Class 16 - Inventory Management

8/3/2019 Class 16 - Inventory Management

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Inventory

InventoryManagement

Industrial Engineering

Inventory

Models

What is Inventory?

The total amount of goods and/or materials contained in a store or factoryat any given time

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

Examples


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Inventory

InventoryManagement


Inventory

Models

The Functions of Inventory

To decouple or separate various parts of the production processTo provide a stock of goods that will provide a selection for customersTo take advantage of quantity discountsTo hedge against inflation and upward price changes

The Material Flow Cycle

Examples


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Inventory

InventoryManagement


Inventory

Models

The Material Flow Cycle

Examples

1 Run time: Job is at machine and being worked on

2 Setup time: Job is at the work station, and the work station isbeing "setup."

3 Queue time: Job is where it should be, but is not being

processed because other work precedes it.

4 Move time: The time a job spends in transit

5 Wait time: When one process is finished, but the job iswaiting to be moved to the next work area.

6 Other: "Just-in-case" inventory.

Other WaitTime

MoveTime

Queue

Time

SetupTime

RunTimeInput

Cycle Time

Output


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Inventory Management

InventoryManagement


Inventory

Models


How inventory items can be classifiedHow accurate inventory records can be maintained

Disadvantages of Inventory

Higher costs

Item cost (if purchased) Ordering (or setup) cost

Costs of forms, clerks wages etc. Holding (or carrying) cost

Building lease, insurance, taxes etc. Difficult to control Hides production problems

Examples


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InventoryManagement


Inventory

Models

Inventory Management Methods

ABC Analysis Record Accuracy

Cycle Counting Control of Service Inventory

Disadvantages of Inventory

Higher costs Item cost (if purchased) Ordering (or setup) cost

Costs of forms, clerks wages etc. Holding (or carrying) cost

Building lease, insurance, taxes etc. Difficult to control Hides production problems

Examples


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InventoryManagement


Inventory

Models

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 andnot the many trivial ones

Examples


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InventoryManagement


Inventory

Models

Independent versus Dependent Demand

Independent Demand - demand for item isindependent of demand for any other item

Dependent Demand - demand for item is dependentupon the demand for some other item

Inventory Costs

Holding Costs - associated with holding or carryinginventory over time

Ordering Costs - associated with costs of placingorder and receiving goods

Setup Costs - cost to prepare a machine or processfor manufacturing an order

Examples


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InventoryManagement


Inventory

Models

Holding Costs

Obsolescence InsuranceExtra staffing InterestPilferage DamageWarehousing

Ordering Costs

Supplies FormsOrder processing Clerical support

Setup Costs

Clean-up costs Re-tooling costsAdjustment costs

Examples


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Inventory Models

InventoryManagement


Inventory

Models

Inventory Models

Fixed order-quantity models Economic Order Quantity (EOQ) Production Order Quantity (PEQ) Quantity Discount

Probabilistic models Fixed order-period models

EOQ Assumptions

Known and constant demand Known and constant lead time Instantaneous receipt of material No quantity discounts Only order (setup) cost and holding cost No stockouts

Examples


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Inventory Models

InventoryManagement


Inventory

Models

Inventory Usage Over Time

Examples


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Inventory Models

InventoryManagement


Inventory

Models

Objective is to minimize total costs

Examples


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Inventory Models

InventoryManagement


Inventory

Models

Basic Fixed-Order Quantity (EOQ) Model Formula

Examples


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Inventory Models

InventoryManagement


Inventory

Models

Examples

POQ Model Equations


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Example

InventoryManagement


Inventory

Models

Examples

Given the information below, what are the EOQ and reorderpoint?

Annual Demand = 1,000 units

Days per year considered in average daily demand = 365

Cost to place an order = SR 10

Holding cost per unit per year = SR 2.50

Lead time = 7 days Cost per unit = SR 15


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Example

InventoryManagement


Inventory

Models

Examples

unitsunits or.=.

))(,(

=H

DS

=QOPT 9044389502

10000122

units/day.=days/year

runits/yea,=d 742

365

0001

units20or19.18=(7days)day2.74units/

=Ld=Rpoint,Reorder_

In summary, you place an optimal order of 90 units. In the

course of using the units to meet demand, when you only have20 units left, place the next order of 90 units.


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Example

InventoryManagement


Inventory

Models

Examples

A showroom dealer whishes to determine the order size for itsbest selling model XYZ. The manger estimated the annual

demand for the model as 1000 units. His past record showseach order cost SR 250 to place an order. And. if one unitmodel carried for whole year, it cost SR1000. Assuming thedemand uniform and constant. Similarly assuming orderingcost and carrying cost constant, How many models managershould order to avoid no stock out situation.

If lead time is 5 days (assumed to be constant) at what level ofinventory on hand he should order the models.

d(TC) 0

dQ

2DSQ

H


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Example

InventoryManagement


Inventory

Models

Examples

So, Q is approximately equal to 23

Reorder level = Average daily demand x Lead time

R = (1000/365) x 5 = 13 units

i.e. when inventory level drop to 13 the manager should orderfor 23 models

This case is of Fixed order quantity without safety stock

Class 16 - Inventory Management

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