Inventory presentation

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Inventory Management Operations Management II Juan Ignacio Camino Moya Álvaro Fernández-Novel Rodríguez

Transcript of Inventory presentation

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Inventory ManagementOperations Management II

Juan Ignacio Camino MoyaÁlvaro Fernández-Novel Rodríguez

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Objective: strike a balance between inventory investment and customer service.

Functions:

1. To 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.

The Importance of Inventory

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Types of inventory

Raw materials

Work in process

Maintenance/repair/operating materials (MRO)

Finished goods

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MANAGING INVENTORY

Inventories Classification

Inventory Records Maintenance

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Pareto

Principle

•Many trivial goods

•Few crucial ones

Measurement

•Annual demand of each product

•Cost per unit

Classes

•Class A: 15% of total inventory, but 70% of dollar usage.

•Class B: 30% of total inventory, but 25% of dollar usage

•Class C: 55% of total inventory, but 5% of dollar usage

ABC Analysis

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IMPORTANT: Know what you have and what you need.

Precise decisions about ordering, scheduling and shipping

Correct incoming and outgoing record keeping, stock- room security…

Record Accuracy

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A Items: Frequent

C Items: Least

B Items: Medium

Cycle Counting, instead of annual

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Service sector needs inventory control•Inventory in transit is lost value•Inventory damaged or stolen prior to sale is a

lost

Retail business•Shrinkage: Retail inventory unaccounted

between receipt and sale•Pilferage: Inventory theft.

Applicable measures•Good personnel selection, training and

discipline•Control of incoming shipments•Effective control of all goods leaving the

facility

Control of Service Inventories

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INVENTORY MODELS

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INTRODUCTION: Types of costs

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INVENTORY MODELS FOR INDEPENDENT

DEMANDBasic Economy Order Quantity Model

Production Order Quantity ModelQuantity Discount Model

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The Basic Economic Order Quantity Model

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Demand for an item is known, constant and independent from other items

Lead time is known and consistent

Receipt of inventory instantaneous and complete

Quantity discounts not possible

The only variable costs are the ones previously explained

Shortages can be completely avoided

Assumptions

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EOQ Model: Minimizing Cost

Significant costs are holding and ordering costs.

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EOQ Model: Minimizing Cost

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Reorder Points

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EOQ MODEL

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Assumptions

1. Demand for an item is known, constant and independent.

2. Lead time is known and consistent.3. Receipt of inventory is instantaneous and

complete. The inventory from an order arrives in one batch at one time.

4. No quantity discounts5. Holding, ordering and set up costs are variable.6. Shortages can be avoided if orders are placed at

the right time

Production order quantity model

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Objective:

How much to order (Q*p) and when to order (ROP) so that we minimize costs

Production order quantity model

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Production order quantity model

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1. Demand for an item is known, constant and independent.

2. Lead time is known and consistent.3. Receipt of inventory is instantaneous and

complete. The inventory from an order arrives in one batch at one time.

4. No quantity discounts5. Holding, ordering and set up costs are

variable.6. Shortages can be avoided if orders are

placed at the right time

Quantity Discount Model

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A quantity discount is a reduced price per unit of item when we purchase it in larger quantities.

Quantity discount models

Discount number

Discount quantity

Discount (%)

Discount price

1 0 to 999 0 $5.00

2 1000 to 1999 4 $4.80

3 2000 and over

5 $4.75

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Objective: How much to order to minimize costs?

Quantity discount model

Ordering quantities with the highest

discount?

NO!!!

Tradeoff between reduced product costs and increased holding costs

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Step 1: calculate Q* for each discount

Step 2: Adjust Q* to the lowest quantity that will

qualify for the discount

Step 3: Apply the total cost equation for each order quantity and pick the one with the lowest cost.

Quantity discount model

D = Annual demandS = Set up cost per orderI = holding cost as % of unit priceP = price per unit

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Quantity discount model

Discount Category

Unit CostOrder

Quantity

Annual cost

Holding Ordering Purchase Total

123

$5.004.854.75

70010002500

$350485

1188

$35024598

$25,00024,50023,750

$25,70024,98025,036

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1. Demand for an item is known, constant and independent.

2. Lead time is known and consistent.3. Receipt of inventory is instantaneous and

complete. The inventory from an order arrives in one batch at one time.

4. No quantity discounts5. Holding, ordering and set up costs are

variable.6. Shortages can be avoided if orders are

placed at the right time

Probabilistic Models and safety stock

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Key issue : maintaining an adequate service level in the face of uncertain demand.

Service level: 1-probability of stockout

Stockout is reduced with safety stock.

Therefore:

Probabilistic models and safety stock

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Objective: find such safety stock level that satisfies the given service level and minimizes total costs

Probabilistic models and safety stock.

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One order is placed for each product

Remaining products have little or no value after sales period

Exact demand is never known, so we consider a probability distribution

Consider probability of stock out and have left overs

Single Period Model

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Single Period Model: Optimal stocking

Cs: Cost of shortage Sales Price/Unit – Cost/Unit

Co: Cost of overageCost/Unit – Residual Value/Unit

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Same order amount each

time

• Inventory decreases to reorder point

• New order is placed

Perpetual monitoring

system

• Every movement of inventory must be recorded

Fixed period system

• Inventory is ordered at the end of a giving period

• Always same amount per interval

Fixed Period Systems

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ANY QUESTION?Thank you for your attention