Transcript Operations
CHAPTER Independent Demand Inventory Management Reid & Sanders, Operations Management © Wiley 2002 12 Learning Objectives • • • • • • • Describe different types & uses of inventory Understand relevant inventory costs Calculate order quantities Evaluate different inventory policies Calculate appropriate safety stock policies Understand ABC inventory policies Compare cycle & periodic counting Reid & Sanders, Operations Management © Wiley 2002 Page 2 Types of Inventory Reid & Sanders, Operations Management © Wiley 2002 Page 3 Uses of Inventory • Anticipation or seasonal inventory • Safety stock: buffer demand fluctuations • Lot-size or cycle stock: take advantage of quantity discounts or purchasing efficiencies • Pipeline or transportation inventory • Speculative or hedge inventory • Maintenance, repair, and operating (MRO) inventories Reid & Sanders, Operations Management © Wiley 2002 Page 4 Objectives & Measures • Provide desired customer service level: – Percentage of orders shipped on schedule – Percentage of lines shipped on schedule – Percentage of dollar volume shipped on schedule • Provide for cost-efficient operations: – Total inventory-related costs • Minimize inventory related investments: – Inventory turnover – Weeks (or days) of supply Reid & Sanders, Operations Management © Wiley 2002 Page 5 Relevant Costs • Item price • Holding costs – Variable costs dependent upon the amount of inventory held (e.g.: capital & opportunity costs, storage & insurance, risk of obsolescence) • Ordering & setup costs: – Fixed cost of placing an order (e.g.: clerical accounting & physical handling) or setting up production (e.g.: lost production to change tools & clean equipment) • Shortage costs: – Lost profit, expediting & back ordering expenses Reid & Sanders, Operations Management © Wiley 2002 Page 6 Order Quantity Approaches • Lot-for-lot: – Order exactly what is needed • Fixed order quantity: – Order a predetermined amount each time • Min-max system: – When inventory falls to a set minimum level, order up to the predetermined maximum level • Order enough for n periods • Periodic review: – At specified intervals, order up to a predetermined target level Reid & Sanders, Operations Management © Wiley 2002 Page 7 Periodic Review System • Target inventory calculation: TI d RP L SS • Order quantity calculation: Q TI OH Reid & Sanders, Operations Management © Wiley 2002 Page 8 Fixed-Order Quantity Models • Economic Order Quantity (EOQ) • Economic Production Quantity (EPQ) • Quantity Discount Model Reid & Sanders, Operations Management © Wiley 2002 Page 9 EOQ Assumptions • Demand is known & constant - no safety stock is required • Lead time is known & constant • No quantity discounts are available • Ordering (or setup) costs are constant • All demand is satisfied (no shortages) • The order quantity arrives in a single shipment Reid & Sanders, Operations Management © Wiley 2002 Page 10 Inventory Profile Reid & Sanders, Operations Management © Wiley 2002 Page 11 EOQ Total Costs Total annual costs + annual ordering costs + annual holding costs Reid & Sanders, Operations Management © Wiley 2002 Page 12 EOQ: Total Cost Equation TC EOQ D Q S H Q 2 • Minimize the TC by ordering the EOQ: 2 DS EOQ H Reid & Sanders, Operations Management © Wiley 2002 Page 13 Simple Reorder Point R = dL Reid & Sanders, Operations Management © Wiley 2002 Page 14 EOQ Example Reid & Sanders, Operations Management © Wiley 2002 Page 15 Solution Reid & Sanders, Operations Management © Wiley 2002 Page 16 EPQ Assumptions • Same as the EOQ except: inventory arrives in increments & is drawn down as it arrives Reid & Sanders, Operations Management © Wiley 2002 Page 17 EPQ Equations • Adjusted total cost: TCEPQ • Maximum inventory: I MAX • Adjusted order quantity: Reid & Sanders, Operations Management © Wiley 2002 D I MAX S H Q 2 d Q1 p EPQ 2 DS d H 1 p Page 18 Quantity Discount Model Assumptions • Same as the EOQ, except: – Unit price depends upon the quantity ordered • Adjusted total cost equation: TCQD D Q S H PD Q 2 Reid & Sanders, Operations Management © Wiley 2002 Page 19 Quantity Discount Procedure • Calculate the EOQ at the lowest price • Determine whether the EOQ is feasible at that price – Will the vendor sell that quantity at that price • If yes, stop – if no, continue • Check the feasibility of EOQ at the next higher price • Continue to the next slide ... Reid & Sanders, Operations Management © Wiley 2002 Page 20 QD Procedure • Continue until you identify a feasible EOQ • Calculate the total costs (including purchase price) for the feasible EOQ model • Calculate the total costs of buying at the minimum quantity allowed for each of the cheaper unit prices • Compare the total cost of each option & choose the lowest cost alternative Reid & Sanders, Operations Management © Wiley 2002 Page 21 What if Demand is Uncertain? Reid & Sanders, Operations Management © Wiley 2002 Page 22 Adding Safety Stock • Order-cycle service level: – From a managerial standpoint, determine the acceptable probability that demand during lead time won’t exceed on-hand inventory – Risk of a stockout: 1 – (service level) Reid & Sanders, Operations Management © Wiley 2002 Page 23 Adjusted Reorder Point Equation R dL z dL R = reorder point d = average daily demand L = lead time in days z = number of standard deviations associated with desired service level sigma = standard deviation of demand during lead time Reid & Sanders, Operations Management © Wiley 2002 Page 24 ABC Classification • Pareto’s law: – Roughly 20% of inventories will account for 80% of inventory value • Divide inventories into A, B, and C categories based on value, risk, & other considerations – Use tight controls & frequent reviews for A items – Use normal methods to manage B items – Use simple, inexpensive systems with large safety stocks to manage C items (just don’t run out) Reid & Sanders, Operations Management © Wiley 2002 Page 25 Periodic versus Cycle Counting • Periodic counting: – Take a periodic (often annual) physical inventory to verify & update records • Cycle counting: – Count specified items each day (mini physical inventories) – Frequency with which each item is counted depends upon its ABC classification Reid & Sanders, Operations Management © Wiley 2002 Page 26 The End Copyright © 2002 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United State Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein. Reid & Sanders, Operations Management © Wiley 2002 Page 27