12.1
Chapter 12
Inventory planning and control
Photodisc. Kim Steele
12.1
Slack, Chambers and Johnston, Operations Management, 6th Edition,
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
12.2
Inventory planning and control
Operations
strategy
Design
Inventory planning
and control
Improvement
Planning and
control
The market requires…
a quantity of products
and services at a
particular time
The operation supplies…
the delivery of a quantity of
products and services
when required
12.2
Slack, Chambers and Johnston, Operations Management, 6th Edition,
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
12.3
Key operations questions
In Chapter 12 – Inventory planning and control – Slack
et al. identify the following key questions:
• What is inventory?
• Why is inventory necessary?
• What are the disadvantages of holding inventory?
• How much inventory should an operation hold?
• When should an operation replenish its inventory?
• How can inventory be controlled?
12.3
Slack, Chambers and Johnston, Operations Management, 6th Edition,
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
12.4
Inventory is created to compensate for the differences in
timing between supply and demand
Rate of supply from
input process
Inventory
Rate of demand from
output process
Input
process
Output
process
Inventory
12.4
Slack, Chambers and Johnston, Operations Management, 6th Edition,
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
12.5
Single-stage and two-stage inventory systems
Single-stage
inventory system
Stock
Sales
operation
Suppliers
e.g. Local retail store
12.5
Two-stage inventory
system
Central
depot
Distribution
Local
distribution
point
Sales
operation
Suppliers
e.g. Automotive parts
distributor
Slack, Chambers and Johnston, Operations Management, 6th Edition,
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
12.6
A multi-stage inventory system
Input
stock
Stage
1
WIP
Stage
2
WIP
Stage
3
Finished
goods
stock
Suppliers
e.g. Television manufacturer
12.6
Slack, Chambers and Johnston, Operations Management, 6th Edition,
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
12.7
A multi-echelon inventory system
Garment
manufacturers
Cloth
manufacturers
Yarn
producers
12.7
Regional
warehouses
Retail
stores
Slack, Chambers and Johnston, Operations Management, 6th Edition,
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
12.8
12.8
A paper merchant must get its inventory planning and
control right
Slack, Chambers and Johnston, Operations Management, 6th Edition,
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
12.9
Inventory profiles chart the variation in inventory level
Steady and
predictable
demand (D)
Order
quantity = Q
Slope = demand rate (D)
Inventory level
Average inventory
=Q
2
Q
D
Time
Instantaneous deliveries at a rate of D per period
Q
12.9
Slack, Chambers and Johnston, Operations Management, 6th Edition,
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
12.10
Two alternative inventory plans with different
order quantities (Q)
Inventory level
Demand (D) = 1000 items per year
400
Plan A
Q = 400
Average inventory
for plan A = 200
Plan B
100 Q = 100
Average inventory
for plan B = 50
Time
0.1 yr
12.10
0.4 yr
Slack, Chambers and Johnston, Operations Management, 6th Edition,
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
12.11
Traditional view of inventory-related costs
400
350
300
Total costs
Costs
250
200
150
Holding costs
100
Order costs
50
Economic order
quantity (EOQ)
50
100
150
200
250
300
350
400
Order quantity
12.11
Slack, Chambers and Johnston, Operations Management, 6th Edition,
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
Cycle inventory in a bakery
Inventory level
12.12
Produce A Produce B Produce C Produce A
Deliver
A
Deliver
B
Deliver
C
Deliver
A
Produce B Produce C
Deliver
B
Deliver
C
Time
12.12
Slack, Chambers and Johnston, Operations Management, 6th Edition,
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
12.13
Inventory profile for gradual replacement of inventory
Inventory level
Order
quantity
Q
Slope = P – D
M
Q
P
12.13
Slope = D
Time
Slack, Chambers and Johnston, Operations Management, 6th Edition,
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
Inventory planning allowing for shortages
Inventory
level
12.14
Time
Shortages
12.14
Slack, Chambers and Johnston, Operations Management, 6th Edition,
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
12.15
The re-order point
Demand (D) = 100 items per week
Inventory level
400
Re-order level
300
Re-order point
200
100
0
0
1
2
3
4
Order lead time
12.15
5
6
7
8
Time
Slack, Chambers and Johnston, Operations Management, 6th Edition,
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
12.16
Safety stock(s) helps to avoid stock-outs when demand and/or
order lead times are uncertain
Inventory level
Re-order level (ROL)
Distribution of
lead-time
usage
Q
d1
d2
?
S
t2
t1
Time
12.16
Slack, Chambers and Johnston, Operations Management, 6th Edition,
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
12.17
The probability distributions for order lead time and demand
rate combine to give the lead-time usage distribution
0.4
Probability
Probability
0.4
0.3
0.2
0.1
0
0.3
0.2
0.1
0
1 2 3 4 5
Order lead time
110 120 130 140
Demand rate
Probability
0.4
0.3
0.2
0.1
0
100–199
12.17
120–299
300–399 400–499 500–599
Lead-time usage
600–699
700–799
Slack, Chambers and Johnston, Operations Management, 6th Edition,
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
12.18
A periodic review approach to order timing with probabilistic
demand and lead time
Qm
Inventory level
Q1
To
Q2
T1
T2
t1
tf
12.18
Q3
T3
t2
tf
Time
t3
tf
Slack, Chambers and Johnston, Operations Management, 6th Edition,
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
12.19
Pareto curve for stocked items
Percentage of value of items
100
90
80
70
60
50
40
30
Class A
items
Class B
items
Class C
items
20
10
10
20
30
40
50
60
70
80
90
100
Percentage of types of items
12.19
Slack, Chambers and Johnston, Operations Management, 6th Edition,
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
12.20
Inventory classifications and measures
Class A items – the
20% or so of highvalue items which
account for around
80% of the total
stock value.
Class B items – the
next 30% or so of
medium-value items
which account for
around 10% of the
total stock value.
Class C items – the
remaining 50% or so
of low-value items
which account for
around the last 10%
of the total stock
value.
12.20
Slack, Chambers and Johnston, Operations Management, 6th Edition,
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
12.21
If the true costs of stock holding are taken into account, and if the cost of ordering (or
changeover) is reduced, the economic order quantity ( EOQ) is much smaller
Revised
holding
costs
Costs
Revised total
costs
Original total
costs
Original
holding costs
Original order
costs
Revised order
costs
Revised
EOQ
12.21
Original
EOQ
Order quantity
Slack, Chambers and Johnston, Operations Management, 6th Edition,
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
12.22
The ‘Two bin’ and ‘Three bin’ systems of re-ordering system
Two bin system
12.22
Three bin system
Bin 1
Bin 2
Bin 1
Bin 2
Bin 3
Items being
used
Re-order
level + safety
inventory
Items being
used
Re-order
level
inventory
Safety
inventory
Slack, Chambers and Johnston, Operations Management, 6th Edition,
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010