KR-Ch12E.ppt

7/29/2019 KR-Ch12E.ppt

1/36

2007 Pearson Education

InventoryManagement

Chapter 12

7/29/2019 KR-Ch12E.ppt

2/36


How Inventory Managementfits the Operations Management

Philosophy

Operations As a CompetitiveWeapon

Operations StrategyProject Management Process StrategyProcess Analysis

Process Performance and QualityConstraint Management

Process LayoutLean Systems

Supply Chain StrategyLocation

Inventory ManagementForecasting

Sales and Operations PlanningResource Planning

Scheduling

7/29/2019 KR-Ch12E.ppt

3/36


Inventory at WAL-MART

Making sure the shelves are stocked with tens of thousands ofitems at their 5,379 stores in 10 countries is no small matter forinventory managers at Wal-Mart.

Knowing what is in stock, in what quantity, and where it is

being held, is critical to effective inventory management. With inventories in excess of $29 billion, Wal-Mart is aware of

the benefits from improved inventory management.

They know that effective inventory management must includethe entire supply chain.

The firm is implementing radio frequency identification (RFID)technology in its supply chain.

When passed within 15 of a reader, the chip activates, and its

unique product identifier code is transmitted to an inventorycontrol system.

7/29/2019 KR-Ch12E.ppt

4/36


Inventory Management

Inventory management is the planning andcontrolling of inventories in order to meet thecompetitive priorities of the organization.

Effective inventory management is essential for realizingthe full potential of any value chain.

Inventory management requires information aboutexpected demands, amounts on hand and amounts

on order for every item stocked at all locations.

The appropriate timing and size of the reorder quantitiesmust also be determined.

7/29/2019 KR-Ch12E.ppt

5/36


Inventory Basics

Inventory is created when the receipt ofmaterials, parts, or finished goods exceedstheir disbursement.

Inventory is depleted when theirdisbursement exceeds their receipt.

An inventory managers job is to balance the

advantages and disadvantages of both lowand high inventories.

Both have associated cost characteristics.

7/29/2019 KR-Ch12E.ppt

6/36


Pressures forLowInventories

Inventory holding cost is the sum of the cost ofcapital and the variable costs of keeping items onhand, such as storage and handling, taxes,insurance, and shrinkage. Cost of Capital is the opportunity cost of investing in an

asset relative to the expected return on assets of similarrisk.

Storage and Handling arise from moving in and out of astorage facility plus the rental cost and/or opportunity cost

of that space. Taxes, Insurance, and Shrinkage: More taxes are paid and

insurance costs are higher if end-of-the-year inventoriesare high. Shrinkage comes from theft, obsolescence anddeterioration.

7/29/2019 KR-Ch12E.ppt

7/36


Customer Service:Reduces the potential forstockouts and backorders.

Ordering Cost: The cost of preparing a purchase

order for a supplier or a production order for the shop. Setup Cost: The cost involved in changing over a

machine to produce a different item.

Labor and Equipment: Creating more inventory can

increase workforce productivity and facility utilization. TransportationCosts: Costs can be reduced.

Quantity Discount: A drop in the price per unit whenan order is sufficiently large.

Pressures forHighInventories

7/29/2019 KR-Ch12E.ppt

8/36


Types of Inventory

Cycle Inventory: The portion of totalinventory that varies directly with lot size (Q).

Average cycle inventory =

Lot Sizing: The determination of how frequentlyand in what quantity to order inventory.

Safety Stock Inventory: Surplus inventory

that a company holds to protect againstuncertainties in demand, lead time andsupply changes.

Q

2

7/29/2019 KR-Ch12E.ppt

9/36


Anticipation Inventory is used to absorbuneven rates of demand or supply, which

businesses often face.

Pipeline Inventory: Inventory moving frompoint to point in the materials flow system.

Types of Inventory

Pipeline inventory = DL = dLDLis the average demand for theitem per period (d) times the number

of periods in the items lead time (L).

7/29/2019 KR-Ch12E.ppt

10/36


Placement of Inventories

The positioning of a firms inventories supports itscompetitive priorities.

Inventories can be held at the raw materials, work-in-process, and finished goods levels.

Managers make inventory placement decisions bydesignating an item as either a specialor astandard.

Special: An item made to order. If purchased, it isbought to order.

Standard: An item that is made to stock or orderedto stock, and normally is available upon request.

7/29/2019 KR-Ch12E.ppt

11/36


Thousands of items are held in inventory bya typical organization, but only a small % of

them deserves managements closestattention and tightest control.

ABC analysis:

Purpose

Classification

Process

Identifying CriticalInventory Items

7/29/2019 KR-Ch12E.ppt

12/36


ABC Analysis

10 20 30 40 50 60 70 80 90 100

Percentage of items

Percentageofdollarvalue

100

90

80

70

60

50

40

30

20

10

0

Class C

Class A

Class B

7/29/2019 KR-Ch12E.ppt

13/36

7/29/2019 KR-Ch12E.ppt

14/36


Inventory depletion(demand rate)

Receiveorder

1 cycle

On-h

andinventory(units)

Time

Q

Averagecycleinventory

Q2

Cycle-Inventory Levels

7/29/2019 KR-Ch12E.ppt

15/36


Annualcost(dol

lars)

Lot Size (Q)

Total AnnualCycle-Inventory Costs

Holding cost = (H)Q2

Ordering cost = (S)DQ

Total cost = (H) + (S)DQQ2

Q = lot size; C = total annual cycle-inventory costH = holding cost per unit; D = annual demandS = ordering or setup costs per lot

7/29/2019 KR-Ch12E.ppt

16/36


Costing out a Lot Sizing PolicyExample 12.2

Bird feeder sales are 18 units per week, and thesupplier charges $60 per unit. The cost of placing an

order (S) with the supplier is $45.Annual holding cost (H) is 25%of a feeders value,

based on operations 52 weeks per year.

Management chose a 390-unit lot size (Q) so that

new orders could be placed less frequently. What is the annual cycle-inventory cost (C) of the

current policy of using a 390-unit lot size?

Museum of Natural History Gift Shop:

7/29/2019 KR-Ch12E.ppt

17/36


Costing out a Lot Sizing PolicyExample 12.2

What is the annual cycle-inventory cost (C) of thecurrent policy of using a 390-unit lot size?

D = (18 /week)(52 weeks) = 936 units H= 0.25 ($60/unit) = $15

C= $2925 + $108 = $3033

C= (H) + (S) = (15) + (45)

Q

2

D

Q

936

390

390

2

Museum of Natural History Gift Shop:

7/29/2019 KR-Ch12E.ppt

18/36


Computing the EOQExample 12.3

C = (H) + (S)Q2

DQ

EOQ =2DS

H

D = annual demandS = ordering or setup costs per lot

H= holding costs per unit

D = 936 unitsH= $15S = $45

EOQ =2(936)45

15= 74.94 or 75 units

C = (15) + (45)752

93675

C = $1,124.10

Bird Feeders:

7/29/2019 KR-Ch12E.ppt

19/36


Time Between Orders

Time between orders (TBO) is the averageelapsed time between receiving (or placing)replenishment orders ofQ units for a particular lotsize.

Example 12.3continued:

For the birdfeeder example, using an EOQ of 75units.

TBOEOQ = EOQD

TBOEOQ

= = 75/936 = 0.080 yearEOQ

DTBOEOQ = (75/936)(12) = 0.96 months

TBOEOQ = (75/936)(52) = 4.17 weeks

TBOEOQ = (75/936)(365) = 29.25 days

7/29/2019 KR-Ch12E.ppt

20/36


Understanding theEffect of Changes

A Change in the Demand Rate (D): When demandrises, the lot size also rises, but more slowly thanactual demand.

A Change in the Setup Costs (S): Increasing S

increases the EOQ and, consequently, the averagecycle inventory.

A Change in the Holding Costs (H): EOQ declineswhen Hincreases.

Errors in Estimating D, H, and S: Total cost isfairly insensitive to errors, even when the estimatesare wrong by a large margin. The reasons are thaterrors tend to cancel each other out and that thesquare root reduces the effect of the error.

7/29/2019 KR-Ch12E.ppt

21/36


InventoryControl Systems

Inventory control systems tell us how much to orderand when to place the order. Independent demand items: Items for which demand is

influenced by market conditions and is not related to the

inventory decisions for any other item held in stock.

Continuous review (Q) systems (Reorder pointsystems ROP) are designed to track the remaininginventory of an item each time a withdrawal is made

to determine whether it is time to reorder. Periodic review (P) systems (Fixed Interval

Reorder systems) in which an items inventory

position is reviewed periodically rather than

continuously.

7/29/2019 KR-Ch12E.ppt

22/36


Inventory position (IP) is the measurementof an items ability to satisfy future demand.

IP = OH + SR BO

Scheduled receipts (SR) orOpen ordersare orders that have been placed but havenot yet been received.

Reorder point (R) is the predeterminedminimum level that an inventory positionmust reach before a fixed order quantity Qof the item is ordered.

InventoryControl Systems

7/29/2019 KR-Ch12E.ppt

23/36


Continuous ReviewQ systems when demand & lead time are constant and certain.

Time

On-handinve

ntory

R

TBO

L

TBO

L

TBO

L

Orderreceived

Orderreceived

Q

OH

Orderplaced

IP

Orderreceived

Q

OH

Orderplaced

IP

Orderreceived

Orderplaced

IP

Q

OH

7/29/2019 KR-Ch12E.ppt

24/36


Determining Whetherto Place an Order

Demand for chicken soup is always 25 cases a dayand lead time is always 4 days. Chicken soup was justrestocked, leaving an on-hand inventory of10 cases.

No backorders currently exist. There is an open orderfor200 cases. What is the inventory position?Should a new order be placed?

R = Average demand during lead time= (25)(4) = 100 cases

IP = OH + SR BO= 10 + 200 0 = 210 cases

IP = Inventory PositionOH = On-hand InventorySR = Scheduled receiptsBO = Back ordered

Since IP exceeds R(210 > 100), do not reorder. An SR is pending.

Example 12.4

7/29/2019 KR-Ch12E.ppt

25/36


Time

On-handinve

ntory

TBO1 TBO2 TBO3

L1 L2 L3

R

Orderreceived

Q

Orderplaced

Orderplaced

Orderreceived

IP IP

Q

Orderplaced

Q

Orderreceived

Orderreceived

OH

Continuous ReviewQ system when demand is uncertain.

7/29/2019 KR-Ch12E.ppt

26/36


Choosing an AppropriateService-Level Policy

Service level (Cycle-service level): The desiredprobability of not running out of stock in any oneordering cycle, which begins at the time an order isplaced and ends when it arrives.

Protection interval: The period over which safetystock must protect the user from running out.

Safety stock =zsLz= The number of standard deviations needed for a

given cycle-service level.

sL=The standard deviation of demand during the leadtime probability distribution.

7/29/2019 KR-Ch12E.ppt

27/36


Finding Safety StockWith a normal Probability Distribution

for an 85% Cycle-Service Level

Averagedemand

duringlead time

Averagedemand

duringlead time

Cycle-service level = 85%

Probability of stockout(1.0 0.85 = 0.15)

zsL

R

7/29/2019 KR-Ch12E.ppt

28/36


Finding Safety Stock and RExample 12.5

Records show that the demand for dishwasherdetergent during the lead time is normally distributed,with an average of250 boxes and sL = 22. Whatsafety stock should be carried for a 99 percent cycle-

service level?What is R?

Safety stock = zsL= 2.33(22) = 51.3= 51 boxes

Reorder point = DL + SS= 250 + 51= 301 boxes

2.33 is the number of standarddeviations, z, to the right of

average demand during thelead time that places 99% ofthe area under the curve to theleft of that point.

7/29/2019 KR-Ch12E.ppt

29/36


Development of DemandDistributions for the Lead Time

st = 15

+75

Demand for week 1

st = 26

225Demand for 3-week lead time

+75

Demand for week 2

st = 15

=75

Demand for week 3

st = 15

7/29/2019 KR-Ch12E.ppt

30/36


Finding Safety Stock and RExample 12.6

sL =st L = 5 2 = 7.1

Safety stock = zsL

= 1.28(7.1) = 9.1 or9 units

Reorder point = dL + safety stock = 2(18) + 9 = 45 units

Suppose that the average demand for bird feeders is 18 units perweek with a standard deviation of 5 units. The lead time isconstant at 2 weeks. Determine the safety stock and reorder pointfor a 90 percent cycle-service level. What is the total cost of the Qsystem? (t= 1 week; d= 18 units per week; L = 2 weeks)

C = ($15) + ($45) + 9($15)75

2

936

75

C = $562.50 + $561.60 + $135 = $1259.10

Demand distribution for lead time must be developed:

7/29/2019 KR-Ch12E.ppt

31/36


Periodic Review (P) System

Periodic review (P) system: A system inwhich an items inventory position is reviewed

periodically rather than continuously.

Sometimes called a fixed interval reorder systemor aperiodic reorder system.

A new order is always placed at the end of eachreview, and the time between orders is fixed at P.

Demand is a variable, so total demand betweenreviews varies.

The lot size, Q, may change from one order to thenext.

7/29/2019 KR-Ch12E.ppt

32/36


Periodic Review(P)System

P PTime

On-handinv

entory

T

Q1

Orderplaced

L

Orderplaced

Orderreceived

Orderreceived

Orderplaced

Q2

Q3

Orderreceived

OH

L L

Protection interval

IP1

IP3

IP2

IP IPIP

OH

7/29/2019 KR-Ch12E.ppt

33/36


Comparison ofQ and P Systems

P Systems

Convenient to administer Orders for multiple items from the same supplier

may be combined Inventory Position (IP) only required at review

Systems in which inventory records are alwayscurrent are calledPerpetual Inventory Systems

Review frequencies can be tailored to each item Possible quantity discounts Lower, less-expensive safety stocks

Q Systems

7/29/2019 KR-Ch12E.ppt

34/36


Visual Systems

Visual system: A system that allowsemployees to place orders when inventoryvisibly reaches a certain marker.

Two-bin system: A visual system version ofthe Qsystem in which an items inventory isstored at two different locations.

Single-bin system: The concept of a P

system can be translated into a simplevisual system. A maximum level is markedon the bin and inventory is brought up to themark periodically.

7/29/2019 KR-Ch12E.ppt

35/36


Hybrid Systems

Optional replenishment system: A system used to

review the inventory position at fixed time intervals

and, if the position has dropped to (or below) a

predetermined level, to place a variable-sized orderto cover expected needs.

Base-stock system: An inventory control system

that issues a replenishment order, Q, each time a

withdrawal is made, for the same amount as thewithdrawal.

7/29/2019 KR-Ch12E.ppt

36/36


Approaches forInventory Record Accuracy

Assign responsibility for reporting inventory transactions to

specific employees.

Secure inventory in locked storage areas.

Cycle counting, an inventory control method, whereby

storeroom personnel physically count a small percentage of the

total number of items each day, correcting errors that they find,

is used to frequently check records against physical inventory.

Logic error checks on each transaction; reporting and fully

investigating discrepancies. If inventory records prove to be accurate over several years

time, the annual physical count can be avoided. It is disruptive,

adds no value to the products, and often introduces as many

errors as it removes.

KR-Ch12E.ppt

Documents

Transcript of KR-Ch12E.ppt