11-1
Inventory Management
11-2
Inventory Management
CHAPTER
Operations Management
11
Inventory
Management
William J. Stevenson
8th edition
Operations Management, Eighth Edition, by William J. Stevenson
Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
11-3
Inventory Management
11-4
Inventory: a stock or store of goods
Independent Demand
Dependent Demand
A
Inventory Management
Types of Inventories
Raw materials & purchased parts
• Partially completed goods called
work in progress
•
•
C(2)
B(4)
D(2)
E(1)
D(3)
Finished-goods inventories
•
F(2)
Independent demand is uncertain.
Dependent demand is certain.
(manufacturing firms)
or merchandise
(retail stores)
11-5
11-7
Inventory Management
Types of Inventories (Cont’
(Cont’d)
11-6
Inventory Management
Functions of Inventory
•
Replacement parts, tools, & supplies
•
To meet anticipated demand
•
Goods-in-transit to warehouses or customers
•
To smooth production requirements
•
To decouple operations
•
To protect against stock-outs
Inventory Management
Functions of Inventory (Cont’
(Cont’d)
•
To take advantage of order cycles
•
To help hedge against price increases
•
To permit operations
•
To take advantage of quantity discounts
11-8
Inventory Management
Objective of Inventory Control
•
To achieve satisfactory levels of customer
service while keeping inventory costs within
reasonable bounds
•
Level of customer service
•
Costs of ordering and carrying inventory
11-9
Inventory Management
Effective Inventory Management
•
A system to keep track of inventory
•
A reliable forecast of demand
•
Knowledge of lead times
•
Reasonable estimates of
•
•
Holding costs
•
Ordering costs
•
Shortage costs
11-10 Inventory Management
Inventory Counting Systems
•
Periodic System
Physical count of items made at periodic
intervals
•
Perpetual Inventory System
System that keeps track
of removals from inventory
continuously, thus
monitoring
current levels of
each item
A classification system
11-11 Inventory Management
Inventory Counting Systems (Cont’
(Cont’d)
Two-Bin System - Two containers of
inventory; reorder when the first is empty
• Universal Bar Code - Bar code
printed on a label that has
information about the item
to which it is attached
•
0
214800 232087768
11-12 Inventory Management
Key Inventory Terms
Lead time: time interval between ordering
and receiving the order
• Holding (carrying) costs: cost to carry an
item in inventory for a length of time,
usually a year
• Ordering costs: costs of ordering and
receiving inventory
• Shortage costs: costs when demand exceeds
supply
•
11-13 Inventory Management
11-14 Inventory Management
ABC Classification System
Cycle Counting
Figure 11.1
Classifying inventory according to some
measure of importance and allocating control
efforts accordingly.
A - very important
B - mod. important
C - least important
High
•
A physical count of items in inventory
•
Cycle counting management
A
Annual
$ value
of items
•
How much accuracy is needed?
•
When should cycle counting be performed?
•
Who should do it?
B
C
Low
Few
Many
Number of Items
11-15 Inventory Management
Economic Order Quantity Models
11-16 Inventory Management
Assumptions of EOQ Model
•
Economic order quantity model
•
Only one product is involved
•
Economic production model
•
Annual demand requirements known
•
Quantity discount model
•
Demand is even throughout the year
•
Lead time does not vary
•
Each order is received in a single delivery
•
There are no quantity discounts
11-17 Inventory Management
11-18 Inventory Management
The Inventory Cycle
Total Cost
Figure 11.2
Profile of Inventory Level Over Time
Q
Usage
rate
Quantity
on hand
Annual
Annual
Total cost = carrying + ordering
cost
cost
TC =
Reorder
point
Receive
order
Place Receive
order order
Q
H
2
+
DS
Q
Time
Place Receive
order order
Lead time
11-19 Inventory Management
Cost Minimization Goal
11-20 Inventory Management
Deriving the EOQ
Figure 11.4C
Annual Cost
The Total-Cost Curve is U-Shaped
TC =
D
Q
H+ S
2
Q
Using calculus, we take the derivative of the
total cost function and set the derivative
(slope) equal to zero and solve for Q.
Q OPT =
Ordering Costs
QO (optimal order quantity)
Order Quantity
(Q)
2DS
=
H
2( Annual Demand )(Order or Setup Cost )
Annual Holding Cost
11-21 Inventory Management
Minimum Total Cost
The total cost curve reaches its minimum
where the carrying and ordering costs are
equal.
Q OPT =
2DS
=
H
2( Annual Demand )(Order or Setup Cost )
Annual Holding Cost
11-23 Inventory Management
Economic Production Quantity Assumptions
Only one item is involved
• Annual demand is known
• Usage rate is constant
• Usage occurs continually
• Production rate is constant
• Lead time does not vary
• No quantity discounts
11-22 Inventory Management
Economic Production Quantity (EPQ)
Production done in batches or lots
• Capacity to produce a part exceeds the part’s
usage or demand rate
• Assumptions of EPQ are similar to EOQ
except orders are received incrementally
during production
•
11-24 Inventory Management
Economic Run Size
•
Q0 =
p
2DS
H p− u
11-25 Inventory Management
Total Costs with Purchasing Cost
11-26 Inventory Management
Total Costs with PD
Cost
Figure 11.7
Annual
Annual
TC = carrying + ordering + Purchasing
cost
cost
cost
TC =
Q
H
2
+
DS
Q
+
Adding Purchasing cost
doesn’t change EOQ
TC with PD
TC without PD
PD
PD
0
11-27 Inventory Management
Total Cost with Constant Carrying Costs
EOQ
Quantity
11-28 Inventory Management
When to Reorder with EOQ Ordering
Figure 11.9
•
Reorder Point - When the quantity on hand
of an item drops to this amount, the item is
reordered
•
Safety Stock - Stock that is held in excess of
expected demand due to variable demand
rate and/or lead time.
•
Service Level - Probability that demand will
not exceed supply during lead time.
Total Cost
TCa
TCb
Decreasing
Price
TCc
CC a,b,c
OC
EOQ
Quantity
11-29 Inventory Management
Determinants of the Reorder Point
11-30 Inventory Management
Safety Stock
Figure 11.12
The rate of demand
• The lead time
• Demand and/or lead time variability
• Stockout risk (safety stock)
Quantity
•
Maximum probable demand
during lead time
Expected demand
during lead time
ROP
Safety stock reduces risk of
stockout during lead time
11-31 Inventory Management
Safety stock
LT
Time
11-32 Inventory Management
Reorder Point
FixedFixed-OrderOrder-Interval Model
Figure 11.13
The ROP based on a normal
Distribution of lead time demand
Service level
Risk of
a stockout
Probability of
no stockout
Expected
demand
0
ROP
Quantity
Safety
stock
z
z-scale
Orders are placed at fixed time intervals
• Order quantity for next interval?
• Suppliers might encourage fixed intervals
• May require only periodic checks of
inventory levels
• Risk of stockout
•
11-33 Inventory Management
FixedFixed-Interval Benefits
Tight control of inventory items
• Items from same supplier may yield savings
in:
•
Ordering
Packing
• Shipping costs
•
11-34 Inventory Management
FixedFixed-Interval Disadvantages
Requires a larger safety stock
• Increases carrying cost
• Costs of periodic reviews
•
•
•
May be practical when inventories cannot be
closely monitored
11-35 Inventory Management
Single Period Model
•
Single period model: model for ordering of
perishables and other items with limited
useful lives
•
Shortage cost: generally the unrealized
profits per unit
•
Excess cost: difference between purchase
cost and salvage value of items left over at
the end of a period
11-36 Inventory Management
Single Period Model
•
•
Continuous stocking levels
•
Identifies optimal stocking levels
•
Optimal stocking level balances unit shortage
and excess cost
Discrete stocking levels
•
Service levels are discrete rather than
continuous
•
Desired service level is equaled or exceeded
11-37 Inventory Management
11-38 Inventory Management
Operations Strategy
•
CHAPTER
Too much inventory
Tends to hide problems
• Easier to live with problems than to eliminate
them
• Costly to maintain
•
•
Wise strategy
•
•
11
Additional PowerPoint slides
contributed by
Geoff Willis,
University of Central Oklahoma.
Reduce lot sizes
Reduce safety stock
11-39 Inventory Management
Usage
Production
& Usage
Production
& Usage
Economic Production Quantity
11-40 Inventory Management
Gortrac Manufacturing
Usage
In
v
en
t
or
yL
ev
el
GTS3
Inventory/Assessment/Reduction
11-41 Inventory Management
Materials
PS7
Washburn Guitars