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What quantity you need ?
How much is your budget ?
Why you should not buy all in large quantity ?
How much is your transport cost per order ?
How many times you can go and get ?
What is Inventory ?
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Inventory Policy Decisionsy Inventory are stocks or ite s used
to support production (raaterials and WIP), support
activities ( aintenance, repair, andoperatin supplies) and custo erservice (finishes oods and spareparts).
y The fact is inventory is oth avalua le resource and a potentialsource of aste
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Why InventoryThere are three asic reasons for keepin an inventory:
y
Ti ey Uncertainty
y Econo ies of scale
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Reasons ToReasons To NOTNOT Hold InventoryHold Inventoryy Carryin cost
y Valua le factory space
y O solescence
y Da a e
y
Pilfera e
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Inventory Hides Problems
Poor
Quality
UnreliableSupplier
MachineBreakdown
InefficientLayout
BadDesign
Lengthy
Setups
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To Expose Problems:
Reduce Inventory Levels
PoorQuality
UnreliableSupplier
a inerea o n
Ineffi ientLayout
aDesign
Lengt ySetups
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Remove Sources of Problems and
Repeat the Process
PoorQuality
UnreliableSupplier
a inerea o n
Ineffi ientLayout
aDesign
Lengt ySetups
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Types of Inventoryy Cycle stock
y Safety stock ( uffer inventory)
y
Anticipation inventoryy Others
y ed e inventories
y Transportation inventory (pipeline)
y
S oothin inventories
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Cycle Stocky Cycle stock refers to co ponents or products that are
received in ulk y a do nstrea partner, raduallyused up, and then replenished a ain in ulk y the
upstrea partner
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Safety Stocky Extra inventory that
co panies hold to
protect the selvesa ainst uncertainties
y De and
y replenish ent ti e
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Safety Stocks enable organizations to satisfy customer
demand in the event of these possibilities:
y Supplier ay deliver their product late or not at all
y The arehouse ay e on strike
y
Anu er of ite s at the arehouse ay e of poorquality and replace ents are still on order
y Aco petitor ay e sold out on a product, hich isincreasin the de and for your products
y
Rando de and (in reality, rando events occur)y Machinery Breakdo n
y Unexpected increase in de and
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Anticipation Inventoryy Inventory that is held in anticipation of custo er
de and.
y price increase, a seasonal increase in de and, or evenan i pendin la or strike.
y at allo een,Christ as, or the ack-to-schoolseason
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Hedge Inventoryy Inventory uildup to uffer a ainst so e event that
ay not happen.
yHed e inventory plannin involves speculation relatedto potential la or strikes, price increases, unsettledovern ents, and events that could severely i pair
co panies strate ic initiatives.
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Transportation Inventoryy Inventory that is ovin fro one link in the supply chain
to the another
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Aggregate Control of Inventoriesy InventoryTurnover Ratio
y ABCClassification
y Risk Poolin
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Two Classic Systems for Independent
Demand Items
yPeriodic revie syste s
yContinuous (perpetual) revie syste s
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Periodic Review System(Orders at regular intervals)
Inventorylevel
Time2 4 6
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Determining the restocking
level
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=
avera e de and durin the
reorder period plus thereplenish ent lead ti e (if thereis a delay ettin ne productsin).
SS
= safety stock. This is a cushionof inventory held to iti ate theuncertainties of forecasts andlead ti es.Hi her safety stock levels increasethe likelihood that oods areavaila le, ut also drive upinventory levels and costs
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Continuous Review System(Orderswhen inventory drops to R)
L-T
Q
R
How is the reorderpoint ROP established?
Inventorylevel
Time
lead time to geta new order in
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Comparison of Periodic and Continuous
Review Systems
PeriodicReviewy Fixed order intervals
y Variable order sizes
y Convenient to administer
y Orders may be combined
y
Inventory position onlyrequired at review
Continuous Reviewy Varying order intervals
y Fixed order sizes (Q)
y Allows individual review
frequencies
y Possible quantity discounts
y Lower, less-expensive safety
stocks
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What is the Best Order Size Q?Determined by:
y Inventory related costs
y Order preparation costs and setup costsy Inventory carryin costs
y Shorta e and custo er service costs
y Other considerations
y Out of pocket or opportunity cost?
y Fixed, varia le, or so e ix of the t o?
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EOQy D = annual de and of the product
y S = Fixed cost incurred per order
y C = cost per unity h = Holdin cost per year as a fraction of product cost
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Holding Cost$
Q
Holding cost increasesasQ increases . . .
(Q/2)H
H = h X CH = h X C
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Ordering Costs$
Q
Ordering costs per year
decrease as Q increases(why?)
(Q/2)H
(D/Q)S
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No of orders per year = D/QNo of orders per year = D/Q
The purchasing manager makes alot size decision to minimize the
total cost the store incurs.????
y Annual aterial cost
y Annual Order cost
y Annual holdin cost
Annual material cost = DCAnnual material cost = DC
Annual order cost = (D/Q)SAnnual order cost = (D/Q)S
Annual holding cost = ( Q/2) h CAnnual holding cost = ( Q/2) h C
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Total Annual CostAnnual material cost =DCAnnual material cost =DC
Annual order cost = (D/Q)SAnnual order cost = (D/Q)S
Annual holding cost = ( Q/2) h CAnnual holding cost = ( Q/2) h C
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Total Annual Costs and EOQ
0
500
1000
1500
2000
10 50 90 130
170
210
250
290
330
370
410
Order Quantity Q
InventoryCost($
)
Hol ing Cos O e ing Cos To al Cos
EOQ at minimum total cost
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Economic Order Quantity (EOQ) Modely Cost Mini izin Q
y Assu ptions:
Unifor and kno n de and rate
Fixed ite cost
Fixed orderin cost
Constant lead ti e H
DSQEOQ
2*!!
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Aggregate Control of Inventoriesy InventoryTurnover Ratio
y ABCClassification
y Risk Poolin
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Inventory Turnover Ratio
y Measures the nu er of ti es, on avera e, the inventory issold durin the period.Its purpose is to easure the
liquidity of the inventory.
y Inventory turnover ratio = Cost of oods sold / Avera einventory
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STOCK/INVENTORYTURNOVERRATIO
y (Average Inventory/Sales) x 365 for days
y (Average Inventory/Sales) x 52 for weeks
y (Average Inventory/Sales) x 12 for months
Average Inventory or Stocks = (Opening Stock + Closing Stock)-----------------------------------------
2y This ratio indicates the nu er of ti es the inventory is
rotated durin the relevant accountin period
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ABCClassification Method
IDEA
Co panies have thousands of ite s to track
Methods like EOQ only justifia le for osti portant ite s.
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What is the Best Order Size Q?Determined by:
y Inventory related costs
y Order preparation costs and setup costsy Inventory carryin costs
y Shorta e and custo er service costs
y Other considerations
y Out of pocket or opportunity cost?y Fixed, varia le, or so e ix of the t o?
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ABC Method1. Deter ine annual $ usa e for each ite2. Rank the ite s accordin to their annual $ usa e
3. Let:
Top 20% A ite s rou hly 80% of total $
Middle 30% B ite s rou hly 15% of total $
Botto 50% C ite rou hly 5% of total $
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ABCAnalysis Exa l
Total $Usage= $98,500
Item Cost Deman $ Usage
A1 $46 200 $9,200
B2 $40 10 $400
C3 $5 6680 $33,400
D4 $81 100 $8,100
E5 $22 50 $1,100
F6 $6 100 $600
G7 $176 250 $44,000H8 $6 150 $900
I9 $10 10 $100
J10 $14 50 $700
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Ranking y Annual $ Usag
Itl tiv % f t l
l
G7 $44,000 $44,000 44.67% A
3 $33,400 $77,400 78.58% AA1 $9,200 $86,600 87.92% B
D4 $8,100 $94,700 96.14% B
E5 $1,100 $95,800 97.26% B
H8 $900 $96,700 98.17%
J10 $700 $97,400 98.88%
F6 $600 $98,000 99.49%
B2 $400 $98,400 99.90%
I9 $100 $98,500 100.00%
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Market Two
Risk Poolingy Consider these t o syste s:
Supplier
Warehouse One
Warehouse Two
Market One
Market Two
Supplier Warehouse
Market One
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Risk Poolingy For the sa e service level, hich syste ill
require ore inventory? Why?
y For the sa e total inventory level, hich systeill have etter service? Why?
y What are the factors that affect these ans ers?
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Risk Poolingy De and varia ility is reduced if one a re ates
de and across locations.
y
More likely that hi h de and fro one custo er ille offset y lo de and fro another.
y Reduction in varia ility allo s a decrease in safetystock and therefore reduces avera e inventory.
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Virtual Inventory (Cross Filling)y Rarely are planned inventory levels so hi h
to uarantee that custo er de and can efilled i ediately fro availa le stock.
y On avera e, a planned percenta e oforders cannot e filled fro their pri arysource ithout experiencin a ackorderor a lost sale.
y To counter stock outs, co panies illfrequently cross fill, or transship, theunfilled de and fro a co para lesecondary inventory location.
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T
ypes of Pull Systems1. Top-Up Syste
2. Si nal Kan an
3. 2-Bin Kan an4. 3-Bin Kan an
5. Multi-Card Kan an
Si ple ut poor inventory control
Co plex ut excellent inventory control
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Top- p Pull Systemy Material is delivered at a set period, and any aterial
that as consu ed durin this period is replenished.
y Ideal for s all, lo -cost parts here hi h inventorycontrol is not essential
y E.g. Nuts, olts, ashers, etc.
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Top- p Pull SystemExample
Every month, the hardware supplier comes into thefacility and fills up all of the hardware containers (nuts,bolts, screws, etc.). Each container is marked with a lineto indicate how much to fill it. The inventory is equal tothe average monthly consumption (cycle stock), plus abuffer to handle peak production periods (buffer stock),and an allowance for up to 2 days incase the supplier is
late delivering.
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2-Bin Kanban Pull Systemy Material is stored in 2 containers of a set quantity. Every
period, a aterial handler takes a ay e pty containers andreturns the the next period.
y Ideal for processes that consu e any parts, especially ifeach part has a different rate of consu ption
y E.g.Asse ly processes
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2-Bin Kanban Pull SystemExample
The material handler checks the assembly process everyhour. As each container is emptied, it is placed in aspecific location. The material handler retrieves theseempty containers and spends the rest of the hourreplenishing them. They then return the replenishedcontainers to the assembly process and collect anycontainers that are now empty.
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Multi-Card Kanban Pull Systemy Cards are used to signify a set a ount of aterial. When
that aterial is consu ed, the card is returned to thesupplier to indicate that ore inventory is required.
y The supplier places returned cards on a oard and usesthe to deter ine hich product to uild next.
y
Ideal for processes that have an intervaly E.g.Machining processes or Suppliers ( here the
interval = delivery frequency)
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Multi-Card Kanban Pull SystemExample
At the end of each day, the Team leader collects thekanban sheets from the boxes of material that theassembly process opened. They fax these sheets to thesupplier and shreds them. The supplier receives the faxedsheets and places them on a board. When this product isthe highest on the board, the supplier will changeover. Aseach box is completed, the sheet is placed on it, and it is
sent to shipping for delivery.
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2-Bin Kanban Pull SystemAdvantages:y Excellent control of inventoryy Mini izes the a ount of inventory required
Disadvantages:y Requires signals to e sent repeatedlyy Is ore sensitive to changes in data than the other syste s
(needs to e kept up to date)y Requires delivery of aterial al ost every period
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Supermarket Pull Systems
supermarket
Custo erProcess
SupplierProcess
pro u tionanban
it ra npro u t
it ra alanban
replenis epro u t
Purpose: Pro i e pro u tion instru tion to upstreampro esses t at annot be lin e in flo .
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Thank u
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