Operations Management

Management and Operations

Inventory Management

Inventory / Stock
Definition:
The stored accumulation of material resources in a
transformation system.
• Transformed Resources (Inventory Control):
e.g. Stocks of Materials, Stocks of Information
Queues of customers in a theme park
• Capital-Transforming Resource:
e.g. Rooms in a hotel, Cars in a vehicle-hire firm

Inventory occurs in operations because

the Timing of Supply and Demand
do NOT always match.

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Operations Management

Types of Inventory
1. Raw materials:
purchased parts used in manufacturing other items
2. Work-in-Process (WIP):
parts that are in the manufacturing process
3. Sub-assemblies:
manufactured parts that are partially completed and
stocked in inventory
4. Finished goods:
Items ready for sale to a customer
5. MRO:
Maintenance, Repair and Operation supplies.

Functions of Inventory
Functions of Inventory
Safety stocks protect against uncertainties of
materials supply and consumer
demand.
Cycle stocks result from ordering or producing
in lots
Transit stocks materials must be moved from
one location to another
Speculative stocks expected price increase
Promotional stocks additional inventory accumulated
for a promotional event.

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Operations Management

Reasons for Holding Inventory

1. Purchased parts:
• variations in supplier lead time
• quantity discounts
• price changes
• scarcities of materials
2. Manufactured parts:
• cover period between production runs
• allow flexibility in production scheduling
• variations in product demand (safety stock)
• economies of scale.

Pareto’s rule

• + Items/goods are varieties,

• + High value groups >< Low value groups,

 take time and cost to control,…

 focus on selected groups (high value)

 the principle of Pareto (Pareto’s law) 80 / 20:

20% items

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Operations Management

Pareto’s rule

100%
Affected value

90%
80%
70%
60%
50%
40%
Pareto
30%
20% Law “80/20”
10%
0%
10 20 30 40 50 60 70 80 90 100
Affected volume

Pareto’s rule

+ Principle of Pareto:

- tighten control the high value groups (80%)

- period control the low value ones (20%)

 Control the important items/goods based on inventory targets

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Operations Management

A, B, C classification
• Based on Paréto’s law  items classification
(80/20 law).
• How ever, low cycle good increases its stock
value
 it is not fit.
 Annual stock value (annual cost) for item
ith:
• Ci = (annual demand)i x (unit cost)i
 The set of Ci to classification  ABC.

A, B, C classification

ABC classification as follows:

1. A class: including 10% of goods, contributing 65% total
stock value
2. B class: including 20% of goods, contributing 25% total
stock value total stock value
3. C class: including 70% of goods, contributing 10% total
stock value

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Operations Management

A, B, C classification

100%
Affected value
90%
80% C
70%
60%
A B ABC classification
50%
40%
30%
20%
10%
0%
10 20 30 40 50 60 70 80 90 100
Affected volume

A, B, C classification

The objectives of ABC classification is not only service

level confirming, but also the way to control.
1. A class: low variety, tighten control
2. B class: mid variety, maybe software applicable control
3. C class: high variety, low value, simple/period control

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Operations Management

A, B, C classification
Classification Policies Methods
A Tighten control Continuos monitoring
Low variety Control responsibility Reliability data
High value Safety stock control Forecasting demand
High service lavel
B Lean applicabe control Determine inventory level
Mid variety Traditional /quick control Software to control
Mid value Acceptable control

C Period control Simple

High variety Increasing lot size ordering Avoiding shortage/over
Low value (if possibe) periodic ordering

A, B, C classification

+ Saving time:
Pareto, and ABC balance the stock, availability, and
warehouse resources
 selective groups control
 reducing the time and resources  effective stock
control

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Operations Management

A, B, C classification

+ practical considerations in using ABC analysis:

Saving time, resources, and reducing tasks for staffs in
warehouse:
1. Focus on group A
2. Reducing control with group D
3. Reducing control with non movers group O
4. Non affected to operations
5. Non considering stock

A, B, C classification
Group A: Continous control (daily or weekly)  therefore
variety of A should be reduced (#300 kinds)

Reducing control for dumped class: This group has large

volume but less value contribution ABCD
Classification Volume percentage Value percentage (%)
(%) (sales)
A 5 45
B 10 30
C 35 22
D 50 3

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Operations Management

A, B, C classification

Group O (non-movers)

Non movers (low demand, end of life-cycle, out of

date,…)  reducing stock level, reducing lot size ordering.

Group F (fixed classification)

The items do not affecte to operations (uinform, tools,

cutting tools, attachment,…)

A, B, C classification
Group Z (non-stock items)

• Random demand of items, depend on stock policies or market

conditions.

• Meet customer demand from stock without considration, lead

time depend on outside suppliers (because non-available stock)

• This group is re-ordered to supplier when receiving customers’

• requests and stock is not meet this demand.

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Operations Management

Inventory
Role ofmanagement
Inventory in the Supply Chain

Understocking: Demand exceeds amount available

–Lost margin and future sales

Overstocking: Amount available exceeds demand

– Liquidation, Obsolescence, Holding

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Inventory
Role ofmanagement
Inventory in the Supply Chain
Improve
Improve Matching
Matching of
of Supply
Supply
and
and Demand
Demand

Improved Forecasting

Reduce Material Flow Time

Cost Availability
Efficiency Responsiveness
Reduce Waiting Time

Reduce Buffer Inventory

Supply / Demand
Variability Seasonal Variability
Economies of Scale

Cycle Inventory Safety Inventory Seasonal Inventory

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Operations Management

Cycle Inventory
Cylce Inventory

Inventory

Time t
Cycle inventory = lot size/2 = Q/2

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Economics of Scale to Exploit Fixed Costs

— Economic Order Quantity—

» D= Annual demand of the product

» S= Fixed cost incurred per order

» C= Cost per unit

» h=Holding cost per year as a fraction of product cost

» H=Holding cost per unit per year =hC

» Q=Lot size

» n=Order frequency

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Operations Management

Lot Sizing for a Single

Product (EOQ)
► Annual order cost =(D/Q)S=ns
Annual holding cost = (Q/2)H =(Q/2)hC
Annual material cost = CD

TC =CD + (D/Q)S + (Q/2)hC

Cost
Total Cost
Holding Cost

Order Cost
Material Cost
Lot Size

Lot Sizing for a Single Product

(EOQ ーEconomic Order Quantity)

Total annual cost, TC =CD + (D/Q)S + (Q/2)hc

Optimal lot size, Q is obtained by taking the first derivative

d (TC) = -DS +hC = 2DS

0 Q* =
dQ Q2 2 hC

* D DhC
n = *=
Q 2S

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Operations Management

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