Essentials of Inventory Management: Answers and Strategies

Inventory management involves determining how much and when to order items to meet future demand. It addresses different types of inventory, reasons for holding inventory, forms of demand, inventory costs, control systems, ABC classification, and basic EOQ model assumptions.

• Inventory Management
• Demand
• Inventory Types
• Cost Control
• EOQ Model

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1. Inventory Stock of items held to meet future demand Tangible goods Intangible goods Inventory management answers two questions How much to order? When to order? DSCI 6213 1

2. Types of Inventory Raw materials Purchased parts and supplies Labor In-process (partially completed) products Component parts Working capital Tools, machinery, and equipment Finished goods DSCI 6213 2

3. Reasons To Hold Inventory Meet unexpected demand Smooth seasonal or cyclical demand Meet variations in customer demand Take advantage of price discounts Hedge against price increases Quantity discounts DSCI 6213 3

4. Two Forms Of Demand Dependent items used to produce final products Independent items demanded by external customers DSCI 6213 4

5. Inventory Costs Carrying Cost cost of holding an item in inventory Ordering Cost cost of replenishing inventory Shortage Cost temporary or permanent loss of sales when demand cannot be met DSCI 6213 5

6. Inventory Control Systems Fixed-order-quantity system (Continuous) constant amount ordered when inventory declines to predetermined level Fixed-time-period system (Periodic) order placed for variable amount after fixed passage of time DSCI 6213 6

7. ABC Classification System Demand volume & value of items vary Classify inventory into 3 categories Class A B C % of Units 5 - 15 30 50 - 60 % of Dollars 70 - 80 1515 5 - 10 DSCI 6213 7

8. ABC Classification Example DSCI 6213 8

9. Assumptions Of Basic EOQ Model Demand is known with certainty Demand is relatively constant over time No shortages are allowed Lead time for the receipt of orders is constant The order quantity is received all at once DSCI 6213 9

10. The Inventory Order Cycle Demand rate Order qty, Q Inventory Level Reorder point, R Lead time Lead time 0 Time Order Placed Order Received Order Placed Order Received DSCI 6213 10

11. EOQ Cost Model CO - cost of placing order CC - annual per-unit carrying cost Q - order quantity Annual ordering cost = D - annual demand Annual carrying cost = Total cost = + DSCI 6213 11

12. EOQ Model DSCI 6213 12

13. Total Cost at Q* DSCI 6213 13

14. EOQ Model Cost Curves Slope = 0 Annual cost ($) Total Cost Minimum total cost Carrying Cost = CcQ/2 Ordering Cost = CoD/Q Order Quantity, Q Optimal order Qopt DSCI 6213 14

15. EOQ Example CC = $0.75 per yard CO = $150 D = 10,000 yards Find EOQ, TC at Q*, # of order/year, and cycle time NOTE: store days = 311 DSCI 6213 15

16. EOQ Example DSCI 6213 16

17. Orders per/yr and Cycle Time DSCI 6213 17

18. EOQ With Noninstantaneous Receipt Inventory level Maximum inventory level Q(1-d/p) Begin Order receipt Average inventory level Q 2 (1-d/p) 0 Time End Order receipt Order receipt period DSCI 6213 18

19. EOQ With Noninstantaneous Receipt p = production rate d = demand rate DSCI 6213 19

20. EOQ With Noninstantaneous Receipt DSCI 6213 20

21. Production Quantity Example CC = $0.75 per yard CO = $150 D = 10,000 yards d = 10,000/311 = 32.2 yards per day p = 150 yards per day DSCI 6213 21

22. Optimum Q - Q* DSCI 6213 22

23. Total Cost DSCI 6213 23

24. Production Run and Max Inv. Levels Production run = Q/p = 2,256.8/150 = 15.05 yards = D/Q = 10,000/2,256.8 = 4.43 Number of production runs DSCI 6213 24

25. Safety Stocks Safety stock buffer added to on hand inventory during lead time Stockout an inventory shortage Service level probability that the inventory available during lead time will meet demand DSCI 6213 25

26. Inputs and Outputs to Aggregate Production Planning Strategic Objectives Constraints Capacity Company Policies Demand Forecasts Financial Constraints Aggregate Production Planning Size of Workforce Units or dollars subcontracted, backordered, or lost Production per month (in units or $) Inventory Levels DSCI 6213 26

27. Hierarchical Planning Process Items Product lines or families Production Planning Aggregate Production Plan Capacity Planning Resource Requirements Plan Resource level Plants Individual products Critical work centers Master Production Schedule Rough-Cut Capacity Plan All work centers Material Capacity Requirements Plan Components Requirements Plan Manufacturing operations Individual machines Shop Floor Schedule Input/Output Control DSCI 6213 27