Ch12 - Inventory

2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745812-*Operations Management Inventory Management Chapter 12

2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745812-*Stock of materialsStored capacity 1995 Corel Corp. 1984-1994 T/Maker Co. 1984-1994 T/Maker Co. 1995 Corel Corp.What is Inventory?


2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745812-*Types of Inventory Raw material Work-in-progress Maintenance / repair / operating supplies Finished goods


2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745812-*The Material Flow Cycle


2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745812-*The Functions of InventoryTo decouple or separate various parts of the production processTo provide a stock of goods that will provide a selection for customersTo take advantage of quantity discountsTo hedge against inflation and upward price changes


2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745812-*Higher costsInterest or opportunity costsHolding (or carrying) costs storage, handling, taxes, insurance, shrinkageOrdering (or setup) costsRisk of deterioration or obsolescenceHides production problemsYield / scrap variationsUnscheduled downtimeDisadvantages of InventoryTotal cost = 20% - 40% of inventory value / year


2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745812-*Pressures on inventoryPressure for lower inventoryInventory investmentInventory holding costPressure for higher inventoryCustomer serviceOther costs related to inventory


2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745812-*Different Views of Inventory


2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745812-*How Is Inventory Created?Cycle Inventory result of lot size Pipeline Inventory in transit Safety StockAnticipation Inventory


2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745812-*Inventory CalculationsWe use 70 hypodermic needles a week. We buy them in lots of 280. It takes three weeks for order handling and shipment.

Cycle inventory =Q/2=280/2=140 needles

Pipeline inventory=DL=dL=(70 needles/week)(3 weeks)=210 drills


2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745812-*Inventory Reduction TacticsCycle inventory Pipeline inventory Safety Stock Anticipation inventory

Reduce lot sizeReduce lead timeVariousReduce uncertainties


2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745812-*Divides on-hand inventory into three classes on the basis of annual dollar volume A, B, and C$ volume = Annual demand x Unit costPolicies based on ABC analysisDevelop class A suppliers moreMaintain tighter physical control of A itemsForecast A items more carefullyABC Analysis


2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745812-*ABC Analysis


2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745812-*Fixed order-quantity modelsEconomic order quantityProduction order quantityQuantity discountProbabilistic modelsFixed order-period modelsHelp answer the inventory planning questions! 1984-1994 T/Maker Co.Inventory Models forIndependent Demand


2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745812-*

Objective: minimize (ordering cost + holding cost) Assumptions:Known and constant demandKnown and constant lead timeInstantaneous receipt of materialNo quantity discountsOnly ordering / setup cost and holding costNo stockoutsEOQ Economic Order Quantity


2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745812-*Inventory Usage Over Time


2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745812-*EOQ ModelHow Much to Order?


2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745812-*More units must be stored if more are orderedWhy Holding Costs Increase


2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745812-*Cost is spread over more units Example: You need 1000 microwave ovens Why Ordering Costs Decrease


2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745812-*EOQ Model When to Order


2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745812-*EOQ Model Equations


2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745812-*Answers how much to order and when to orderAllows partial receipt of materialOther EOQ assumptions applySuited for production environmentMaterial produced, used immediatelyProvides production lot sizeLower holding cost than EOQ modelPOQ Production Order Quantity


2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745812-*EOQ POQ Model

TimeInventory LevelBoth production and usage take placeUsage only takes placeMaximum inventory level


2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745812-*Quantity Discount ModelAnswers how much to order & when to orderAllows quantity discountsOther EOQ assumptions applyTrade-off is between lower price & increased holding cost

Discount NumberDiscount QuantityDiscount (%)Discount Price (P)10 to 999No discount$ 5.0021,000 to 1,9994$ 4.8032,000 and over5$ 4.75


2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745812-*Quantity Discount How Much to Order


2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745812-*Answer how much & when to order Allow demand to varyOther EOQ assumptions applyConsider service level & safety stockService level = 1 Probability of stockoutHigher service level means more safety stockMore safety stock means higher ROPProbabilistic Models


2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745812-*Probabilistic Models - When to Order?


2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745812-*Answers how much to orderOrders placed at fixed intervalsInventory brought up to target amountAmount ordered variesNo continuous inventory countPossibility of stockout between intervalsUseful when vendors visit routinelyExample: Office Max representative calls every weekFixed Period (P) Systems


2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745812-*Inventory in a Fixed Period SystemVarious amounts (Qi) are ordered at regular time intervals (p) based on the quantity necessary to bring inventory up to target maximum


2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745812-*Comparison of Q and P SystemsContinuous Review System (Q) A system designed to track the remaining inventory of an item each time a withdrawal is made, to determine whether it is time to replenish Periodic Review System (P) A system in which an items inventory position is reviewed periodically rather than continuously


2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745812-*Continuous Review System (Q)Individual review frequenciesPossible quantity discountsLower, less-expensive safety stocks Periodic Review System (P)Convenient to administerOrders may be combinedInventory position only required at review

Comparison of Q and P Systems


2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745812-*Inventory MeasuresAverage inventory = $2 millionCost of goods sold = $10 million52 business weeks per year = = 5 turns/yearInventory turns =Annual sales (at cost) Average inventory value


2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745812-*Summary Functions of inventory Inventory enables value creation for many processes Costs of inventory Different views of inventory Inventory reduction tactics ABC and EOQ are traditional tools used to manage inventory still used in many circumstances Continuous review system (Q) for high-value parts; Periodic review system (P) for some low value parts Weeks of Supply and inventory turns are widely-used measures of inventory


**While most students recognize inventory as a stock of material, the notion of inventory as a stored capacity probably merits explicit discussion.*It might be useful here to explicitly discuss the purpose of each type of inventory.*This slide illustrates the overall material flow cycle. You should stress the proportion of time material spends as inventory as opposed to being actually worked on; and note that this suggests effective inventory management and materials movement can reduce overall cycle time significantly.*If this course is the first exposure of students to manufacturing, it might be useful to discuss the decoupling function.*Of the items listed on this slide, the least obvious to most students is the manner in which inventory can be used to hide production problems.*It might be helpful here to discuss some of the differences in the ways we would manage items in the three different levels. What actions would we actually take in managing A versus in managing C?*Are we back to Pareto analysis?*This slide simply introduces some of the available models. Additional details are provided in subsequent slides.*Students should be asked to consider the degree to which each of these assumptions is accurate.*One should link this model to the assumptions. You should also explore, at least briefly, how this picture would change if the assumptions were not met.****One should link this model to the assumptions. You should also explore, at least briefly, how this picture would change if the assumptions were not met.*For some students, it is most important at this point to explain in detail the meaning and significance of each equation. It might be helpful to actually work through a numerical example.*This slide simply introduces some of the available models. Additional details are provided in subsequent slides.*One way to approach this is as an EOQ model with the instantaneous replenishment assumption relaxed. The following slide (EOQ Model modified to show changes for POQ) allows you to do this if you wish. Otherwise, skip it and move on.**This slide simply introduces some of the available models. Additional details are provided in subsequent slides.**This slide simply introduces some of the available models. Additional details are provided in subsequent slides.*One point to stress here is that this is simply an extension of the original EOQ model where we are now allowing the demand to vary. Students should become accustomed to seeking such extensions as the need arises.

The next slide presents a graphical view of this model.*32*This slide simply introduces some of the available models. Additional details are provided in subsequent slides.*This represents a model in which orders are based upon time, not the quantity needed. The following slide provides a graphical representation.

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Ch12 - Inventory