INVENTORY MANAGEMENT-DANTE V. ARIÑEZ

7/28/2019 INVENTORY MANAGEMENT-DANTE V. ARIEZ

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11-1 Inventory Management

CHAPTER

10Inventory

Management

Prepared by:

DANTE V. ARIEZMBA


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1. Identify the components of inventory andits related terms;

2. Identify the various forms and documentsused to evidence an inventory account

3. Check the importance of human resourceswho handle the inventory

4. Methods of costing an inventory; and

5. Describe the EOQ model

When you complete this chapter you

should be able to:

Learning Objectives


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CASH

INVENTORY

RECEIVABLE


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The operating cycle says that the momentthe company has cash; ordinarily they haveto convert it into inventory

When they have the inventory, they aregoing to sell and convert the inventory into areceivable and then they will collect the

account to eventually convert it back tocash.


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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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Inventory Models

Independent demandfinished goods, items thatare ready to be sold

E.g. a computer

Dependent demandcomponents of finishedproducts

E.g. parts that make up the computer


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Types of Inventories

Raw materials & purchased parts These are thee materials, which

the company purchased and is foruse in the production

Partially completed goods calledwork in progress

These are the partially finished

products at the end of the month Finished goods inventories

These are products already finished,ready to be sold to customers


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11-8 Inventory ManagementWhy do we have to manageinventories?

1. Under-stockingthis is a serious problem as this

can result in the following:

a. Missed deliveries

b. Lost sales

c. Unsatisfied customers

d. Production bottlenecks and worst, work stoppage

2. Overstocking- these are the possible effect of this:

a. Holding cost might be too highb. Funds could have been used for a more productive

venture thus improving operating performance


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Two major concern of inventories

1. Timing of order

2. Size of Order


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Types of Inventories (Contd) Replacement parts, tools, & supplies

Goods-in-transit to warehouses or customers

11 11 I M


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Functions of Inventory To meet anticipated demand

To smooth production requirements

To decouple operations

To protect against stock-outs

11 12 I M


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Functions of Inventory (Contd) To take advantage of order cycles

To help hedge against price increases

To permit operations

To take advantage of quantity discounts

11 13 I M


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Objective of Inventory Control

To achieve satisfactory levels of customerservice while keeping inventory costs within

reasonable bounds/limits

Level of customer service

Costs of ordering and carrying inventory

11 14 I t M t


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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-Costs incurred when an item is out ofstock; also calledstockout costs. These costs include thelost contribution margin (cm) on sales plus lostcustomer goodwill.

A classification system

Effective Inventory Management

11 15 I t M t
http://localhost/var/www/apps/conversion/tmp/scratch_8/WHAT%20IS%20HOLDING%20COST.pptxhttp://localhost/var/www/apps/conversion/tmp/scratch_8/WHAT%20IS%20ORDERING%20COSTS.pptxhttp://localhost/var/www/apps/conversion/tmp/scratch_8/WHAT%20IS%20ORDERING%20COSTS.pptxhttp://localhost/var/www/apps/conversion/tmp/scratch_8/WHAT%20IS%20HOLDING%20COST.pptx


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Lead time: time interval between orderingand 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

11 16 I t M t


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Inventory Counting Systems Periodic System

Physical count of items made at periodic

intervals

Perpetual Inventory SystemSystem that keeps track

of removals from inventory

continuously, thus

monitoringcurrent levels of

each item

11 17 Inventory Management


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Inventory Counting Systems (Contd) Two-Bin System - Two containers of

inventory; reorder when the first is empty

Universal Bar Code - Bar code

printed on a label that hasinformation about the item

to which it is attached

0

214800 232087768



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ABC Classification SystemClassifying inventory according to somemeasure of importance and allocating controlefforts accordingly.

A -very importantB- mod. important

C- least important

Figure 11.1

Annual$ valueof items

A

B

C

High

Low

Few Many

Number of Items



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ABS Classification - Guidelines

A B C

Percentage of

total number of

items10 to 20 % 30 to 40 % 40 to 50 %

Percentage of

total annual

value ($)70 to 80 % 15 to 20 % 5 to 10 %

Inventory control Rigourous Normal Simple

Purchasing

process

Precise withconstant

revisions

Normal Periodical



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ABC Analysis

ItemStock

Number

Percent ofNumber of

ItemsStocked

AnnualVolume(units) x

UnitCost =

AnnualDollar

Volume

Percent ofAnnualDollar

Volume Class

#10286 20% 1,000 $ 90.00 $ 90,000 38.8% A

#11526 500 154.00 77,000 33.2% A

#12760 1,550 17.00 26,350 11.3% B

#10867 30% 350 42.86 15,001 6.4% B

#10500 1,000 12.50 12,500 5.4% B



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ABC Analysis

ItemStock

Number

Percent ofNumber of

ItemsStocked

AnnualVolume(units) x

UnitCost =

AnnualDollar

Volume

Percent ofAnnualDollar

Volume Class

#12572 600 $ 14.17 $ 8,502 3.7% C

#14075 2,000 .60 1,200 .5% C

#01036 50% 100 8.50 850 .4% C

#01307 1,200 .42 504 .2% C

#10572 250 .60 150 .1% C

8,550 $232,057 100.0%



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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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5,000 items in inventory, 500 A items, 1,750 B items, 2,750 Citems

Policy is to count A items every month (20 working days), B itemsevery quarter (60 days), and C items every six months (120 days)

ItemClass Quantity Cycle Counting Policy

Number of ItemsCounted per Day

A 500 Each month 500/20 = 25/day

B 1,750 Each quarter 1,750/60 = 29/day

C 2,750 Every 6 months 2,750/120 = 23/day

77/day

Cycle Counting Example



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EOQ models identify the optimal orderquantity by minimizing the sum of annual

cost.

Economic order quantity model

Economic production model

Quantity discount model

Economic Order Quantity Models



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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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Total Cost

Annualcarrying

cost

Annualordering

cost

Total cost = +

Q2

HDQ

STC = +

TC= Total annual costQ= Order quantity in unitsH= Holding cost per unitD= Annual DemandS= Ordering cost



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y g

Deriving the EOQUsing calculus, we take the derivative of the total cost functionand set the derivative (slope) equal to zero and solve for Q.

The total cost curve reaches its minimum where the carrying

and ordering costs are equal.

QDyearperordersofNo

DQcycleorderofLength

SQ

DtorderingAnnual

/.

/

cos

CostHoldingAnnual

Cost)SetuporderDemand)(Or2(Annual=H

2DS=QOPT

QOPT= Optimum order quantityQ= Order quantity in unitsH= Holding cost per unitD= Annual Demand

S= Ordering cost



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y g

EOQ MODEL EXAMPLE

A local distributor for a national tire company expects to

sell approximately 9600 steel-belted radial tires of acertain size and tread design next year. Annual carrying

cost is $16 per tire, and ordering cost is $75. The

distributor operates 288 days a year.

D= $ 9600 H= $ 16 S= $ 75

a) What is the EOQ?

b) No. Of orders per year=D/Q=9600/300=32

tires30016

2(9600)75

H

2DS=QOPT



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y g

EOQ MODEL EXAMPLE

D= $ 9600 H= $ 16 S= $ 75

c) Length of order cycle= Q/D= 300/9600

=1/32 of a year*288 =9 work days.

d) Total Cost=Carrying cost+Ordering cost=(Q/2)H+(D/Q)S

=(300/2)16+(9600/300)75

=2400+2400=$ 4800



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y g

Quantity Discounts

Quantity Discounts are price reductions for large ordersoffered to customers to induce them to buy in largequantities.

Annualcarryingcost

PurchasingcostTC = +

Q2

H DQ

STC = +

+Annualorderingcost

PD+



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y g

Quantity Discount Example

Range Price

1 to 49 $2050 to 79 18

80 to 99 17

100 or more 16

D = 816 cases; S = $12; H = $4per case per year

EOQ = sqrt(2DS/H) = sqrt(2*816*12)/4) = 69.97 or 70

TC70= Carrying Cost + Order Cost + Purchase Cost= (70/2)*4 + (816/70)/12 + 18(816)= $14,968

TC80= Carrying Cost + Order Cost + Purchase Cost

= (80/2)*4 + (816/80)/12 + 17(816)= $14,154

TC100= Carrying Cost + Order Cost + Purchase Cost= (100/2)*4 + (816/100)/12 + 16(816)= $13,354



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When to Reorder with EOQ OrderingReorder Point- When the quantity on hand

of an item drops to this amount, the item isreordered

Safety Stock - Stock that is held in excess ofexpected demand due to variable demandrate and/or lead time.

Service Level - Probability that demand willnot exceed supply during lead time.



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Orders are placed at fixed time intervals Order quantity for next interval?

Suppliers might encourage fixed intervals

May require only periodic checks ofinventory levels

Risk of stockout

Fixed-Order-Interval Model



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Tight control of inventory items Items from same supplier may yield savings

in:

Ordering

Packing

Shipping costs

May be practical when inventories cannot beclosely monitored

Fixed-Interval Benefits



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Order amount (Q) = Target (T) - On-handinventory - Earlier orders not yet received

+ Back orders

Q = 50 - 0 - 0 + 3 = 53 jackets

3 jackets are back ordered No jackets are in stockIt is time to place an order Target value = 50

Fixed-Interval Example



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Single period model: model for ordering ofperishables and other items with limiteduseful lives

Shortage cost: generally the unrealizedprofits per unit (Revenue per unitCost per unit)

Excess cost: difference between purchasecost and salvage value of items left over atthe end of a period (Orig cost per unitSalvage per unit)

Single Period Model



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Continuous stocking levels Identifies optimal stocking levels

Optimal stocking level balances unit shortage

and excess cost

Discrete stocking levels

Service levels are discrete rather thancontinuous

Desired service level is equaled orexceeded

Single Period Model



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Continuous Stocking Example

Sweet cider is delivered weekly to Cindys Cider Bar. Demand varied

between 30500 liters per week. Cindy pays 20cents per liter for thecider and changes 80 cents per liter for it. Find the stocking level and

its stockout risk fro that quantity.

Ce= Cost per unitSalvage value= $.200 SL = Cs/(Cs +Ce)

= $0.20 per unit = .60/(.60 + .20)

Cs =Revenue per unitCost per unit = .75

= $.80.20

= $0.60 per unit



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Reorder Point

Inventory level at which a new order is placed

R= dLwhere

d= demand rate per periodL = lead time



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Reorder Point

Demand = 10,000 gallons/yearStore open 311 days/yearDaily demand = 10,000 / 311 =

32.154 gallons/dayLead time = L = 10 days

R = dL = (32.154)(10) = 321.54gallons



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END OF THE DISCUSSIONTHANK YOU

SO MUCH

INVENTORY MANAGEMENT-DANTE V. ARIÑEZ

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