Essentials of Inventory Management: Answers and Strategies

 
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?
 
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
 
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
 
Two Forms Of Demand
 
Dependent
items used to produce final products
 
Independent
items demanded by external customers
 
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
 
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
 
ABC Classification System
 
Demand volume & value of items vary
Classify inventory into 3 categories
 
Class
      
        
% of Units
   
        
% of Dollars
A
   
5 - 15
 
70 - 80
B            
 
30    
 
                    15
15
C
   
50 - 60
 
5 - 10
 
ABC Classification Example
 
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
 
The Inventory Order Cycle
 
EOQ Cost Model
 
C
O
 - cost of placing order
 
 
 
D - annual demand
C
C
 - annual per-unit carrying cost
 
Q - order quantity
  
Annual ordering cost =
  
Annual carrying cost =
  
Total cost =           +
EOQ Model
Total Cost at Q*
 
EOQ Model Cost Curves
 
EOQ Example
 
C
C
 = $0.75 per yard
C
O
 = $150
D = 10,000 yards
Find EOQ, TC at Q*, # of order/year,
and cycle time
 
NOTE:  store days  = 311
EOQ Example
 
Orders per/yr and Cycle Time
 
EOQ With
Noninstantaneous Receipt
 
EOQ With
Noninstantaneous Receipt
 
p = production rate
d = demand rate
EOQ With
Noninstantaneous Receipt
 
Production Quantity Example
 
C
C
 = $0.75 per yard
C
O
 = $150
D = 10,000 yards
d = 10,000/311 = 32.2 yards per day
p = 150 yards per day
 
Optimum Q - Q*
 
 
Total Cost
 
Production Run and Max Inv. Levels
 
   
Production run 
 
= Q/p
      
= 2,256.8/150
      
= 15.05 yards
Number of production runs 
  
= D/Q
      
= 10,000/2,256.8
      
= 4.43
 
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
 
Inputs and Outputs to Aggregate
Production Planning
 
Hierarchical Planning Process
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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

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