CHAPTER THIRTEEN INVENTORY MANAGEMENT Chapter 13 Inventory Management.
Chap 13 Inventory Management
32
13-1 McGraw-Hill/Irwin Operations Management, Seventh Edition, by William J. Stevenson Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Inventory Management Chapter 13 Inventory Management
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Transcript of Chap 13 Inventory Management
13-1
McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Inventory Management
Chapter 13
Inventory Management
13-2
McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Inventory Management
Independent Demand
A
B(4) C(2)
D(2) E(1) D(3) F(2)
Dependent Demand
Independent demand is uncertain. Dependent demand is certain.
13-3
McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Inventory Management
Types of Inventories
• Raw materials & purchased parts
• Partially completed goods called work in progress
• Finished-goods inventories – (manufacturing firms)
or merchandise (retail stores)
13-4
McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Inventory Management
Types of Inventories (Cont’d)
• Replacement parts, tools, & supplies
• Goods-in-transit to warehouses or customers
13-5
McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Inventory Management
Functions of Inventory
• To meet anticipated demand
• To smooth production requirements
• To decouple components of the production-distribution
• To protect against stock-outs
13-6
McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Inventory Management
Functions of Inventory (Cont’d)
• To take advantage of order cycles
• To help hedge against price increases or to take advantage of quantity discounts
• To permit operations
13-7
McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Inventory Management
• A system to keep track of inventory• A reliable forecast of demand• Knowledge of lead times• Reasonable estimates of
– Holding costs– Ordering costs– Shortage costs
• A classification system
Effective Inventory Management
13-8
McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Inventory Management
Inventory Counting Systems
• Periodic SystemPhysical count of items made at periodic intervals
• Perpetual Inventory System System that keeps track of removals from inventory continuously, thus monitoringcurrent levels of each item
13-9
McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Inventory Management
Inventory Counting Systems (Cont’d)
• Two-Bin System - Two containers of inventory; reorder when the first is empty
• Universal Bar Code - Bar code printed on a label that hasinformation about the item to which it is attached
0
214800 232087768
13-10
McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Inventory Management
• Lead time: time interval between ordering and receiving the order
• Holding (carrying) costs: cost to carry an item in inventory for a length of time, usually a year
• Ordering costs: costs of ordering and receiving inventory
• Shortage costs: costs when demand exceeds supply
Key Inventory Terms
13-11
McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Inventory Management
ABC Classification System
Classifying inventory according to some measure of importance and allocating control efforts accordingly.
AA - very important
BB - mod. important
CC - least important
Figure 13-1
Annual $ volume of items
AA
BB
CC
High
Low
Few ManyNumber of Items
13-12
McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Inventory Management
• Economic order quantity model
• Economic production model
• Quantity discount model
Economic Order Quantity Models
13-13
McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Inventory Management
• Only one product is involved
• Annual demand requirements known
• Demand is even throughout the year
• Lead time does not vary
• Each order is received in a single delivery
• There are no quantity discounts
Assumptions of EOQ Model
13-14
McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Inventory Management
The Inventory Cycle
Profile of Inventory Level Over Time
Quantityon hand
Q
Receive order
Placeorder
Receive order
Placeorder
Receive order
Lead time
Reorderpoint
Usage rate
Time
Figure 13-2
13-15
McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Inventory Management
Total Cost
Annualcarryingcost
Annualorderingcost
Total cost = +
Q2H D
QSTC = +
13-16
McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Inventory Management
Cost Minimization Goal
Order Quantity (Q)
The Total-Cost Curve is U-Shaped
Ordering Costs
QO
An
nu
al C
os
t
(optimal order quantity)
TCQ
HD
QS
2
Figure 13-4
13-17
McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Inventory Management
Deriving the EOQ
Using calculus, we take the derivative of the total cost function and set the derivative (slope) equal to zero and solve for Q.
Q = 2DS
H =
2(Annual Demand)(Order or Setup Cost)
Annual Holding CostOPT
13-18
McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Inventory Management
Minimum Total Cost
The total cost curve reaches its minimum where the carrying and ordering costs are equal.
Q = 2DS
H =
2(Annual Demand)(Order or Setup Cost)
Annual Holding CostOPT
13-19
McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Inventory Management
• Production done in batches or lots
• Capacity to produce a part exceeds the part’s usage or demand rate
• Assumptions of EPQ are similar to EOQ except orders are received incrementally during production
Economic Production Quantity
13-20
McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Inventory Management
• Only one item is involved
• Annual demand is known
• Usage rate is constant
• Usage occurs continually
• Production rate is constant
• Lead time does not vary
• No quantity discounts
Economic Production Quantity Assumptions
13-21
McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Inventory Management
Total Costs with Purchasing Cost
Annualcarryingcost
PurchasingcostTC = +
Q2H D
QSTC = +
+Annualorderingcost
PD +
13-22
McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Inventory Management
Total Costs with PD
Co
st
EOQ
TC with PD
TC without PD
PD
0 Quantity
Adding Purchasing costdoesn’t change EOQ
Figure 13-7
13-23
McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Inventory Management
Total Cost with Constant Carrying Costs
OC
EOQ Quantity
To
tal C
os
t
TCa
TCc
TCbDecreasing Price
CC a,b,c
Figure 13-9
13-24
McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Inventory Management
When to Reorder with EOQ Ordering
• Reorder Point - When the quantity on hand of an item drops to this amount, the item is reordered
• Safety Stock - Stock that is held in excess of expected demand due to variable demand rate and/or lead time.
• Service Level - Probability that demand will not exceed supply during lead time.
13-25
McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Inventory Management
Safety Stock
LT Time
Expected demandduring lead time
Maximum probable demandduring lead time
ROP
Qu
an
tity
Safety stock
Figure 13-12
13-26
McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Inventory Management
Reorder Point
ROP
Risk ofa stockout
Service level
Probability ofno stockout
Expecteddemand Safety
stock0 z
Quantity
z-scale
Figure 13-13
13-27
McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Inventory Management
• Orders are placed at fixed time intervals
• Order quantity for next interval?
• Suppliers might encourage fixed intervals
• May require only periodic checks of inventory levels
Fixed-Order-Interval Model
13-28
McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Inventory Management
• Tight control of type A items• Items from same supplier may yield
savings in:– Ordering– Packing– Shipping costs
• May be practical when inventories cannot be closely monitored
Fixed-Interval Benefits
13-29
McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Inventory Management
• Requires a larger safety stock
• Increases carrying cost
• Costs of periodic reviews
Fixed-Interval Disadvantages
13-30
McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Inventory Management
• Single period model: model for ordering of perishables and other items with limited useful lives
• Shortage cost: generally the unrealized profits per unit
• Excess cost: difference between purchase cost and salvage value of items left over at the end of a period
Single Period Model
13-31
McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Inventory Management
• Continuous stocking levels– Identifies optimal stocking levels– Optimal stocking level balances unit
shortage and excess cost
• Discrete stocking levels– Service levels are discrete rather than
continuous– Desired service level is equaled or exceeded
Single Period Model
13-32
McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Inventory Management
• Too much inventory– Tends to hide problems– Easier to live with problems than to
eliminate them– Costly to maintain
• Wise strategy– Reduce lot sizes– Reduce safety stock
Operations Strategy
