1. Fixed Time Order Inventory Systems
Slide presentation by Steven Cheney
Final project for Operations Management 345
Boise State University
Instructor: Dr.Tom Foster
Introduce current strategy employed by firm. List reasons for reviewing this type of inventory system.
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2. Inventory Control Systems
1. Fixed quantity re-order inventory system.
Re-order quantities are predetermined, and the re-order takes place when predetermined low levels of inventory are reached.
The re-order date varies.
2. Fixed time re-order inventory system.
The re-order date is predetermined and an order is placed once a consistent passage of time occurs.
Orders are given and received consistently.
The re-order quantity varies
There are two categories of Inventory Management. Fixed time re-order, and Fixed quantity re-order systems.
Fixed Time inventory is less automated. Fixed quantity is very automated.
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3. Fixed Time Re-order System
Ideal for use in:
Smaller businesses with single or a low number of vendors and or lower volume sales.
Small to medium retail.
Restaurants.
Job shop manufacturing.
Light industry.
Construction.
Service firm.
What all these applications have in common is little automation. Inventory is inspected manually.
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4. Advantages of Fixed Time Re-order System
Ideal fixed re-order and distribution dates can be negotiated with vendor and distributor to ensure desired management of inventory.
Inventory levels can be minimized during low demand periods easily.
Communication between a small number of vendors or with a wholesaler is consistent and reliable.
Wholesale distributors may have salespersons who place orders for the retailers, eliminating inventory costs.
Distribution dates are often predetermined by wholesalers. Some vendors may have immediate delivery, while others may have specific days that they deliver such as every Friday. In such cases, retailers may have less choice in the days that goods are delivered. This is important and this should be a factor in determining vendor relationships.
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5. Different Applications
Business start ups.
Can negotiate and determine ideal re-order intervals.
Low volume retail and job shop.
Low number of vendors, custom quantity ordering, with strict scrutiny.
Larger volume retail and job shops.
Utilizing of ABC method of prioritizing inventory management and minimizing inventory expenses.
Depending on the type of business, and the amount of capitol available, a business start up may consider using a fixed time order system and then upgrade to a fixed quantity inventory system later. Or depending on the business strategy, fixed time inventory may just be the way to go.
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6. Determine Order Interval
In a business start up, Vendor and wholesale distributors may negotiate with a small firm in regards to ordering and distribution dates.
Changing or establishing ideal order intervals may be a great way to improve quality in an existing firm.
When many vendors are involved, order dates vary significantly. Therefore, a fixed quantity system may be more appropriate. When few vendors are utilized, having a set order and receiving day, allows management to plan and keep labor hours low, and reduce inventory costs.
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7. Order Interval Determination For Multiple Items
The economic order interval can be obtained by minimizing the total annual cost. Neglecting stock out cost, the formulation is:
Total annual cost = (purchase cost) + (order cost) + (holding cost)
The minimum cost order is obtained by taking the first derivative of the total annual cost with respect to the order interval (T) and setting it equal to zero.
Ri = annual requirement for item i Formula
Pi = purchase cost of item i.
N = total number of joint order items.
C = order cost for the joint order
C = order cost associated with each individual item.
T = order interval in years.
F = annual holding cost as a fraction of purchase cost.
Determining the Order Interval may not be an option in most cases.
If determining the Order Interval is an option, this is a formula that may be used to order multiple items.
Most vendors have specific dates that they have trucks running. They have arrangements made with distributors or if they have their own trucking, they have set routes that they maintain on a regular basis.
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8. Difficulties in Order Intervals
It is not common for a business start up to have access to the information required to determine the optimal re-order interval dates.
Managerial experience and adequate market exposure is the best way to determine re-order dates in start ups.
Wholesalers and vendors should also be able to provide valuable input when determining a re-order schedule.
Figuring the perfect ordering day and receiving day may just be a matter of analyzing the company labor schedule.
Using a formula may not be reasonable or useful.
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9. How It Works: Fixed Time Re-order Inventory
Any one who has worked for a small job shop, or in retail can tell you exactly how this works. They can also tell you how it is not so great when you have a stock out. Business owners like this system more than employees, because inventory costs are kept very low, at the expense of loosing a few sales. It is a good compromise for a small business owner. A few lost sales is better than having too much money tied up in inventory when demand is low.
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10. Fixed Time Re-order
Inventory is maintained for a period of time. As time goes by, it is consumed. It is the Inventory managers job to order the specific quantity of an item that will satisfy the customers needs and not bring too much inventory.
If the fixed re-order time is one week, the inventory manager must bring enough inventory to satisfy customer demand for five working days.
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11. Low Inventory Costs! High Inventory Control!
Quantity levels are quickly adjusted for fluctuating demand.
Inventory management and ordering are monitored only on order days, eliminating daily supervision of inventory.
Seasonal demand and demand trends are difficult to forecast. Each inventory items demand is analyzed on a routine basis by a department manager.
When demand is low, or when a firm is in its slow season, being overstocked can kill a small firm. As demand falls, inventory levels are manually dropped.
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12. ABC Fixed Time Re-order Intervals
Demand for a large variety of goods
with different values vary significantly.
ABC classification system divides inventory into three different groups.
1. Close inventory control (continuous).
2. Moderate inventory control (less stringent).
3. Low scrutiny inventory control (periodic review).
A firms niche in the market. A firm needs to pay close attention to certain products and inventory levels of these important products. It is less important to oversee inventory of slow moving products.
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13. ABC Classification
The first step in ABC classification is to associate each class with a different dollar valuation.
The next step is to determine the inventory scrutiny level to be assigned for each classification.
A firms most profitable inventory should get its highest classification. This merchandise should receive the most scrutiny in inventory management and it should receive the most attention in marketing and shelf stocking.
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14. Why ABC classification?
Typically the majority of a firms profit comes from a small number of items in inventory, and sometimes these items are sold in large volume.
Moderately profitable items need less inventory scrutiny
Low profitable inventory requires little management, minimizing inventory costs.
Company order winners are our most profitable items. They get the highest classification and get the most attention to detail.
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15. Perfect Example Russ’s Trusses
Ruses trusses is a large truss producer/construction company that purchases truss kits and the kits are custom assembled to engineered specifications. They are used by the firm in construction or sold to outside construction companies.
Ruses trusses utilizes an ABC classification inventory management system. It is beneficial because one employee supervises all inventory of materials.
Fixed Time order systems are perfect for job shop companies.
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16. Russ’s Trusses ABC Inventory System
Russ Jr. Re-orders class A kits every day from vendor A direct over the internet.
He orders class B kits once a week from vendor B via fax machine.
Wholesaler C comes one a month to do the inventory of
C kits and re-orders. The salesperson tries to sell different new items to Russ Sr.
One of the big advantage of this system is utilizing free services provided by vendors.
“Coca Cola” salespersons place orders, reorder, stock, and make displays, all for free.
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17. Russ’s Trusses Annual Inventory Value and Consumption
Valuation of inventory helps us order and monitor inventory with more scrutiny.
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18. Contribution to Value
Compute each item’s percentage of total value and quantity.
Q x P = Value for item
Value for item / total value = % of total value
Then rank the inventory in terms of % of total value.
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19. ABC Inventory Classification Russ’s Trusses
Section 1,2,3 are Russ’s bread and butter. Don’t run out of those!
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20. Classification Results
Class A items provide >71% to profit and are reviewed each day.
Class B items provide approximately 20.7% to profit and are reviewed weekly.
Items that contribute <8.% of profit are automatically ordered once a month by the wholesaler, at no cost to Ruses Trusses.
This breakdown really helps employees visualize the profitability of certain items. This breakdown would really help salespersons.
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21. Fixed Time Re-order Inventory
Limited applications such as:
Small retail where demand is seasonal and it fluctuates greatly.
Great for simple inventory systems and floor level inventory management applications.
Perfect for job shop applications where inventory is limited and seldom reviewed.
Less time ordering and inventorying means more time to perform other functions. Typically, employees that do inventory with a fixed time inventory system are employees the provide and perform other functions as well.
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22. Practical Limitations of Fixed Time
Not suited for large SKU counts.
Requires daily to weekly manual supervision in various departments.
Generally less automation than fixed quantity re-order system.
Focuses on minimum inventory which may promote stock outs.
Large firms need more automation.
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23. Practical Advantages of Fixed time
Quickly adjusts to variations in demand.
Utilizes services provided by vendors at no cost to the firm.
Assures minimum inventory when needed.
Minimizes inventory labor and costs.
Allocates resources where needed.
Establishes good relationships with distributors.
Summary of good features.
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24. Sources Referenced
Richard J. Tersine, Principles of Inventory and Materials Management, third edition, North-Holland , New York
R. Fetter, Decision Models for Inventory Management, Ann Arbor London, 1978
Roberta S. Russel, Bernard W. Taylor 3rd, Operations Management, third edition, Prentice Hall, Inc. Upper Saddle River, New Jersey. 2000
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