19 -1

CHAPTER

Inventory
Management

19 -2

Objectives
Objectives
1. Describe theAfter
traditional
inventory
studying
After studying this
this
managementchapter,
model. you should
chapter, you should
2. Discuss JIT inventory
management.
be
able
be able to:
to:
3. Explain the theory of constraints, and tell
how it can be used to manage inventory.

19 -3

Inventory
Inventory Costs
Costs
1. Ordering costs are the costs of
placing and receiving an order.
2. Setup costs are the costs of
preparing equipment and facilities
so they can be used to produce a
particular product or component.
3. Carrying costs are the costs of
carrying inventory.

defective parts. 4. To satisfy customer demand. To balance ordering or setup costs and carrying costs. 3. or late delivery of parts.19 -4 Traditional Traditional Reasons Reasons for for Carrying Carrying Inventory Inventory 1. 6. . To hedge against future price increases. To buffer against unreliable production processes. To take advantage of discounts. 5. unavailable parts. 2. To avoid shutting down manufacturing facilities because of machine failure.

19 -5 The The Appropriate Appropriate Inventory Inventory Policy Policy Two Basic Questions Must be Addressed  How much should be ordered or produced?  When should the order be placed or the setup be performed? .

The The Traditional Traditional Inventory Inventory Model Model Total Costs = Ordering costs + Carrying costs TC = PD/Q + CQ/2 Where TC = The total ordering (or setup) and carrying costs P = The cost of placing and receiving an order (or the cost of setting up a production run) Q = The number of units ordered each time an order is placed D = The known annual demand C = The cost of carrying one unit of stock for one year 19 -6 .

000 units P = $25 per order C = $2 per unit 19 -7 .000 units Q = 1.The The Traditional Traditional Inventory Inventory Model Model Economic order =  2PD/C quantity (EOQ) D = 10.

000)/2 EOQ =  250.000 EOQ = 500 units 19 -8 .The The Traditional Traditional Inventory Inventory Model Model EOQ =  ($2 x $25 x 10.

Reorder point = 4 x 50 = 200 units Thus.Reorder Reorder Point Point Demand DemandisisCertain Certain Reorder point = Rate of usage x Lead time Example: The producer uses 50 parts per day and that the lead time is 4 days. 19 -9 . an order should be placed when inventory drops to 200 units.

19 -10 Reorder Reorder Point Point Demand DemandisisCertain Certain Inventory (units) (EOQ) 500 400 300 (ROP) 200 100 2 4 6 8 10 12 Days 14 16 18 20 .

the firm would use 200 parts after three and one-third days.19 -11 Reorder Reorder Point Point Safety SafetyStock Stock If the refrigerator part was used at a rate of 60 parts a day instead of 50. The safety stock is determined as follows: Maximum usage Average usage Difference Lead time Safety stock 60 50 10 x4 40 .

Reorder Reorder Point Point Safety SafetyStock Stock ROP = (Average rate of usage x Lead time) + Safety stock ROP = (50 x 4) + 40 ROP = 240 units 19 -12 .

500 Lead time 20 days .19 -13 A Manufacturing Example The manager of Benson Company is trying to determine the size of the production runs for the blade fabrication.000 Unit carrying cost $5 Setup cost $12. The controller supplies the following information: Average demand for blades 320 per day Maximum demand for blades 340 per day Annual demand for blades 80.

000.000 x 2.500 5 400.000 = 20.19 -14 A Manufacturing Example EOQ = = =  2PD C   2 x 80.000 blades .

800 units .19 -15 A Manufacturing Example Maximum usage Average usage Difference Lead time Total safety stock 340 320 20 x20 400 Reorder point = (Average usage x Lead time) + Safety stock = (320 x 20) + 400 = 6.

19 -16 Traditional Traditional Inventory Inventory Systems Systems            Push-through system Significant inventories Large supplier base Short-term supplier contracts Departmental structure Specialized labor Centralized services Low employee involvement Supervisory management style Acceptable quality level Driver tracing dominates .

19 -17 Traditional Traditional Manufacturing Manufacturing Layout Layout Product A Product B A Lathes B Department. process. A Abrasive Grinders Department 2   Welding B Equipment Department 3 Finished Product A Finished Product B . 1 Each Each process process passes passes through through departments departments that that specialize specialize in in one one process.

19 -18 JIT JIT Inventory Inventory Systems Systems            Pull-through system Insignificant inventories Small supplier base Long-term supplier contracts Cellular structure Multiskilled labor Decentralized services High employee involvement Facilitating management style Total quality control Direct tracing dominates .

19 -19 JIT JIT Inventory Inventory Systems Systems JIT JIT has has two two strategic strategic objectives: objectives:  To increase profits  To improve a firm’s competitive positions .

PURCHASING JIT .19 -20 JUST-IN-TIME JIT.PHILOSOPHY JIT -TECHNIQUES first known as the TOYOTA Technique: JIT .DISTRIBUTION .PRODUCTION JIT .

JIT Purchasing Requires suppliers to deliver parts and materials just in time to be used in production. Suppliers linked by long-term contracts. 19 -21 . Supply of parts must be linked to production which is linked to demand. Few chosen suppliers located as close to the production facility as possible.

19 -22 JIT Production/Manufacturing JIT Manufacturing is a demand-pull system. They are arranged to perform a variety of operations in sequence. Plant layout is managed as a cellular system. that means. machines are grouped in semicircle. The objective is to eliminate waste by producing a product only when it is needed and only in the quantities demanded by customers. .

19 -23 JIT JIT Manufacturing Manufacturing Layout Layout Cell A Grinder Cell B  Grinder  Lathe Welding Lathe Welding Product A Finished Product Product B Finished Product .

Using long-term contracts for outside purchases Carrying costs are reduced to insignificant levels by reducing inventories to insignificant levels . Drastically reducing setup time 2.19 -24 JIT And Inventory Management Setup and Carrying Costs: The JIT Approach JIT reduces the costs of acquiring inventory to insignificant levels by: 1.

Lead times are reduced by: reducing setup times improving quality using cellular manufacturing .19 -25 JIT And Inventory Management Due Date Performance: The JIT Solution Lead times are reduced so that the company can meet requested delivery dates and to respond quickly to customer demand.

19 -26 JIT And Inventory Management Avoidance of Shutdown: The JIT Approach Total preventive maintenance to reduce machine failures Total quality control to reduce defective parts Cultivation of supplier relationships to ensure availability of quality raw materials and subassemblies The use of the Kanban system is also essential .

19 -27 What What is is the the Kanban Kanban System? System? A Card System is used to monitor work-inprocess  A withdrawal Kanban  A production Kanban  A vendor Kanban .

___________________ _____________ 15670T07 Processing Process Circuit Board Item Name_________________ _____________ CB Assembly TR6547 PC Computer Type_____________ _____________ 8 Box Capacity_______________ Subsequent Process _____________ C Box Type__________________ Final Assembly _____________ .19 -28 Withdrawal Withdrawal Kanban Kanban Item No.

19 -29 Production Production Kanban Kanban Item No.___________________ _____________ 15670T07 Process Circuit Board Item Name_________________ TR6547 PC Computer Type_____________ 8 Box Capacity_______________ C Box Type__________________ _____________ CB Assembly .

Computer Casing Item Name_________________ _____________ Electro PC 8 Box Capacity_______________ Receiving Gate C Box Type__________________ 75 Time to Deliver Name of Supplier 8:30 A. 2:30 P..19 -30 Vendor Vendor Kanban Kanban Item No. 12:30 P.M.M.___________________ 15670T08 Name of Receiving Co. Garry Supply .M..

(3) Withdrawal Post Final Assembly .19 -31 Kanban Kanban Process Process (7) Withdrawal Store Lot with P-Kanban CD Assembly (5) (6) Signal Remove (4) P-Kanban Attach W-Kanban CB Stores (1) Remove W-Kanban Attach to Post Attach to Post Production Ordering Post (1) (2).

19 -32 JIT’s JIT’s Limitations Limitations  Time is required to build sound relationships with suppliers.  Sharp reductions in inventory buffers may cause a regimented workflow and high levels of stress among production workers.  The absence of inventory to buffer production interruptions. .  Current sales are placed at risk to achieve assurance of future sales.

19 -33 JIT And Inventory Management Discounts and Price Increases: JIT Purchasing Versus Holding Inventories Careful vendor selection Long-term contracts with vendors Prices are stipulated (usually producing a significant savings) Quality is stipulated The number of orders placed are reduced .

19 -34 Theory Theory of of Constraints Constraints Three Measures of Organizational Performance  Throughput  Inventory  Operating expenses .

Elevate the binding constraint(s). Subordinate everything else to the decisions made in Step 2.19 -35 Theory Theory of of Constraints Constraints Five Steps to Improve Performance 1. Identify the organization’s constraint(s). Repeat the process. 2. . 3. 4. Exploit the binding constraint(s). 5.

19 -36 Drum-Buffer-Rope Drum-Buffer-Rope System System Materials Rope Initial Process Process C Process A Final Process Process B Time Buffer Drummer Process Finished Goods .

19 -37 Drum-Buffer-Rope Drum-Buffer-Rope System System Material for 12 Parts per Day (Part X: 6 and Part Y: 6) Confer Confer Company Company Rope Time 12 Units Part X Finished Goods 6 Units Part X per Day 6 Units Part Y per Day Grinding Process DRUMMER Drilling Process Polishing Process Buffer 12 Units Part Y .

19 -38 Chapter Nineteen The The End End .

19 -39 .