Post on 02-Jan-2016
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13 Inventory Management
Inventory Management
13 Inventory Management
Types of Inventories
• Raw materials & purchased parts
• Partially completed goods called work in progress
• Finished-goods inventories – (manufacturing firms)
or merchandise (retail stores)
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Types of Inventories (Cont’d)
• Replacement parts, tools, & supplies
• Goods-in-transit to warehouses or customers
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Functions of Inventory
• To meet anticipated demand
• To smooth production requirements
• To decouple components of the production-distribution
• To protect against stock-outs
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Functions of Inventory (Cont’d)
• To take advantage of order cycles
• To help hedge against price increases or to take advantage of quantity discounts
• To permit operations
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• Lead time: time interval between ordering and receiving the order
• Holding (carrying) costs: cost to carry an item in inventory for a length of time, usually a year
• Ordering costs: costs of ordering and receiving inventory
• Shortage costs: costs when demand exceeds supply
Key Inventory Terms
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ABC Classification System
Classifying inventory according to some measure of importance and allocating control efforts accordingly.
AA - very important
BB - mod. important
CC - least important
Figure 13-1
Annual $ volume of items
AA
BB
CC
High
Low
Few ManyNumber of Items
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• Economic order quantity model
• Economic production model
• Quantity discount model
Economic Order Quantity Models
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• 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
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The Inventory Cycle
Profile of Inventory Level Over Time
Quantityon hand
Q
Receive order
Placeorder
Receive order
Placeorder
Receive order
Lead time
Reorderpoint
Usage rate
Time
Figure 13-2
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Total Cost
Annualcarryingcost
Annualorderingcost
Total cost = +
Q2H D
QSTC = +
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Cost Minimization Goal
Order Quantity (Q)
The Total-Cost Curve is U-Shaped
Ordering Costs
QO
An
nu
al C
os
t
(optimal order quantity)
TCQ
HD
QS
2
Figure 13-4
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Minimum Total Cost
The total cost curve reaches its minimum where the carrying and ordering costs are equal.
Q = 2DS
H =
2(Annual Demand)(Order or Setup Cost)
Annual Holding CostOPT
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Economic Production Quantity
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• 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
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Economic Production Quantity
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Quantity Discounts
Annualcarryingcost
PurchasingcostTC = +
Q2H D
QSTC = +
+Annualorderingcost
PD +
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Total Costs with PD
Co
st
EOQ
TC with PD
TC without PD
PD
0 Quantity
Adding Purchasing costdoesn’t change EOQ
Figure 13-7
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Total Cost with Constant Carrying Costs
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Total Cost with Constant Carrying Costs
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Total Cost with Variable Carrying Costs
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Total Cost with Variable Carrying Costs
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When to Reorder with EOQ Ordering
• Reorder Point - When the quantity on hand of an item drops to this amount, the item is reordered
• Safety Stock - Stock that is held in excess of expected demand due to variable demand rate and/or lead time.
• Service Level - Probability that demand will not exceed supply during lead time.
– SL=100-stockout risk
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Reorder Point (ROP)
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Reorder Point (ROP)
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Reorder Point (ROP)
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Shortage and Service Level
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• 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
Fixed-Order-Interval Model
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Fixed-Order-Interval Model
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Stockout Risk
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• Tight control of type A 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
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• Requires a larger safety stock
• Increases carrying cost
• Costs of periodic reviews
Fixed-Interval Disadvantages
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• Single period model: model for ordering of perishables and other items with limited useful lives
• Shortage cost: generally the unrealized profits per unit
• Excess cost: difference between purchase cost and salvage value of items left over at the end of a period
Single Period Model
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Single Period Model
• Cshortage = Cs = revenue per unit - cost per unit
• Cexcess = Ce = original cost per unit - salvage value per unit
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• Continuous stocking levels– Identifies optimal stocking levels– Optimal stocking level balances unit
shortage and excess cost
• Discrete stocking levels– Service levels are discrete rather than
continuous– Desired service level is equaled or exceeded
Single Period Model
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• Too much inventory– Tends to hide problems– Easier to live with problems than to
eliminate them– Costly to maintain
• Wise strategy– Reduce lot sizes– Reduce safety stock
Operations Strategy