3Inventory: A stock or store of goods. Firms typically stock many items in inventory.Many of the items a firm carries in inventory relate to the kind of business it engages in.
4Independent demand is uncertain. Dependent demand is certain. InventoryIndependent DemandAB(4)C(2)D(2)E(1)D(3)F(2)Dependent DemandIndependent demand is uncertain. Dependent demand is certain.Inventory: a stock or store of goods
5Independent demand – finished goods, items that are ready to be sold Inventory ModelsIndependent demand – finished goods, items that are ready to be soldE.g. a computerDependent demand – components of finished productsE.g. parts that make up the computer
6ExamplesManufacturing firms carry supplies of raw materials, purchased parts, finished items, spare parts, tools,....Department stores carry clothing, furniture, stationery, appliances,...Hospitals stock drugs, surgical supplies, life-monitoring equipment, sheets, pillow cases,...Supermarkets stock fresh and canned foods, packaged and frozen foods, household supplies,...Not all items in inventory are items to be sold.
7The Nature and Importance of Inventories Inventories are a vital part of businessNecessary for operationsContribute to customer satisfactionInventories represent a significant portion of total assetsSale of merchandise (inventory) is a major source of revenues for retail and wholesale businesses
8Types of Inventories Raw materials & purchased parts Partially completed goods called work in progressFinished-goods inventories(manufacturing firms) or merchandise (retail stores)
9Types of Inventories (Cont’d) Replacement parts, tools, & suppliesGoods-in-transit to warehouses or customers
10Functions of Inventory To meet anticipated demand: Anticipation stock – average demandTo smooth production requirements: Seasonal inventoriesTo protect against stock-outs: Safety stock – uncertaintyTo take advantage of quantity discountsTo help hedge against price increases2. stock-up against seasonal demand3. To decouple components of the production-distribution system, delay in one will not hinder the other.4. safety stocks
11Inadequate Control of Inventories Inadequate control of inventories can result in both under- and overstocking of items.Understocking (too few) results in missed deliveries, lost sales, dissatisfied customers, and production bottlenecks (idle workers or machines).Resulting underage cost.Overstocking (too many) ties up funds that might be more productive elsewhere.Resulting overage cost.In other words, the manager tries to achieve a balance in stocking.Goal: matching supply with demand!
12Objective of Inventory Control To achieve satisfactory levels of customer service while keeping inventory costs within reasonable boundsRight goods, right place, right time, right quantityInventory management has two main concernsTwo fundamental decisions:When to order (timing)How much to order (size)
13Performance MeasuresPerformance measures used to judge the effectiveness of inventory managementCustomer satisfaction: the number and quantity of backorders, customer complaints.2. Inventory turnoverThe higher, the better – more efficient use of inventoryDesirable number of turns depend on industry and profit marginIndicate how many times a year the inventory is soldturnover3. Days of inventory on-hand: the expected number of days of sales that can be supplied from existing inventory.Performance measures used to judge the effectiveness of inventory management:
14Inventory Counting Systems Periodic SystemPhysical count of items made at periodic intervalsPerpetual Inventory System System that keeps track of removals from inventory continuously, thus monitoring current levels of each item
15Inventory Counting Systems (Cont’d) Two-Bin System - Two containers of inventory; reorder when the first is emptyUniversal Bar Code - Bar code printed on a label that has information about the item to which it is attached
16Lead Time: Time interval between ordering and receiving the order 3. Lead Time InformationLead Time: Time interval between ordering and receiving the order- Lead time variability: the greaterthe potential variability, the greaterthe need for additional stock toreduce the risk of a shortagebetween deliveries
17Ordering cost : Costs of ordering/producing and receiving inventory. 4. Inventory CostsOrdering cost : Costs of ordering/producing and receiving inventory.Eg. RM12 per orderUnit ordering/production cost: cost of obtaining one unit of the inventory.Eg. RM 77 per itemBuy stationary,Some raw materials – steel, nails, etc.
18b. Holding (carrying) cost: Physically holding item in storage. 4. Inventory Costs cont.b. Holding (carrying) cost: Physically holding item in storage.interestinsurancetaxesdepreciationobsolescencewarehouse costs (heat, light, rent, security)opportunity costsHolding costs are stated in either way:a percentage of unit pricea dollar amount per unitdeteriorationspoilagetheftbreakageHolding cost also include opportunity costs having funds tied up in inventory.
19c. Shortage costs: Costs resulting when demand exceeds supply. 4. Inventory Costs cont.c. Shortage costs: Costs resulting when demand exceeds supply.Opportunity cost for not making a saleLoss of customer goodwillLateness chargesCost of lost productionIt is often difficult to quantify shortage costs.One objective of Inventory Control is to minimizethe sum of these costs by balancing them.
21Basic Economic Order Quantity Model (EOQ) Assumptions:1. Ordering in batch from supplier.2. Only one product is involved.3. Constant demand rate. Demand is spread evenly throughout the year.4. Constant lead time. Lead time does not vary much for a long enough time.5. Single delivery for each order.6. A single flat unit price from the supplier.
22Profile of Inventory Level Over Time The Inventory CycleFigure 11.2Profile of Inventory Level Over TimeOrder/batch sizeQDemand rate DReorderpointTimeReceiveorderPlaceorderReceiveorderPlaceorderReceiveorderOrder lead timeOrder cycle time
23High average inventory Inventory Level vs. Order FrequencySmall orderLow average inventoryShort order cycle timeLarge orderHigh average inventoryLong order cycle time
24Now the Question is…..Economic order quantity (EOQ): The order size Q that minimizes total costs per unit time.Fixed ordering cost S IGD / orderUnit ordering cost P IGD / unit( P = unit price, assuming no other unit ordering cost component)Unit carrying cost H= h P IGD / time( h = carrying cost rate for one IGD value of inventory/time)NO shortage cost here! Demand is a constant and it is always met.
25H = rP = IGD80 * 0.2 = IGD16 /unit · yr Match! Example 2Demand for a certain radial tires at a tire company is 800 units per month. Each tire costs the company IGD 80. Ordering costs are IGD 75, and the annual carrying costs are 20 percent of the purchase price.D = 800 * 12 = 9600 /yrS = IGD75 /orderP = IGD80, r = 0.20H = rP = IGD80 * 0.2 = IGD16 /unit · yrMatch!
26Solution to Example 21. How many tires should the manager order in each lot?2. What is the company's average inventory of this tire?3. How often will an order be placed (length of order cycle)?
27Solution to Example 2 (Cont.) 4. How many times per year will an order be placed?5. How much does the company spend annually on ordering costs?6. How much does the company spend annually on holding (carrying) costs?
28Solution to Example 2 (Cont.) 7. What is the total annual cost if the EOQ quantity is ordered?ORThe ordering and carrying costs are equal at the EOQ