Transcript Operations Management Inventory Management Lecture 18

Operations
Management
Inventory Management
1
The Functions of Inventory

To have a stock of goods that will
provide a “selection” for customers

To take advantage of quantity discounts

To hedge against inflation and upward
price changes
2
Disadvantages of Inventory

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
3
Types of Inventory

Raw material

Work-in-process (WIP)

Maintenance/repair/operating
supplies (MRO)

Finished goods
4
Inventory Management
Two ingredients of inventory mgmt systems

Classification of inventory items


Basis for establishing inventory policies
Maintenance of accurate inventory
records
5
ABC Analysis

Divides on-hand inventory into 3 classes


Basis is usually annual $ volume



A class, B class, C class
$ volume = Annual demand x Unit cost
A (70%-80% of total annual $ volume); B (1525%), C (5%)
Other criteria could include



Delivery problems
Quality problems
High unit cost
6
Classifying Items as ABC
Class
A
B
C
% Annual $ Usage
100
80
60
% $ Vol
80
15
5
% Items
15
30
55
A
40
B
20
C
0
0
50
100
% of Inventory Items
7
ABC Analysis

Policies then established for each class after
analysis

Policies based on ABC analysis could include

Focus more on development of class A suppliers

Have tighter physical control of A items

Forecast A items more carefully
8
Independent versus
Dependent Demand

Independent demand - demand for item is
independent of demand for any other item


Demand for cars is independent of demand for TV’s
Dependent demand - demand for item is
dependent upon the demand for some other
item

Demand for car tires is dependent on demand for
cars
9
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 machine or
process for manufacturing an order
10
Inventory Models

When to order and how much to order

Fixed order-quantity models

Economic order quantity

Production order quantity

Quantity discount

Probabilistic models
11
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
12
Inventory Usage Over Time
Inventory Level
Order quantity = Q
(maximum
inventory level)
Minimum
inventory 0
Usage Rate
Average
Inventory
(Q*/2)
Time
13
EOQ Model
How Much to Order?
Annual Cost
Minimum
total cost
Order (Setup) Cost Curve
Optimal
Order Quantity (Q*)
Order quantity
14
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 best order
quantity
15
EOQ Model When To Order
Inventory Level
Average
Inventory
(Q*/2)
Optimal
Order
Quantity
(Q*)
Reorder
Point
(ROP)
Lead Time
Time
16
The Reorder Point (ROP) Curve
Q*
Inventory level (units)
Slope = units/day = d
ROP
(Units)
Time (days)
Lead time = L
17
Production Order Quantity
Model

Answers how much to order and when to order

Allows partial receipt of material – no
instantaneous 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
18
Production Order Quantity
Model

Answers how much to order and when to order

Allows partial receipt of material – no
instantaneous 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
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 cost
Quantity Discount Schedule
Discount
Number
Discount Quantity
Discount (%)
Discount Price
(P)
1
0 to 999
$5.00
2
1,000 to 1,999
No
discount
4
3
2,000 and over
5
$4.75
$4.80
Quantity Discount Model

Compute the common EOQ and identify the feasible
range.

If the feasible EOQ is on the lowest price range, that is
the optimal order quantity.

If the EOQ is below the allowable range, adjust the
EOQ to the lowest price break qty of that range

If the EOQ is above the allowable range, discard that
EOQ

Compare the total costs (including total cost of product)
for the feasible EOQ and price break quantity.

Select the quantity that yields the lowest total costs.
Probabilistic models

When demand is not known, but can be
expressed as a probabilistic distribution

Uncertain demand raises possibility of stock
out

Service level – complement of probability of
stock out