Transcript ch12

Inventory Management
Professor Ahmadi
Slide 1
The Functions of Inventory
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To ”decouple” or separate various parts of the
production process
To provide 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
Slide 2
Types of Inventory
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Raw material
Work-in-progress
Maintenance/repair/operating supply
Finished goods
Slide 3
ABC Analysis
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Divides on-hand inventory into 3 classes
• A class, B class, C class
Basis is usually annual $ volume
• $ volume = Annual demand x Unit cost
Policies based on ABC analysis
• Develop class A suppliers more
• Give tighter physical control of A items
• Forecast A items more carefully
Slide 4
Example of 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
Slide 5
Cycle Counting
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Physically counting a sample of total inventory
on a regular basis
Used often with ABC classification
• A items counted most often (e.g., daily)
Advantages of cycle counting
• Eliminates shutdown and interruption of production
necessary for annual physical inventories
• Eliminates annual inventory adjustments
• Allows the cause of errors to be identified and
remedial action to be taken
• Maintains accurate inventory records
Slide 6
Independent versus
Dependent Demand
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Independent demand - demand for item is
independent of demand for any other item
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Dependent demand - demand for item is
dependent upon the demand for some other
item
Slide 7
Inventory Costs
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Holding costs - associated with holding or
“carrying” inventory over time
(Such as Obsolescence, Insurance, Extra staffing, Interest,
Pilferage, Damage, Warehousing, Etc.)
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Ordering costs - associated with costs of placing
order and receiving goods
(Such as: Supplies, Forms, Order processing, Clerical support,
Etc.)
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Setup costs - cost to prepare a machine or process
for manufacturing an order
(Such as Clean-up costs, Re-tooling costs, Adjustment costs, Etc.)
Slide 8
Inventory Models
3.
Economic order quantity models (EOQ)
Production order quantity models (POQ)
Quantity discount
4.
Probabilistic models (Normal Demand)
5.
Probabilistic models (Discrete demand)
1.
2.
Slide 9
EOQ Assumptions
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Known and constant demand
Known and constant lead time
Instantaneous receipt of material
No quantity discounts
Only order (setup) cost and holding cost
No stockouts
Slide 10
Inventory Usage Over Time
Inventory Level
Order quantity = Q
(maximum inventory
level)
Minimum
inventory 0
Usage Rate
Average
Inventory
(Q*/2)
Time
Slide 11
EOQ Model
How Much to Order?
Annual Cost
Minimum
total cost
Order (Setup) Cost Curve
Optimal
Order Quantity (Q*)
Order quantity
Slide 12
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
Slide 13
EOQ Model Equations
Optimal Order Quantity
Expected Number of Orders
Expected Time Between Orders
d =
D
Working Days
ROP = d × L
/ Year
2 × D× S
H
D
=N =
Q*
= Q* =
=T =
Working Days
/ Year
N
D = Demand per year
S = Setup (order) cost per order
H = Holding (carrying) cost
d = Demand per day
L = Lead time in days
Slide 14
Production Order Quantity Model (POQ)
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Answers how much to order and when to
order
Allows partial receipt of material
•
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Suited for production environment
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•
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Other EOQ assumptions apply
Material produced, used immediately
Provides production lot size
Lower holding cost than EOQ model
Slide 15
POQ Model Equations
Optimal Order Quantity = Q *
p
Maximum inventory level = Q*
Setup Cost =
D
(
2*D*S
d
H* 1 p
=
( )
d
1 -
p
)
* S
Q
Holding Cost = 0.5 * H * Q
( )
1-
d
p
D = Demand per year
S = Setup cost
H = Holding cost
d = Demand per day
p = Production per day
Slide 16
Quantity Discount Model
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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
Slide 17
Probabilistic Models
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Answers how much & when to order
Allows demand to vary
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•
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Follows normal distribution
Other EOQ assumptions apply
Consider service level & safety stock
•
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Service level = 1 - Probability of stockout
Higher service level means more safety stock
•
More safety stock means higher ROP
Slide 18