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OML - Inventory MS

Jun 04, 2018

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    OM Inventory Management 1

    Operations

    Management

    Inventory Management

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    OM Inventory Management 2

    AMAZON.com

    Jeff Bezos, in 1995, started AMAZON.com

    as a virtual retailer no inventory, no

    warehouses, no overhead; just a bunch of

    computers.

    Growth forced AMAZON.com to excel in

    inventory management!

    AMAZON is now a worldwide leader in

    warehouse management and automation.

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    OM Inventory Management 3

    Order Fulfillment at AMAZON

    1. You order items;, computer assigns yourorder to distribution center [closest facility

    that has the product(s)]

    2. Lights indicate products ordered to workerswho retrieve product and reset light.

    3. Items placed in crate with items from other

    orders, and crate is placed on conveyor.Bar code on item is scanned 15 times

    virtually eliminating error.

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    Order Fulfillment at AMAZON

    4. Crates arrive at central point where items

    are boxed and labeled with new bar code.

    5. Gift wrapping done by hand (30 packages

    per hour)

    6. Box is packed, taped, weighed and labeled

    before leaving warehouse in a truck.

    7. Order appears on your doorstep within a

    week

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    The Functions of Inventory

    To decouple or separate various parts of

    the production process

    To have a stock of goods that will provide aselection for customers

    To take advantage of quantity discounts

    To hedge against inflation and upward price

    changes

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    Higher costs

    Item cost (if purchased)

    Ordering (or setup) cost

    Costs of forms, clerks wages etc.

    Holding (or carrying) cost

    Building lease, insurance, taxes etc.

    Difficult to control

    Hides production problems

    Disadvantages of Inventory

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    Types of Inventory

    Raw material

    Work-in-process (WIP)

    Maintenance/repair/operating

    supplies (MRO)

    Finished goods

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    Inventory Management

    Two ingredients of inventory mgmt

    systems

    Classification of inventory items

    Basis for establishing inventory policies

    Maintenance of accurate inventory

    records

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    ABC Analysis

    Divides on-hand inventory into 3 classes

    A class, B class, C class

    Basis is usually annual $ volume

    $ volume = Annual demand x Unit cost

    A (70%-80% of total annual $ volume); B (15-25%), C (5%)

    Other criteria could include Delivery problems

    Quality problems

    High unit cost

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    OM Inventory Management 10

    Classifying Items as ABC

    % of Inventory Items

    020

    40

    60

    80

    100

    0 50 100

    % Annual $ Usage

    A

    B

    C

    Class % $ Vol % Items

    A 80 15B 15 30

    C 5 55

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    OM Inventory Management 11

    ABC Analysis

    Policies then established for each class

    after analysis

    Policies based on ABC analysis could

    include

    Focus more on development of class Asuppliers

    Have tighter physical control of A items

    Forecast A items more carefully

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    OM Inventory Management 12

    Record Accuracy

    Good Inventory policies are meaningless

    if mgmt does not know what inventory is

    on hand

    Incoming and outgoing record-keeping

    must be good

    Stock-room security must be good

    Cycle count ingcan result in accurate

    record keeping

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    OM Inventory Management 13

    Cycle Counting

    Continuous audit for verifying accuracy ofinventory records

    Physically counting inventory on a regular

    basis Used often withABCclassification

    Aitems counted most often (e.g., daily)

    Cause of inaccuracies traced andappropriate remedial action taken

    Does not require the facilities to be shutdown for this periodic audit

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    OM Inventory Management 14

    Advantages of Cycle Counting

    Eliminates shutdown and interruption ofproduction necessary for annual physical

    inventories

    Eliminates annual inventory adjustments Provides trained personnel to audit the

    accuracy of inventory

    Allows the cause of errors to be identifiedand remedial action to be taken

    Maintains accurate inventory records

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    OM Inventory Management 15

    Independent versusDependent Demand

    Independent demand- demand for item isindependent of demand for any other item

    Demand for cars is independent of demand for

    white boards

    Dependent demand- demand for item isdependent upon the demand for some

    other item Demand for car wipers is dependent on

    demand for cars

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    OM Inventory Management 16

    Inventory Costs

    Holding costs- associated with holding or

    carrying inventory over time

    Ordering costs- associated with costs of

    placing order and receiving goods

    Setup costs- cost to prepare a machineor process for manufacturing an order

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    OM Inventory Management 17

    Inventory Models

    When to order and how much to order

    Fixed order-quantity models

    Economic order quantity Production order quantity

    Quantity discount

    Probabilistic models

    Fixed order-period models

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    OM Inventory Management 18

    EOQ Assumptions

    Known, constant and independent

    demand

    Known and constant lead time Instantaneous and complete receipt of

    material

    No quantity discounts

    Only order (setup) cost and holding cost

    considered

    No stock outs

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    OM Inventory Management 19

    Inventory Usage Over Time

    Time

    In

    ventoryLeve

    l

    AverageInventory

    (Q*/2)

    0

    Minimuminventory

    Order quantity = Q(maximuminventory level)

    Usage Rate

    EOQ M d l

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    OM Inventory Management 20

    EOQ ModelHow Much to Order?

    Order quantity

    Annual Cost

    Order (Setup) Cost Curve

    OptimalOrder Quantity (Q*)

    Minimumtotal cost

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    OM Inventory Management 21

    Deriving an EOQ

    1. Develop an expression for setup or

    ordering costs

    2. Develop an expression for holding cost

    3. Set setup cost equal to holding cost

    4. Solve the resulting equation for the bestorder quantity

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    Objective is to minimize total costs

    Annualcost

    Order quantity

    Curve for totalcost of holding

    and setup

    Holding cost

    curve

    Setup (or order)cost curve

    Minimumtotal cost

    Optimal orderquantity (Q*)

    Minimizing cost

    OM Inventory Management 22

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    Q = Number of pieces per orderQ* = Optimal number of pieces per order (EOQ)D = Annual demand in units for the inventory itemS = Setup or ordering cost for each orderH = Holding or carrying cost per unit per year

    Annual holding cost = (Average inventory level)x (Holding cost per unit per year)

    Order quantity2

    = (Holding cost per unit per year)

    = (H)Q2

    Annual setup cost = SDQ

    Annual holding cost = H

    Q

    2

    The EOQ model

    OM Inventory Management 24

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    Q = Number of pieces per orderQ* = Optimal number of pieces per order (EOQ)D = Annual demand in units for the inventory itemS = Setup or ordering cost for each orderH = Holding or carrying cost per unit per year

    Optimal order quantity is found when annual setup costequals annual holding cost

    Annual setup cost = SDQ

    Annual holding cost = H

    Q

    2

    Solving for Q*

    2DS = Q2

    HQ2= 2DS/H

    Q* = 2DS/H

    The EOQ model

    OM Inventory Management 25

    Production Order Quantity

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    OM Inventory Management 26

    Production Order QuantityModel

    Answers how much to order and when to

    order

    Allows partial receipt of materialnoinstantaneous receipt of materials

    Other EOQ assumptions apply

    Suited for production environment Material produced, used immediately

    Provides production lot size

    Lower holding cost than EOQ model

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    Inventoryleve

    l

    Time

    Demand part of cyclewith no production

    Part of inventory cycle duringwhich production (and usage) istaking place

    t

    Maximuminventory

    Production order quantity model

    OM Inventory Management 27

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    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

    = Maximuminventory levelTotal produced during the

    production runTotal used during the

    production run

    = ptdt

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

    Maximuminventory level = p d = Q 1

    Qp

    Qp

    dp

    Holding cost = (H) = 1 Hdp

    Q2

    Maximum inventory level

    2

    POQ model

    OM Inventory Management 29

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    Q = Number of pieces per order p = Daily production rateH = Holding cost per unit per year d = Daily demand/usage rateD = Annual demand

    Q2=2DS

    H[1 - (d/p)]

    Q* =2DS

    H[1 - (d/p)]p

    Setup cost = (D/Q)SHolding cost = HQ[1 - (d/p)]1

    2

    (D/Q)S = HQ[1 - (d/p)]12

    POQ model

    OM Inventory Management 30

    Q tit Di t M d l

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    Quantity Discount Model

    Answers how much to order & when to

    order

    Allows quantity discounts Reduced price when item is purchased in

    larger quantities

    Other EOQ assumptions apply

    Trade-off is between lower price &

    increased holding costOM Inventory Management 31

    Q tit Di t M d l

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    Reduced prices are often available whenlarger quantities are purchased

    Trade-off is between reduced product costand increased holding cost

    Total cost = Setup cost + Holding cost + Product cost

    TC = S + H + PDDQ

    Q2

    Quantity Discount Model

    OM Inventory Management 32

    Q tit di t d l

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    DiscountNumber Discou nt Quant i ty Discou nt (%)

    DiscountPric e (P)

    1 0to 999 no d iscount $5.00

    2 1,000to 1,999 4 $4.80

    3 2,000and over 5 $4.75

    A typical quantity discount schedule

    Quantity discount model

    OM Inventory Management 33

    Q tit di t d l

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    1. For each discount, calculate Q*

    2. If Q* for a discount doesnt qualify, choosethe smallest possible order size to get thediscount

    3. Compute the total cost for each Q* oradjusted value from Step 2

    4. Select the Q* that gives the lowest totalcost

    Steps in analyzing a quantity discount

    Quantity discount model

    OM Inventory Management 34

    Fi d P i d M d l

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    Answers how much to order

    Orders placed at fixed intervals

    Inventory brought up to target amount

    Amount ordered varies

    No continuous inventory count

    Possibility of stockout between intervals

    Useful when vendors visit routinely

    Example: P&G representative calls every 2

    weeks

    Fixed Period Model

    OM Inventory Management 35

    Inventory Level in a Fixed

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    OM Inventory Management 36

    yPeriod System

    Various amounts (Qi) are ordered at regular time intervals(p) based on the quantity necessary to bring inventory up

    to target maximum

    p p p

    Q1 Q2

    Q3

    Q4Target maximum

    Time

    On-HandInventory