Inventory Management
Outline
GLOBAL COMPANY PROFILE: [Link] FUNCTIONS OF INVENTORY
Types of Inventory
INVENTORY MANAGEMENT
ABC Analysis Record Accuracy Cycle Counting Control of Service Inventories
Outline - Continued
INVENTORY MODELS
Independent versus Dependent Demand Holding, Ordering, and Setup Costs
INVENTORY MODELS FOR INDEPENDENT DEMAND
Basic Economic Order Quantity (EOQ) Model Minimizing Costs Reorder Points Production Order Quantity Model
Outline - Continued
PROBABILISTIC MODELS WITH CONSTANT LEAD TIME FIXED PERIOD (P) SYSTEMS
Learning Objectives
When you complete this chapter, you should be able to : Identify or Define:
ABC analysis Record accuracy Cycle counting Independent and dependent demand Holding, Ordering, and Setup Costs
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Describe or Explain:
The functions of inventory and basic
[Link]
Jeff Bezos, in 1995, started [Link] as a virtual retailer no inventory, no warehouses, no overhead; just a bunch of computers. Growth forced [Link] to excel in inventory management! AMAZON is now a worldwide leader in warehouse management and automation.
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Order Fulfillment at AMAZON
1. You order items;, computer assigns your order to distribution center [closest facility that has the product(s)] 2. Lights indicate products ordered to workers who retrieve product and reset light. 3. Items placed in crate with items from other orders, and crate is placed on conveyor. Bar code on item is scanned 15 times virtually eliminating error. 7
Order Fulfillment at AMAZON- Continued
4. Crates arrive at central point where items are boxed and labeled with new bar code. 5. Gift wrapping done by hand (30 packages per hour) 6. Box is packed, taped, weighed and labeled before leaving warehouse in a truck. 7. Order appears on your doorstep within a 8
What is Inventory?
jStock of materials jStored capacity Examples
1995 Corel Corp.
1984-1994 T/Maker Co. 1995 Corel Corp.
1984-1994 T/Maker Co.
The Functions of Inventory
To decouple or separate various parts of the production process To provide a stock of goods that will provide a selection for customers To take advantage of quantity discounts To hedge against inflation and upward price changes
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Types of Inventory
Raw material Work-in-progress Maintenance/repair/operating supply Finished goods
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The Material Flow Cycle
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Disadvantages of Inventory
Higher costs
Item cost (if purchased) Ordering (or setup) cost
Costs of forms, clerks wages etc.
Holding (or carrying) cost
Building lease, insurance, taxes etc.
Difficult to control Hides production problems
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Inventory Classifications
Inventory
1984-1994 T/Maker Co.
Process stage
Number & Value
Demand Type
Other
Raw Material WIP Finished Goods
A Items B Items C Items
Independent Dependent
Maintenance Operating
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The Material Flow Cycle
1 Run time: Job is Wait at machine and being worked on Run Queue Setup Move Other Time Time Time Time Input 2 Setup time: Job is at the work station, and the work Time station is Output being "setup." 3 Queue time: Job is where itCycle Timebe, but is not being processed should because other work precedes it. 4 Move time: The time a job spends in transit 5 Wait time: When one process is finished, but the job is waiting to be moved to the next work area. 6 Other: "Just-in-case" inventory.
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ABC Analysis
Divides on-hand inventory into 3 classes
A class, B class, C class
Basis is usually annual $ volume
$ volume = Annual demand x Unit cost
Policies based on ABC analysis
Develop class A suppliers more Give tighter physical control of A items Forecast A items more carefully
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Classifying Items as ABC
% Annual $ Usage
100 80 60 40 20 0 0 50 100
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Class A B C
% $ Vol 80 15 5
% Items 15 30 55
A B C
% of Inventory Items
Cycle Counting
Physically counting a sample of total inventory on a regular basis Used often with ABC classification
A items counted most often (e.g., daily)
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Advantages of Cycle Counting
Eliminates shutdown and interruption of production necessary for annual physical inventories Eliminates annual inventory adjustments Provides trained personnel to audit the accuracy of inventory Allows the cause of errors to be identified and remedial action to be taken Maintains accurate inventory records
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Techniques for Controlling Service Inventory Include:
Good personnel selection, training, and discipline Tight control of incoming shipments Effective control of all goods leaving the facility
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Independent versus Dependent Demand
Independent demand - demand for item is independent of demand for any other item Dependent demand - demand for item is dependent upon the demand for some other item
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Inventory Costs
Holding costs - associated with holding or carrying inventory over time Ordering costs - associated with costs of placing order and receiving goods Setup costs - cost to prepare a machine or process for manufacturing an order
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Holding (Carrying) Costs
Obsolescence Insurance Extra staffing Interest Pilferage Damage Warehousing Etc.
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Inventory Holding Costs (Approximate Ranges)
Category
Housing costs (building rent, depreciation, operating cost, taxes, insurance) Material handling costs (equipment, lease or depreciation, power, operating cost) Labor cost from extra handling Investment costs (borrowing costs, taxes, and insurance on inventory) Pilferage, scrap, and obsolescence
Cost as a % of Inventory Value
6% (3 - 10%) 3% (1 - 3.5%) 3% (3 - 5%) 11% (6 - 24%) 3% (2 - 5%) 26%
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Ordering Costs
Supplies Forms Order processing Clerical support Etc.
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Setup Costs
Clean-up costs Re-tooling costs Adjustment costs Etc.
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Inventory Models
Fixed order-quantity models
Economic order quantity Production order quantity Quantity discount
Help answer the inventory planning questions!
Probabilistic models Fixed order-period models
1984-1994 T/Maker Co.
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EOQ Assumptions
Known and constant demand Known and constant lead time Instantaneous receipt of material No quantity discounts Only order (setup) cost and holding cost No stockouts
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Inventory Usage Over Time
Order quantity = Q (maximum inventory level)
Usage Rate
Minimum inventory
Inventory Level
Average Inventory (Q*/2)
Time
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EOQ Model How Much to Order?
Annual Cost
Minimum total cost
Order (Setup) Cost Curve Optimal Order Quantity (Q*)
Order quantity
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Why Holding Costs Increase
More units must be stored if more are ordered
Purchase Order Description Qty. Microwave 1
Purchase Order Description Qty. Microwave 1000
Order quantity
Order quantity
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Why Order Costs Decrease
Cost is spread over more units
Example: You need 1000 microwave ovens
1 Order (Postage $ 0.33)
Purchase Order Description Qty. Microwave 1000
1000 Orders (Postage $330)
Purchase Order Purchase Order Purchase OrderQty. Description Purchase OrderQty. Description Qty. Description Qty. 1 Microwave Description Microwave Microwave 11 Microwave 1
Order quantity
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Deriving an EOQ
1. Develop an expression for setup or ordering costs 2. Develop an expression for holding cost 3. Set setup cost equal to holding cost 4. Solve the resulting equation for the best order quantity
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EOQ Model When To Order
Inventory Level
Optimal Order Quantity (Q*) Reorder Point (ROP) Lead Time Average Inventory (Q*/2)
Time
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EOQ Model Equations
2 D S = Q* = H D Expected Number of Orders = N = Q*
Optimal Order Quantity Expected Time Between Orders
=T =
Working Days
/ Year
d =
D
Working Days / Year
ROP = d L
D = Demand per year S = Setup (order) cost per order H = Holding (carrying) cost d = Demand per day L = Lead time in days
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The Reorder Point (ROP) Curve
Q* Slope = units/day = d Inventory level (units)
ROP (Units)
Time (days)
Lead time = L
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Production Order Quantity Model
Answers how much to order and when to order Allows partial receipt of material
Other EOQ assumptions apply
Suited for production environment
Material produced, used immediately Provides production lot size
Lower holding cost than EOQ model
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EOQ POQ Model When To Order
Maximum inventory level
Both production and usage take place
Usage only takes place
Inventory Level
Time
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EOQ POQ Model When To Order
Inventory Level
Optimal Order Quantity (Q*) Reorder Point (ROP) Average Inventory
Lead Time
Time
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Reasons for Variability in Production
Most variability is caused by waste or by poor management. Specific causes include:
employees, machines, and suppliers produce units that do not conform to standards, are late or are not the proper quantity inaccurate engineering drawings or specifications production personnel try to produce before drawings or specifications are complete customer demands are unknown
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POQ Model Inventory Levels
Inventory Level
Production portion of cycle
Demand portion of cycle with no supply
Supply Begins
Supply Ends
Time
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POQ Model Inventory Levels
Inventory Level Inventory level with no demand Max. Inventory Q(1- d/p)
Q*
Production Portion of Cycle
Supply Begins
Supply Ends
Demand portion of cycle with no supply
Time
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POQ Model Equations
Optimal Order Quantity = Q* = p
2*D*S d H* 1 p
d p
( )
D = Demand per year S = Setup cost H = Holding cost d = Demand per day p = Production per day
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Maximum inventory level Setup Cost = D Q * S
= Q*
1 -
Holding Cost
= 0.5 * H * Q
( )
1d p
Quantity Discount Model
Answers how much to order & when to order Allows quantity discounts
Reduced price when item is purchased in larger quantities Other EOQ assumptions apply
Trade-off is between lower price & increased holding cost
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Quantity Discount Schedule
Discou nt Numbe r 1 2 3 Discount Quantity Discount (%) Discount Price (P)
0 to 999 1,000 to 1,999 2,000 and over
No discount 4 5
$5.00 $4.80 $4.75
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Quantity Discount How Much to Order
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Probabilistic Models
Answer how much & when to order Allow demand to vary
Follows normal distribution Other EOQ assumptions apply
Consider service level & safety stock
Service level = 1 - Probability of stockout Higher service level means more safety stock
More safety stock means higher ROP
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Probabilistic Models When to Order?
Inventory Level Optimal Order Quantity Reorder Point (ROP) ROP
Frequency
Service Level
P(Stockout)
SS
Safety Stock (SS) Place order Lead Time Receive order Time
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Fixed Period Model
Answers how much to order Orders placed at fixed intervals
Inventory brought up to target amount Amount ordered varies
No continuous inventory count
Possibility of stockout between intervals
Useful when vendors visit routinely
Example: P&G representative calls every 2 weeks
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Inventory Level in a Fixed Period System
Various amounts (Qi) are ordered at regular time intervals (p) based on the quantity necessary to bring inventory up to target maximum
Target maximum
Q1
On-Hand Inventory
Q2 Q3 p p p
Q4
Time
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Fixed Period Model When to Order?
Inventory Level Target maximum
Period
Period
Period
Time
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