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Lecture 4 Inventory Management Chapter 11.

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Presentation on theme: "Lecture 4 Inventory Management Chapter 11."— Presentation transcript:

1 Lecture 4 Inventory Management Chapter 11

2 Dependent and Independent Demand
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

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 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 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 Effective Inventory 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

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 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 Key Inventory Terms 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

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

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

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

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

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

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/Q0 Length of order cycle = Q0/D

16 Assumptions of EOQ Model
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

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

19 Safety Stock Figure 11.12 Quantity Maximum probable demand
LT Time Expected demand during lead time Maximum probable demand ROP Quantity Safety stock Safety stock reduces risk of stockout during lead time

20 Economic Production Quantity (EPQ)
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

21 EOQ with Incremental Inventory Replenishment

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

23 Economic Production Quantity Assumptions
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

24 Operations Strategy Too much inventory Wise strategy
Tends to hide problems Easier to live with problems than to eliminate them Costly to maintain Wise strategy Reduce lot sizes Reduce safety stock

25 The Balance Sheet – Dell Computer Co.

26 Income Statement – Dell Computer Co.

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 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 Operations Scheduling
Chapter 15

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

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 #1 Work Center #2 Output

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

35 More Gantt Charts

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 Performance Measures Job flow time Lateness = flow time – due date
Table 15.2 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


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