4 InventoryInventory: Material held in an idle or incomplete state awaiting for future sale, use, or transformation.Types of inventorySuppliesRaw MaterialWork-in-processFinished GoodsPipe-line
5 Inventory Model Inventory Costs Purchase Cost (P) of an item is the unit purchase price if it is obtained from an external source, or the unit production cost if it is produced internally.Order/Setup Cost (C) originates from the expense of issuing a purchase order to an outside supplier or from internal production setup costs.Holding Cost (H), synonymous with carrying cost, subsumes the costs associated with investing in inventory and maintaining the physical investment in storage.
6 Inventory Model Inventory Costs (continued) Stockout Cost (depletion cost) is the economic consequence of an external or internal shortage. An external shortage occurs when a customer’s order is not filled; an internal shortage occurs when an order of a group or dependent within the organization is not filled.
7 Inventory Model Types of demands Independent demand: no relationship exists between the demand for an item and for any other item (i.e., end items, finished products).Dependent demand: The demand for an item is directly related to or the result of demand for a “higher level” item (i.e., raw materials, components, and subassemblies).
8 Inventory Model Parameters and Notations P = per unit price cost (Baht/unit)C = setup or order cost (Baht/order)H = Inventory holding cost (Baht/unit/year). Sometimes, H = PF, where F is the annual factor associated with capital costs, taxes, insurance, etc.R = demand rate (units/year)Q = order quantity (units)T = time between order arrivalsM = number of orders during the yearL = order lead time (year)B = reorder point
9 Economic Order Quantity (EOQ) Model Simplest and most used policySingle itemWhenever the inventory position reaches a predetermined point, an order for a fixed number of units is placedInventory LevelTimeQBT T T
10 Economic Order Quantity (EOQ) Model Inventory LevelTimeBQT T TT 2T 3T 4T 5THQRCPRTC21)(+=
11 Economic Order Quantity (EOQ) Model Total CostHolding CostOrder CostPurchase CostQCostTC(Q*)
12 Managing the inventory Pareto AnalysisABC analysis is an excellent technique for achieving objectives.A class-there aren’t many, so control tightly.B class-let the system manage theseC class-don’t take risks, be lazy. High but not excessive inventory
13 ABC Pareto ChartPercent of Total ItemsPercent of Annual CostABC
15 ABC Analysis Item Percentage Annual Cost (%) Percentage of Amount (%) Cumulative Percentage Annual CostCumulative Percentage of Amount3692411085741.232.06.94.126.96.36.199.518.010.812.62.79.05.58.113.573.280.184.889.592.494.897.098.5100.028.831.434.144.953.959.467.581.0
16 ABC Analysis class Items Percentage of Items (%) Percentage of Value (%)ABC3, 62, 4, 91, 5, 7, 8,1020305073.216.310.5Total100
17 ABC Analysis Class Degree of Control Type of Records Lot Sizes Frequency of ReviewSize of Safety StocksATightAccurate and CompleteLowContinuousSmallBModerateGoodMediumOccasionalCLooseSimpleLargeInfrequent
18 Just in Time (JIT) Management JIT production means making or buying just enough, no more or less than, of the right items just in time, no sooner or later.Production strategyEliminate waste (anything that impedes the flow of product or does not contribute to producing or selling the product) and the consistent improvement of productivity
19 Elimination of WasteElimination of all costs (waste) that do not add valueWaste– anything other than the absolute minimum resources of materials, machines, and personnel required to add value to the productLower inventorySimplification and elimination through problem solving, continuous improvement
20 Inventory as waste Inventory can also inhibit efficient operations Inventory hides1. machine breakdowns2. poor quality or high scrap3. substandard raw material4. worn tools5. worker absences or tardiness6. late delivery of parts7. unavailable materials handing equipment8. unavailable inspector or setup persons
21 Goals of JIT Small lot size High quality Reliable workers Minimize inventoryReliable machineLevel and stable production plansSpace must not be used for storage
22 To achieve this goals Shorten setup times Develop multifunctional workersCommit employees to total quality controlControl quality at sourcePreventive maintenanceGroup machines sequentially and dedicate them to partsReliable sole source suppliersHave suppliers deliver in small lots