1. 1 OPERATIONS MANAGEMENT for MBAs Second Edition Prepared by Scott M. Shafer Wake Forest University Meredith and Shafer John Wiley and Sons, Inc.

2. 2 Chapter 9 Inventory Management

3. 3 Introduction

4. Chapter 9: Inventory Management4 Mothers Work, Inc. 4 Custom designed inventory management system helped transform company from small mail-order operation to dominant retailer of maternity clothes 4 Inventory system –detail down to individual garment –provides picture of entire inventory pipeline –daily reports on what is and isn’t selling

5. Chapter 9: Inventory Management5 Mothers Work, Inc. continued 4 System used to test market fashions before committing to large production runs 4 Can produce more of hot selling styles in two weeks 4 Can wait to last possible moment before ordering or producing more garments 4 Facilitates providing sufficient inventory levels and reduces need to mark down items

6. Chapter 9: Inventory Management6 Electronic Commerce 4 Changing way products bought and sold 4 Initially large companies such as Wal-Mart, GM and Kodak developed private networks 4 Private networks now moving to Internet

7. Chapter 9: Inventory Management7 Campbell Soup 4 60% of orders received contain mistakes 4 Salespeople spend 40% of time fixing problems instead of selling 4 Campbell estimates that electronic commerce will reduce cost of processing purchase order from $150 to $25

8. Chapter 9: Inventory Management8 Fruit of the Loom 4 Developed system to link its 50 wholesalers to its central warehouse 4 If customer needs product and wholesaler is low, product shipped directly from central warehouse to customer

9. Chapter 9: Inventory Management9 Issues Illustrated by Examples 4 Many organizations are increasing their emphasis on reducing lead times and meeting delivery schedules 4 The importance of integrating the inventory management system with the rest of the organization

10. 10 General Considerations

11. Chapter 9: Inventory Management11 Functions of Inventories 4 Transit Inventories 4 Buffer Inventories (safety stocks) 4 Anticipation Inventories 4 Decoupling Inventories 4 Cycle Inventories

12. Chapter 9: Inventory Management12 Forms of Inventories 4 Raw Materials 4 Maintenance, repair, and operating supplies 4 Work-In-Process (WIP) 4 Finished Goods

13. Chapter 9: Inventory Management13 Inventory-Related Costs 4 Ordering or Setup Costs 4 Inventory Carrying or Holding Costs 4 Stockout Costs 4 Capacity Associated Costs 4 Cost of Goods

14. Chapter 9: Inventory Management14 Decisions in Inventory Management 4 When to order? 4 How much to order?

15. Chapter 9: Inventory Management15 Types of Inventory Management Systems 4 Reorder point systems –time between orders varies –constant order quantity 4 Periodic review systems –time between orders fixed –order quantity varies 4 Material requirements planning (MRP) –dependent demand items

16. Chapter 9: Inventory Management16 Fluctuations in Inventory

17. Chapter 9: Inventory Management17 Reorder Point Systems 4 Reorder point 4 Lead time 4 Two-bin system 4 Perpetual inventory system

18. Chapter 9: Inventory Management18 A Reorder Point System

19. Chapter 9: Inventory Management19 Periodic Review System maximum inventory level - on-hand inventory - on-order quantity + demand over lead time reorder quantity

20. Chapter 9: Inventory Management20 Periodic Review System Without Considering On-Order Quantity

21. Chapter 9: Inventory Management21 Periodic Review System (Assumes None On Order at Time of Reorder)

22. Chapter 9: Inventory Management22 Priorities for Inventory Management: The ABC Concept 4 A items –15-20% of items that account for 75-80% of annual inventory value 4 B items –30-40% of items that account for15% of annual inventory value 4 C items –40-50% of items that account for 10-15% of annual inventory value

23. Chapter 9: Inventory Management23 ABC Inventory Categories

24. 24 The Economic Order Quantity (EOQ)

25. Chapter 9: Inventory Management25 Assumptions 4 Constant rate of demand 4 Shortages not allowed 4 Stock replenishment can be scheduled to arrive exactly when inventory drops to zero 4 Purchase price, ordering cost, and per unit holding cost are independent of quantity ordered 4 Items are ordered independently of each other

26. Chapter 9: Inventory Management26 Notation Q = order quantity U = annual usage C O = order cost per order C H = annual holding cost per unit

27. Chapter 9: Inventory Management27 Water Distributor’s Inventory Pattern

28. Chapter 9: Inventory Management28 Water Distributor’s Inventory Graph

29. Chapter 9: Inventory Management29 Annual Order Cost $ Q

30. Chapter 9: Inventory Management30 Annual Holding Cost $ Q

31. Chapter 9: Inventory Management31 Graph of Annual Inventory Costs

32. Chapter 9: Inventory Management32 Finding an Optimal Policy

33. Chapter 9: Inventory Management33 Alternative Way of Deriving EOQ

34. Chapter 9: Inventory Management34 Alternative Way of Deriving EOQ continued

35. Chapter 9: Inventory Management35 EOQ Example 4 Given: –25,000 annual demand –$3 per unit per year holding cost –$100 ordering costs

36. Chapter 9: Inventory Management36 Cautions Regarding EOQ 4 GIGO 4 Exclude “sunk” costs 4 Very small EOQ values my not be valid

37. 37 Copyright Copyright  John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that named in Section 117 of the United States Copyright Act without the express written consent of the copyright owner is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. Adopters of the textbook are granted permission to make back-up copies for their own use only, to make copies for distribution to students of the course the textbook is used in, and to modify this material to best suit their instructional needs. Under no circumstances can copies be made for resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.