Inventory Management


Inventory Management


Operations Management


William J. Stevenson

Inventory Management

8th edition
McGraw-Hill/Irwin Operations Management, Eighth Edition, by William J. Stevenson Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.


Inventory Management


Inventory Management

Types of Inventories

Inventory: a stock or store of goods

Independent Demand


Dependent Demand

Raw materials & purchased parts • Partially completed goods called work in progress
• •

Finished-goods inventories







(manufacturing firms) or merchandise (retail stores)

Independent demand is uncertain. Dependent demand is certain.

11-5 Inventory Management Types of Inventories (Cont’d) (Cont’ 11-6 Inventory Management Functions of Inventory • • Replacement parts. & supplies Goods-in-transit to warehouses or customers • • • • To meet anticipated demand To smooth production requirements To decouple operations To protect against stock-outs 11-7 Inventory Management Functions of Inventory (Cont’d) (Cont’ 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 . tools.

11-9 Inventory Management Effective Inventory Management • • • • 11-10 Inventory Management Inventory Counting Systems A system to keep track of inventory A reliable forecast of demand Knowledge of lead times Reasonable estimates of • • • • Periodic System Physical count of items made at periodic intervals • Perpetual Inventory System System that keeps track of removals from inventory continuously. usually a year • Ordering costs: costs of ordering and receiving inventory • Shortage costs: costs when demand exceeds supply • .Bar code printed on a label that has information about the item to which it is attached • 0 11-12 Inventory Management Key Inventory Terms 214800 232087768 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.Two containers of inventory. thus monitoring current levels of each item Holding costs Ordering costs Shortage costs • A classification system 11-11 Inventory Management Inventory Counting Systems (Cont’d) (Cont’ Two-Bin System . reorder when the first is empty • Universal Bar Code .

• • A physical count of items in inventory Cycle counting management • • A . important C .11-13 Inventory Management ABC Classification System 11-14 Inventory Management Cycle Counting Figure 11.1 Classifying inventory according to some measure of importance and allocating control efforts accordingly.mod.very important B .least important How much accuracy is needed? When should cycle counting be performed? Who should do it? High Annual $ value of items Low A B C 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 Economic production model Quantity discount model • • • • • • Only one product is involved Annual demand requirements known Demand is even throughout the year Lead time does not vary Each order is received in a single delivery There are no quantity discounts .

2 Q Quantity on hand Usage rate Annual Annual Total cost = carrying + ordering cost cost TC = Q H 2 + DS Q Reorder point Receive order Place Receive order order Place Receive order order Time Lead time 11-19 Inventory Management Cost Minimization Goal The Total-Cost Curve is U-Shaped 11-20 Inventory Management Deriving the EOQ Figure 11.4C Annual Cost TC = D Q H+ S 2 Q Using calculus.11-17 Inventory Management The Inventory Cycle Profile of Inventory Level Over Time 11-18 Inventory Management Total Cost Figure 11. Q OPT = 2DS = H 2( Annual Demand )(Order or Setup Cost ) Annual Holding Cost Ordering Costs QO (optimal order quantity) Order Quantity (Q) . we take the derivative of the total cost function and set the derivative (slope) equal to zero and solve for Q.

Q OPT = 2DS = H 2( Annual Demand )(Order or Setup Cost ) Annual Holding Cost 11-23 Inventory Management 11-24 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 • Economic Run Size Q0 = p 2DS H p− u .11-21 Inventory Management Minimum Total Cost 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 • The total cost curve reaches its minimum where the carrying and ordering costs are equal.

the item is reordered Safety Stock .7 Annual Annual TC = carrying + ordering + Purchasing cost cost cost TC = Q H 2 + DS Q + PD Cost TC with PD TC without PD PD 0 EOQ Quantity 11-27 Inventory Management Total Cost with Constant Carrying Costs 11-28 Inventory Management When to Reorder with EOQ Ordering • Figure 11.11-25 Inventory Management Total Costs with Purchasing Cost 11-26 Inventory Management Total Costs with PD Adding Purchasing cost doesn’t change EOQ Figure 11.9 Total Cost TCa TCb TCc Decreasing Price Reorder Point . Service Level .c OC • EOQ Quantity .Stock that is held in excess of expected demand due to variable demand rate and/or lead time.Probability that demand will not exceed supply during lead time. • CC a.When the quantity on hand of an item drops to this amount.b.

12 Quantity Maximum probable demand during lead time Expected demand during lead time ROP Safety stock reduces risk of stockout during lead time Safety stock LT Time 11-31 Inventory Management Reorder Point The ROP based on a normal Distribution of lead time demand Service level Risk of a stockout Probability of no stockout Expected demand 0 11-32 Inventory Management Fixed-Order-Interval Model Fixed.Order- Figure 11.13 ROP Safety stock z Quantity 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 • z-scale .11-29 Inventory Management Determinants of the Reorder Point The rate of demand • The lead time • Demand and/or lead time variability • Stockout risk (safety stock) • 11-30 Inventory Management Safety Stock Figure 11.

11-33 Inventory Management Fixed-Interval Benefits Fixed- 11-34 Inventory Management Fixed-Interval Disadvantages Fixed- Tight control of inventory items • Items from same supplier may yield savings in: • Ordering Packing • Shipping costs • • 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 11-36 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 • 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 • .

University of Central Oklahoma. Reduce lot sizes Reduce safety stock 11-39 Inventory Management Economic Production Quantity 11-40 Inventory Management Gortrac Manufacturing Production & Usage Usage Production & Usage Usage In v en t or yL ev el GTS3 Inventory/Assessment/Reduction .11-37 Inventory Management Operations Strategy 11-38 Inventory Management • Too much inventory Tends to hide problems • Easier to live with problems than to eliminate them • Costly to maintain • CHAPTER 11 • Wise strategy • • Additional PowerPoint slides contributed by Geoff Willis.

11-41 Inventory Management Materials PS7 Washburn Guitars .

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