MBA, Semester 2 Operations Management Ms. Aarti Mehta Sharma

1

AMITY GLOBALBUSINESS SCHOOL Bangalore

MBA, Semester 2

Operations Management

Ms. Aarti Mehta Sharma

2


3


Inventory Management

EOQ, EBQ

Types of inventory

4

AMITY GLOBALBUSINESS SCHOOL BangaloreInventory

• Stock of any item or resource used in an organisation

• Inventory system is the set of policies and controls that monitor levels of inventory and determine what levels should be maintained

5


Inventory managementInventory is working capital

- How much to keep ?

- When to store ?

- When to order ?

- How large the order should be ?

6

AMITY GLOBALBUSINESS SCHOOL Bangalore If not being able

to fill the order …• Cancel the order

• Buy from another dealer and resell

• Postpone order

• Rearrange deliveries to various customers so that no goodwill is lost

TO AVOID THE ABOVE - INVENTORY MANAGEMENT

7

AMITY GLOBALBUSINESS SCHOOL BangalorePurpose

• To maintain independence of operations

• To meet variation in product demand

• To allow flexibility in production scheduling

• To provide a safeguard for variation in raw material delivery time

• To take advantage of economic purchase order size ( larger shipment – lower price per unit )

8


Kinds

• Production Inventories

• MRO Inventories

• In Process Inventories

• Finished Goods Inventories

9

AMITY GLOBALBUSINESS SCHOOL Bangalore Production

Inventory• Items that contribute to or become part of

a firms product output

- Raw materials

- Finished goods

- Component parts

- Supplies

10

AMITY GLOBALBUSINESS SCHOOL Bangalore MRO Inventories

Maintenance, repair, and operating supplies which are consumed in the production process but which do not become part of the product (eg. Lubricating oil, soap, machine repair parts)

11


In Process InventoriesSemi Finished products found at various

stages in the production operation

12


Finished goods InventoriesCompleted products

ready for shipment

13

AMITY GLOBALBUSINESS SCHOOL BangaloreCosts

• Holding costs : costs for storage, handling, insurance, pilferage, breakage, depreciation, taxes

• Setup : while making different products cost of necessary materials, equipment, paperwork

14


• Ordering Costs : managerial and clerical costs to prepare the production orders

• Shortage costs : when the stock of an item is depleted, an order for that item must either wait until the stock is replenished or be cancelled.

Higher inventory/ higher storage ---- higher costs


E(1)

Independent vs. Dependent Demand

Independent Demand (Demand for the final end-product or demand not related to other items)

Dependent Demand

(Derived demand items for

component parts,

subassemblies, raw materials,

etc)

Finishedproduct

Component parts

16


17

AMITY GLOBALBUSINESS SCHOOL BangaloreDemand

• Independent Demand : Demands for various items are unrelated to each other

• Dependent Demand : need for any item is a direct result of the demand for some other item

For Eg: if output is 400 cars per day, demand ---2000 tyres (min)

AMITY GLOBALBUSINESS SCHOOL BangaloreInventory Systems

• Single-Period Inventory Model– One time purchasing decision (Example: vendor

selling t-shirts at a football game)– Seeks to balance the costs of inventory overstock

and under stock• Multi-Period Inventory Models

– Fixed-Order Quantity Models• Event triggered (Example: running out of stock)

– Fixed-Time Period Models • Time triggered (Example: Monthly sales call by

sales representative)

19

AMITY GLOBALBUSINESS SCHOOL Bangalore Two approaches to multi period

inventory systems

• Fixed order Quantity System (Q system)

• Fixed order period system (P system)

20

AMITY GLOBALBUSINESS SCHOOL BangaloreBasic Fixed-Order Quantity Model and Reorder

Point Behavior

R = Reorder pointQ = Economic order quantityL = Lead time

L L

Q QQ

R

Time

Numberof unitson hand

1. You receive an order quantity Q.

2. Your start using them up over time. 3. When you reach down to

a level of inventory of R, you place your next Q sized order.

4. The cycle then repeats.

21


Optimal Order Quantity• A = annual consumption of a material

• Q = quantity of one order

• L = Lead time for supply

• Cc / Ch = cost of carrying an inventory of one unit per year

22


• Cp/Co= cost of procurement ordering per order

• Total Cost = carrying cost + ordering cost

= Cc ×Q/2 + Cp × A/Q

23

AMITY GLOBALBUSINESS SCHOOL Bangalore Economic Order

QuantityEOQ = 2CpA

√ Cc

24

AMITY GLOBALBUSINESS SCHOOL Bangalore Assumptions of

EOQ formula• Material has a uniform rate of consumption

• Material is supplied without fail

Thus, no variation in supply and demand is assumed

25

AMITY GLOBALBUSINESS SCHOOL BangaloreQ

A hospital procures its supplies of a material once a year. The total no. procured is 2400 packages in a year. This policy of procuring material once a year is being questioned. The accountants calculate the cost of inventory holding at Rs 36 per pkg per year. It is also figured out that the costs of procurement add upto Rs1200 per order. What inventory policy would you advise to this hospital.

26


EOQ = √ 2 × 1200 × 2400 / 36

= 400 units

No. of orders = 2400 / 400 = 6 per year

27


An auto industry purchases spark plugs at the rate of Rs.25/- per piece. The annual consumption of spark plug is 18,000 no.’s . If the ordering cost is Rs. 250/- per order and carrying cost is 25 % per p.a, what would be the EOQ ?

28


D = 18,000

Cp = 250

Cc = 25% of Rs. 25

EOQ = 2 * 18000 * 250

√ 25 * 0.25

= 1200 units

29


Economic batch quantity (EBQ), also called "optimal batch quantity" or economic production quantity is a measure used to determine the quantity of units that can be produced at minimum average costs in a given batch or production run.

30

AMITY GLOBALBUSINESS SCHOOL Bangalore Economic Mfg

Batch SizeBatch Size is large – average level of inventory

is also large – inventory carrying charges are high – inventory ordering charges low – set up charges low

Cost of set up

- Cost of time spent in setting up the equipments

- Cost due to rejects, scrap

- Cost of administrative paper work

31


• t=time interval of production

• d=rate of consumption = d

• p=no. of units produced

• Peak inventory during any cycle = t ×(p-r)

• If Q is the mfg batch quantity, no. of set ups during a year = A / Q

32


• Economic Batch Quantity for a single product =

√ 2 Cp A / Cc ( p-d)

p

33


CCcc = $0.75 per yard = $0.75 per yard CCoo = $150 = $150 DD = 10,000 yards = 10,000 yards

dd = 10,000/311 = 32.2 yards per day = 10,000/311 = 32.2 yards per day pp = 150 yards per day = 150 yards per day

QQoptopt = = = 2,256.8 yards = = = 2,256.8 yards

22CCppAA

CCcc 1 - 1 - ddpp

2(150)(10,000)2(150)(10,000)

0.75 1 - 0.75 1 - 32.232.2150150

Production run = = = 15.05 days per orderProduction run = = = 15.05 days per orderQQpp

2,256.82,256.8150150

34


A production manager of a plant must determine the lot size for a particular component that has a steady demand of 50 units per day. The production rate is 200 units per day, annual demand is 10,000 units, set up costs is Rs. 200, annual holding costs is Rs. 0.20 per unit and the plant operates 350 days per year. Calculate EBQ

35


2 Cp A / Cc ( p-d)

√ p

= 2 * 200 * 10000

0.20 * (200-50)

√ 200

= 5160 units

36

AMITY GLOBALBUSINESS SCHOOL Bangalore Classification of

Materials• Items of inventory are classified into A, B,

C or other classes for selective management control

• Depending upon

- necessity of control

- relative importance of material

- particular characteristic of matl

37

AMITY GLOBALBUSINESS SCHOOL BangaloreABC Classification

• Class A– 5 – 15 % of units– 70 – 80 % of value

• Class B– 30 % of units– 15 % of value

• Class C– 50 – 60 % of units– 5 – 10 % of value

38


ABC Analysis• Based upon relative importance of the

materials

• Basis : price / criticality / non availability / weight

• Annual consumption value of the items

39


A B C0

0.2

0.4

0.6

0.8

1

1.2

% of items

cum

ula

tive

% ,

ann

ual

tu

rno

ver

40

AMITY GLOBALBUSINESS SCHOOL BangaloreQItem No.

Cum % Of items

Annualconsum

Value per unit

Ann cons value (Rs)

Cum %appr

1 10 100 400 40,000 402 20 500 60 30,000 703 30 200 70 14,000 844 40 40 200 8000 925 50 25 100 2500 946 60 65 20 1300 957 70 50 25 1250 968 80 100 25 2500 999 90 25 10 250 9910 100 20 10 200 100Total 100,000

41

AMITY GLOBALBUSINESS SCHOOL BangaloreProbabilistic Inventory Models

In reality, the demand is not uniform, it follows some prob distn.

We minimise the expected costs rather than the actual costs.

42

AMITY GLOBALBUSINESS SCHOOL BangaloreEg :

The demand for a newspaper does not follow a fixed pattern. The associated prob distn may be discrete or continuous.

For each unsold newspaper there will be a penaltymarginal cost of surplus/unit

C1 = purchase price/unit – salvagevalue/unit

For each shortage unit, there will be a penalty which is given by the formula

marginal cost of shortage/unit C2 = selling price/unit – purchase price/unit

43


Let the generalised probability distribution of the demand of the item be a discrete distribution as shown below :

Observation

i 1 2 3 … i … n

Demand Di D1 D2 D3 … Di … Dn

Probability

Pi P1 P2 P3 … Pi … Pn

44


The optimal order size Di0 is determined by the relation

Pi-1 < C2 < Pi

C1 + C2

45

AMITY GLOBALBUSINESS SCHOOL BangaloreExample

The daily demand of bread at a bakery follows a discrete distribution as follows :

S.No

1 2 3 4 5 6 7 8 9 10 11

Di 25 26 27 28 29 30 31 32 33 34 35

Pi 0.2 0.11 0.10 0.09 0.08 0.12 0.14

0.05

0.04

0.04

0.03

46


The purchase price of the bread is Rs. 8 per packet. The SP is rs.11 per packet.If the bread packets are not sold within the day of purchase, they are sold at Rs. 4 per packet to secondary hotels. Find the optimal order size of the bread.

47


Given purchase price / packet = Rs. 8SP / packet = Rs. 11Salavge price/ packet = rs. 4Marginal cost of surplus/unit C1 = 8-4 = Rs.

4Marginal cost of shortages C2 = 11 -8 = rs. 3Cumulative prob. P = c2 / c1 + c2 = 3/4+3 = 0.43

48

AMITY GLOBALBUSINESS SCHOOL BangaloreCumulative prob of demand S. No Demand Di Prob Pi Cumulative prob

1 25 0.2 0.2

2 26 0.11 0.31

3 27 0.10 0.41

4 28 0.09 0.50

5 29 0.08 0.58

6 30 0.12 0.70

7 31 0.14 0.84

8 32 0.05 0.89

9 33 0.04 0.93

10 34 0.04 0.97

11 35 0.03 1.00

49


P3< C2 = 0.43 < P4

C1 + C2

0.41 < 0.43 < 0.50

THEREFORE, THE OPTIMAL SIZE is D4 which is equal to 28 breads

50

AMITY GLOBALBUSINESS SCHOOL BangaloreConsideration

of Uncertainities• Variable sales

• Delay in supplies of raw material

• Buffer stock – extra stock

51

AMITY GLOBALBUSINESS SCHOOL BangaloreExplicit

Consideration of shortage costs Inventory control is the trade off between

different costs :

• Cost of not having the material in the quantity that is reqd – understocking cost

• Cost of keeping excess material in stock for fear of demand rate variations

- overstocking cost

MBA, Semester 2 Operations Management Ms. Aarti Mehta Sharma

Documents