12 – 3 3 Functions of Inventory Meet customer demands, provide selection De-couple production from distribution Decrease costs (all types) De-couple production processes Manage input demand (services, backlogs) Uncertainty protection
12 – 4 4 Disadvantages of Inventory (All measured by increased cost) Increased costs for storage, handling, tracking, and protection Hides production problems Risk of deterioration or obsolescence Risk of lost business (demand inventory)
12 – 5 5 Types of Inventory – Where Did It Come From? Cycle inventory –> result of lot size = (Q/2)+SS Raw –> fixed order sizes WIP and FG –> fixed production batch sizes Safety stock –> just in case something goes wrong – all types Demand/Backorders -> insufficient capacity Anticipation inventory –> all types Pipeline –> demand rate times transit time = d×L Vendor Managed Inventory (VMI) Maintenance/Repair/Operating Supplies
12 – 6 6 Inventory Notation and Definitions IP = inventory position = OH + SR – BO T = target inventory position OH = on-hand inventory SR = scheduled receipts (open orders) BO = back orders (delayed delivery) ROP = reorder point (inventory level when order is placed) Q = order quantity TBO = time between orders for continuous review P = fixed time between orders for periodic review L = lead time from order until delivery Protection interval = P + L ADDLT = average demand during lead time SO = stock out (no material to satisfy demand) SS = safety stock (cushion to prevent stock out)
12 – Inventory Process stage Demand Type Number and Value Other Raw Material WIP Finished Goods Independent Dependent A Items B Items C Items Maintenance Operating Physical Inventory Classifications
12 – Pressures on inventory Pressure for lower inventory Inventory investment Inventory holding cost Pressure for higher inventory Customer service Other costs related to inventory
12 – Enables effective focus, prioritization Divides on-hand inventory into 3 classes A class, B class, C class Basis is usually annual dollar volume (investment) $ volume = Annual demand x Unit cost Policies based on ABC analysis Develop class A suppliers more Establish tighter physical control of A items Forecast A items more carefully ABC Analysis
12 – Percentage of items Percentage of dollar value Class C Class A Class B Class% $Vol% Items A8020 B1530 C 550 ABC Analysis
12 – Inventory Costs Holding costs - associated with holding or carrying inventory over time Ordering costs - associated with costs of placing order and receiving goods Setup costs - cost to prepare a machine or process for manufacturing an order Transportation costs – associated with distribution (pipeline inventory).
12 – Holding (Carrying) Costs Obsolescence Insurance Extra staffing for handling, management Interest Pilferage Damage Warehousing Taxes Tracking IBM Tracking RFID Etc.
12 – Inventory Holding Costs (Approximate Ranges) Category Housing costs (building rent, depreciation, operating cost, taxes, insurance) Material handling costs (equipment, lease or depreciation, power, operating cost) Labor cost from extra handling Investment costs (borrowing costs, taxes, and insurance on inventory) Pilferage, scrap, and obsolescence Overall carrying cost Cost as a % of Inventory Value 6% (3 - 10%) 3% ( %) 3% (3 - 5%) 11% (6 - 24%) 3% (2 - 5%) 26%
12 – Ordering Costs Supplies Forms Order placement (submitting, tracking, receiving) Clerical support Packaging waste disposal Etc.
12 – Inventory Management Expected demand (accurate forecasting) Amounts on hand Amounts on order Appropriate timing and size of the reorder quantities Acquisition and holding costs Effective inventory management requires information about: