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1 Lecture 4 Inventory Management Chapter 11. 2 Independent Demand A B(4) C(2) D(2)E(1) D(3) F(2) Dependent Demand Independent demand is uncertain. Dependent.

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Presentation on theme: "1 Lecture 4 Inventory Management Chapter 11. 2 Independent Demand A B(4) C(2) D(2)E(1) D(3) F(2) Dependent Demand Independent demand is uncertain. Dependent."— Presentation transcript:

1 1 Lecture 4 Inventory Management Chapter 11

2 2 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 Dependent and Independent Demand

3 3 Types of Inventories  Raw materials & purchased parts  Partially completed goods called work in progress  Finished-goods inventories  (manufacturing firms) or merchandise (retail stores)  Replacement parts, tools, & supplies  Goods-in-transit to warehouses or customers

4 4 Functions of Inventory  To meet anticipated demand  To smooth production requirements  To decouple operations  To protect against stock-outs  To take advantage of order cycles  To help hedge against price increases  To permit operations  To take advantage of quantity discounts

5 5 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

6 6  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

7 7 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

8 8 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

9 9  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

10 10 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

11 11  Economic order quantity (EOQ) model  Economic production model (EPQ)  Quantity discount model Economic Order Quantity Models

12 12 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

13 13 Total Cost Annual carrying cost Annual ordering cost Total cost =+ Q 2 H D Q S TC = +

14 14 Cost Minimization Goal Order Quantity (Q) The Total-Cost Curve is U-Shaped Ordering Costs QOQO Annual Cost ( optimal order quantity) Figure 11.4C

15 15 Deriving the EOQ & Minimum Total Cost The total cost curve reaches its minimum where the carrying and ordering costs are equal. Number of orders per year = D/Q 0 Length of order cycle = Q 0 /D

16 16  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

17 17 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.

18 18 Determinants of the Reorder Point  The rate of demand  The lead time  Demand and/or lead time variability  Stockout risk (safety stock)

19 19 Safety Stock LT Time Expected demand during lead time Maximum probable demand during lead time ROP Quantity Safety stock Figure Safety stock reduces risk of stockout during lead time

20 20  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)

21 21 EOQ with Incremental Inventory Replenishment

22 22 Economic Run Size Formula (11-5) in page 498 of Chapter 11

23 23  Only one item is involved  Annual demand is known  Usage rate is constant  Usage occurs continually  Production occurs periodically  Production rate is constant  Lead time does not vary  No quantity discounts Economic Production Quantity Assumptions

24 24  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

25 25 The Balance Sheet – Dell Computer Co.

26 26 Income Statement – Dell Computer Co.

27 27 Debt Ratio  What It Measures: The extent to which a form uses debt financing  How You Compute: The ratio of total debt to total assets

28 28 Inventory Turnover Ratio  What It Measures: How effectively a firm is managing its inventories.  How You Compute: This ratio is computed by dividing sales by inventories Inventory turnover ratio =

29 29 Operations Scheduling Chapter 15

30 30  Establishing the timing of the use of equipment, facilities and human activities in an organization  Effective scheduling can yield  Cost savings  Increases in productivity Scheduling

31 31 High-Volume Systems  Flow system: High-volume system with Standardized equipment and activities  Flow-shop scheduling: Scheduling for high- volume flow system Work Center #1Work Center #2 Output

32 32 High-Volume Success Factors  Process and product design  Preventive maintenance  Rapid repair when breakdown occurs  Optimal product mixes  Minimization of quality problems  Reliability and timing of supplies

33 33 Scheduling Low-Volume Systems  Loading - assignment of jobs to process centers  Sequencing - determining the order in which jobs will be processed  Job-shop scheduling  Scheduling for low-volume systems with many variations in requirements

34 34 Gantt Load Chart  Gantt chart - used as a visual aid for loading and scheduling Figure 15.2

35 35 More Gantt Charts

36 36 Sequencing  Sequencing: Determine the order in which jobs at a work center will be processed.  Workstation: An area where one person works, usually with special equipment, on a specialized job.  Priority rules: Simple heuristics used to select the order in which jobs will be processed.  FCFS - first come, first served  SPT - shortest processing time  Minimizes mean flow time  EDD - earliest due date

37 37 Performance Measures  Job flow time  Length of time a job is at a particular workstation  Includes actual processing time, waiting time, transportation time etc.  Lateness = flow time – due date  Tardiness = max {lateness, 0}  Makespan  Total time needed to complete a group of jobs  Length of time between start of first job and completion of last job Table 15.2

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