Rev. 07/22/04SJSU Bus David Bentley1 Chapter 11 – Inventory Management Definition, objectives, historical evolution, EOQ, service levels, models

Rev. 09/06/01SJSU Bus David Bentley2 What Is Inventory? Material owned for use in product or as operating supply Has value (usually) Need for product or to support production Other?

Rev. 09/06/01SJSU Bus David Bentley3 Inventory Types - 1 Raw Material (RM) – purchased “true” raw material Component parts Work-in-process (WIP) – manufactured in- house Assemblies Sub-assemblies Fabricated parts

Rev. 03/02/05SJSU Bus David Bentley4 Inventory Types - 2 Finished Goods (FGI) Completed products Raw Materials in Process (RIP) Found in lean operations (JIT) environments Combines RM and WIP Operating supplies Goods in transit

Rev. 09/06/01SJSU Bus David Bentley5 Major Objectives Never have a stockout Customer dissatisfaction Production disruption Never carry excess inventory Inventory is an asset but it is not free In other words – walk a tightrope!

10/01/02SJSU Bus David Bentley6 Inventory Related Costs Carrying costs Obvious Capital Holding * Semi-obvious Obsolescence Inventory management Hidden Idle stock Scrap and rework * Next slide Ordering costs People Purchasing staff Receiving Inspection Order transmission Purchasing supplies Occupancy Purchasing Receiving

10/01/02SJSU Bus David Bentley7 Holding costs – Stock Related Personnel Equipment Occupancy (rent and utilities) Interest Insurance Taxes Security Shrinkage and damage

Rev. 10/01/02SJSU Bus David Bentley8 Historical Evolution of I/C - 1 Record keeping Answer 2 questions When to order How much to order When? Sawtooth diagram & ROP (see next slide) ROP = d X LT

Rev. 03/01/02SJSU Bus Source: Stevenson9 Sawtooth diagram & ROP 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

10/01/02SJSU Bus David Bentley10 ROP Limitations Assumes demand is known and linear Relies on instantaneous replenishment when inventory reaches zero Assumes lead time is known and constant Has no relationship to future usage Treats each item independently Encourages safety stock

Rev. 10/01/02SJSU Bus David Bentley11 Historical Evolution of I/C - 2 How Much? Cost of inventory & EOQ Balance carrying (holding) and ordering costs EOQ = square root of 2DS/IC Variations Multiple delivery (manufacturing: EMQ or EPQ) Quantity discounts

10/01/02SJSU Bus David Bentley12 EOQ Limitations Assumes ordering costs are accurately known Assumes carrying costs are accurately known Results in always carrying a certain amount of inventory Focuses on mechanics, not basics No emphasis on changing costs

Rev. 10/01/02SJSU Bus David Bentley13 Additional ordering models Fixed-order interval Frequency is set Quantity varies with each order Single-period model One-time order Perishables, refurbishing contracts Alternative: ABC approach (Pareto!) Based on dollar usage over a fixed period Order “A” often, “C” rarely, “B” in between

Rev. 03/01/02SJSU Bus Source: Stevenson14 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

Rev. 10/10/01SJSU Bus David Bentley15 Inventory Counting Systems Periodic Full physical (“wall-to-wall”) Two bin Bulk and shelf Stockroom minimum (SRM) Perpetual Transaction recording and balance maintenance Historical evolution Cycle counting (using ABC)

Rev. 09/19/05SJSU Bus David Bentley16 Inventory Metrics Inventory Turnover T = CGS AI Expected Annual Shortages E(N) = E(n) x D Q Service Level SL ANNUAL = 1 - (E(N)/D)