Chapter 8 Inventory Management

Introduction

Radio Frequency Identification (RFID) Conventional bar codes are replaced with computer chips or smart tags. Use wireless technology to track inventory. Chapter 8 - Inventory Management

Chapter 8 - Inventory Management Wal-Mart RFID Early adopter of RFID is Wal-Mart. By January 2005, 53 of its top 100 suppliers were sending RFID-tagged goods to its three distribution centers in the Dallas, Texas area. Wal-Mart’s goal is to have all top 100 suppliers shipping RFID-tagged goods by the end of February 2005 in addition to 37 other suppliers. Chapter 8 - Inventory Management

Wal-Mart RFID continued The impetus for Wal-Mart’s investment in RFID was the lack of visibility it had into its backroom storage areas. The major drawback to RFID is its cost. In 2005, the cost of smart tags was $0.25 each if purchased in volume, and $0.75 if purchased in smaller quantities. The stated goal in the industry is to get the price of smart tags down to $.05 Chapter 8 - Inventory Management

Vendor-Managed Inventory (VMI) With VMI, suppliers are given responsibility for managing the inventory carried by their retail or wholesale customers. Rich Products, a $2 billion family-owned food company headquartered in Buffalo, NY, has a partnership with IBM to provide VMI services to the grocery industry for its frozen food items.  Chapter 8 - Inventory Management

General Considerations

Functions of Inventories Transit Inventories Buffer Inventories (safety stocks) Anticipation Inventories Decoupling Inventories Cycle Inventories Chapter 8 - Inventory Management

Chapter 8 - Inventory Management Forms of Inventories Raw materials Maintenance, repair, and operating supplies Work-in-process (WIP) Finished goods Chapter 8 - Inventory Management

Inventory-Related Costs Ordering or setup costs Inventory carrying or holding costs Stockout costs Opportunity costs Cost of goods Chapter 8 - Inventory Management

Decisions in Inventory Management When to order? How much to order? Chapter 8 - Inventory Management

Types of Inventory Management Systems Reorder point systems time between orders varies constant order quantity Periodic review systems time between orders fixed order quantity varies Material requirements planning (MRP) dependent demand items Chapter 8 - Inventory Management

Fluctuations in Inventory Chapter 8 - Inventory Management

Chapter 8 - Inventory Management Reorder Point Systems Reorder point Lead time Two-bin system Perpetual inventory system Chapter 8 - Inventory Management

Chapter 8 - Inventory Management A Reorder Point System Chapter 8 - Inventory Management

Periodic Review System maximum inventory level - on-hand inventory - on-order quantity + demand over lead time reorder quantity Chapter 8 - Inventory Management

Periodic Review System Without Considering On-Order Quantity Chapter 8 - Inventory Management

Periodic Review System (Assumes None On Order at Time of Reorder) Chapter 8 - Inventory Management

Priorities for Inventory Management: The ABC Concept A items 15-20% of items that account for 75-80% of annual inventory value B items 30-40% of items that account for 15% of annual inventory value C items 40-50% of items that account for 10-15% of annual inventory value Chapter 8 - Inventory Management

ABC Inventory Categories Chapter 8 - Inventory Management

The Economic Order Quantity (EOQ)

Chapter 8 - Inventory Management Assumptions Constant rate of demand Shortages not allowed Stock replenishment can be scheduled to arrive exactly when inventory drops to zero Purchase price, ordering cost, and per unit holding cost are independent of quantity ordered Items are ordered independently of each other Chapter 8 - Inventory Management

Chapter 8 - Inventory Management Notation Q = order quantity U = annual usage CO = order cost per order CH = annual holding cost per unit Chapter 8 - Inventory Management

Water Distributor’s Inventory Pattern Chapter 8 - Inventory Management

Water Distributor’s Inventory Graph Chapter 8 - Inventory Management

Chapter 8 - Inventory Management Annual Order Cost $ Q Chapter 8 - Inventory Management

Chapter 8 - Inventory Management Annual Holding Cost $ Q Chapter 8 - Inventory Management

Graph of Annual Inventory Costs Chapter 8 - Inventory Management

Finding an Optimal Policy Chapter 8 - Inventory Management

Alternative Way of Deriving EOQ Chapter 8 - Inventory Management

Alternative Way of Deriving EOQ continued Chapter 8 - Inventory Management

Chapter 8 - Inventory Management EOQ Example Given: 25,000 annual demand $3 per unit per year holding cost $100 ordering costs Chapter 8 - Inventory Management

Cautions Regarding EOQ GIGO Exclude “sunk” costs Very small EOQ values my not be valid Chapter 8 - Inventory Management

Chapter 8 - Inventory Management