Inventory & store management m

Inventory & store management

Mohit mendiratta

What is inventory?

Inventory is the raw materials, component parts, work-in-process, or finished products

that are held at a location in the supply chain.

Costs of Inventory

• Physical holding costs:– out of pocket expenses for storing inventory (insurance,

security, warehouse rental, cooling)– All costs that may be entailed before you sell it

(obsolescence, spoilage, rework...)• Opportunity cost of inventory: foregone return on

the funds invested.• Operational costs:

– Delay in detection of quality problems.– Delay the introduction of new products.– Increase throughput times.

• Hedge against uncertain demand

• Hedge against uncertain supply

• Economize on ordering costs

• Smoothing

Benefits of Inventory

To summarize, we build and keep inventory in order to match supply and demand in the most cost effective way.

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Types of Inventories

• Raw materials & purchased parts• Partially completed goods called

work in progress• Finished-goods inventories

– (manufacturing firms) or merchandise (retail stores)

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Types of Inventories (Cont’d)

• Replacement parts, tools, & supplies

• Goods-in-transit to warehouses or customers

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Functions of Inventory

• To meet anticipated demand

• To smooth production requirements

• To decouple operations

• To protect against stock-outs

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Functions of Inventory (Cont’d)

• To take advantage of order cycles

• To help hedge against price increases

• To permit operations

• To take advantage of quantity discounts

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Objective of Inventory Control

• To achieve satisfactory levels of customer service while keeping inventory costs within reasonable bounds– Level of customer service

– Costs of ordering and carrying inventory

Inventory turnover is the ratio ofaverage cost of goods sold toaverage inventory investment.

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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

• A classification system

Effective Inventory Management

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• Too much inventory– Tends to hide problems– Easier to live with problems than to eliminate

them– Costly to maintain

• Wise strategy– Reduce lot sizes– Reduce safety stock

Operations Strategy

Inventory Control Systems

Continuous system (fixed-order-quantity)

constant amount ordered when inventory declines to predetermined level

Periodic system (fixed-time-period)order placed for variable amount

after fixed passage of time

Economic Order Quantity (EOQ) Models

• EOQ– optimal order quantity that will

minimize total inventory costs• Basic EOQ model• Production quantity model

Assumptions of Basic EOQ Model

Demand is known with certainty and is constant over timeNo shortages are allowedLead time for the receipt of orders is constantOrder quantity is received all at once

Inventory Order Cycle

Demand rate

TimeLead time

Lead time

Order placed

Order placed

Order receipt

Order receipt

Inve

ntor

y Le

vel

Reorder point, R

Order quantity, Q

0

EOQ Cost Model

Co - cost of placing order D - annual demandCc - annual per-unit carrying cost Q - order quantity

Annual ordering cost =CoD

Q

Annual carrying cost =CcQ

2

Total cost = +CoD

Q

CcQ

2

EOQ Cost Model (cont.)

Order Quantity, Q

Annual cost ($) Total Cost

Carrying Cost =CcQ

2

Slope = 0

Minimum total cost

Optimal order Qopt

Ordering Cost =CoD

Q

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Production Order Quantity Model

Used when inventory builds up over a period of time after an order is placed

Used when units are produced and sold simultaneously

© 2011 Pearson Education, Inc. publishing as Prentice Hall

Production Order Quantity ModelIn

vent

ory

leve

l

Time

Demand part of cycle with no production

Part of inventory cycle during which production (and usage) is taking place

t

Maximum inventory

Figure 12.6

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Production Order Quantity Model

Q = Number of pieces per order p = Daily production rateH = Holding cost per unit per year d = Daily demand/usage ratet = Length of the production run in days

= (Average inventory level) xAnnual inventory holding cost

Holding cost per unit per year

= (Maximum inventory level)/2Annual inventory level

= –Maximum inventory level

Total produced during the production run

Total used during the production run

= pt – dt

© 2011 Pearson Education, Inc. publishing as Prentice Hall

Production Order Quantity Model

Q = Number of pieces per order p = Daily production rateH = Holding cost per unit per year d = Daily demand/usage ratet = Length of the production run in days

= –Maximum inventory level

Total produced during the production run

Total used during the production run

= pt – dt

However, Q = total produced = pt ; thus t = Q/p

Maximum inventory level = p – d = Q 1 –Q

pQp

dp

Holding cost = (H) = 1 – H dpQ2

Maximum inventory level2

© 2011 Pearson Education, Inc. publishing as Prentice Hall

Production Order Quantity Example

D = 1,000 units p = 8 units per dayS = $10 d = 4 units per dayH = $0.50 per unit per year

Q* =2DS

H[1 - (d/p)]

= 282.8 or 283 hubcaps

Q* = = 80,0002(1,000)(10)

0.50[1 - (4/8)]

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Probabilistic Models and Safety Stock

Used when demand is not constant or certain

Use safety stock to achieve a desired service level and avoid stockouts

ROP = d x L + ss

Annual stockout costs = the sum of the units short x the probability x the stockout cost/unit

x the number of orders per year

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Safety Stock Example

Number of Units Probability

30 .2

40 .2

ROP 50 .3

60 .2

70 .1

1.0

ROP = 50 units Stockout cost = $40 per frameOrders per year = 6 Carrying cost = $5 per frame per year

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Safety Stock ExampleROP = 50 units Stockout cost = $40 per frameOrders per year = 6 Carrying cost = $5 per frame per year

Safety Stock

Additional Holding Cost Stockout Cost

Total Cost

20 (20)($5) = $100 $0 $100

10 (10)($5) = $ 50 (10)(.1)($40)(6) = $240 $290

0 $ 0 (10)(.2)($40)(6) + (20)(.1)($40)(6) =$960 $960A safety stock of 20 frames gives the lowest total cost

ROP = 50 + 20 = 70 frames

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Safety stock 16.5 units

ROP

Place order

Probabilistic DemandIn

vent

ory

leve

l

Time0

Minimum demand during lead time

Maximum demand during lead time

Mean demand during lead time

Normal distribution probability of demand during lead time

Expected demand during lead time (350 kits)

ROP = 350 + safety stock of 16.5 = 366.5

Receive order

Lead time

Figure 12.8

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Probabilistic Demand

Use prescribed service levels to set safety stock when the cost of stockouts cannot be determined

ROP = demand during lead time + ZsdLT

where Z = number of standard deviationssdLT = standard deviation of demand during lead time

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Probabilistic Demand

Safety stock

Probability ofno stockout

95% of the time

Mean demand

350

ROP = ? kits Quantity

Number of standard deviations

0 z

Risk of a stockout (5% of area of normal curve)

© 2011 Pearson Education, Inc. publishing as Prentice Hall

Probabilistic Example

Average demand = m = 350 kitsStandard deviation of demand during lead time = sdLT = 10 kits5% stockout policy (service level = 95%)

Using Appendix I, for an area under the curve of 95%, the Z = 1.65

Safety stock = ZsdLT = 1.65(10) = 16.5 kits

Reorder point = expected demand during lead time + safety stock= 350 kits + 16.5 kits of safety stock= 366.5 or 367 kits