Ch13-b

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a Times Mirror Higher Education Group, Inc. company, 1996

Inventory Management

CHAPTER

12

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What is Inventory? Stock (or any resource) held for future use “Insurance” Policy/Buffer -- Just-in-Case Critical resource “Dead” resource The same as money Something most organizations have too much of!! The “root of all evil” - Japanese view

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Types of Demand

Independent (Master Production Schedule)– Bicycle

Dependent (Materials Requirements Plan)– Chain– Frame– Sprockets– Spokes

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Types of Inventory

Raw materials and purchased parts Work in process (WIP) and goods

in transit Finished goods Spare parts, tools, and supplies

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Functions of Inventory Satisfy anticipated demand Smooth production requirements Decouple operations Protect against stockouts/serve customers immediately Buy/produce economic lot sizes (cycle stock) Hedge against price increases Permit on-going operations

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Inventory Management

Primary Objectives– Maximize Customer Service, yet Minimize Costs– Replace Inventory with Information

With Mismanagement– Higher costs– Difficult to control– Hides production problems

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Requirements for Effective Inventory Management

A comprehensive strategic view– Committed– Systematic– Organizationwide– People-based

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A system to keep track of inventory– Counting/Monitoring– Physical control

» Location, security, policies– Accountability

» Annual inventory vs. cycle counting

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Requirements for Effective Inventory Management (cont.)

Demand forecasts/market intelligence– Past history, Point of Sale (POS) Information

Knowledge of lead times & variability– Purchasing, fabrication, assembly

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Estimates of pertinent costs– Holding/carrying, ordering, shortage,

expediting (Details later)

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A priority classification system– A-B-C system

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Divides on-hand inventory into 3 classes– A, B , C

Basis is usually annual $ volume– $ volume = Annual demand x Unit cost

Control policies based on ABC analysis

ABC Analysis

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0

20

40

60

80

100

0 50 100% of Inventory Items% of Inventory Items

% Annual $ Usage% Annual $ Usage

AABB CC

Class % $ Vol % ItemsA 80 15B 15 30C 5 55

Classifying Items as ABC

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Physically counting a sample of total inventory on a regular basis

Used often with ABC classification– A items counted most often (e.g., daily)

Cycle Counting

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A computer system?– Technology is a tool, not salvation!!! --

Avoiding GIGO, GASL and other maladies Replacement of inventory with

information!!– Believe and use the data in the system

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Fundamental Analysis & Replenishment Issues

How much to order (quantity)– EOQ model

When to place an order (timing)– Reorder point model

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Holding/Carrying Costs

Proportional to Order Size Measured in $ per unit per year

– Obsolescence– Insurance– Extra staffing– Interest/Cost of Capital– Pilferage– Damage– Warehousing/Space

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Ordering Costs

Proportional to Number of Orders Measured in $ per order

– Supplies/Forms– Inspection– Order processing– Clerical support– Expediting

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How Much to Order - EOQ model

The “annual demand pie” Equal sized pieces - fixed order quantity (Q) The basic tradeoff-cost minimization The inventory cycle The optimal order quantity

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When to Reorder with EOQ Ordering

Reorder Point - When the quantity on hand of an item drops to this amount, the item is reordered

ROP is a function of: 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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Safety Stock

LT Time

Expected demandduring lead time

Maximum probable demandduring lead time

ROP

Qua

ntity

Safety stock

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Reorder Point

ROP

Risk ofa stockout

Service level

Probability ofno stockout

Expecteddemand Safety

stock0 z

Quantity

z-scale

Ch13-b

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