2. Inventory Management Chapter 12

3. 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.

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

5. Types of Inventories (Cont’d) Replacement parts, tools, & supplies Goods-in-transit to warehouses or customers

6. Functions of Inventory To meet anticipated demand To smooth production requirements To decouple components of the production- distribution To protect against stock-outs

7. Functions of Inventory (Cont’d) To take advantage of order cycles To help hedge against price increases or to take advantage of quantity discounts To permit operations

8. Objective of Inventory Control §To achieve satisfactory levels of customer service while keeping inventory costs within reasonable bounds l Level of customer service l Costs of ordering and carrying inventory

9. 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

10. 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

11. 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 RFID System – Tags attached to products that transmit product data to readers via radio waves 0 214800 232087768

12. 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 $ volume of items A B C High Low Few Many Number of Items

14. §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 (H) §Ordering costs: costs of ordering and receiving inventory (S) §Shortage costs: costs when demand exceeds supply Key Inventory Terms

15. The Inventory Cycle 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

17. Cost Minimization Goal The Total Annual Carrying (Holding) Cost Order Quantity (Q) Annual Cost Carrying Cost H Q 2

18. Cost Minimization Goal The Total Annual Ordering Cost Order Quantity (Q) Annual Cost D Q S Ordering Cost

19. Cost Minimization Goal The Total-Cost Curve is U-Shaped Ordering Cost QOQO Order Quantity (Q) Annual Cost (Q O = optimal order quantity) Carrying Cost

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

21. Minimum Total Cost The total cost curve reaches its minimum where the carrying and ordering costs are equal. Note that Q opt below is sometimes written as Q 0 or EOQ (for Economic Order Quantity) Using calculus, we take the derivative of the total cost function and set the derivative (slope) equal to zero and solve for Q.

22. §Economic order quantity (EOQ) model l The order size that minimizes total annual cost Economic Order Quantity (EOQ) or Q 0

24. §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

25. Homework Problems Do problems 3 and 5 on p. 594. While the solutions are given in the following slides, be sure that you take the time to try to solve these problems prior to looking at the solutions.

26. TC= (Q/2)H + (D/Q)S

28. End of Slides for Inventory Management