chapter 12

Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Chapter 12

Inventory planning and control

Source: Corbis



Operations strategy

Design Improvement

Planning and control

Operations management


The operation supplies ... the delivery of a quantity of products and services when

required

The market requires … a quantity of products

and services at a particular time


Inventory is created to compensate for the differences in timing between supply and demand

Input process

Inventory

Output process

Rate of supply from input process

Rate of demand from output processInventory

Source: Alamy/Van Hilversum


e.g. Automotive parts distributor

e.g. Local retail store

Single-stage inventory system

Suppliers Suppliers

Stock Sales operation

Central depot

Distribution Local distribution

point

Sales operation

Two-stageinventory system

Single-stage and two-stage inventory systems


e.g. Television manufacturer

Suppliers

Input stock

Stage 1

A multi-stage inventory system

WIP Stage 2

WIP Stage 3

Finished goods stock


A multi-echelon inventory system

Yarn producers

Cloth manufacturers

Garment manufacturers

Regional warehouses

Retail stores


A paper merchant must get its inventory planning and control right


Inventory profiles chart the variation in inventory level

Time

per period DQInstantaneous deliveries at a rate of

QD

Inve

nto

ry le

vel

Steady and predictable demand (D) Slope = demand rate (D)

=Average inventory

Q2

Orderquantity

= Q


Two alternative inventory plans with different order quantities (Q)

Time

Inve

nto

ry le

vel Plan A

Q = 400

Demand (D) = 1000 items per year

Average inventory for plan A = 200

Average inventory for plan B = 50

0.1 yr 0.4 yr

100

400

Plan BQ = 100


400

350

300

250

200

150

100

50

40035030025020015010050Order quantity

Co

sts

Economic order quantity (EOQ)

Total costs

Holding costs

Order costs

Traditional view of inventory-related costs


Cycle inventory in a bakeryIn

vent

ory

leve

l

Deliver A

Produce A

Deliver B

Produce B

Deliver C

Produce C

Deliver A

Produce A Produce B

Deliver B

Produce C

Deliver C

Time


Time

Inve

nto

ry le

vel

Inventory profile for gradual replacement of inventory

Order quantity

Q

QP

M

Slope = P – DSlope = D

Sou

rce:

Ala

my/

Arc

hivB

erlin

Fot

oage

ntur

Gm

bH


Inve

nto

ry le

vel

Time

Shortages

Inventory planning allowing for shortages


The re-order point

400

300

200

100Inve

nto

ry le

vel

00 1 2 3 4 5 6 7 8

Re-order level

Re-order point

Time

Demand (D) = 100 items per week

Order lead time


Safety stock(s) helps to avoid stock-outs when demand and/or order lead times are uncertain

Inve

nto

ry le

vel

S

Q

Timet1 t2

d1

d2

Re-order level (ROL)

Distribution of lead-time

usage

?


The probability distributions for order lead time and demand rate combine to give the lead-time usage distribution

0.4

0.3

0.2

0.1

0110 120 130 140

Pro

babi

lity

Demand rate

0.4

0.3

0.2

0.1

01 2 3 4 5

Pro

babi

lity

Order lead time

0.4

0.3

0.2

0.1

0

Pro

babi

lity

100-199Lead-time usage

200-299 300-399 400-499 500-599 600-699 700-799


A periodic review approach to order timingwith probabilistic demand and lead time

Inve

nto

ry le

vel

Qm

T0 T1 T2 T3 Timet1 t2 t3

tf tf tf

Q1 Q2 Q3


100

90

80

70

60

50

40

30

20

10

100908070605040302010

Class C items

Class B items

Class A items

Pareto curve for stocked items

Percentage of types of items

Pe

rce

nta

ge

of v

alu

e o

f ite

ms

Source: Howard Smith Paper Group


Inventory classifications and measures

Class A items – the 20% or so of high-value items which account for around 80% of the total stock value

Class B items – the next 30% or so of medium-value items which account for around 10% of the total stock value

Class C items – the remaining 50% or so of low-value items which account for around the last 10% of the total stock value


If the true costs of stock holding are taken into account,and if the cost of ordering (or changeover) is reduced,the economic order quantity (EOQ) is much smaller

Original holding costs

Original total costs

Revised holding costs

Order quantity

Co

st s

Original EOQ

Revised EOQ

Revised order costs

Revised total costs

Original order costs


Two-bin system Three-bin system

The ‘two-bin’ and ‘three-bin’ re-ordering systems

Bin 2Bin 1 Bin 1 Bin 2 Bin 3

Items being used

Re-order level + safety inventory

Items being used

Re-order level inventory

Safety inventory


Key Terms TestInventory (also known as stock)The stored accumulation of transformed resources in a process;

usually applies to material resources but may also be used for inventories of information; inventories of customers (or customers of customers) are usually called queues.

Buffer inventoryAn inventory that compensates for unexpected fluctuations in

supply and demand; can also be called a safety inventory.

Cycle inventoryInventory that occurs when one stage in a process cannot supply

all the items it produces simultaneously and so has to build up inventory of one item while it processes the others.


Key Terms Test

De-coupling inventoryThe inventory that is used to allow work centres or

processes to operate relatively independently.

Anticipation inventoryInventory that is accumulated to cope with expected

future demand or interruptions in supply.

Pipeline inventoryThe inventory that exists because material cannot be

transported instantaneously.


Key Terms Test

Work-in-process (WIP)The number of units within a process waiting to be processed

further (also called work-in-progress).

Economic order quantity (EOQ)The quantity of items to order that supposedly minimizes the total

cost of inventory management, derived from various formulae.

Economic batch quantity (EBQ)The amount of items to be produced by a machine or process that

supposedly minimizes the costs associated with production and inventory holding.


Key Terms Test

Re-order pointThe point in time at which more items are ordered, usually

calculated to ensure that inventory does not run out before the next batch of inventory arrives.

Re-order levelThe level of inventory at which more items are ordered, usually

calculated to ensure that inventory does not run out before the next batch of inventory arrives.

Lead-time usageThe amount of inventory that will be used between ordering

replenishment and the inventory arriving, usually described by a probability distribution to account for uncertainty in demand and lead time.


Key Terms Test

Continuous reviewAn approach to managing inventory that makes inventory-related

decisions when inventory reaches a particular level, as opposed to periodic review.

Periodic reviewAn approach to making inventory decisions that defines points in

time for examining inventory levels and then makes decisions accordingly, as opposed to continuous review.

Usage valueA term used in inventory control to indicate the quantity of items

used or sold multiplied by their value or price.


Key Terms TestPareto lawA general law found to operate in many situations that indicates

that 20% of something causes 80% of something else, often used in inventory management (20% of products produce 80% of sales value) and improvement activities (20% of types of problems produce 80% of disruption).

ABC inventory controlAn approach to inventory control that classes inventory by its

usage value and varies the approach to managing it accordingly.

Perpetual inventory principleA principle used in inventory control that inventory records should

be automatically updated every time items are received or taken out of stock.

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