DPT 335 PRODUCTION PLANNING & CONTROL 6 Managing Inventory DPT 335 PRODUCTION PLANNING & CONTROL

Inventory Management The objective of inventory management is to strike a balance between inventory investment and customer service © 2011 Pearson Education

Importance of Inventory One of the most expensive assets of many companies representing as much as 50% of total invested capital Operations managers must balance inventory investment and customer service

Functions of Inventory To decouple or separate various parts of the production process To decouple the firm from fluctuations in demand and provide a stock of goods that will provide a selection for customers To take advantage of quantity discounts To hedge against inflation © 2011 Pearson Education

Types of Inventory Raw material Work-in-process 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 © 2011 Pearson Education

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 Used to establish policies that focus on the few critical parts and not the many trivial ones © 2011 Pearson Education

Percent of Number of Items Stocked Percent of Annual Dollar Volume ABC Analysis Item Stock Number Percent of Number of Items Stocked Annual Volume (units) x Unit Cost = Annual Dollar Volume Percent of Annual Dollar Volume Class #10286 20% 1,000 $ 90.00 $ 90,000 38.8% A #11526 500 154.00 77,000 33.2% #12760 1,550 17.00 26,350 11.3% B #10867 30% 350 42.86 15,001 6.4% #10500 12.50 12,500 5.4% 72% 23% © 2011 Pearson Education

Percent of Number of Items Stocked Percent of Annual Dollar Volume ABC Analysis Item Stock Number Percent of Number of Items Stocked Annual Volume (units) x Unit Cost = Annual Dollar Volume Percent of Annual Dollar Volume Class #12572 600 $ 14.17 $ 8,502 3.7% C #14075 2,000 .60 1,200 .5% #01036 50% 100 8.50 850 .4% #01307 .42 504 .2% #10572 250 150 .1% 8,550 $232,057 100.0% 5% © 2011 Pearson Education

ABC Analysis A Items 80 – 70 – 60 – Percent of annual dollar usage 80 – 70 – 60 – 50 – 40 – 30 – 20 – 10 – 0 – | | | | | | | | | | 10 20 30 40 50 60 70 80 90 100 Percent of inventory items A Items B Items C Items Figure 12.2 © 2011 Pearson Education

Exercise 1: © 2011 Pearson Education

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 © 2011 Pearson Education

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 © 2011 Pearson Education

Inventory Models for Independent Demand Need to determine when and how much to order Basic economic order quantity Production order quantity Quantity discount model © 2011 Pearson Education

Basic EOQ Model Important assumptions Demand is known, constant, and independent Lead time is known and constant Receipt of inventory is instantaneous and complete Quantity discounts are not possible Only variable costs are setup and holding Stockouts can be completely avoided © 2011 Pearson Education

Inventory Usage Over Time Inventory level Time Average inventory on hand Q 2 Usage rate Order quantity = Q (maximum inventory level) Minimum inventory Figure 12.3

Q represents the amount that is ordered. From figure 12.3 Q represents the amount that is ordered. Ex: 500 dresses If all 500 dresses arrive at one time (when order is received). So the inventory levels jumps from0 to 500. An An inventory levels increse from 0 to Q units If demand constant over time, inventory drops at uniform rate over time (sloped line) © 2011 Pearson Education

Total cost of holding and setup (order) Optimal order quantity (Q*) Minimizing Costs Objective is to minimize total costs Annual cost Order quantity Total cost of holding and setup (order) Setup (or order) cost Minimum total cost Optimal order quantity (Q*) Holding cost As the authors state, this graph (Figure 12.4(c)) is the heart of inventory modeling. It represents the essential tradeoff between ordering/setup cost and holding cost. With very small order sizes, ordering/setup cost is much higher than holding cost, and total cost would decrease by ordering more units each time. This continues, in fact, until ordering/setup cost exactly equals holding cost. At that point, the total cost curve reaches its minimum. (This can be shown analytically as well as graphically.) Table 12.4(c) © 2011 Pearson Education

Number of units in each order Setup or order cost per order The EOQ Model Annual setup cost = S D Q Q = Number of pieces per order Q* = Optimal number of pieces per order (EOQ) D = Annual demand in units for the inventory item S = Setup or ordering cost for each order H = Holding or carrying cost per unit per year Annual setup cost = (Number of orders placed per year) (or ordering cost) x (Setup or order cost per order) Annual demand Number of units in each order Setup or order cost per order = = (S) D Q

The EOQ Model Q = Number of pieces per order Annual setup cost = S D Q Annual holding cost = H Q 2 Q = Number of pieces per order Q* = Optimal number of pieces per order (EOQ) D = Annual demand in units for the inventory item S = Setup or ordering cost for each order H = Holding or carrying cost per unit per year Annual holding cost = (Average inventory level) (or carrying cost) x (Holding cost per unit per year) Order quantity 2 = (Holding cost per unit per year) = (H) Q 2 © 2011 Pearson Education

The EOQ Model 2DS = Q2H Q2 = 2DS/H Q* = 2DS/H Annual setup cost = S D Q Annual holding cost = H Q 2 Q = Number of pieces per order Q* = Optimal number of pieces per order (EOQ) D = Annual demand in units for the inventory item S = Setup or ordering cost for each order H = Holding or carrying cost per unit per year Optimal order quantity is found when annual setup cost equals annual holding cost D Q S = H 2 Solving for Q* 2DS = Q2H Q2 = 2DS/H Q* = 2DS/H © 2011 Pearson Education

An EOQ Example Q* = 2DS H Q* = 2(1,000)(10) 0.50 = 40,000 = 200 units Determine optimal number of needles to order D = 1,000 units S = $10 per order H = $.50 per unit per year Q* = 2DS H Q* = 2(1,000)(10) 0.50 = 40,000 = 200 units © 2011 Pearson Education

Exercise 2: William Beville’s computer training school in Richmond, stock workbooks with the following characteristics: Demand = 19,500 units/year Ordering cost = $25/order Holding cost = $4/unit/year Calculate the EOQ for the workbooks. What are the annual holding costs for the workbooks? What are the annual ordering costs Soklan refer kepada question 12.5

Expected number of orders An EOQ Example Determine optimal number of needles to order D = 1,000 units Q* = 200 units S = $10 per order H = $.50 per unit per year = N = = Expected number of orders Demand Order quantity D Q* N = = 5 orders per year 1,000 200 © 2011 Pearson Education

Expected time between orders Number of working days per year An EOQ Example Determine optimal number of needles to order D = 1,000 units Q* = 200 units S = $10 per order N = 5 orders per year H = $.50 per unit per year = T = Expected time between orders Number of working days per year N T = = 50 days between orders 250 5 © 2011 Pearson Education

The optimal order quantity, Exercise 3 : The warren W.fisher computer corporation purchases 8000 transistors each years as components in minicomputers. The unit cost of each transistor is $10, and the cost of carrying one transisteor in inventory for a year is $3. Ordering cost is $30 per order. What are: The optimal order quantity, The expected number of orders placed each year, The expected time between order? Assume that fisher operates on a 200-day working in year. © 2011 Pearson Education

An EOQ Example Determine optimal number of needles to order D = 1,000 units Q* = 200 units S = $10 per order N = 5 orders per year H = $.50 per unit per year T = 50 days Total annual cost = Setup cost + Holding cost TC = S + H D Q 2 TC = ($10) + ($.50) 1,000 200 2 TC = (5)($10) + (100)($.50) = $50 + $50 = $100 © 2011 Pearson Education

Lead time for a new order in days Number of working days in a year Reorder Points EOQ answers the “how much” question The reorder point (ROP) tells “when” to order ROP = Lead time for a new order in days Demand per day = d x L d = D Number of working days in a year © 2011 Pearson Education

Reorder Point Curve Q* Resupply takes place as order arrives Inventory level (units) Time (days) Q* Resupply takes place as order arrives Slope = units/day = d ROP (units) Lead time = L Figure 12.5 © 2011 Pearson Education

Number of working days in a year Reorder Point Example Demand = 8,000 iPods per year 250 working day year Lead time for orders is 3 working days d = D Number of working days in a year = 8,000/250 = 32 units ROP = d x L = 32 units per day x 3 days = 96 units © 2011 Pearson Education

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