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1
When we need to order?
Course Outline
How much to order?
How much safety stock
type of
Introduction to Inventory product
Replenishment systems for single-item inventory: fluctuate is very
Order Quantities when demand is approximate level small
Lot Sizing for Individual items with time-varying demand.
Individual items with probabilistic demand Demand is based on
forecasting
Special classes of Items:
Managing the most important inventories have short life time. When
Managing routine inventories the time is run out --> the
Style goods and perishable items value =0
example: moon cake, food,
Multiple items and multiple locations etc
Coordinated replenishments at a single stocking point
SCM and Multi-echelon Inventories
multi-level, multi-layers
Chapter 1: Introduction
Definitions
Types of Inventory
Functions of Inventory
Introduction to Inventory Control
ABC Analysis
Inventory Accuracy and Cycle Counting
Inventory System
General Framework for Inventory Model
1. Definitions
Warehousing: hardware job
Inventory: software job
It exists because demand and supply cannot be matched for physical and
economic reasons.
Transaction Stocks
Organization Stocks
Excess Stocks
Transaction Stocks
move stock
Raw material
Purchased but not processed
Work-in-process hard to keep in stock
Undergone some change but not completed
A function of cycle time for a product
Maintenance/repair/operating (MRO) example: glove, helmet, etc
Necessary to keep machinery and processes productive
Finished goods
Completed product awaiting shipment
3. Functions of Inventory
To decouple or separate various parts of the production
process Not to affect the other part of the production process
To protect/buffer the firm from fluctuations in demand
To take advantage of quantity discounts
To hedge against inflation
Levels of Inventory
Inventory may occur at various levels or echelons within the
company. An echelon, level, or stage is a stock point that is
under control of the company. Have inventory in many places,
wahoures
Raw material, work in process, high level components, and
finished products belong to different echelons
Reasons for Carrying Inventories
1. To provide service
finished good inventory to meet demand and keep
customers happy
work-in-progress inventory to increase flexibility by
decoupling production stages and keep machines running
raw material inventory keeps production moving
protection against uncertainty
Reasons for Carrying Inventories
2. To save money
buying in large quantities allows spreading of fixed costs
such as ordering costs and obtaining quantity discounts.
stocking of seasonal items allow production smoothing or
work-load balancing.
4. Introduction to Inventory Control
Not all customers and not all SKU’s are equally important.
Usually, 20% of the SKU’s will account for 80% of the value of the
inventory
Usually, the ABC system picks 15% to 20% of the items, representing 80%
of the dollar value to be A items.
About the next 30% to 40% of the items form a B category, account for
15% of the total value
The rest are C items, account for about 5% of the total value
Example
Total Annual
Annual Usage Annual Usage
Item Unit Cost Percentage
(Units) (Cost)
Usage
A 10 7000 70,000 3.2
B 86 400 34,400 1.6
C 130 1300 169,000 7.7
D 92 60 5,520 0.3
E 32 13000 416,000 19.0
G 102 10000 1,020,000 46.5
H 13 7000 91,000 4.2
I 9 5000 45,000 2.1
M 630 250 157,500 7.2
P 180 850 153,000 7.0
Q 4 2,000 8,000 0.4
S 22 1,000 22,000 1.0
80
70
60
Usage
50
40
30
20
10
0
-- G E C M P H A I B S Q D
Controls for A Items
A items is not allow to have error b/t actual quantity and in report
error is max 2%
normally the actual quantity of invt and invt in report are not the same
Frequent, perhaps monthly, cycle counting with tight
tolerances on accuracy
Daily updating of records
Frequent review of demand requirements, order
quantities, and safety stock; usually resulting in
relatively small order quantities
Close follow-up and expediting to reduce lead time
Controls for B Items
Similar to controls for A items with most control
activities taking place less frequently
Controls for C Items
Basic rule is to have them simple records or no records;
perhaps use a periodic review of physical inventory
Large order quantity and safety stock
Store in area readily available to production workers or
order fillers
Count items infrequently with scale accuracy acceptable
6. Inventory Accuracy and
Cycle Counting
Inventory accuracy refers to how well the inventory
records agree with physical count.
Tolerance refers to the acceptable errors of inventory
records.
Cycle Counting is a physical inventory- taking technique
in which inventory is counted on a frequent basis rather
than once or twice a year.
7. Inventory System
Objective is to keep the total cost associated with the
system to a minimum
inventory cost is included holding cost, ordering cost, cots
Important Issues
Inventory Transaction order time, order accuracy is not good
Inventory Accuracy
Physical Control
Cycle Counting
Inventory Valuations items which are lose to dead time can lose a lot
of their value
Independent vs. Dependent Demand
One-Time Intermittent-Time
Continuous Decisions
Decisions Decisions
Continuous Review Periodic Review
System Systems
Optional
Two Bins
Replenishment
Structure of timing decisions