36
13 Inventory Management Inventory Management
| Date post: | 02-Jan-2016 |
| Category: |
Documents |
| Upload: | marian-hodge |
| View: | 215 times |
| Download: | 0 times |
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)
13 Inventory Management
Types of Inventories (Cont’d)
• Replacement parts, tools, & supplies
• Goods-in-transit to warehouses or customers
13 Inventory Management
Functions of Inventory
• To meet anticipated demand
• To smooth production requirements
• To decouple components of the production-distribution
• To protect against stock-outs
13 Inventory Management
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
13 Inventory Management
• 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
13 Inventory Management
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
13 Inventory Management
• Economic order quantity model
• Economic production model
• Quantity discount model
Economic Order Quantity Models
13 Inventory Management
• 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
13 Inventory Management
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
13 Inventory Management
Total Cost
Annualcarryingcost
Annualorderingcost
Total cost = +
Q2H D
QSTC = +
13 Inventory Management
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
13 Inventory Management
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
13 Inventory Management
Economic Production Quantity
13 Inventory Management
• 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
13 Inventory Management
Economic Production Quantity
13 Inventory Management
Quantity Discounts
Annualcarryingcost
PurchasingcostTC = +
Q2H D
QSTC = +
+Annualorderingcost
PD +
13 Inventory Management
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
13 Inventory Management
Total Cost with Constant Carrying Costs
13 Inventory Management
Total Cost with Constant Carrying Costs
13 Inventory Management
Total Cost with Variable Carrying Costs
13 Inventory Management
Total Cost with Variable Carrying Costs
13 Inventory Management
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
13 Inventory Management
Reorder Point (ROP)
13 Inventory Management
Reorder Point (ROP)
13 Inventory Management
Reorder Point (ROP)
13 Inventory Management
Shortage and Service Level
13 Inventory Management
• 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
13 Inventory Management
Fixed-Order-Interval Model
13 Inventory Management
Stockout Risk
13 Inventory Management
• 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
13 Inventory Management
• Requires a larger safety stock
• Increases carrying cost
• Costs of periodic reviews
Fixed-Interval Disadvantages
13 Inventory Management
• 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
13 Inventory Management
Single Period Model
• Cshortage = Cs = revenue per unit - cost per unit
• Cexcess = Ce = original cost per unit - salvage value per unit
13 Inventory Management
• 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
13 Inventory Management
• 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
