2 Learning Objectives Define the term inventory and list the major reasons for holding inventories; and list the main requirements for effective inventory management. Discuss the nature and importance of service inventories Discuss the objectives of inventory management. Describe the A-B-C approach and explain how it is useful.
3 Learning Objectives Describe the basic EOQ model and its assumptions and solve typical problems. Describe the economic production quantity model and solve typical problems. Describe reorder point models and solve typical problems.
12-4 Examples: –Parts in a factory –Paper towels in your cupboard –Customers on hold –Paperwork in secretary’s in-box Not limited to physical products Inventory is DELAY in business process. What is inventory?
12-5 What is inventory? Transformation Input Output Raw materials Materials received Customers waiting in a bank Paperwork in in- box Work-in-Process Semi-finished products Customers at the counter Paperwork on desk Finished goods Products waiting to be shipped Customers leaving the bank Paperwork in out- box Within organization: Between organizations: Goods-in-transit
6 Types of Inventories 1.Raw materials & purchased parts 2.Partially completed goods called work in progress (WIP) 3.Finished-goods inventories (manufacturing firms or merchandise, retail stores)
7 Types of Inventories (Cont’d) 4.Replacement parts, tools, & supplies 5.Goods-in-transit to warehouses or customers
8 Functions of Inventory To meet anticipated demand (anticipation stock) To maintain continuity of operations (buffer stock) To protect against stock-outs, i.e. decrease the risk of shortages due to delayed delivery and unexpected increases in demand, (safety stock) To take advantage of quantity discounts
9 Objective of Inventory Control To achieve satisfactory levels of customer service while keeping inventory costs within reasonable bounds (limits), there are 2 concerns: 1.Level of customer service Right goods (in sufficient quantities) Right place Right time 2.Costs of ordering and carrying inventory
10 A system to keep track of inventory A reliable forecast of demand Knowledge of lead times Reasonable estimates of –Holding costs –Ordering costs –Shortage costs A classification system Effective Inventory Management
11 Inventory Tracking Systems Periodic System Physical count of items made at periodic intervals Perpetual Inventory System System that keeps track of removals from inventory continuously, thus monitoring current levels of each item Perpetual = all-time, เป็นไปอย่างต่อเนื่อง ตลอดเวลา
12 Inventory Tracking Systems (Cont’d) Two-Bin System - Two containers of inventory; reorder when the first is empty Universal Product Code (UPC) - Bar code printed on a label that has information about the item to which it is attached 0 214800 232087768
13 ABC Classification System Classifying inventory according to some measure of importance and allocating control efforts accordingly. A A - very important B B - mod. important C C - least important Annual $ value of items A B C High Low High Percentage of Items
14 ABC Classification System Item #Annual demandUnit cost ($) Annual Dollar Value 12500360 2100070 32,400500 41500100 570070 61000 7200210 810004000 9800010 500200
15 ABC Classification System ItemAnnual Dollar valueClassification% items% Annual Dollar value 84,000,000A10 31,200,000B30 61,000,000B 1900,000B 4150,000C60 10C 9C 2C 5C 7C A item is 10 -20% of the number of items but 60-70% of the annual dollar C item is 50-60% of the number of items but 10-15% of the annual dollar Normally, A items should receive close attention (frequent reviews) while C items should receive only loose control.
16 Cycle Counting A physical count of items in inventory Cycle counting management –How much accuracy is needed? (± 0.2% for A items, ± 1% B items, and ± 5% C items) –When should cycle counting be performed? –Who should do it?
17 Inventory Models Independent demand – finished goods, items that are ready to be sold –E.g. a computer Dependent demand – components of finished products –E.g. parts that make up the computer
19 Economic order quantity (EOQ) model –The order size that minimizes total annual cost Economic production model Quantity discount model Economic Order Quantity Models
20 Only one product is involved Annual demand requirements known Demand is even throughout the year Lead time does not vary Each order is received in a single delivery There are no quantity discounts Assumptions of EOQ Model
21 The Inventory Cycle Profile of Inventory Level Over Time Quantity on hand Q Receive order Place order Receive order Place order Receive order Lead time Reorder point Usage rate Time
23 Total Cost Annual carrying cost Annual ordering cost Total cost =+ TC = Q 2 H D Q S +
24 Cost Minimization Goal Order Quantity (Q) The Total-Cost Curve is U-Shaped Ordering Costs QOQO Annual Cost ( optimal order quantity)
25 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.
26 Minimum Total Cost The total cost curve reaches its minimum where the carrying and ordering costs are equal. Q 2 H D Q S =
27 Production done in batches or lots Capacity to produce a part exceeds the part’s usage or demand rate Assumptions of EPQ are similar to EOQ except orders are received incrementally during production Economic Production Quantity (EPQ)
28 Only one item is involved Annual demand is known Usage rate is constant Usage occurs continually Production rate is constant Lead time does not vary No quantity discounts Economic Production Quantity Assumptions
29 EPQ: Inventory Profile Q Q*Q* I max Production and usage Production and usage Production and usage Usage only Usage only Cumulative production Amount on hand Time
37 When to Reorder Reorder point –When the quantity on hand of an item drops to this amount, the item is reordered. –Determinants of the reorder point 1.The rate of demand 2.The lead time 3.The extent of demand and/or lead time variability 4.The degree of stockout risk acceptable to management
39 Reorder Point: Under Uncertainty Demand or lead time uncertainty creates the possibility that demand will be greater than available supply To reduce the likelihood of a stockout, it becomes necessary to carry safety stock –Safety stock Stock that is held in excess of expected demand due to variable demand and/or lead time
40 Safety Stock LT Time Expected demand during lead time Maximum probable demand during lead time ROP Quantity Safety stock 12-40 Safety stock reduces risk of stockout during lead time
41 Safety Stock? As the amount of safety stock carried increases, the risk of stockout decreases. –This improves customer service level Service level –The probability that demand will not exceed supply during lead time –Service level = 100% - Stockout risk 12-41
42 How Much Safety Stock? The amount of safety stock that is appropriate for a given situation depends upon: 1.The average demand rate and average lead time 2.Demand and lead time variability 3.The desired service level
49 Orders are placed at fixed time intervals Order quantity for next interval? Suppliers might encourage fixed intervals May require only periodic checks of inventory levels Risk of stockout Fill rate – the percentage of demand filled by the stock on hand Fixed-Order-Interval Model
50 Tight control of inventory items Items from same supplier may yield savings in: –Ordering –Packing –Shipping costs May be practical when inventories cannot be closely monitored Fixed-Interval Benefits
51 Requires a larger safety stock Increases carrying cost Costs of periodic reviews Fixed-Interval Disadvantages
53 When to orderHow much to order Fixed-quantity (orders are triggered by a quantity) Fixed-interval (orders are triggered by time) Amount for order = Expected demand during production interval + SS – Amount on hand at reorder time = demandsafety stock excel