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1 Inventory Management and Control. 2 AMAZON.com Jeff Bezos, in 1995, started AMAZON.com as a “virtual” retailer – no inventory, no warehouses, no overhead;

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Presentation on theme: "1 Inventory Management and Control. 2 AMAZON.com Jeff Bezos, in 1995, started AMAZON.com as a “virtual” retailer – no inventory, no warehouses, no overhead;"— Presentation transcript:

1 1 Inventory Management and Control

2 2 AMAZON.com Jeff Bezos, in 1995, started AMAZON.com as a “virtual” retailer – no inventory, no warehouses, no overhead; just a bunch of computers. Growth forced AMAZON.com to excel in inventory management! AMAZON is now a worldwide leader in warehouse management and automation.

3 3 Order Fulfillment at AMAZON (1 of 2) 1.You order items; computer assigns your order to distribution center [closest facility that has the product(s)] 2.Lights indicate products ordered to workers who retrieve product and reset light. 3.Items placed in crate with items from other orders, and crate is placed on conveyor. Bar code on item is scanned 15 times – virtually eliminating error.

4 4 Order Fulfillment at AMAZON (2 of 2) 4.Crates arrive at a central point where items are boxed and labeled with new bar code. 5.Gift wrapping done by hand (30 packages per hour) 6.Box is packed, taped, weighed and labeled before leaving warehouse in a truck. 7.Order appears on your doorstep within a week

5 5 Inventory Defined Inventory is the stock of any item or resource held to meet future demand and can include: raw materials, finished products, component parts, supplies, and work-in-process

6 6 Inventory Process stage Demand Type Number & Value Other Raw Material WIP Finished Goods Independent Dependent A Items B Items C Items Maintenance Operating Inventory Classifications

7 7 E(1 ) Independent vs. Dependent Demand B(4) E(2)D(1) C(2) E(3)B(1) A Independent Demand (Demand for the final end-product or demand not related to other items; demand created by external customers) Dependent Demand (Derived demand for component parts, subassemblies, raw materials, etc- used to produce final products ) Finished product Component parts Independent demand is uncertain Dependent demand is certain

8 8 Inventory Models Independent demand – finished goods, items that are ready to be sold –E.g. a computer Dependent demand – components of finished products –E.g. parts that make up the computer

9 9 Types of Inventories (1 of 2) Raw materials & purchased parts Partially completed goods called work in progress Finished-goods inventories (manufacturing firms) or merchandise (retail stores)

10 10 Types of Inventories (2 of 2) Replacement parts, tools, & supplies Goods-in-transit to warehouses or customers

11 11 The Material Flow Cycle (1 of 2)

12 12 Run time: Job is at machine and being worked on Setup time: Job is at the work station, and the work station is being "setup." Queue time: Job is where it should be, but is not being processed because other work precedes it. Move time: The time a job spends in transit Wait time: When one process is finished, but the job is waiting to be moved to the next work area. Other: "Just-in-case" inventory. The Material Flow Cycle (2 of 2) Wait Time Move Time Queue Time Setup Time Run Time Input Cycle Time Output

13 13 Performance Measures Inventory turnover (the ratio of annual cost of goods sold to average inventory investment) Days of inventory on hand (expected number of days of sales that can be supplied from existing inventory)

14 14 Functions of Inventory (1 of 2) 1.To “decouple” or separate various parts of the production process, ie. to maintain independence of operations 2.To meet unexpected demand & to provide high levels of customer service 3.To smooth production requirements by meeting seasonal or cyclical variations in demand 4.To protect against stock-outs

15 15 Functions of Inventory (2 of 2) 5. To provide a safeguard for variation in raw material delivery time 6. To provide a stock of goods that will provide a “selection” for customers 7. To take advantage of economic purchase-order size 8. To take advantage of quantity discounts 9. To hedge against price increases

16 16 Higher costs –Item cost (if purchased) –Ordering (or setup) cost –Holding (or carrying) cost Difficult to control Hides production problems May decrease flexibility Disadvantages of Inventory

17 17 Inventory Costs  Holding (or carrying) costs  Costs for storage, handling, insurance, etc  Setup (or production change) costs  Costs to prepare a machine or process for manufacturing an order, eg. arranging specific equipment setups, etc  Ordering costs (costs of replenishing inventory)  Costs of placing an order and receiving goods  Shortage costs  Costs incurred when demand exceeds supply

18 18 Holding (Carrying) Costs Obsolescence Insurance Extra staffing Interest Pilferage Damage Warehousing Etc.

19 19 Inventory Holding Costs (Approximate Ranges) Category Housing costs (building rent, depreciation, operating cost, taxes, insurance) Material handling costs (equipment, lease or depreciation, power, operating cost) Labor cost from extra handling Investment costs (borrowing costs, taxes, and insurance on inventory) Pilferage, scrap, and obsolescence Overall carrying cost Cost as a % of Inventory Value 6% (3 - 10%) 3% ( %) 3% (3 - 5%) 11% (6 - 24%) 3% (2 - 5%) 26%

20 20 Ordering Costs Supplies Forms Order processing Clerical support etc.

21 21 Setup Costs Clean-up costs Re-tooling costs Adjustment costs etc.

22 22 Shortage Costs Backordering cost Cost of lost sales

23 23 Inventory Control System Defined  An inventory system is the set of policies and controls that monitor levels of inventory and determine what levels should be maintained, when stock should be replenished and how large orders should be  Answers questions as:  When to order?  How much to order?

24 24 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

25 25  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 Requirements of an Effective Inventory Management

26 26 Inventory Counting (Control) Systems Periodic System Physical count of items made at periodic intervals; order is placed for a variable amount after fixed passage of time Perpetual (Continuous) Inventory System System that keeps track of removals from inventory continuously, thus monitoring current levels of each item (constant amount is ordered when inventory declines to a predetermined level)

27 27 Inventory Models  Single-Period Inventory Model  One time purchasing decision (Example: vendor selling t-shirts at a football game)  Seeks to balance the costs of inventory overstock and under stock  Multi-Period Inventory Models  Fixed-Order Quantity Models Event triggered (Example: running out of stock)  Fixed-Time Period Models Time triggered (Example: Monthly sales call by sales representative)

28 28 Single-Period Inventory Model

29 29 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

30 30 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

31 31 Single-Period Model This model states that we should continue to increase the size of the inventory so long as the probability of selling the last unit added is equal to or greater than the ratio of: Cu/Co+Cu

32 32 Optimal Stocking Level Service Level So Quantity CeCs Balance point Service level = CsCs Cs + Ce Cs = Shortage cost per unit Ce = Excess cost per unit

33 33 Single Period Example 1 Ce = $0.20 per unit Cs = $0.60 per unit Service level = Cs/(Cs+Ce) =.6/(.6+.2) Service level =.75 Service Level = 75% Quantity CeCs Stockout risk = 1.00 – 0.75 = 0.25

34 34 Single Period Model Example 2 Our college basketball team is playing in a tournament game this weekend. Based on our past experience we sell on average 2,400 shirts with a standard deviation of 350. We make $10 on every shirt we sell at the game, but lose $5 on every shirt not sold. How many shirts should we make for the game? C u = $10 and C o = $5; P ≤ $10 / ($10 + $5) =.667 Z.667 =.432 therefore we need 2, (350) = 2,551 shirts

35 35 Multi-Period Inventory Models  Fixed-Order Quantity Models (Types of) Economic Order Quantity Model Economic Production Order Quantity (Economic Lot Size) Model Economic Order Quantity Model with Quantity Discounts  Fixed Time Period (Fixed Order Interval) Models

36 36 Fixed Order Quantity Models: Economic Order Quantity Model

37 37 Economic Order Quantity Model Assumptions (1 of 2): Demand for the product is known with certainty, is constant and uniform throughout the period Lead time (time from ordering to receipt) is known and constant Price per unit of product is constant (no quantity discounts) Inventory holding cost is based on average inventory

38 38 Economic Order Quantity Model Assumptions (2 of 2): Ordering or setup costs are constant All demands for the product will be satisfied (no back orders are allowed) No stockouts (shortages) are allowed The order quantity is received all at once. (Instantaneous receipt of material in a single lot) The goal is to calculate the order quantitiy that minimizes total cost

39 39 Basic Fixed-Order Quantity Model and Reorder Point Behavior R = Reorder point Q = Economic order quantity L = Lead time L L QQQ R Time Number of units on hand (Inv. Level) 1. You receive an order quantity Q. 2. You start using them up over time. 3. When you reach down to a level of inventory of R, you place your next Q sized order. 4. The cycle then repeats.

40 40 EOQ Model Reorder Point (ROP) Time Inventory Level Average Inventory (Q/2) Lead Time Order Quantity (Q) Demand rate Order placedOrder received

41 41 EOQ Cost Model: How Much to Order? By adding the holding and ordering costs together, we determine the total cost curve, which in turn is used to find the optimal order quantity that minimizes total costs Slope = 0 Total Cost Order Quantity, Q Annual cost ($) Minimum total cost Optimal order Q opt Q opt Carrying Cost = HQHQ22HQHQ222 Ordering Cost = SDSDQQSDSDQQQ

42 42 More units must be stored if more are ordered Purchase Order DescriptionQty. Microwave1 Order quantity Purchase Order DescriptionQty. Microwave1000 Order quantity Why Holding Costs Increase?

43 43 Cost is spread over more units Example: You need 1000 microwave ovens Purchase Order DescriptionQty. Microwave1 Purchase Order DescriptionQty. Microwave1 Purchase Order DescriptionQty. Microwave1 Purchase Order Description Qty. Microwave 1 1 Order (Postage $ 0.33)1000 Orders (Postage $330) Order quantity Purchase Order Description Qty. Microwave1000 Why Ordering Costs Decrease ?

44 44 Basic Fixed-Order Quantity (EOQ) Model Formula Total Annual = Cost Annual Purchase Cost Annual Ordering Cost Annual Holding Cost ++ TC=Total annual cost D =Annual demand C =Cost per unit Q =Order quantity S =Cost of placing an order or setup cost R =Reorder point L =Lead time H=Annual holding and storage cost per unit of inventory TC=Total annual cost D =Annual demand C =Cost per unit Q =Order quantity S =Cost of placing an order or setup cost R =Reorder point L =Lead time H=Annual holding and storage cost per unit of inventory

45 45 EOQ Cost Model Annual ordering cost = S D Q Annual carrying cost = HQHQ22HQHQ222 Total cost = + S D Q H Q 2 TC = + S DQS DQ H Q 2 = + S DQ2S DQ2 H2H2  TC  Q 0 = + S DQ2S DQ2 H2H2 Q opt = 2SD H Deriving Q opt Proving equality of costs at optimal point = S D Q H Q 2 Q 2 = 2S D H Q opt = 2 S D H Using calculus, we take the first derivative of the total cost function with respect to Q, and set the derivative (slope) equal to zero, solving for the optimized (cost minimized) value of Qopt

46 46 Deriving the EOQ We also need a reorder point to tell us when to place an order How much to order?: When to order?

47 47 Optimal Order Quantity Expected Number of Orders Expected Time Between Orders Working Days / Year Working Days / Year == ×× == == = =× Q* DS H N D Q*Q* T N d D ROPdL 2 EOQ Model Equations

48 48 EOQ Example 1 (1 of 3) Annual Demand = 1,000 units Days per year considered in average daily demand = 365 Cost to place an order = $10 Holding cost per unit per year = $2.50 Lead time = 7 days Cost per unit = $15 Given the information below, what are the EOQ and reorder point?

49 49 EOQ Example 1(2 of 3) In summary, you place an optimal order of 90 units. In the course of using the units to meet demand, when you only have 20 units left, place the next order of 90 units.

50 50 EOQ Example I(3 of 3) TC min = SDSDQQSDSDQQQ HQHQ22HQHQ222 (10)(1,000)90 (2,5)(90) 2 TC min = $ $111 = 22 $ Orders per year =D/Q opt =1000/90 =11 orders/year Order cycle time= 365/(D/Qopt) =365/11 =33.1days =33.1days + +

51 51 EOQ Example 2(1 of 2) 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 Determine the economic order quantity and the reorder point given the following… Determine the economic order quantity and the reorder point given the following…

52 52 EOQ Example 2(2 of 2) Place an order for 366 units. When in the course of using the inventory you are left with only 274 units, place the next order of 366 units.

53 53 EOQ Example 3 H = $0.75 per yardS = $150D = 10,000 yards Q opt = 2 S D H Q opt = 2(150)(10,000)(0.75) Q opt = 2,000 yards TC min = + S D Q H Q 2 TC min = + (150)(10,000) 2,000(0.75)(2,000)2 TC min = $750 + $750 = $1,500 Orders per year =D/Q opt =10,000/2,000 =5 orders/year Order cycle time =311 days/(D/Q opt ) =311/5 =311/5 =62.2 store days

54 54 When to Reorder with EOQ Ordering ? Reorder Point – is the level of inventory at which a new order is placed ROP = d. L 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 (probability that inventory available during lead time will meet demand) 1 - Probability of stockout

55 55 Reorder Point Example Demand = 10,000 yards/year Store open 311 days/year Daily demand = 10,000 / 311 = yards/day Lead time = L = 10 days R = dL = (32.154)(10) = yards

56 56 Determinants of the Reorder Point The rate of demand The lead time Demand and/or lead time variability Stockout risk (safety stock)

57 57  Answer how much & when to order  Allow demand to vary  Follows normal distribution  Other EOQ assumptions apply  Consider service level & safety stock  Service level = 1 - Probability of stockout  Higher service level means more safety stock  More safety stock means higher ROP Probabilistic Models

58 58 Safety Stock LT Time Expected demand during lead time Maximum probable demand during lead time ROP Quantity Safety stock Safety stock reduces risk of stockout during lead time

59 59 Variable Demand with a Reorder Point Reorder point, R Q LT Time LT Inventory level 0

60 60 Reorder Point with a Safety Stock Reorder point, R Q LT Time LT Inventory level 0 Safety Stock

61 61 Reorder Point With Variable Demand R = dL + z  d L where d=average daily demand L=lead time  d =the standard deviation of daily demand z=number of standard deviations corresponding to the service level probability z  d L=safety stock

62 62 Reorder Point for Service Level Probability of meeting demand during lead time = service level Probability of a stockout R Safety stock dL Expected Demand z  d L The reorder point based on a normal distribution of LT demand

63 63 Reorder Point for Variable Demand (Example) The carpet store wants a reorder point with a 95% service level and a 5% stockout probability d= 30 yards per day L= 10 days  d = 5 yards per day For a 95% service level, z = 1.65 R= dL + z  d L = 30(10) + (1.65)(5)( 10) = yards Safety stock= z  d L = (1.65)(5)( 10) = 26.1 yards

64 64 Fixed Order Quantity Models: -Noninstantaneous Receipt- Production Order Quantity (Economic Lot Size) Model

65 65  Production done in batches or lots  Capacity to produce a part exceeds that part’s usage or demand rate  Allows partial receipt of material  Other EOQ assumptions apply  Suited for production environment  Material produced, used immediately  Provides production lot size  Lower holding cost than EOQ model  Answers how much to order and when to order Production Order Quantity Model

66 66 EOQ POQ Model When To Order Time Inventory Level Both production and usage take place Usage only takes place Maximum inventory level

67 67 EOQ POQ Model When To Order Reorder Point (ROP) Time Inventory Level Average Inventory Lead Time Optimal Order Quantity (Q*)

68 68 POQ Model Inventory Levels (1 of 2) Inventory Level Time Supply Begins Supply Ends Production portion of cycle Demand portion of cycle with no supply Maximum inventory level

69 69 POQ Model Inventory Levels (2 of 2) Time Inventory Level Production Portion of Cycle Max. Inventory Q·(1- u/p) Q* Supply Begins Supply Ends Inventory level with no demand Demand portion of cycle with no supply Average inventory Q/2(1- u/p)

70 70 D = Demand per year S = Setup cost H = Holding cost d = Demand per day p = Production per day POQ Model Equations Production Order Quantity Setup Cost Holding Cost == - = * = * = Q H* u p Q D Q S p * 1 ( 1/2 * H * Q - u p 1 ) - u p 1 () 2*D*S () Maximum inventory level

71 71 Production Order Quantity Example (1 of 2) H = $0.75 per yardS = $150D = 10,000 yards u = 10,000/311 = 32.2 yards per dayp = 150 yards per day POQ opt = = = 2,256.8 yards 2 S D H 1 - upup 2(150)(10,000) TC = = $1,329 upup S D Q H Q 2 Production run = = = days per order QpQp 2,

72 72 Production Quantity Example (2 of 2) H = $0.75 per yardS = $150D = 10,000 yards u= 10,000/311 = 32.2 yards per dayp = 150 yards per day Q opt = = = 2,256.8 yards 2C o D C c 1 - dp 2(150)(10,000) TC = = $1,329 dp CoDCoDQQCoDCoDQQQ CcQCcQ22CcQCcQ222 Production run = = = days per order QpQp 2, Number of production runs = = = 4.43 runs/year DQDQ 10,000 2,256.8 Maximum inventory level =Q 1 - = 2, =1,772 yards upup

73 73 Fixed-Order Quantity Models: Economic Order Quantity Model with Quantity Discounts

74 74 Answers how much to order & when to order Allows quantity discounts –Price per unit decreases as order quantity increases –Other EOQ assumptions apply Trade-off is between lower price & increased holding cost Quantity Discount Model TC = + + PD S D Q Q iC Q2 Where P: Unit Price Total cost with purchasing cost

75 75 Price-Break Model Formula Based on the same assumptions as the EOQ model, the price-break model has a similar Q opt formula: i = percentage of unit cost attributed to carrying inventory C = cost per unit Since “C” changes for each price-break, the formula above will have to be used with each price-break cost value

76 76 Total Costs with PD Cost EOQ TC with PD TC without PD PD 0 Quantity Adding Purchasing cost doesn’t change EOQ

77 77 Total Cost with Constant Carrying Costs OC EOQ Quantity Total Cost TC a TC c TC b Decreasing Price CC a,b,c

78 78 Quantity Discount – How Much to Order?

79 79 Price-Break Example 1 (1 of 3) ORDER SIZEPRICE $ ( d 1 ) ( d 2 ) For this problem holding cost is given as a constant value, not as a percentage of price, so the optimal order quantity is the same for each of the price ranges. (see the figure)

80 80 Price Break Example 1 (2 of 3) Q opt Carrying cost Ordering cost Inventory cost ($) Q( d 1 ) = 100 Q( d 2 ) = 200 TC ( d 2 = $6 ) TC ( d 1 = $8 ) TC = ($10 )

81 81 Price Break Example 1 (3 of 3) Q opt Carrying cost Ordering cost Inventory cost ($) Q( d 1 ) = 100 Q( d 2 ) = 200 TC ( d 2 = $6 ) TC ( d 1 = $8 ) TC = ($10 ) The lowest total cost is at the second price break

82 82 Price Break Example 2 QUANTITYPRICE $1, , S =$2,500 S =$2,500 H =$190 per computer D =200 Q opt = = = 72.5 PCs 2SD2SDHH2SD2SDHHH2(2500)(200)190 TC = + + PD = $233,784 SD Q opt H Q opt 2 For Q = 72.5 TC = + + PD = $194,105 SDSDQQSDSDQQQ H Q 2 For Q = 90

83 83 Price-Break Example 3 (1 of 4) A company has a chance to reduce their inventory ordering costs by placing larger quantity orders using the price-break order quantity schedule below. What should their optimal order quantity be if this company purchases this single inventory item with an ordering cost of $4, a carrying cost rate of 2% of the inventory cost of the item, and an annual demand of 10,000 units? Order Quantity(units)Price/unit($) 0 to 2,499 $1.20 2,500 to 3, ,000 or more.98

84 84 Price-Break Example (2 of 4) Annual Demand (D)= 10,000 units Cost to place an order (S)= $4 First, plug data into formula for each price-break value of “C” Carrying cost % of total cost (i)= 2% Cost per unit (C) = $1.20, $1.00, $0.98 Interval from 0 to 2499, the Q opt value is feasible Interval from , the Q opt value is not feasible Interval from 4000 & more, the Q opt value is not feasible Next, determine if the computed Q opt values are feasible or not

85 85 Price-Break Example 2 (3 of 4) Since the feasible solution occurred in the first price- break, it means that all the other true Q opt values occur at the beginnings of each price-break interval. Why? Order Quantity Total annual costs So the candidates for the price- breaks are 1826, 2500, and 4000 units Because the total annual cost function is a “u” shaped function

86 86 Price-Break Example 2 (4 of 4) Next, we plug the true Q opt values into the total cost annual cost function to determine the total cost under each price-break TC(0-2499)=(10000*1.20)+(10000/1826)*4+(1826/2)(0.02*1.20) = $12, TC( )= $10,041 TC(4000&more)= $9, TC(0-2499)=(10000*1.20)+(10000/1826)*4+(1826/2)(0.02*1.20) = $12, TC( )= $10,041 TC(4000&more)= $9, Finally, we select the least costly Q opt, which in this problem occurs in the 4000 & more interval. In summary, our optimal order quantity is 4000 units

87 87 Multi-period Inventory Models: Fixed Time Period (Fixed-Order- Interval) Models

88 88  Orders are placed at fixed time intervals  Order quantity for next interval? (inventory is brought up to target amount, amount ordered varies)  Suppliers might encourage fixed intervals  Requires only periodic checks of inventory levels (no continous monitoring is required)  Risk of stockout between intervals Fixed-Order-Interval Model

89 89 Inventory Level in a Fixed Period System Various amounts (Q i ) are ordered at regular time intervals (p) based on the quantity necessary to bring inventory up to target maximum ppp Q1Q1Q1Q1 Q2Q2Q2Q2 Q3Q3Q3Q3 Q4Q4Q4Q4 Target maximum Time d Inventory

90 90  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

91 91  Requires a larger safety stock  Increases carrying cost  Costs of periodic reviews Fixed-Interval Disadvantages

92 92 Fixed-Time Period Model with Safety Stock Formula q = Average demand + Safety stock – Inventory currently on hand

93 93 Fixed-Time Period Model: Determining the Value of  T+L The standard deviation of a sequence of random events equals the square root of the sum of the variances

94 94 Order Quantity for a Periodic Inventory System Q = d(t b + L) + z  d T + L - I where d= average demand rate T= the fixed time between orders L= lead time  d = standard deviation of demand z  d t b + L= safety stock I= inventory level z = the number of standard deviations for a specified service level

95 95 Fixed-Period Model with Variable Demand (Example 1) d= 6 bottles per day  d = 1.2 bottles t b = 60 days L= 5 days I= 8 bottles z= 1.65 (for a 95% service level) Q= d(t b + L) + z  d t b + L - I = (6)(60 + 5) + (1.65)(1.2) = bottles

96 96 Fixed-Time Period Model with Variable Demand (Example 2)(1 of 3) Average daily demand for a product is 20 units. The review period is 30 days, and lead time is 10 days. Management has set a policy of satisfying 96 percent of demand from items in stock. At the beginning of the review period there are 200 units in inventory. The standard deviation of daily demand is 4 units. Given the information below, how many units should be ordered?

97 97 Fixed-Time Period Model with Variable Demand (Example 2)(2 of 3) So, by looking at the value from the Table, we have a probability of , which is given by a z = 1.75

98 98 Fixed-Time Period Model with Variable Demand (Example 2) (3 of 3) So, to satisfy 96 percent of the demand, you should place an order of 645 units at this review period

99 99 Miscellaneous Systems: Optional Replenishment System Maximum Inventory Level, M M Actual Inventory Level, I q = M - I I Q = minimum acceptable order quantity If q > Q, order q, otherwise do not order any.

100 100 ABC Classification System Demand volume and value of items vary Items kept in inventory are not of equal importance in terms of: – dollars invested – profit potential – sales or usage volume – stock-out penalties

101 101 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 Annual $ value of items A B C High Low High Percentage of Items

102 102  Classify inventory into 3 categories typically on the basis of the dollar value to the firm $ volume = Annual demand x Unit cost  A class, B class, C class Policies based on ABC analysis –Develop class A suppliers more carefully –Give tighter physical control of A items –Forecast A items more carefully ABC Analysis

103 103 % of Inventory Items Classifying Items as ABC % Annual $ UsageA B C Class% $ Vol% Items A B1530 C

104 104 ABC Classification 1$ PARTUNIT COSTANNUAL USAGE

105 105 ABC Classification 1$ PARTUNIT COSTANNUAL USAGE TOTAL% OF TOTAL% OF TOTAL PARTVALUEVALUEQUANTITY% CUMMULATIVE 9$30, , , , , , , , , , $85,400

106 106 ABC Classification 1$ PARTUNIT COSTANNUAL USAGE TOTAL% OF TOTAL% OF TOTAL PARTVALUEVALUEQUANTITY% CUMMULATIVE 9$30, , , , , , , , , , $85,400 A B C

107 107 ABC Classification 1$ PARTUNIT COSTANNUAL USAGE TOTAL% OF TOTAL% OF TOTAL PARTVALUEVALUEQUANTITY% CUMMULATIVE 9$30, , , , , , , , , , $85,400 A B C % OF TOTAL CLASSITEMSVALUEQUANTITY A9, 8, B1, 4, C6, 5, 10,

108 108 ABC Classification – – – – – 0 0 – |||||| % of Quantity % of Value A B C

109 109 Inventory accuracy refers to how well the inventory records agree with physical count. Physically counting a sample of total inventory on a regular basis Used often with ABC classification –A items counted most often (e.g., daily) Inventory Accuracy and Cycle Counting

110 110 Advantages of Cycle Counting Eliminates shutdown and interruption of production necessary for annual physical inventories Eliminates annual inventory adjustments Provides trained personnel to audit the accuracy of inventory Allows the cause of errors to be identified and remedial action to be taken Maintains accurate inventory records

111 111 Last Words Inventories have certain functions. But too much inventory -Tends to hide problems -Costly to maintain So it is desired Reduce lot sizes Reduce safety stocks


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