1. DPT 335 PRODUCTION PLANNING & CONTROL6
Managing Inventory
DPT 335
PRODUCTION PLANNING & CONTROL

2. Inventory Management
The objective of inventory management is to strike a balance between inventory investment and customer service
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3. 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

4. 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
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5. 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
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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
Used to establish policies that focus on the few critical parts and not the many trivial ones
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7. 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%
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8. 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%
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9. ABC Analysis A Items 80 – 70 – 60 – Percent of annual dollar usage
80 –
70 –
60 –
50 –
40 –
30 –
20 –
10 –
0 –
| | | | | | | | | |
Percent of inventory items
A Items
B Items
C Items
Figure 12.2
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10. Exercise 1:
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11. 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
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12. 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
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13. Inventory Models for Independent Demand
Need to determine when and how much to order
Basic economic order quantity
Production order quantity
Quantity discount model
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14. 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
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15. 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

16. 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)
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17. 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)
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18. 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

19. 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
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20. 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
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21. 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
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22. 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

23. 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
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24. 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
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25. 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.
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26. 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
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27. 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
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28. 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
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29. 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
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30. Thank’s
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