1. Chapter 8
Inventory Management

2. Introduction

3. 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

4. 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

5. 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

6. 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

7. General Considerations

8. Functions of Inventories
Transit Inventories
Buffer Inventories (safety stocks)
Anticipation Inventories
Decoupling Inventories
Cycle Inventories
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9. Chapter 8 - Inventory Management
Forms of Inventories
Raw materials
Maintenance, repair, and operating supplies
Work-in-process (WIP)
Finished goods
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10. Inventory-Related Costs
Ordering or setup costs
Inventory carrying or holding costs
Stockout costs
Opportunity costs
Cost of goods
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11. Decisions in Inventory Management
When to order?
How much to order?
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12. 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
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13. Fluctuations in Inventory
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14. Chapter 8 - Inventory Management
Reorder Point Systems
Reorder point
Lead time
Two-bin system
Perpetual inventory system
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15. Chapter 8 - Inventory Management
A Reorder Point System
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16. Periodic Review System
maximum inventory level
- on-hand inventory
- on-order quantity
+ demand over lead time
reorder quantity
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17. Periodic Review System Without Considering On-Order Quantity
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18. Periodic Review System (Assumes None On Order at Time of Reorder)
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19. 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
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20. ABC Inventory Categories
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21. The Economic Order Quantity (EOQ)

22. 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
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23. Chapter 8 - Inventory Management
Notation
Q = order quantity
U = annual usage
CO = order cost per order
CH = annual holding cost per unit
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24. Water Distributor’s Inventory Pattern
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25. Water Distributor’s Inventory Graph
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26. Chapter 8 - Inventory Management
Annual Order Cost $ Q
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27. Chapter 8 - Inventory Management
Annual Holding Cost $ Q
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28. Graph of Annual Inventory Costs
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29. Finding an Optimal Policy
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30. Alternative Way of Deriving EOQ
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31. Alternative Way of Deriving EOQ continued
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32. Chapter 8 - Inventory Management
EOQ Example
Given:
25,000 annual demand
$3 per unit per year holding cost
$100 ordering costs
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33. Cautions Regarding EOQ
GIGO
Exclude “sunk” costs
Very small EOQ values my not be valid
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34. Chapter 8 - Inventory Management