1. SJSU Bus 140 - David Bentley1 Week 12B – Inventory Management (Chapter 12) Definition, objectives, historical evolution, EOQ, ABC, Inventory counting systems

2. SJSU Bus 140 - 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?

3. SJSU Bus 140 - David Bentley3 Some Terminology Item Stock-keeping unit (SKU) Part Stockout Shortage Decoupling Safety stock Safety time

4. SJSU Bus 140 - David Bentley4 Inventory Types - 1 Raw Material (RM) – purchased “true” raw material Component parts Work-in-process (WIP) – manufactured in- house Assemblies Sub-assemblies Fabricated parts

5. SJSU Bus 140 - David Bentley5 Inventory Types - 2 Finished Goods (FGI) Completed products Raw Materials in Process (RIP) Found in lean operations (JIT) environments Combines RM and WIP Maintenance, Repair & Operating (MRO) Goods in transit

6. SJSU Bus 140 - David Bentley6 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!

7. SJSU Bus 140 - David Bentley7 Inventory Related Costs Carrying costs Obvious Capital Various 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

8. SJSU Bus 140 - David Bentley8 Holding costs – Stock Related Personnel Equipment Occupancy (rent and utilities) Interest Insurance Taxes Security Shrinkage and damage

9. SJSU Bus 140 - David Bentley9 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, where d = demand per period and LT = lead time in periods

10. SJSU Bus 140 - David Bentley10 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

11. SJSU Bus 140 - David Bentley11 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

12. SJSU Bus 140 - David Bentley12 Historical Evolution of I/C - 2 How Much? Cost of inventory & EOQ Balance carrying (holding) and ordering costs EOQ = square root of 2DS/IC, where D = quantity demand or usage for a period of time S = setup and/or ordering cost I = inventory carrying rate (percentage in decimal form) C = cost of 1 unit of the item Text: “H” which is the product of I times C

13. SJSU Bus 140 - David Bentley13 Historical Evolution of I/C - 3 EOQ variations Multiple delivery (manufacturing: EMQ or EPQ) See pp. 489-492 Quantity discounts (price breaks) See pp. 492-494

14. SJSU Bus 140 - David Bentley14 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

15. SJSU Bus 140 - David Bentley15 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

16. SJSU Bus 140 - David Bentley16 ABC Classification System - 1 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

17. SJSU Bus 140 - David Bentley17 ABC Classification System - 2 A items 70-80% of the annual dollar usage 5-15% of the number of items B items 10-20% of the annual dollar usage 30-35% of the number of items C items 5-10% of the annual dollar usage 50-60% of the number of items

18. SJSU Bus 140 - David Bentley18 ABC Classification System - 2 Category Or Class % of Annual $ Usage % of Number Of Items A70-80 % 5-15% B10-20%30-35% C5-10%50-60%

19. SJSU Bus 140 - David Bentley19 Inventory Counting Systems - 1 Periodic Full physical (“wall-to-wall”) Two bin Bulk and shelf Stockroom minimum (SRM)

20. SJSU Bus 140 - David Bentley20 Inventory Counting Systems - 2 Perpetual Transaction recording and balance maintenance Historical evolution Cycle counting Based on quantity usage Based on $ usage using Pareto Principle (ABC) Block counting