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8-1Inventory Management William J. Stevenson Operations Management 8 th edition
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8-2Inventory Management CHAPTER 8 Inventory Management McGraw-Hill/Irwin Operations Management, Eighth Edition, by William J. Stevenson Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
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8-3Inventory Management Independent Demand A B(4) C(2) D(2)E(1) D(3) F(2) Dependent Demand Independent demand is uncertain. Dependent demand is certain. Inventory: a stock or store of goods
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8-4Inventory Management Types of Inventories Raw materials & purchased parts Partially completed goods called work in progress Finished-goods inventories (manufacturing firms) or merchandise (retail stores)
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8-5Inventory Management Types of Inventories (Cont’d) Replacement parts, tools, & supplies Goods-in-transit to warehouses or customers
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8-6Inventory Management Functions of Inventory To meet anticipated demand To smooth production requirements To decouple operations To protect against stock-outs
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8-7Inventory Management Functions of Inventory (Cont’d) To take advantage of order cycles To help hedge against price increases To permit operations To take advantage of quantity discounts
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8-8Inventory Management Objective of Inventory Control To achieve satisfactory levels of customer service while keeping inventory costs within reasonable bounds Level of customer service Costs of ordering and carrying inventory
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8-9Inventory Management A system to keep track of inventory A reliable forecast of demand Knowledge of lead times Reasonable estimates of Holding costs Ordering costs Shortage costs A classification system Effective Inventory Management
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8-10Inventory Management Inventory Counting Systems Periodic System Physical count of items made at periodic intervals Perpetual Inventory System System that keeps track of removals from inventory continuously, thus monitoring current levels of each item
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8-11Inventory Management Inventory Counting Systems (Cont’d) Two-Bin System - Two containers of inventory; reorder when the first is empty Universal Bar Code - Bar code printed on a label that has information about the item to which it is attached 0 214800 232087768
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8-12Inventory Management Lead time: time interval between ordering and receiving the order Holding (carrying) costs: cost to carry an item in inventory for a length of time, usually a year Ordering costs: costs of ordering and receiving inventory Shortage costs: costs when demand exceeds supply Key Inventory Terms
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8-13Inventory Management 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 Figure 8.1
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8-14Inventory Management Cycle Counting A physical count of items in inventory Cycle counting management How much accuracy is needed? When should cycle counting be performed? Who should do it?
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8-15Inventory Management Economic order quantity model Economic production model Quantity discount model Economic Order Quantity Models
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8-16Inventory Management Only one product is involved Annual demand requirements known Demand is even throughout the year Lead time does not vary Each order is received in a single delivery There are no quantity discounts Assumptions of EOQ Model
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8-17Inventory Management The Inventory Cycle Figure 8.2
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8-18Inventory Management Figure 8-3
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8-19Inventory Management Total Cost Annual carrying cost Annual ordering cost Total cost =+ Q 2 H D Q S TC = +
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8-20Inventory Management Figure 8-4
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8-21Inventory Management Deriving the EOQ Using calculus, we take the derivative of the total cost function and set the derivative (slope) equal to zero and solve for Q.
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8-22Inventory Management Minimum Total Cost The total cost curve reaches its minimum where the carrying and ordering costs are equal.
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8-23Inventory Management Figure 8-5
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8-24Inventory Management Production done in batches or lots Capacity to produce a part exceeds the part’s usage or demand rate Assumptions of EPQ are similar to EOQ except orders are received incrementally during production Economic Production Quantity (EPQ)
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8-25Inventory Management Only one item is involved Annual demand is known Usage rate is constant Usage occurs continually Production rate is constant Lead time does not vary No quantity discounts Economic Production Quantity Assumptions
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8-26Inventory Management Figure 8-6
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8-27Inventory Management Economic Run Size
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8-28Inventory Management Total Costs with Purchasing Cost Annual carrying cost Purchasing cost TC =+ Q 2 H D Q S + + Annual ordering cost PD +
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8-29Inventory Management Total Costs with PD Figure 8.7
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8-30Inventory Management Figure 8-8
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8-31Inventory Management Total Cost with Constant Carrying Costs Figure 8.9
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8-32Inventory Management Figure 8-10
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8-33Inventory Management Figure 8-11
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8-34Inventory Management When to Reorder with EOQ Ordering Reorder Point - When the quantity on hand of an item drops to this amount, the item is reordered Safety Stock - Stock that is held in excess of expected demand due to variable demand rate and/or lead time. Service Level - Probability that demand will not exceed supply during lead time.
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8-35Inventory Management Determinants of the Reorder Point The rate of demand The lead time Demand and/or lead time variability Stockout risk (safety stock)
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8-36Inventory Management Safety Stock Figure 8.12 Safety stock reduces risk of stockout during lead time
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8-37Inventory Management Reorder Point Figure 8.13
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8-38Inventory Management Figure 8-14
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8-39Inventory Management Orders are placed at fixed time intervals Order quantity for next interval? Suppliers might encourage fixed intervals May require only periodic checks of inventory levels Risk of stockout Fixed-Order-Interval Model
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8-40Inventory Management Figure 8-15
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8-41Inventory Management Tight control of inventory items Items from same supplier may yield savings in: Ordering Packing Shipping costs May be practical when inventories cannot be closely monitored Fixed-Interval Benefits
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8-42Inventory Management Requires a larger safety stock Increases carrying cost Costs of periodic reviews Fixed-Interval Disadvantages
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8-43Inventory Management Single period model: model for ordering of perishables and other items with limited useful lives Shortage cost: generally the unrealized profits per unit Excess cost: difference between purchase cost and salvage value of items left over at the end of a period Single Period Model
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8-44Inventory Management Continuous stocking levels Identifies optimal stocking levels Optimal stocking level balances unit shortage and excess cost Discrete stocking levels Service levels are discrete rather than continuous Desired service level is equaled or exceeded Single Period Model
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8-45Inventory Management Figure 8-16
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8-46Inventory Management Figure 8-17
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8-47Inventory Management Too much inventory Tends to hide problems Easier to live with problems than to eliminate them Costly to maintain Wise strategy Reduce lot sizes Reduce safety stock Operations Strategy
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8-48Inventory Management Additional PowerPoint slides contributed by Geoff Willis, University of Central Oklahoma. CHAPTER 8
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8-49Inventory Management Economic Production Quantity Inventory Level Usage Production & Usage Production & Usage
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8-50Inventory Management Gortrac Manufacturing GTS3 Inventory/Assessment/Reduction
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8-51Inventory Management Materials PS7 Washburn Guitars
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