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Raw materials & purchased parts • Partially completed goods called work in progress •
• C(2)
B(4)
D(2)
E(1)
D(3)
Finished-goods inventories •
F(2)
Independent demand is uncertain. Dependent demand is certain.
(manufacturing firms) or merchandise (retail stores)
11-5
11-7
Inventory Management
Types of Inventories (Cont’ (Cont’d)
11-6
Inventory Management
Functions of Inventory
•
Replacement parts, tools, & supplies
•
To meet anticipated demand
•
Goods-in-transit to warehouses or customers
•
To smooth production requirements
•
To decouple operations
•
To protect against stock-outs
Inventory Management
Functions of Inventory (Cont’ (Cont’d)
•
To take advantage of order cycles
•
To help hedge against price increases
•
To permit operations
•
To take advantage of quantity discounts
11-8
Inventory Management
Objective of Inventory Control
•
To achieve satisfactory levels of customer service while keeping inventory costs within reasonable bounds •
Level of customer service
•
Costs of ordering and carrying inventory
11-9
Inventory Management
Effective Inventory Management •
A system to keep track of inventory
•
A reliable forecast of demand
•
Knowledge of lead times
•
Reasonable estimates of
•
•
Holding costs
•
Ordering costs
•
Shortage costs
11-10 Inventory Management
Inventory Counting Systems
•
Periodic System Physical count of items made at periodic intervals
•
Perpetual Inventory System System that keeps track of removals from inventory continuously, thus monitoring current levels of each item
A classification system
11-11 Inventory Management
Inventory Counting Systems (Cont’ (Cont’d) Two-Bin System - Two containers of inventory; reorder when the first is empty • Universal Bar Code - Bar code printed on a label that has information about the item to which it is attached •
0
214800 232087768
11-12 Inventory Management
Key Inventory Terms
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 •
11-13 Inventory Management
11-14 Inventory Management
ABC Classification System
Cycle Counting
Figure 11.1
Classifying inventory according to some measure of importance and allocating control efforts accordingly.
A - very important B - mod. important C - least important
Economic Production Quantity Assumptions 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
11-22 Inventory Management
Economic Production Quantity (EPQ) Production done in batches or lots • Capacity to produce a part exceeds the part’s usage or demand rate • Assumptions of EPQ are similar to EOQ except orders are received incrementally during production •
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.
Total Cost
TCa TCb
Decreasing Price
TCc
CC a,b,c OC
EOQ
Quantity
11-29 Inventory Management
Determinants of the Reorder Point
11-30 Inventory Management
Safety Stock
Figure 11.12
The rate of demand • The lead time • Demand and/or lead time variability • Stockout risk (safety stock)
Quantity
•
Maximum probable demand during lead time Expected demand during lead time
ROP Safety stock reduces risk of stockout during lead time
11-31 Inventory Management
Safety stock LT
Time
11-32 Inventory Management
Reorder Point
FixedFixed-OrderOrder-Interval Model
Figure 11.13 The ROP based on a normal Distribution of lead time demand Service level Risk of a stockout Probability of no stockout Expected demand 0
ROP
Quantity
Safety stock z
z-scale
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 • Risk of stockout •
11-33 Inventory Management
FixedFixed-Interval Benefits
Tight control of inventory items • Items from same supplier may yield savings in: •
Ordering Packing • Shipping costs •
11-34 Inventory Management
FixedFixed-Interval Disadvantages
Requires a larger safety stock • Increases carrying cost • Costs of periodic reviews •
•
•
May be practical when inventories cannot be closely monitored
11-35 Inventory Management
Single Period Model
•
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
11-36 Inventory Management
Single Period Model
•
•
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
11-37 Inventory Management
11-38 Inventory Management
Operations Strategy
•
CHAPTER
Too much inventory Tends to hide problems • Easier to live with problems than to eliminate them • Costly to maintain •
•
Wise strategy • •
11
Additional PowerPoint slides contributed by Geoff Willis, University of Central Oklahoma.
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