2 Learning ObjectivesDefine 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 inventoriesDiscuss the objectives of inventory management.Describe the A-B-C approach and explain how it is useful.
3 Learning ObjectivesDescribe 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.
4 Inventory is DELAY in business process. What is inventory?Examples:Parts in a factoryPaper towels in your cupboardCustomers on holdPaperwork in secretary’s in-boxNot limited to physical productsInventory is DELAY in business process.
5 What is inventory? Input Transformation Output Within organization: Raw materialsMaterials receivedCustomers waiting in a bankPaperwork in in-boxWork-in-ProcessSemi-finished productsCustomers at the counterPaperwork on deskFinished goodsProducts waiting to be shippedCustomers leaving the bankPaperwork in out-boxBetween organizations: Goods-in-transit
6 Types of Inventories Raw materials & purchased parts Partially completed goods called work in progress (WIP)Finished-goods inventories(manufacturing firms or merchandise, retail stores)
7 Types of Inventories (Cont’d) Replacement parts, tools, & suppliesGoods-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:Level of customer serviceRight goods (in sufficient quantities)Right placeRight timeCosts of ordering and carrying inventory
10 Effective Inventory Management A system to keep track of inventoryA reliable forecast of demandKnowledge of lead timesReasonable estimates ofHolding costsOrdering costsShortage costsA classification system
11 Inventory Tracking Systems Periodic SystemPhysical count of items made at periodic intervalsPerpetual Inventory System System that keeps track of removals from inventory continuously, thus monitoring current levels of each itemPerpetual = all-time, เป็นไปอย่างต่อเนื่อง ตลอดเวลา
12 Inventory Tracking Systems (Cont’d) Two-Bin System - Two containers of inventory; reorder when the first is emptyUniversal Product Code (UPC) - Bar code printed on a label that has information about the item to which it is attached
13 ABC Classification System Classifying inventory according to some measure of importance and allocating control efforts accordingly.A - very importantB - mod. importantC - least importantAnnual$ valueof itemsABCHighLowPercentage of Items
14 ABC Classification System Item #Annual demandUnit cost ($)Annual Dollar Value12500360210007032,40050041500100570067200210840009800010
15 ABC Classification System ItemAnnual Dollar valueClassification% items% Annual Dollar value84,000,000A1031,200,000B3061,000,0001900,0004150,000C609257A item is % 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 managementHow 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 ModelsIndependent demand – finished goods, items that are ready to be soldE.g. a computerDependent demand – components of finished productsE.g. parts that make up the computer
19 Economic Order Quantity Models Economic order quantity (EOQ) modelThe order size that minimizes total annual costEconomic production modelQuantity discount model
20 Assumptions of EOQ Model Only one product is involvedAnnual demand requirements knownDemand is even throughout the yearLead time does not varyEach order is received in a single deliveryThere are no quantity discounts
21 Profile of Inventory Level Over Time The Inventory CycleProfile of Inventory Level Over TimeQuantityon handQReceiveorderPlaceLead timeReorderpointUsagerateTime
23 Total Cost Annual carrying cost Annual ordering cost Total cost = + Q 2HDS+TC =
24 Cost Minimization Goal The Total-Cost Curve is U-ShapedAnnual CostOrdering CostsOrder Quantity (Q)QO(optimal order quantity)
25 Deriving the EOQUsing 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 CostThe total cost curve reaches its minimum where the carrying and ordering costs are equal.Q2HDS=
27 Economic Production Quantity (EPQ) Production done in batches or lotsCapacity to produce a part exceeds the part’s usage or demand rateAssumptions of EPQ are similar to EOQ except orders are received incrementally during production
28 Economic Production Quantity Assumptions Only one item is involvedAnnual demand is knownUsage rate is constantUsage occurs continuallyProduction rate is constantLead time does not varyNo quantity discounts
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 pointThe rate of demandThe lead timeThe extent of demand and/or lead time variabilityThe 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 supplyTo reduce the likelihood of a stockout, it becomes necessary to carry safety stockSafety stockStock that is held in excess of expected demand due to variable demand and/or lead time
40 Safety Stock Quantity Maximum probable demand Expected demand LTTimeExpected demandduring lead timeMaximum probable demandROPQuantitySafety stockSafety stock reduces risk ofstockout during lead time12-40
41 Safety Stock?As the amount of safety stock carried increases, the risk of stockout decreases.This improves customer service levelService levelThe probability that demand will not exceed supply during lead timeService level = 100% - Stockout risk12-41
42 How Much Safety Stock?The amount of safety stock that is appropriate for a given situation depends upon:The average demand rate and average lead timeDemand and lead time variabilityThe desired service level
49 Fixed-Order-Interval Model Orders are placed at fixed time intervalsOrder quantity for next interval?Suppliers might encourage fixed intervalsMay require only periodic checks of inventory levelsRisk of stockoutFill rate – the percentage of demand filled by the stock on hand
50 Fixed-Interval Benefits Tight control of inventory itemsItems from same supplier may yield savings in:OrderingPackingShipping costsMay be practical when inventories cannot be closely monitored
51 Fixed-Interval Disadvantages Requires a larger safety stockIncreases carrying costCosts of periodic reviews
53 Fixed-quantity (orders are triggered by a quantity) When to orderHow much to orderFixed-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 stockexcel