Chapter 8
Inventory Management
Introduction
Radio Frequency Identification
(RFID)


Conventional bar codes are replaced
with computer chips or smart tags.
Use wireless technology to track
inventory.
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Wal-Mart RFID



Early adopter of RFID is Wal-Mart.
By January 2005, 53 of its top 100
suppliers were sending RFID-tagged
goods to its three distribution centers in
the Dallas, Texas area.
Wal-Mart’s goal is to have all top 100
suppliers shipping RFID-tagged goods
by the end of February 2005 in addition
to 37 other suppliers.
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Wal-Mart RFID continued




The impetus for Wal-Mart’s investment in
RFID was the lack of visibility it had into
its backroom storage areas.
The major drawback to RFID is its cost.
In 2005, the cost of smart tags was
$0.25 each if purchased in volume, and
$0.75 if purchased in smaller quantities.
The stated goal in the industry is to get
the price of smart tags down to $.05
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Vendor-Managed Inventory (VMI)


With VMI, suppliers are given
responsibility for managing the inventory
carried by their retail or wholesale
customers.
Rich Products, a $2 billion family-owned
food company headquartered in Buffalo,
NY, has a partnership with IBM to
provide VMI services to the grocery
industry for its frozen food items.
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General Considerations
Functions of Inventories





Transit Inventories
Buffer Inventories (safety stocks)
Anticipation Inventories
Decoupling Inventories
Cycle Inventories
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Forms of Inventories




Raw materials
Maintenance, repair, and operating
supplies
Work-in-process (WIP)
Finished goods
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Inventory-Related Costs





Ordering or setup costs
Inventory carrying or holding costs
Stockout costs
Opportunity costs
Cost of goods
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Decisions in Inventory Management

When to order?

How much to order?
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Types of Inventory Management
Systems

Reorder point systems



Periodic review systems



time between orders varies
constant order quantity
time between orders fixed
order quantity varies
Material requirements planning (MRP)

dependent demand items
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Fluctuations in Inventory
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Reorder Point Systems




Reorder point
Lead time
Two-bin system
Perpetual inventory system
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A Reorder Point System
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Periodic Review System





maximum inventory level
- on-hand inventory
- on-order quantity
+ demand over lead time
reorder quantity
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Periodic Review System Without
Considering On-Order Quantity
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Periodic Review System (Assumes
None On Order at Time of Reorder)
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Priorities for Inventory Management:
The ABC Concept

A items


B items


15-20% of items that account for 75-80% of
annual inventory value
30-40% of items that account for
annual inventory value
15% of
C items

40-50% of items that account for 10-15% of
annual inventory value
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ABC Inventory Categories
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The Economic Order Quantity
(EOQ)
Assumptions





Constant rate of demand
Shortages not allowed
Stock replenishment can be scheduled to
arrive exactly when inventory drops to zero
Purchase price, ordering cost, and per unit
holding cost are independent of quantity
ordered
Items are ordered independently of each other
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Notation

Q = order quantity

U = annual usage

CO = order cost per order

CH = annual holding cost per unit
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Water Distributor’s Inventory Pattern
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Water Distributor’s Inventory Graph
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Annual Order Cost
$
U
 CO
Q
Q
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Annual Holding Cost
$
Q
 CH
2
Q
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Graph of Annual Inventory Costs
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Finding an Optimal Policy
 U
 Q
C

  H   CO
 2
 Q
 Q2 

 CH  UCO
 2 
2 UC O
Q 
CH
2
2UCO
EOQ =
CH
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Alternative Way of Deriving EOQ
 U
 Q
TAC =   C H    C O
 2
 Q
TAC C H  U 

  2  CO
Q 
Q
2
CH
 U
0
  2  CO
2 Q 
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Alternative Way of Deriving EOQ
continued
CH
 U
C

 2 O
Q 
2
UC O
Q2C H

2
2 UC O
 Q2
CH
2 UC O
 Q
CH
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EOQ Example

Given:



25,000 annual demand
$3 per unit per year holding cost
$100 ordering costs
EOQ =
2(25,000)(100)
 1291
3
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Cautions Regarding EOQ



GIGO
Exclude “sunk” costs
Very small EOQ values my not be valid
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Management
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