Presentation on theme: "Prepared by Hazem Abdel-Al 1 Inventory Planning, Control & Valuation."— Presentation transcript:
Prepared by Hazem Abdel-Al 1 Inventory Planning, Control & Valuation
Prepared by Hazem Abdel-Al 2 What is an Inventory ? Inventory the stock of any item or resource used in an organization: raw materials, finished products, component parts, supplies and work-in-process. An inventory system policies and controls for monitoring levels of inventory Information system that records transactions and enables analysis of stock requirements and levels/quantities, costs etc
Prepared by Hazem Abdel-Al 3 Why hold inventory / stock? Provide flexibility minimum delay in supplying customers a good range Protect against uncertainties Enable economic purchasing Anticipate changes in demand or supply Buffers to feed processes and enable efficient scheduling Strategic stock holdings
Prepared by Hazem Abdel-Al 4 Inventory Types Raw-materials. Work-in-progress or in-transit Finished-goods In the warehouse, awaiting shipment, in delivery vehicles, in tanks, on shelves, in the stores Strategic inventory Scrap & re-work
Prepared by Hazem Abdel-Al 5 The Nature of Inventory Planning Inventory do not give revenues without operations. Organizations resources are limited there for investments in inventory should be optimized ( Economic ). Why to manage inventory ? To ensure a continues operation activities (non-stop).
Prepared by Hazem Abdel-Al 6 Costs of Inventory Ordering costs Offering prices, purchase order & office, shipping and/or set up Holding / Carrying Costs tied up capital (item value), staff & equipment, obsolescence, perish ability, shrinkage, insurance & security, (rent/lease), audit, taxes. Cost of being out of stock, cancelling an order Scrap and re-working Shortage Costs.
Prepared by Hazem Abdel-Al 8 Inventory Costs (cont) Ordering costs Production control costs Setup and teardown costs Lost capacity costs Purchase order costs Stockout costs Capacity-associated costs
Prepared by Hazem Abdel-Al 9 Material-Flows Process From Suppliers To Customer Production Processes Inventory in transit Stores warehouse Finished goods WIP Work in process
Prepared by Hazem Abdel-Al 10 Stock : Input (Flow in), Storage (Holding) and Flow out (Usage) Supply Rate Inventory Level Rate of Demand (Usage) Stock Level
Prepared by Hazem Abdel-Al 11 Economic Order Quantity (EOQ) In trying to minimize inventory costs a company must find the order quantity which spreads the ordering or set-up costs over as many units as possible without incurring excess holding costs. The EOQ model attempts to determine the amount of units to purchase which will minimize the total costs associated with ordering and holding inventory
Prepared by Hazem Abdel-Al 12 Economic Order Quantity (EOQ) How to calculate EOQ ? Tabular Approach /Trial and Error. (waste time) Graphic Approach /By using charts. Formula Approach /Mathematically.
Prepared by Hazem Abdel-Al 13 EOQ Aim = Cost Minimization Cost Ordering Costs Holding Costs Q eoq Order Quantity (Q) Total Cost Holding + Ordering costs = total cost curve. Find Q eoq inventory order point to minimize total costs.
Prepared by Hazem Abdel-Al 14 Economic Order Quantity (EOQ) EOQ Assumptions Demand is known and constant. Lead time is known and constant. Order and holding costs are averaged across all transactions. Single product line No quantity discounts - stable unit cost No stock-outs allowed Items ordered/produced in a lot or batch Batch received all at once Holding cost is linear based on average stock level Fixed order + set up cost
Prepared by Hazem Abdel-Al 15 Calculate EOQ Q eoq = 2DS H = 2(Annual/Period Demand) (Order cost) Holding Cost Exercise EOQ and reorder point? Annual demand = 12,000 units Days/year in average daily demand = 365 Cost to place an order = £500 Holding cost /unit p.a. = £12 ( 20% Cost per unit) Lead time = 7 days Cost per unit = £60 (total unit cost * %storage) =
Prepared by Hazem Abdel-Al 16 EOQ Solution Q = 2DS H = 2(12,000 )(500) 0.2 * 60 = 1000 units eoq Number of orders = Annual Demand / EOQ = / 1000 = 12 orders per year. Orders Cost = 12 * 500 = 6000 £ Total Holding Cost = 0.2*60* = £ There for Total Inventory Cost = = £
Prepared by Hazem Abdel-Al 17 EOQ Table – minimum TVc Avg.stock x item £ x hc % Oc + Hc
Prepared by Hazem Abdel-Al 18 Cost Estimation & Model Sensitivity In practical way it’s difficult to estimate the variables in the EOQ model such as the holding cost. Example: Daily demand Demand during period (240 days) EOQ Total cost of inventory 40 Min9600 units894.4 units10,733 £ 60 Max1440 units units10,800 £ Not that much in sensitivity
Prepared by Hazem Abdel-Al 19 Extensions of the EOQ model 1. EOQ with Order Size Restrictions. 2. EOQ with Storage limitations. 3. EOQ with quantity discount.
Prepared by Hazem Abdel-Al 20 Extensions of the EOQ model 1. EOQ with Order Size Restrictions. Example: AICO ltd Demand Expected next year : 5000 units. Supplier packages only contains 400 unit for each. EOQ = 1000 unit when ordering cost 10$ & holding cost per unit 0.1$ We have two options : 800 unit or 1200 unit. OptionOrdering CostHolding CostTotal Cost 800 unit62.5 $40 $ $ 1200 unit41.7 $60 $ $
Prepared by Hazem Abdel-Al 21 Extensions of the EOQ model 2. EOQ with Storage limitations. Example: AICO ltd Demand Expected next year : 5000 units. Supplier packages only contains 400 unit for each. EOQ = 1000 unit when ordering cost 10$ & holding cost per unit 0.1$
Prepared by Hazem Abdel-Al 22 Extensions of the EOQ model 3. EOQ with quantity discount.
Prepared by Hazem Abdel-Al 23 The Reorder Point (ROP) Reorder point ROP = D * L D = Avg daily demand (constant) L = Lead time (constant) when to place an order in units? Annual Demand = 10,000 units Days per year considered in average daily demand = 365 Cost to place an order = £10 Holding cost per unit per year = 10% of cost per unit Lead time = 10 days Cost per unit = £15
Prepared by Hazem Abdel-Al 24 EOQ and ROP example (366 units)= (10,000)(10) = H 2DS = Q eoq D = 10,000 units/year 365 days = units/day If lead time = 10 days, Reorder point = * 10 days = = 274 units Place order for 366 units. When 274 left, place next order for 366.
Prepared by Hazem Abdel-Al 25 Order Quantities & Reorder Points R = Reorder point L = Lead time L L q R Time No. of units on hand safety or buffer level Average stock q/2 q
Prepared by Hazem Abdel-Al 26 Order Quantities & Reorder Points
Prepared by Hazem Abdel-Al 27 Safety Stock and Re-order Levels Reserve - buffer - cushion against uncertain demand (usage) & lead time. A basis for a "2-bin" system Application to JIT? EOQ assumes certain demand & lead time. If uncertain, then: ROL = Average usage in lead time + safety stock (Avg. lead time x Avg. daily usage)
Prepared by Hazem Abdel-Al 28 How Much Safety Stock? Cost vs. safety level Depends on: Uncertainty: demand & lead time cost of being out of stock carrying inventory increasingly better service Service level policy % confidence of not hitting a stock-out situation
Prepared by Hazem Abdel-Al 29 Order Point with Safety Stock Units Days Safety Stock Actual lead time is 3 days! (at day 21) Order Point Dip into safety stock