventory Management

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Inventory Counting Systems Inventory Counting Systems

•

• Periodic SystemPeriodic System

Physical count of items made at periodic intervals Physical count of items made at periodic intervals

•

• Perpetual Inventory SystemPerpetual Inventory System

System that keeps track

of removals from inventory

continuously, thus

monitoring

current levels of

each item

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Inventory Counting Systems (Cont’d) Inventory Counting Systems (Cont’d) •

• Two-Bin System -Two-Bin System - Two containers of Two containers of

inventory; reorder when the first is empty

•

• _{Universal Bar Code -}_{Universal Bar Code -} _{Bar code}_{Bar code}

printed on a label that has

information about the item

to which it is attached to which it is attached 0 0 214800 232087768 214800 232087768

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•

• Lead timeLead time: time interval between ordering: time interval between ordering

and receiving the order

•

• Holding (carrying) costsHolding (carrying) costs: cost to carry an: cost to carry an

item in inventory for a length of time,

usually a year

•

• Ordering costsOrdering costs: costs of ordering and: costs of ordering and

receiving inventory

•

• Shortage costsShortage costs: costs when demand: costs when demand

exceeds supply

Key Inventory Terms Key Inventory Terms

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ABC Classification System ABC Classification System

Classifying inventory according to some Classifying inventory according to some

measure of importance and allocating control measure of importance and allocating control efforts accordingly.

efforts accordingly.

A A A

A -- very importantvery important

B B B

B -- mod. importantmod. important

C C C

C -- least importantleast important Figure 13-1 Figure 13-1 Annual Annual $ volume $ volume of items of items A A A A B B B B C C C C High High Low Low Few

Few _Many_Many Number of Items Number of Items

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•

• Economic order quantity modelEconomic order quantity model

•

• _{Economic production model}_{Economic production model}

•

• Quantity discount modelQuantity discount model

Economic Order Quantity Models Economic Order Quantity Models

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•

• Only one product is involvedOnly one product is involved

•

• Annual demand requirements knownAnnual demand requirements known

•

• Demand is even throughout the year Demand is even throughout the year

•

• Lead time does not varyLead time does not vary

•

• Each order is received in a single deliveryEach order is received in a single delivery

•

• There are no quantity discountsThere are no quantity discounts

Assumptions of EOQ Model Assumptions of EOQ Model

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The Inventory Cycle The Inventory Cycle

Profile of Inventory Level Over Time

Quantity Quantity on hand on hand Q Q Reorder Reorder point point Usage Usage rate rate Figure 13-2 Figure 13-2

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Total Cost Total Cost

Annual

carrying

cost

Annual

ordering

cost

T

o

t

a

l

c

o

s

t

=

+

Q Q 2 2 H H D D Q Q S S

TC

=

+

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Cost Minimization Goal Cost Minimization Goal

The Total-Cost Curve is U-Shaped The Total-Cost Curve is U-Shaped

Ordering Costs Ordering Costs A A n n n n u u a a l l C C o o s s t t TC TC QQ H H DD Q Q S S = = ++ 2 2 Figure 13-4 Figure 13-4

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Deriving the EOQ 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. for Q. Q Q == 22DDSS H H == 2(

2(AAnnnnuuaal Dl Deemmaanndd )(Or)(Orddeer r oor r SSeetutup p CCoosstt )) Annual Holding Cost

Annual Holding Cost

O

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Minimum Total Cost Minimum Total Cost The total cost curve reaches its

The total cost curve reaches its

minimum where the carrying and

ordering costs are equal.

Q

Q == 22DDSS H

H ==

2(

2(AAnnnnuuaal l DDeemmaanndd )(Or)(Orddeer r oor r SSeetutup p CCoostst )) Annual Holding Cost

Annual Holding Cost

OP

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•

• _{Production done in batches or lots}_{Production done in batches or lots}

•

• Capacity to produce a part exceeds theCapacity to produce a part exceeds the

part’s usage or demand rate

•

• _{Assumptions of EPQ are similar to EOQ}_{Assumptions of EPQ are similar to EOQ}

except orders are received

incrementally during production

Economic Production Quantity Economic Production Quantity

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•

• _{Only one item is involved}_{Only one item is involved}

•

• Annual demand is knownAnnual demand is known

•

• _{Usage rate is constant}_{Usage rate is constant}

•

• Usage occurs continuallyUsage occurs continually

•

• _{Production rate is constant}_{Production rate is constant}

•

• Lead time does not varyLead time does not vary

•

• _{No quantity discounts}_{No quantity discounts}

Economic Production Quantity Assumptions Economic Production Quantity Assumptions

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Total Costs with Purchasing Cost Total Costs with Purchasing Cost

Annual

carrying

cost

Purchasing

cost

T

C

=

+

Q Q 2 2 H H D D Q Q S S

TC

=

+

Annual

ordering

cost

PD PD

+

(22)

Total Costs with PD Total Costs with PD

C C o o s s t t TC with PD TC with PD TC without PD TC without PD PD PD Adding Purchasing cost

Adding Purchasing cost doesn’t change EOQ

doesn’t change EOQ

Figure 13-7

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Total Cost with Constant Carrying Costs Total Cost with Constant Carrying Costs

OC

EOQ

EOQ QuantityQuantity

T T o o t t a a l l C C o o s s t t TCTCaa TC TC_c_c TC TC_b_b Decreasing Decreasing Price Price CC CC _a,b,c_a,b,c Figure 13-9 Figure 13-9

(24)

When to Reorder with EOQ Ordering When to Reorder with EOQ Ordering

•

• Reorder Point Reorder Point - When the quantity on hand of an item drops- When the quantity on hand of an item drops to this amount, the item is

to this amount, the item is reorderedreordered

•

• Safety Stock Safety Stock -- Stock that is held in excess of expectedStock that is held in excess of expected demand due to variable demand rate and/or lead time. demand due to variable demand rate and/or lead time.

•

• Service Level Service Level -- Probability that demand will not exceedProbability that demand will not exceed supply during lead time.

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Safety Stock Safety Stock LT LT TimeTime Expected demand Expected demand

during lead time

Maximum probable demand

during lead time

ROP ROP Q Q u u a a n n t t i i t t y y Safety stock Safety stock Figure 13-12 Figure 13-12

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Reorder Point Reorder Point ROP ROP Risk of Risk of a stockout a stockout Service level Service level Probability of Probability of no stockout no stockout Expected Expected demand

demand _Safety_Safety

Quantity

Figure 13-13

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•

• _{Orders are placed at fixed}_{Orders are placed at fixed}_{time intervals}_{time intervals}

•

• Order quantity for next interval?Order quantity for next interval?

•

• _{Suppliers might encourage fixed}_{Suppliers might encourage fixed}

intervals

•

• May require only periodic checks of May require only periodic checks of

inventory levels

Fixed-Order-Interval Model Fixed-Order-Interval Model

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•

• Tight control of type A itemsTight control of type A items •

• Items from same supplier may yieldItems from same supplier may yield savings in: savings in: – – OrderingOrdering – – PackingPacking –

– Shipping costsShipping costs

•

• May be practical when inventories cannotMay be practical when inventories cannot be closely monitored

be closely monitored

Fixed-Interval Benefits Fixed-Interval Benefits

(29)

•

• _{Requires a larger safety stock}_{Requires a larger safety stock}

•

• Increases carrying costIncreases carrying cost

•

• _{Costs of periodic reviews}_{Costs of periodic reviews}

Fixed-Interval Disadvantages Fixed-Interval Disadvantages

(30)

•

• Single period model Single period model : model for ordering: model for ordering

of perishables and other items with

limited useful lives

•

• Shortage cost Shortage cost : generally the unrealized: generally the unrealized

profits per unit

•

• Excess cost Excess cost : difference between: difference between

purchase cost and salvage value of

items left over at the end of a period

Single Period Model Single Period Model

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•

• Continuous stocking levelsContinuous stocking levels

–

– IdenIdentifitifies optimes optimal stockal stocking leving levelsels

–

– OptiOptimal stomal stocking levcking level balancel balances unit shortaes unit shortagege

and excess cost

•

• Discrete stocking levelsDiscrete stocking levels

–

– ServService levice levels are diels are discretscrete rather the rather thanan

continuous

–

– DesiDesired servred service levice level is equel is equaled or aled or exceeded exceeded

Single Period Model Single Period Model

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•

• _{Too much inventory}_{Too much inventory}

–

– _{Tends to hide problems}_{Tends to hide problems}

–

– Easier to live with problems than toEasier to live with problems than to

eliminate them

–

– Costly to maintainCostly to maintain

•

• _{Wise strategy}_{Wise strategy}

–

– Reduce lot sizesReduce lot sizes

–

– Reduce safety stockReduce safety stock

Operations Strategy Operations Strategy