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11-1Inventory Management CHAPTER 11 Inventory Management.

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Presentation on theme: "11-1Inventory Management CHAPTER 11 Inventory Management."— Presentation transcript:

1 11-1Inventory Management CHAPTER 11 Inventory Management

2 11-2Inventory Management Supply Sources: plants vendors ports Regional Warehouses: stocking points Field Warehouses: stocking points Customers, demand centers sinks Production/ purchase costs Inventory & warehousing costs Transportation costs Inventory & warehousing costs Transportation costs

3 11-3Inventory Management Inventory  Where do we hold inventory? – Suppliers and manufacturers – warehouses and distribution centers – retailers  Types of Inventory – WIP – raw materials – finished goods  Why do we hold inventory? – Economies of scale – Uncertainty in supply and demand – Lead Time, Capacity limitations

4 11-4Inventory Management Goals: Reduce Cost, Improve Service  By effectively managing inventory: – Xerox eliminated $700 million inventory from its supply chain – Wal-Mart became the largest retail company utilizing efficient inventory management – GM has reduced parts inventory and transportation costs by 26% annually

5 11-5Inventory Management Goals: Reduce Cost, Improve Service  By not managing inventory successfully – In 1994, “IBM continues to struggle with shortages in their ThinkPad line” (WSJ, Oct 7, 1994) – In 1993, “Liz Claiborne said its unexpected earning decline is the consequence of higher than anticipated excess inventory” (WSJ, July 15, 1993) – In 1993, “Dell Computers predicts a loss; Stock plunges. Dell acknowledged that the company was sharply off in its forecast of demand, resulting in inventory write downs” (WSJ, August 1993)

6 11-6Inventory Management Independent Demand A B(4) C(2) D(2)E(1) D(3) F(2) Dependent Demand Independent demand is uncertain. Dependent demand is certain. Inventory: a stock or store of goods

7 11-7Inventory Management Types of Inventories  Raw materials & purchased parts  Partially completed goods called work in progress  Finished-goods inventories  (manufacturing firms) or merchandise (retail stores)

8 11-8Inventory Management Types of Inventories (Cont’d)  Replacement parts, tools, & supplies  Goods-in-transit to warehouses or customers

9 11-9Inventory Management Functions of Inventory  To meet anticipated demand  To smooth production requirements  To decouple operations  To protect against stock-outs

10 11-10Inventory Management Functions of Inventory (Cont’d)  To take advantage of order cycles  To help hedge against price increases  To permit operations  To take advantage of quantity discounts

11 11-11Inventory Management Objective of Inventory Control  To achieve satisfactory levels of customer service while keeping inventory costs within reasonable bounds  Level of customer service  Costs of ordering and carrying inventory

12 11-12Inventory Management  A system to keep track of inventory  A reliable forecast of demand  Knowledge of lead times  Reasonable estimates of  Holding costs  Ordering costs  Shortage costs  A classification system Effective Inventory Management

13 11-13Inventory Management Inventory Counting Systems  Periodic System Physical count of items made at periodic intervals  Perpetual Inventory System System that keeps track of removals from inventory continuously, thus monitoring current levels of each item

14 11-14Inventory Management Inventory Counting Systems (Cont’d)  Two-Bin System - Two containers of inventory; reorder when the first is empty  Universal Bar Code - Bar code printed on a label that has information about the item to which it is attached 0 214800 232087768

15 11-15Inventory Management  Lead time: time interval between ordering and receiving the order  Holding (carrying) costs: cost to carry an item in inventory for a length of time, usually a year  Ordering costs: costs of ordering and receiving inventory  Shortage costs: costs when demand exceeds supply Key Inventory Terms

16 11-16Inventory Management ABC Classification System Classifying inventory according to some measure of importance and allocating control efforts accordingly. A A - very important B B - mod. important C C - least important Figure 11.1 Annual $ value of items A B C High Low Few Many Number of Items

17 11-17Inventory Management Cycle Counting  A physical count of items in inventory  Cycle counting management  How much accuracy is needed?  When should cycle counting be performed?  Who should do it?

18 11-18Inventory Management  Economic order quantity model  Economic production model  Quantity discount model Economic Order Quantity Models

19 11-19Inventory Management  Only one product is involved  Annual demand requirements known  Demand is even throughout the year  Lead time does not vary  Each order is received in a single delivery  There are no quantity discounts Assumptions of EOQ Model

20 11-20Inventory Management The Inventory Cycle Figure 11.2 Profile of Inventory Level Over Time Quantity on hand Q Receive order Place order Receive order Place order Receive order Lead time Reorder point Usage rate Time

21 11-21Inventory Management Total Cost Annual carrying cost Annual ordering cost Total cost =+ Q 2 H D Q S TC = +

22 11-22Inventory Management Cost Minimization Goal Order Quantity (Q) The Total-Cost Curve is U-Shaped Ordering Costs QOQO Annual Cost ( optimal order quantity) Figure 11.4C

23 11-23Inventory Management Deriving the EOQ Using calculus, we take the derivative of the total cost function and set the derivative (slope) equal to zero and solve for Q.

24 11-24Inventory Management Minimum Total Cost The total cost curve reaches its minimum where the carrying and ordering costs are equal.

25 11-25Inventory Management  Production done in batches or lots  Capacity to produce a part exceeds the part’s usage or demand rate  Assumptions of EPQ are similar to EOQ except orders are received incrementally during production Economic Production Quantity (EPQ)

26 11-26Inventory Management  Only one item is involved  Annual demand is known  Usage rate is constant  Usage occurs continually  Production rate is constant  Lead time does not vary  No quantity discounts Economic Production Quantity Assumptions

27 11-27Inventory Management Economic Run Size

28 11-28Inventory Management Total Costs with Purchasing Cost Annual carrying cost Purchasing cost TC =+ Q 2 H D Q S + + Annual ordering cost PD +

29 11-29Inventory Management Total Costs with PD Cost EOQ TC with PD TC without PD PD 0 Quantity Adding Purchasing cost doesn’t change EOQ Figure 11.7

30 11-30Inventory Management Total Cost with Constant Carrying Costs OC EOQ Quantity Total Cost TC a TC c TC b Decreasing Price CC a,b,c Figure 11.9

31 11-31Inventory Management When to Reorder with EOQ Ordering  Reorder Point - When the quantity on hand of an item drops to this amount, the item is reordered  Safety Stock - Stock that is held in excess of expected demand due to variable demand rate and/or lead time.  Service Level - Probability that demand will not exceed supply during lead time.

32 11-32Inventory Management Determinants of the Reorder Point  The rate of demand  The lead time  Demand and/or lead time variability  Stockout risk (safety stock)

33 11-33Inventory Management Safety Stock LT Time Expected demand during lead time Maximum probable demand during lead time ROP Quantity Safety stock Figure 11.12 Safety stock reduces risk of stockout during lead time

34 11-34Inventory Management Reorder Point ROP Risk of a stockout Service level Probability of no stockout Expected demand Safety stock 0z Quantity z-scale Figure 11.13 The ROP based on a normal Distribution of lead time demand

35 11-35Inventory Management  Orders are placed at fixed time intervals  Order quantity for next interval?  Suppliers might encourage fixed intervals  May require only periodic checks of inventory levels  Risk of stockout Fixed-Order-Interval Model

36 11-36Inventory Management  Tight control of inventory items  Items from same supplier may yield savings in:  Ordering  Packing  Shipping costs  May be practical when inventories cannot be closely monitored Fixed-Interval Benefits

37 11-37Inventory Management  Requires a larger safety stock  Increases carrying cost  Costs of periodic reviews Fixed-Interval Disadvantages

38 11-38Inventory Management  Single period model: model for ordering of perishables and other items with limited useful lives  Shortage cost: generally the unrealized profits per unit  Excess cost: difference between purchase cost and salvage value of items left over at the end of a period Single Period Model

39 11-39Inventory Management  Continuous stocking levels  Identifies optimal stocking levels  Optimal stocking level balances unit shortage and excess cost  Discrete stocking levels  Service levels are discrete rather than continuous  Desired service level is equaled or exceeded Single Period Model

40 11-40Inventory Management  Too much inventory  Tends to hide problems  Easier to live with problems than to eliminate them  Costly to maintain  Wise strategy  Reduce lot sizes  Reduce safety stock Operations Strategy

41 11-41Inventory Management Gortrac Manufacturing GTS3 Inventory/Assessment/Reduction

42 11-42Inventory Management Materials PS7 Washburn Guitars

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