1. © 2008 Prentice Hall, Inc.12 – 1 Operations Management Inventory Management Zaheer u din 01141 Ameer Hamza M.Fawad 13201

2. © 2008 Prentice Hall, Inc.12 – 2 Inventory  One of the most expensive assets of many companies

3. © 2008 Prentice Hall, Inc.12 – 3 Types of Inventory  Raw material  Purchased but not processed  Work-in-process  Undergone some change but not completed  A function of cycle time for a product  Maintenance/repair/operating (MRO)  Necessary to keep machinery and processes productive  Finished goods  Completed product awaiting shipment

4. © 2008 Prentice Hall, Inc.12 – 4 The Material Flow Cycle Figure 12.1 InputWait forWait toMoveWait in queueSetupRunOutput inspectionbe movedtimefor operatortimetime Cycle time 95%5%

5. © 2008 Prentice Hall, Inc.12 – 5 Inventory Management  How inventory items can be classified  How accurate inventory records can be maintained  ABC Analysis  Record Accuracy  Cycle Counting

6. © 2008 Prentice Hall, Inc.12 – 6 ABC Analysis  Divides inventory into three classes based on annual dollar volume  Class A - high annual dollar volume  Class B - medium annual dollar volume  Class C - low annual dollar volume

7. © 2008 Prentice Hall, Inc.12 – 7 ABC Analysis A Items B Items C Items Percent of annual dollar usage 80 80 – 70 70 – 60 60 – 50 50 – 40 40 – 30 30 – 20 20 – 10 10 – 0 0 – |||||||||| 102030405060708090100 Percent of inventory items Figure 12.2

8. © 2008 Prentice Hall, Inc.12 – 8 ABC Analysis  Other criteria than annual dollar volume may be used  Anticipated engineering changes  Delivery problems  Quality problems  High unit cost

9. © 2008 Prentice Hall, Inc.12 – 9 ABC Analysis  Policies employed may include  More emphasis on supplier development for A items  Tighter physical inventory control for A items  More care in forecasting A items

10. © 2008 Prentice Hall, Inc.12 – 10 Record Accuracy  Accurate records are a critical ingredient in production and inventory systems  Allows organization to focus on what is needed  Necessary to make precise decisions about ordering, scheduling, and shipping  Incoming and outgoing record keeping must be accurate  Stockrooms should be secure

11. © 2008 Prentice Hall, Inc.12 – 11 Cycle Counting  Items are counted and records updated on a periodic basis  Often used with ABC analysis to determine cycle  Has several advantages  Eliminates shutdowns and interruptions  Eliminates annual inventory adjustment  Trained personnel audit inventory accuracy  Allows causes of errors to be identified and corrected  Maintains accurate inventory records

12. © 2008 Prentice Hall, Inc.12 – 12 Cycle Counting Example 5,000 items in inventory, 500 A items, 1,750 B items, 2,750 C items Policy is to count A items every month (20 working days), B items every quarter (60 days), and C items every six months (120 days) Item Class Quantity Cycle Counting Policy Number of Items Counted per Day A500 Each month 500/20 = 25/day B1,750 Each quarter 1,750/60 = 29/day C2,750 Every 6 months 2,750/120 = 23/day 77/day

13. © 2008 Prentice Hall, Inc.12 – 13 Control of Service Inventories  Can be a critical component of profitability  Losses may come from shrinkage or pilferage  Applicable techniques include 1.Good personnel selection, training, and discipline 2.Tight control on incoming shipments 3.Effective control on all goods leaving facility

14. © 2008 Prentice Hall, Inc.12 – 14 Independent Versus Dependent Demand  Independent demand - the demand for item is independent of the demand for any other item in inventory  Dependent demand - the demand for item is dependent upon the demand for some other item in the inventory

15. © 2008 Prentice Hall, Inc.12 – 15 Holding, Ordering, and Setup Costs  Holding costs - the costs of holding or “carrying” inventory over time  Ordering costs - the costs of placing an order and receiving goods  Setup costs - cost to prepare a machine or process for manufacturing an order

16. © 2008 Prentice Hall, Inc.12 – 16 Holding Costs Category Cost (and range) as a Percent of Inventory Valu e Housing costs (building rent or depreciation, operating costs, taxes, insurance) 6% (3 - 10%) Material handling costs (equipment lease or depreciation, power, operating cost) 3% (1 - 3.5%) Labor cost 3% (3 - 5%) Investment costs (borrowing costs, taxes, and insurance on inventory) 11% (6 - 24%) Pilferage, space, and obsolescence 3% (2 - 5%) Overall carrying cost 26% Table 12.1

17. © 2008 Prentice Hall, Inc.12 – 17 Holding Costs Category Cost (and range) as a Percent of Inventory Valu e Housing costs (building rent or depreciation, operating costs, taxes, insurance) 6% (3 - 10%) Material handling costs (equipment lease or depreciation, power, operating cost) 3% (1 - 3.5%) Labor cost 3% (3 - 5%) Investment costs (borrowing costs, taxes, and insurance on inventory) 11% (6 - 24%) Pilferage, space, and obsolescence 3% (2 - 5%) Overall carrying cost 26% Table 12.1 Holding costs vary considerably depending on the business, location, and interest rates. Generally greater than 15%, some high tech items have holding costs greater than 50%.

18. © 2008 Prentice Hall, Inc.12 – 18 Inventory Models for Independent Demand  Basic economic order quantity  Production order quantity  Quantity discount model Need to determine when and how much to order

19. © 2008 Prentice Hall, Inc.12 – 19 An inventory-related equation that determines the optimum order quantity that a company should hold in its inventory given a set cost of production, demand rate and other variables. This is done to minimize variable inventory costs. S = Setup costs D = Demand rate P = Production cost I = Interest rate (considered an opportunity cost, so the risk-free rate can be used)An inventory-related equation that determines the optimum order quantity that a company should hold in its inventory given a set cost of production, demand rate and other variables. This is done to minimize variable inventory costs. S = Setup costs D = Demand rate P = Production cost I = Interest rate (considered an opportunity cost, so the risk-free rate can be used) Basic economic order quantity

20. © 2008 Prentice Hall, Inc.12 – 20 Production Order Quantity (POQ) is a model that answers how much to produce and when to order. In this model, the materials produced are used immediately and hence lowering the holding cost that in Economic Order Quantity (EOQ).Production Order Quantity (POQ) is a model that answers how much to produce and when to order. In this model, the materials produced are used immediately and hence lowering the holding cost that in Economic Order Quantity (EOQ). production order quantity

21. © 2008 Prentice Hall, Inc.12 – 21 Quantity discounts are price reductions designed to induce large orders. If quantity discounts are offered, the buyer must weigh the potential benefits of reduced purchase price and fewer orders against the increase in carrying costs caused by higher average inventories. Hence, the buyer's goal in this case is to select the order quantity that will minimize total costs, where total cost is the sum of carrying cost, ordering cost, and purchase cost.Quantity discounts are price reductions designed to induce large orders. If quantity discounts are offered, the buyer must weigh the potential benefits of reduced purchase price and fewer orders against the increase in carrying costs caused by higher average inventories. Hence, the buyer's goal in this case is to select the order quantity that will minimize total costs, where total cost is the sum of carrying cost, ordering cost, and purchase cost. Quantity discount model Quantity discount model

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