112 Inventory Management PowerPresentation® prepared by David J. McConomy, Queen’s University
2Learning ObjectivesDescribe the traditional inventory management model.Describe JIT inventory management.
3Learning ObjectivesDescribe the theory of constraints and explain how it can be used to manage inventory.
4Basics of Traditional Inventory Management Inventory CostsOrdering CostsSetup CostsCarrying CostsStockout Costs3
5Inventory Costs1. Ordering Costs: The costs of placing and receiving an orderExamples: clerical costs, documents, insurance for shipment, and unloading.2. Setup Costs: The costs of preparing equipment and facilities so they can be used to produce a particular product or componentExamples: setup labour, lost income (from idled facilities), and test runs. When a firm produces the goods internally, ordering costs are replaced by setup costs.
6Inventory Costs (continued) 3. Carrying Costs: The costs of keeping inventoryExamples: insurance, obsolescence, opportunity cost of funds tied up in inventory, handling costs and storage space.4. Stockout Costs: The costs of not having sufficient inventoryExamples: lost sales (both current and future), costs of expediting (increased transportation charges, overtime, etc.) and the costs of interrupted production.
7Why Inventory Is Needed: Traditional View Dealing with uncertainty of demandDealing with uncertainty of supplyDealing with unreliable production processes
8Why Inventory Is Needed: Traditional View (continued) To buffer against production interruptionsTo take advantage of discountsTo hedge against future price increases
9The Appropriate Inventory Policy Two Basic Questions Must be AddressedHow much should be ordered or produced?When should the order be placed or the setup be performed?
10An Inventory Model Total Costs = Ordering costs + Carrying costs TC = PD/Q + CQ/2where TC = The total ordering (or setup) and carrying costsP = The cost of placing and receiving an order (or the cost of setting up a production run)D = The known annual demandQ = The number of units ordered in each order (or the lot size for production)C = The cost of carrying one unit of stock for one yearEconomic order quantity (EOQ) = 2PD/C7
11An EOQ Illustration EOQ = 2PD/C D = 10,000 units Q = 1,000 units P = $25 per orderC = $2 per unitEOQ = (2 x 25 x 10,000) / 2EOQ = 250,000EOQ = 500 units8
12Reorder Point When Demand is Certain Reorder point = Rate of usage x Lead timeExample: Assume that the average rate of usage is 50 units per day for a component. Assume also that the time required to place and receive an order is 4 days. What is the reorder point?Reorder point = 4 x 50 = 200 unitsThus, an order should be placed when inventory drops to 200 units.
13Reorder Point When Demand is Uncertain (Ave. rate of usage x Lead time) + Safety stockwhere:Safety stock =(Maximum usage - Average usage) x Lead time
14Reorder Point (continued) Example:Suppose that the maximum usage is 60 units per day and the average usage is 50 units per day. The lead time is 4 days.What is the reorder point?Safety stock = ( ) x 4 = 40 unitsReorder point = (50 x 4) + 40 = 240 units
15Reorder Point (no safety stock) Reorder point = Rate of usage x Lead time10080604020ROPTime
16Traditional versus JIT Inventory Procedures Inventory Control SystemsTraditional SystemsJIT Systems1. Balance setup and carrying costs2. Satisfy customer demand3. Avoid manufacturing shutdowns4. Take advantage of discounts5. Hedge against future price increases1. Drive setup and carrying costs to zero2. Use due-date performance*3. Total preventive maintenance*4. Total quality control*5. The Kanban system*Rather than holding inventories as a hedge against plant-shutdowns,JIT attacks the plant-shutdown problem by addressing these issues.11
17JIT And Inventory Management Setup and Carrying Costs: The JIT Approach JIT reduces the costs of acquiring inventory to insignificant levels by:Drastically reducing setup timeUsing long-term contracts for outside purchasesCarrying costs are reduced to insignificant levels by reducing inventories to insignificant levels
18JIT And Inventory Management Due-Date Performance: The JIT Solution Lead times are reduced so that the company can meet requested delivery dates and to respond quickly to customer demand.Lead times are reduced by:reducing setup timesimproving qualityusing cellular manufacturing
19JIT And Inventory Management Avoidance of Shutdown: The JIT Approach Total preventive maintenance to reduce machine failuresTotal quality control to reduce defective partsCultivation of supplier relationships to ensure availability of quality raw materials and subassembliesThe use of the Kanban system is also essential
20JIT And Inventory Management JIT Purchasing Versus Holding Inventories Careful vendor selectionLong-term contracts with vendorsPrices are stipulated (usually producing a significant savings)Quality is stipulatedThe number of orders placed are reduced
21What is the Kanban System? A Card System is used to monitor work-in-processA withdrawal KanbanA production KanbanA vendor Kanban12
22The Withdrawal Kanban Item No. TVD-114 Preceding Process Item Name LCD Screen Computer AssemblyComputer Type Compaq 4/25Box Capacity Subsequent ProcessBox Type AD Final Assembly13
23The Production Kanban Item No. TVD-114 Process Item Name LCD Screen Computer AssemblyComputer Type Contra 4/25Box CapacityBox Type ___C14
24The Vendor Kanban Item No. TVD-114 Item Name Computer Chassis Type Black PlasticBox Capacity Location North Receiving GateBox Type Cardboard--Type ATime to Deliver :30 AM., 12:30 P.M., 2:30 P.M.Name of Vendor Hovey Supply Company15
25The Kanban Process (7) Withdrawal Store (1) Lot with P-Kanban CB Assembly(5) AttachW-Kanban(1) RemoveW-KanbanAttach to Post(6) SignalRemove(4) P-KanbanAttach to PostCBStore(2), (3)Withdrawal PostProductionOrdering PostFinal Assembly16
26Theory of Constraints Three Measures of Organizational Performance ThroughputInventoryOperating expenses17
27The Theory of Constraints: Five Steps to Improve Performance 1. Identify the organization’s constraint(s).2. Exploit the binding constraint(s).3. Subordinate everything else to the decisions made in Step 2.4. Elevate the binding constraint(s).5. Repeat the process.18
28The Drum-Buffer-Rope System Raw MaterialsInitial ProcessProcess CRopeProcess AFinal ProcessProcess BFinished GoodsTime BufferDrummer Process19