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Slack, Brandon-Jones and Johnston, Operations Management PowerPoints on the Web, 7 th edition © Nigel Slack, Alistair Brandon-Jones and Robert Johnston.

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Presentation on theme: "Slack, Brandon-Jones and Johnston, Operations Management PowerPoints on the Web, 7 th edition © Nigel Slack, Alistair Brandon-Jones and Robert Johnston."— Presentation transcript:

1 Slack, Brandon-Jones and Johnston, Operations Management PowerPoints on the Web, 7 th edition © Nigel Slack, Alistair Brandon-Jones and Robert Johnston 2014 Slide 12.1 Chapter 12 Inventory management

2 Slack, Brandon-Jones and Johnston, Operations Management PowerPoints on the Web, 7 th edition © Nigel Slack, Alistair Brandon-Jones and Robert Johnston 2014 Slide 12.2 Direct Design Develop Deliver Operations management Inventory management The operation supplies... the delivery of a quantity of products and services when required The market requires… a quantity of products and services at a particular time Figure 12.1 This chapter covers inventory management

3 Slack, Brandon-Jones and Johnston, Operations Management PowerPoints on the Web, 7 th edition © Nigel Slack, Alistair Brandon-Jones and Robert Johnston 2014 Slide 12.3 In Chapter 12 – Inventory planning and control – Slack et al. identify the following key questions…  What is inventory?  Why should there be any inventory?  How much should be ordered?  When should an order be placed?  How can inventory be controlled? Key operations questions

4 Slack, Brandon-Jones and Johnston, Operations Management PowerPoints on the Web, 7 th edition © Nigel Slack, Alistair Brandon-Jones and Robert Johnston 2014 Slide 12.4 Inventory Time In-flow (supply from previous process) Time Out-flow (rate of demand from output process) Time Inventory accumulating Inventory reducing Inventory is created to compensate for the differences in timing between supply and demand Inventory management Figure 12.2 Inventory is created to compensate for the differences in timing between supply and demand

5 Slack, Brandon-Jones and Johnston, Operations Management PowerPoints on the Web, 7 th edition © Nigel Slack, Alistair Brandon-Jones and Robert Johnston 2014 Slide 12.5 Process, operation or supply network ‘Inventories’ Physical inventoriesQueues of customersInformation in databases HotelFood items, drinks, toilet items At check in and check out Customer details, loyalty card holders, catering suppliers HospitalDressings, disposable instruments, blood Patients on a waiting list, patients in bed waiting for surgery, patients in recovery wards Patient medical records Credit card application process Blank cards, form letters Customers waiting on the phone Customer’s credit and personal information Computer manufacturer Components for assembly, packaging materials, finished computers ready for sale Customers waiting for delivery of their computer Customers’ details, supplier information Examples of inventory Table 12.1 Examples of inventory held in processes, operations or supply networks

6 Slack, Brandon-Jones and Johnston, Operations Management PowerPoints on the Web, 7 th edition © Nigel Slack, Alistair Brandon-Jones and Robert Johnston 2014 Slide 12.6 ‘Inventories’ Physical inventoriesQueues of customersDigital information in databases CostTies up working capital and there could be high administrative and insurance costs Primarily time-cost to the customer, i.e. wastes customers’ time. Cost of set-up, access, update and maintenance SpaceRequires storage spaceRequires areas for waiting or phone lines for held calls Requires memory capacity. May require secure and/or special environment QualityMay deteriorate over time, become damaged or obsolete May upset customers if they have to wait too long. May lose customers Data may be corrupted or lost or become obsolete Operational/ organizational May hide problems (see lean synchronization – Chapter 15) May put undue pressure on the staff and so quality is compromised for throughput Databases need constant management; access control, updating and security Some reasons to avoid inventories Table 12.2 Some reasons to avoid inventories

7 Slack, Brandon-Jones and Johnston, Operations Management PowerPoints on the Web, 7 th edition © Nigel Slack, Alistair Brandon-Jones and Robert Johnston 2014 Slide 12.7 Reason for holding inventory ExampleHow inventory could be reduced As an insurance against uncertainty Safety stocks for when demand or supply is not perfectly predictable Improve demand forecasting Tighten supply, e.g. through service level penalties To counteract a lack of flexibility Cycle stock to maintain supply when other products are being made Increase flexibility of processes, e.g. by reducing changeover times (see Chapter 11) Using parallel processes producing output simultaneously (see Chapter 7) To take advantage of relatively short- term opportunities Suppliers offer ‘time limited’ special low cost offers Persuade suppliers to adopt ‘everyday low prices’ (see Chapter 13) Some ways in which physical inventory may be reduced Table 12.3 Some ways in which physical inventory may be reduced

8 Slack, Brandon-Jones and Johnston, Operations Management PowerPoints on the Web, 7 th edition © Nigel Slack, Alistair Brandon-Jones and Robert Johnston 2014 Slide 12.8 Reason for holding inventory ExampleHow inventory could be reduced To anticipate future demands Build up stocks in low demand periods for use in high demand periods Increase volume flexibility by moving towards a ‘chase demand’ plan (see Chapter 11) To reduce overall costs Purchasing a batch of products in order to save delivery and administration costs Reduce administration costs through purchasing process efficiency gains Investigate alternative delivery channel that reduce transport costs. To fill the processing ‘pipeline’ Items being delivered to customer Reduce process time between customer request and dispatch of items Reduce throughput time in the downstream supply chain (see Chapter 13) Some ways in which physical inventory may be reduced (Continued) Table 12.3 Some ways in which physical inventory may be reduced (Continued)

9 Slack, Brandon-Jones and Johnston, Operations Management PowerPoints on the Web, 7 th edition © Nigel Slack, Alistair Brandon-Jones and Robert Johnston 2014 Slide 12.9 Inventory has a significant effect on return on assets Return on Assets Profit Total assets Revenues  Costs Working capital + Fixed assets = = Ability to supply from stock Obsolescence, damage, loss Cost of funding inventory Storage costs Ordering costs Amount you owe suppliers Amount customers owe you Figure 12.4 Inventory management has a significant effect on return on assets

10 Slack, Brandon-Jones and Johnston, Operations Management PowerPoints on the Web, 7 th edition © Nigel Slack, Alistair Brandon-Jones and Robert Johnston 2014 Slide Inventory profiles chart the variation in inventory level Time per period DQDQ Instantaneous deliveries at a rate of QDQD Inventory level Steady and predictable demand (D) Slope = demand rate = Average inventory Q2Q2 Order quantity = Q Figure 12.5 Inventory profiles chart the variation in inventory level

11 Slack, Brandon-Jones and Johnston, Operations Management PowerPoints on the Web, 7 th edition © Nigel Slack, Alistair Brandon-Jones and Robert Johnston 2014 Slide Two alternative inventory plans with different order quantities (Q) Time Inventory level Plan A Q = 400 Demand (D) = 1,000 items per year Average inventory for plan A = 200 Average inventory for plan B = yr 0.4 yr Plan B Q = 100 Figure 12.6 Two alternative inventory plans with different order quantities (Q)

12 Slack, Brandon-Jones and Johnston, Operations Management PowerPoints on the Web, 7 th edition © Nigel Slack, Alistair Brandon-Jones and Robert Johnston 2014 Slide Order quantity Costs Economic order quantity (EOQ) Total costs Holding costs Order costs Traditional view of inventory-related costs Figure 12.7 Graphical representation of the economic order quantity

13 Slack, Brandon-Jones and Johnston, Operations Management PowerPoints on the Web, 7 th edition © Nigel Slack, Alistair Brandon-Jones and Robert Johnston 2014 Slide Cycle inventory in a bakery Inventory level Deliver A Produce A Deliver B Produce B Deliver C Produce C Deliver A Produce A Produce B Deliver B Produce C Deliver C Time Figure 12.3 Cycle inventory in a bakery

14 Slack, Brandon-Jones and Johnston, Operations Management PowerPoints on the Web, 7 th edition © Nigel Slack, Alistair Brandon-Jones and Robert Johnston 2014 Slide TimeInventory level Inventory profile for gradual replacement of inventory Order quantity Q QPQP M Slope = P  D Slope = D Figure 12.8 Inventory profile for gradual replacement of inventory

15 Slack, Brandon-Jones and Johnston, Operations Management PowerPoints on the Web, 7 th edition © Nigel Slack, Alistair Brandon-Jones and Robert Johnston 2014 Slide Inventory level Time Shortages Inventory planning allowing for shortages

16 Slack, Brandon-Jones and Johnston, Operations Management PowerPoints on the Web, 7 th edition © Nigel Slack, Alistair Brandon-Jones and Robert Johnston 2014 Slide The re-order point Inventory level Re-order level Re-order point Time Demand (D) = 100 items per week Order lead time Figure Re-order level (ROL) and re-order point (ROP) are derived from the order lead time and demand rate Order quantity (Q) = 400

17 Slack, Brandon-Jones and Johnston, Operations Management PowerPoints on the Web, 7 th edition © Nigel Slack, Alistair Brandon-Jones and Robert Johnston 2014 Slide Safety stock(s) helps to avoid stock-outs when demand and/or order lead times are uncertain Inventory level S Q Time t1t1 t2t2 d1d1 d2d2 Re-order level (ROL) Distribution of lead-time usage ? Figure Safety stock (s) helps to avoid stock-outs when demand and/or order lead time are uncertain

18 Slack, Brandon-Jones and Johnston, Operations Management PowerPoints on the Web, 7 th edition © Nigel Slack, Alistair Brandon-Jones and Robert Johnston 2014 Slide The probability distributions for order lead time and demand rate combine to give the lead-time usage distribution Probability Demand rate Probability Order lead time Probability 100–199 Lead-time usage 120– – – – – – 799 Figure The probability distributions for order lead time and demand rate combine to give the lead-time usage distribution

19 Slack, Brandon-Jones and Johnston, Operations Management PowerPoints on the Web, 7 th edition © Nigel Slack, Alistair Brandon-Jones and Robert Johnston 2014 Slide A periodic review approach to order timing with probabilistic demand and lead time Inventory level QmQm T0T0 T1T1 T2T2 T3T3 Time t1t1 t2t2 t3t3 tftf tftf tftf Q1Q1 Q2Q2 Q3Q3 Figure A periodic review approach to order timing with probabilistic demand and lead time

20 Slack, Brandon-Jones and Johnston, Operations Management PowerPoints on the Web, 7 th edition © Nigel Slack, Alistair Brandon-Jones and Robert Johnston 2014 Slide A paper merchant must get its inventory planning and control right Figure The role of the paper merchant

21 Slack, Brandon-Jones and Johnston, Operations Management PowerPoints on the Web, 7 th edition © Nigel Slack, Alistair Brandon-Jones and Robert Johnston 2014 Slide Class C items Class B items Class A items Pareto curve for stocked items Percentage of types of items Percentage of value of items Figure Pareto curve for items in a warehouse

22 Slack, Brandon-Jones and Johnston, Operations Management PowerPoints on the Web, 7 th edition © Nigel Slack, Alistair Brandon-Jones and Robert Johnston 2014 Slide Inventory classifications and measures Class A items – the 20% or so of high- value items which account for around 80% of the total stock value Class B items – the next 30% or so of medium-value items which account for around 10% of the total stock value Class C items – the remaining 50% or so of low-value items which account for around the last 10% of the total stock value

23 Slack, Brandon-Jones and Johnston, Operations Management PowerPoints on the Web, 7 th edition © Nigel Slack, Alistair Brandon-Jones and Robert Johnston 2014 Slide If the true costs of stock holding are taken into account, and if the cost of ordering (or changeover) is reduced, the economic order quantity (EOQ) is much smaller Original holding costs Original total costs Revised holding costs Order quantity Costs Original EOQ Revised EOQ Revised order costs Revised total costs Original order costs Criticism of the EOQ approach Figure 12.9 If the true costs of stock holding are taken into account, and if the cost of ordering (or changeover) is reduced, the economic order quantity (EOQ) is much smaller

24 Slack, Brandon-Jones and Johnston, Operations Management PowerPoints on the Web, 7 th edition © Nigel Slack, Alistair Brandon-Jones and Robert Johnston 2014 Slide Two-bin system Three-bin system The ‘Two-bin’ and ‘Three-bin’ systems of reordering Bin 2 Bin 1 Bin 2 Bin 3 Items being used Reorder level + safety inventory Items being used Reorder level inventory Safety inventory Figure The two-bin and three-bin systems of re-ordering

25 Slack, Brandon-Jones and Johnston, Operations Management PowerPoints on the Web, 7 th edition © Nigel Slack, Alistair Brandon-Jones and Robert Johnston 2014 Slide supplies4medics.com Chapter 12 ‘end-of-chapter’ case Source: AL RF (Imagemore Co., Ltd)

26 Slack, Brandon-Jones and Johnston, Operations Management PowerPoints on the Web, 7 th edition © Nigel Slack, Alistair Brandon-Jones and Robert Johnston 2014 Slide Questions Prepare a spreadsheet-based ABC analysis of usage value. Classify as follows: A-Items: top 20% of usage value B-Items: next 30% of usage value C-Items: remaining 50% of usage value Calculate the inventory weeks for each item, for each classification, and for all the items in total. Does this suggest that the OM’s estimate of inventory weeks is correct? If so, what is your estimate of the overall inventory at the end of the base year, and how much might that have increased during the year? Based on the sample, analyze the underlying causes of the availability problem described in the text. Calculate the EOQs for the A-items. What recommendations would you give to the company? supplies4medics.com

27 Slack, Brandon-Jones and Johnston, Operations Management PowerPoints on the Web, 7 th edition © Nigel Slack, Alistair Brandon-Jones and Robert Johnston 2014 Slide Sample number Catalogue reference number* Sales unit description **Sales unit cost (Euro) Last 12 months’ Sales (units) Inventory as at last year end (units) Re-order Quantity (units) Disposable Aprons (10pk) Ear-loop Masks (Box)3.606, , Drill Type Incontinence Pads Large3.5035,4008,50010, ml Syringe Rectal Speculum 3 Prong Pocket Organiser Blue Oxygen Trauma Kit Zinc Oxide Tape1.501, Dual Head Stethoscope Disp. Latex Catheter0.603, Roll-up Wheelchair Ramp WashClene Tube1.4022,50010,5008, Cervical Collar Head Wedge Three-Wheel Scooter Neonatal Trach. Tube Mouldable Strip Paste10.201, Sequential Comp. Pump Toilet Safety Frame supplies4medics.com (Continued) Table Representative sample of 20 catalogue Items * Reference numbers are allocated sequentially as new items are added to catalogue. ** All quantities are in sales units (e.g. item, box, case, pack).

28 Slack, Brandon-Jones and Johnston, Operations Management PowerPoints on the Web, 7 th edition © Nigel Slack, Alistair Brandon-Jones and Robert Johnston 2014 Slide Sample # Unit Cost Annual Sales UVCum UV Class- ification % of UVInventoryInventory Value Inventory Turns Stock weeks ,900 A , ,400123,900308,800A69.028,50029, ,50031,500340,300A ,50014, ,00021,600361,900A80.891,2004, Sub Total361,90065, ,547383,447B ,336397,783B ,25012,750410,533B , ,570421,103B , Sub Total59,2036, ,480428,583C ,859433,442C , ,916437,358C ,5602,136439,494C ,2601,890441,384C ,830443,214C , ,680444,984C ,131446,025C ,865C , ,107C ,347C ,410C Sub Total26,30710, Total447, ,


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