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Inventory Management

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Sch.No.132116201
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Inventory Management
The objective of inventory management is to strike a balance between inventory investment and customer service

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Importance of Inventory
One of the most expensive assets of many companies representing as much as 50% of total invested capital Operations managers must balance inventory investment and customer service

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Functions of Inventory
1. To decouple or separate various parts of the production process

2. To decouple the firm from fluctuations in demand and provide a stock of goods that will provide a selection for customers
3. To take advantage of quantity discounts 4. To hedge against inflation
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Types of Inventory
Raw material
Purchased but not processed

Work-in-process
Undergone some change but not completed A function of cycle time for a product

Maintenance/repair/operating (MRO)
Necessary to keep machinery and processes productive

Finished goods
Completed product awaiting shipment
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The Material Flow Cycle


Cycle time 95%
Input Wait for inspection Wait to be moved

5%
Output

Move Wait in queue Setup Run time for operator time time

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ABC Analysis
Divides inventory into three classes based on annual dollar volume
Class A - high annual dollar volume Class B - medium annual dollar volume Class C - low annual dollar volume

Used to establish policies that focus on the few critical parts and not the many trivial ones
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ABC Analysis
Percent of annual dollar usage 80 70 60 50 40 30 20 10 0 A Items B Items | | | | 10 20 30 40

C Items
| | | | | |

50

60

70

80

90 100

Percent of inventory items


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Record Accuracy
Accurate records are a critical ingredient in production and inventory systems Allows organization to focus on what is needed Necessary to make precise decisions about ordering, scheduling, and shipping Incoming and outgoing record keeping must be accurate

Stockrooms should be secure


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Cycle Counting
Items are counted and records updated on a periodic basis Often used with ABC analysis to determine cycle Has several advantages
1. Eliminates shutdowns and interruptions 2. Eliminates annual inventory adjustment 3. Trained personnel audit inventory accuracy 4. Allows causes of errors to be identified and corrected 5. Maintains accurate inventory records
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Control of Service Inventories


Can be a critical component of profitability Losses may come from shrinkage

Applicable techniques include


1. Good personnel selection, training, and discipline

2. Tight control on incoming shipments


3. Effective control on all goods leaving facility
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Inventory Models for Independent Demand


Need to determine when and how much to order
1. Basic economic order quantity

2. Production order quantity


3. Quantity discount model

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Basic EOQ Model


Important assumptions
1. Demand is known, constant, and independent

2. Lead time is known and constant


3. Receipt of inventory is instantaneous and complete

4. Quantity discounts are not possible


5. Only variable costs are setup and holding 6. Stockouts can be completely avoided
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Inventory Usage Over Time


Order quantity = Q (maximum inventory level) Usage rate Average inventory on hand Q 2

Inventory level

Minimum inventory
0 Time
Figure 12.3

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Minimizing Costs
Objective is to minimize total costs
Total cost of holding and setup (order) Minimum total cost Annual cost Holding cost

Setup (or order) cost Optimal order quantity (Q*) Order quantity
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Table 12.4(c)
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The EOQ Model


Q Q* D S H = Number of pieces per order = Optimal number of pieces per order (EOQ) = Annual demand in units for the inventory item = Setup or ordering cost for each order = Holding or carrying cost per unit per year Annual setup cost = (Number of orders placed per year) x (Setup or order cost per order) Annual demand Setup or order = Number of units in each order cost per order = D (S) Q
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The EOQ Model


Q Q* D S H = Number of pieces per order = Optimal number of pieces per order (EOQ) = Annual demand in units for the inventory item = Setup or ordering cost for each order = Holding or carrying cost per unit per year Annual holding cost = (Average inventory level) x (Holding cost per unit per year) = Order quantity (Holding cost per unit per year) 2 Q (H) 2
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The EOQ Model


Q Q* D S H = Number of pieces per order = Optimal number of pieces per order (EOQ) = Annual demand in units for the inventory item = Setup or ordering cost for each order = Holding or carrying cost per unit per year Optimal order quantity is found when annual setup cost equals annual holding cost D Q S = H Q 2 Solving for Q*

2DS = Q2H Q2 = 2DS/H Q* = 2DS/H


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Reorder Points
EOQ answers the how much question The reorder point (ROP) tells when to order

ROP =

Lead time for a Demand per day new order in days

=dxL
D d = Number of working days in a year
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Reorder Point Curve


Inventory level (units)

Q*
Resupply takes place as order arrives

Slope = units/day = d

ROP (units)

Time (days)
Figure 12.5
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Lead time = L
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Production Order Quantity Model


Used when inventory builds up over a period of time after an order is placed Used when units are produced and sold simultaneously

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Production Order Quantity Model


Inventory level Part of inventory cycle during which production (and usage) is taking place

Maximum inventory

Demand part of cycle with no production

Time

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Quantity Discount Models


Reduced prices are often available when larger quantities are purchased Trade-off is between reduced product cost and increased holding cost
Total cost = Setup cost + Holding cost + Product cost TC = D Q S+ H + PD Q 2

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Quantity Discount Models


A typical quantity discount schedule
Discount Number
1 2 3 Discount Quantity 0 to 999 1,000 to 1,999 2,000 and over Discount (%) no discount 4 5

Discount Price (P)


$5.00 $4.80 $4.75

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Quantity Discount Models


Steps in analyzing a quantity discount
1. For each discount, calculate Q* 2. If Q* for a discount doesnt qualify, choose the smallest possible order size to get the discount 3. Compute the total cost for each Q* or adjusted value from Step 2 4. Select the Q* that gives the lowest total cost
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Quantity Discount Models


Total cost curve for discount 1 Total cost curve for discount 2

Total cost $

Total cost curve for discount 3

a
1st price break

Q* for discount 2 is below the allowable range at point a and must be adjusted upward to 1,000 units at point b 2nd price break

0
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1,000

2,000 Order quantity


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Conclusion
Small businesses have limited financial resources and bargaining power. Long-distance suppliers, big fluctuation of demand and lack of formalized inventory control system result on inventory management. The authors analyze the collected data and establish a formal inventory control system as the solution to improve the companys inventory management.

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Reference
1.Buxey, G. (2006). Reconstructing inventory management theory. International Journ Onwubolu, G. C., & Dube, B. C. (2006). Implementing an Improved Inventory Control 2.System in a Small Company: A Case Study. Production Planning & Control, 17(1), 67-76. al of Operations& Production Management, 26(9), 996-1012. 3.Chopra, S., & Meindl, P. (2001). Supply Chain Management: Strategy, Planning, and Operation. Englewood Cliffs: Prentice-Hall. 4.Fuerst, W. L. (1981). Small Business Get A New Look at ABC Analysis for Inventory Control.Journal of Small Business Management, 19(3), 39-44.

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