inventory management • types of inventory • inventory cost elements • economic order quantity • safety stock *inventory cost money

= money sitting there to measure how well you are performing, compare the cost between the amount sold manufacture wants less inventory and retailer have high inventory lower cost = produce more incoming raw material = more produce but too many can be bad due to expiration, stolen or other variables service level - probability of selling the inventory (fulfillment rate) on a service/inventory graph, exponential decay is the most likely correlation one would see cant exceed 100% many companies choose different areas on the scale that they want to be at move on the efficient frontier or push it higher (make system better) - can be achieve with mass customization in order to do that we need to understand inventory more usage tends to be more important ABC analysis - analyzing how important something is; Cost x Qty (annual demand) moving along the frontier is a trade off, question is can we push up from the efficient frontier curve? - usage of is a criterion INVENTORY ABC ANALYSIS - classifying items into ABC category: Cost X Quantity Pareto - 20% of inventory is considered A and the rest is B or C, very subjective when figuring out which falls into which category use Pareto to categorize them A - engines (most important) - items closely monitored *aperiodic counting (real time tracking; keep track of inventory) B - frame (important) C - nuts and bolts (less important) - items are less monitored/ periodic or cycle counting* separate and prioritize, don't immerse into too much information, keep eye on most important. ordering quantity - graph addressing time(x) and inventory (y) *do not need to refill inventory until it hits the bottom lead time - the amount of time you would call ahead in order get the shipping done 2 types of leadtime: purchase leadtime - purchase it manufacture leadtime - make it yourself order point - point on the graph where you order the next batch (lead time)

cost elements - depreciation, transportation, *setup, *carrying cost (storage), *purchase cost * => important total cost = purchase cost + ordering cost + carrying cost

purchase cost is assumed constant ordering cost - *quantity goes up = ordering cost goes down holding cost - *quantity goes up => holding cost goes up => linear relationship for holding cost ordering cost is exponential decay Assumptions: - demand is constant - set up (ordering cost) - carrying cost Annual demand: D ordering cost per order: S carrying cost per inv. unit : H unit cost: P Q: variable can change TC = P x D + S(D/Q) + H(Q/2) EOQ = economic order quantity (the equilibrium point on the cost quantity graph) *gives you the lowest inventory cost; demand is constant EOQ = √(2DS/H) annual demand double, EOQ will not double and same for supply; however if 4x D o S then EOQ will 2x if order stock far from EOQ, then thats trouble but close to EOQ is good Problem: EOQ = √(2(36000)(125)/1) = 3000 monthly order system - order 3000 per month safety stock - backup in case you sell out uncertain in demand have high inventory demand during lead time - the back up inventory during the lead time safety stock worries demand during lead time no need to worry about demand outside lead time during lead time have nothing but safety stock to protect you uncertain demand can lead to companies having uncertain amount of safety stock information sharing is an necessity in order to have the right amount of safety stock reduce uncertainty demand through information share (reduce safety stock) and smaller leadtime smaller or faster lead time = smaller safety stock => leads to better productivity

Aggregate planning -finding out what is the capacity level idle capacity/excessive capacity - unless capacity that is not being used want some insurance but not too much chase stragtegy is trying to keep up with the demand *perfect strategy for response strategy, adjust capacity cost multifunction equipment, sell to international companies; however cost can raise if capacity is roughly the same then you are doing a level strategy; cost is low but response poor curve and shift demand - cost goes down responsive, shift demand is combination of product level strategy price strategy demand curve can be changed if you shift demand during different seasons. trying to level capacity and demand together by selling the demand items abroad. ex. sell snowmobiles abroad where its winter time and produce during summer or ex. airlines (pricing strategy)-price high during vacation time and price low & include deals during the time the demand is low try to find best strategy for the specific situation in order to cover demand, business strategy, cost and all others Product Structure Tree (Bill of Materials): a chart that shows components and materials of how a product is composed purchase items are the items you need to buy in order to make manufacture item manufacture item is what is produced from the purchase item Purchase items (bottom level) - if there is nothing beneath the items (bottom level) manufacturing item - if there are any items below that assembles that item (composed of multiple parts) final product - the combo of purchase items and mfg items to make final item

final product can also be called manufactured item Material Requirement Planning -what to order and what time material requirement planning -> how much you need - how much you have in stock = how much you need to buy ratio and lead time

all purchase items need a leadtime manufacture leadtime is the leadtime you need to assembly the item (ready items to build) for manufacture leadtime you must add the leadtime from the purchase item EX: building C takes 4 weeks and E takes 2 weeks so it will take 6 weeks for the entire product for C

push (efficiency) vs. pull (responsive and quality) - push system - materials are pushed to become final product - continuous production - ordering a bit more to cover you when there is a bad item purpose of inventory: satisfy demand cover other things needed no what any fat, want to see the actual inventory Lean Manufacturing (pull system or JIT systems): no protection, putting pressure on supplier for a particular item, to be perfect, no excess of material, - benefit: no overstock, low cost, less inventory, higher quality, lean manufacture is pulling the required material through a chain of suppliers (pull the handle bar and get the item - lead time has to be short through postponement, modular design, production process must be well organized and pace of production line is even - incoming quality is critical

compressing leadtime operations very expensive and need important decisions; many benefits if planned right; process improvement pays off better than other departments link service - when you need the service we will provide it to you

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