2. Slack, Chambers and Johnston, Operations Management, 6 th Edition, © Nigel Slack, Stuart Chambers, and Robert Johnston 2010 12.1 Chapter 12 Inventory planning and control Photodisc. Kim Steele

3. Slack, Chambers and Johnston, Operations Management, 6 th Edition, © Nigel Slack, Stuart Chambers, and Robert Johnston 2010 12.2 Design Planning and control Operations strategy Improvement Inventory planning and control The operation supplies… the delivery of a quantity of products and services when required The market requires… a quantity of products and services at a particular time

4. Slack, Chambers and Johnston, Operations Management, 6 th Edition, © Nigel Slack, Stuart Chambers, and Robert Johnston 2010 12.3 Key operations questions In Chapter 12 – Inventory planning and control – Slack et al. identify the following key questions: What is inventory? Why is inventory necessary? What are the disadvantages of holding inventory? How much inventory should an operation hold? When should an operation replenish its inventory? How can inventory be controlled?

5. Slack, Chambers and Johnston, Operations Management, 6 th Edition, © Nigel Slack, Stuart Chambers, and Robert Johnston 2010 12.4 Inventory is created to compensate for the differences in timing between supply and demand Input process Inventory Output process Rate of supply from input process Rate of demand from output process Inventory

6. Slack, Chambers and Johnston, Operations Management, 6 th Edition, © Nigel Slack, Stuart Chambers, and Robert Johnston 2010 12.5 e.g. Automotive parts distributor e.g. Local retail store Single-stage inventory system Suppliers Stock Sales operation Central depot Distribution Local distribution point Sales operation Two-stage inventory system Single-stage and two-stage inventory systems

7. Slack, Chambers and Johnston, Operations Management, 6 th Edition, © Nigel Slack, Stuart Chambers, and Robert Johnston 2010 12.6 e.g. Television manufacturer Suppliers Input stock Stage 1 A multi-stage inventory system WIP Stage 2 WIP Stage 3 Finished goods stock

8. Slack, Chambers and Johnston, Operations Management, 6 th Edition, © Nigel Slack, Stuart Chambers, and Robert Johnston 2010 12.7 A multi-echelon inventory system Yarn producers Cloth manufacturers Garment manufacturers Regional warehouses Retail stores

9. Slack, Chambers and Johnston, Operations Management, 6 th Edition, © Nigel Slack, Stuart Chambers, and Robert Johnston 2010 12.8 A paper merchant must get its inventory planning and control right

10. Slack, Chambers and Johnston, Operations Management, 6 th Edition, © Nigel Slack, Stuart Chambers, and Robert Johnston 2010 12.9 Inventory profiles chart the variation in inventory level Time per period DQDQ Instantaneous deliveries at a rate of QDQD Inventory level Steady and predictable demand (D) Slope = demand rate (D) = Average inventory Q2Q2 Order quantity = Q

11. Slack, Chambers and Johnston, Operations Management, 6 th Edition, © Nigel Slack, Stuart Chambers, and Robert Johnston 2010 12.10 Two alternative inventory plans with different order quantities (Q) Time Inventory level Plan A Q = 400 Demand (D) = 1000 items per year Average inventory for plan A = 200 Average inventory for plan B = 50 0.1 yr 0.4 yr 100 400 Plan B Q = 100

12. Slack, Chambers and Johnston, Operations Management, 6 th Edition, © Nigel Slack, Stuart Chambers, and Robert Johnston 2010 12.11 400 350 300 250 200 150 100 50 400 350 300 250 200 150 100 50 Order quantity Costs Economic order quantity (EOQ) Total costs Holding costs Order costs Traditional view of inventory-related costs

13. Slack, Chambers and Johnston, Operations Management, 6 th Edition, © Nigel Slack, Stuart Chambers, and Robert Johnston 2010 12.12 Cycle inventory in a bakery Inventory level Deliver A Produce A Deliver B Produce B Deliver C Produce C Deliver A Produce A Produce B Deliver B Produce C Deliver C Time

14. Slack, Chambers and Johnston, Operations Management, 6 th Edition, © Nigel Slack, Stuart Chambers, and Robert Johnston 2010 12.13 TimeInventory level Inventory profile for gradual replacement of inventory Order quantity Q QPQP M Slope = P – D Slope = D

15. Slack, Chambers and Johnston, Operations Management, 6 th Edition, © Nigel Slack, Stuart Chambers, and Robert Johnston 2010 12.14 Inventory level Time Shortages Inventory planning allowing for shortages

16. Slack, Chambers and Johnston, Operations Management, 6 th Edition, © Nigel Slack, Stuart Chambers, and Robert Johnston 2010 12.15 The re-order point 400 300 200 100 Inventory level 0 012345678 Re-order level Re-order point Time Demand (D) = 100 items per week Order lead time

17. Slack, Chambers and Johnston, Operations Management, 6 th Edition, © Nigel Slack, Stuart Chambers, and Robert Johnston 2010 12.16 Safety stock(s) helps to avoid stock-outs when demand and/or order lead times are uncertain Inventory level S Q Time t1t1 t2t2 d1d1 d2d2 Re-order level (ROL) Distribution of lead-time usage ?

18. Slack, Chambers and Johnston, Operations Management, 6 th Edition, © Nigel Slack, Stuart Chambers, and Robert Johnston 2010 12.17 The probability distributions for order lead time and demand rate combine to give the lead-time usage distribution 0.4 0.3 0.2 0.1 0 110 120 130 140 Probability Demand rate 0.4 0.3 0.2 0.1 0 1 2 3 4 5 Probability Order lead time 0.4 0.3 0.2 0.1 0 Probability 100–199 Lead-time usage 120–299 300–399 400–499 500–599 600–699 700–799

19. Slack, Chambers and Johnston, Operations Management, 6 th Edition, © Nigel Slack, Stuart Chambers, and Robert Johnston 2010 12.18 A periodic review approach to order timing with probabilistic demand and lead time Inventory level QmQm ToTo T1T1 T2T2 T3T3 Time t1t1 t2t2 t3t3 tftf tftf tftf Q1Q1 Q2Q2 Q3Q3

20. Slack, Chambers and Johnston, Operations Management, 6 th Edition, © Nigel Slack, Stuart Chambers, and Robert Johnston 2010 12.19 100 90 80 70 60 50 40 30 20 10 100 90 80 70 605040 30 20 10 Class C items Class B items Class A items Pareto curve for stocked items Percentage of types of items Percentage of value of items

21. Slack, Chambers and Johnston, Operations Management, 6 th Edition, © Nigel Slack, Stuart Chambers, and Robert Johnston 2010 12.20 Inventory classifications and measures Class A items – the 20% or so of high- value items which account for around 80% of the total stock value. Class B items – the next 30% or so of medium-value items which account for around 10% of the total stock value. Class C items – the remaining 50% or so of low-value items which account for around the last 10% of the total stock value.

22. Slack, Chambers and Johnston, Operations Management, 6 th Edition, © Nigel Slack, Stuart Chambers, and Robert Johnston 2010 12.21 If the true costs of stock holding are taken into account, and if the cost of ordering (or changeover) is reduced, the economic order quantity ( EOQ) is much smaller Original holding costs Original total costs Revised holding costs Order quantity Costs Original EOQ Revised EOQ Revised order costs Revised total costs Original order costs

23. Slack, Chambers and Johnston, Operations Management, 6 th Edition, © Nigel Slack, Stuart Chambers, and Robert Johnston 2010 12.22 Two bin system Three bin system The ‘Two bin’ and ‘Three bin’ systems of re-ordering system Bin 2 Bin 1 Bin 2 Bin 3 Items being used Re-order level + safety inventory Items being used Re-order level inventory Safety inventory