Materials And Inventory Management

Zeynep Çıkın Production/ Operations

Management

INDEX• The Strategic Importance of Inventory• Materials Management• Classifying Inventory Problems• Inventory Costs• Inventory Management Systems • Modeling Inventory Decisions

The Strategic Importance of Inventory

Materials Management • Planning , coordinating and contolling acqusition, storage, handling and

movement of raw materials, purchased parts, supplies, tools and other materials that are needed in production process.

The Strategic Importance of Inventory

Inventory

• Any idle goods or materials that are held for future are called inventory.• Inventory represents a major financial investment for any company when

costs of transportation, warehousing, and capital are considered.

The Strategic Importance of InventoryInventory types;

• Lot –size Inventory

• Work-in- Process (WIP) Inventory

• Finished – goods Inventory

• Fluctuation Inventory (safety stock )

• Anticipation Inventory

The Strategic Importance of Inventory

Marketing Department• Prefers high inventory levels to

provide the best possible customer service .

• Production managers want high inventories to prevent production delays.

Financial Depatment• Financial personnel seek to

minimize inventory investment and warehousing costs.

TQMInventory should be managed to support strategic customer satisfaction and

Operational goals such as;

- Availability- Quick responce- Manufacturing flexibility

Materials Management

PurchasingPurchasing function is responsible for getting raw materials, component parts, tools and any other items from suppliers.

• Receive purchase requisitions• Review and evaluate requisitions• Select qualified suppliers• Aggregate and place orders• Follow up and expedite• Authorize payments• Keep records

Materials Management

• Physical Distribution

Physical Distribution is responsible for selecting transportation carriers, managing company own fleets and vehicles and movement of materials and goods. – Plays key role in customer satisfaction -

The term traffic is often used to refer daily operations of managing the transportation function.

Materials Management

Characteristics Rail Truck Air

Speed 3 2 1

Accessibility 2 1 3

Cost 1 2 3

Load capability 1 2 3

Comparison of Transportation Modes

Materials Management

• Supplier Management and Partnership

- When closed relationships are developed, total supplier number can be reduced.

- The older practise of having many suppliers bid on each other – lowest price accepted.

- With larger contracts, suppliers benefit from economies on scale and customer benefit from volume discount.

Materials Management

• GTE DirectoriesYelow pages publisher

Employee exchange programme, to help paper manufacturers undertsand GTE business and they can better meet its needs.

Strong relationship with suppliers and increased both parties’ awareness of the effects of poor quality on productivity.

Materials Management

• Florida Power and Light

Three supplier – certification programme ;

Quality Vendors basic requirements on quality, cost,delivery, safety

Certified Vendor must additionally prove its processes can meet FPL’s special requirements

Excellent Vendor must prove ability to exceed FLP’s special requirements,employ reliability, show that quality improvement is a central part of its management system.

Materials Management • Information Technology in Materials Management

Bar- code Read the symbols on the label, reduces human error and improves data correctness. The use of bar code streamliness the ordering and inventory control.

Radio frequency ( RF ) communications

Hardware allow information to be sent workers electronically from a central computer.

Classifying Inventory Problems

Characteristic Attributes

Number of Items One or many

Number of demand Independent or dependent;deterministic or stochatic; static or dynamic

Number of time periods in planning horizon

One or many

Lead Time Deterministic or stoachastic

Stockouts Back orders or lost sales

   

Inventory Costs

   

               

                     

ItemCosts

 Inventory/

HoldingCosts

 Order/Set Up

Costs 

ShortageCosts

Direct cost for getting an item. Purchase cost for outside orders, manufacturing cost for internal orders.

  Costs associated with carrying items in inventory. Storage and other related costs.

Cost of the capital, interest rate.

  Fixed costs associated with placing an order (either an ordering cost for outside orders, or a setup cost for internal orders).

  Costs associated with not having enough inventory to meet demand.

Additional costs for shipping, invoicing etc.

Inventory Costs• How to monitor Inventory • How much should be ordered • When orders should be placed

Three primary decisions must be made in relation to inventory, each has an important impact on cost.

Inventory Management Systems

• ABC Inventory Analysis

ABC Classification , according to their total annual dollar usage.

A items account for a large dollar value but small percentage of total items.

C items account for a small dollar value but large percentage of total items.

B items are between A and C.

Inventory Management Systems

• ABC Inventory AnalysisABC analysis gives managers useful information.

Class A : Represents a important inventory investment and typically have limited availability. In many cases they are single – sourced thus need close control, record keeping, continuous monitoring and maximum attention to order sizes and frequency of ordering.

This items large costs, small lot size and frequent deliveries from suppliers are common and result in very short lead times.

Inventory Management Systems

• ABC Inventory Analysis

Class C : Large quaintities of this items might be ordered to reduce transportation costs. Simply be checked periodically without maintaining any formal records. Easy to get from many suppliers and have short lead times.

Class B: These items are in the middle. Ordered very infrequently and consist mainly of service parts for older products still in use.Their availability might be limited thus long lead times can be expected.

CONTROL SYSTEMSContinuous –review system

Inventory position : amount on hand plus amount ordered but havent received yet minus back orders. Inventory position continuously monitored.

Whenever inventory position falls or below r , an order for Q units is placed.

Values for Q and r are determined in advance.

CONTROL SYSTEMSPeriodic-review systemInventory position is checked only at fixed intervals.

If the inventory position is at or below the reorder point when checked, an order is placed to bring the inventory position up to R.

In such systems usually clerks checking inventory levels physically .

If the lead time is always shorter than the time between reviews the reorder point can be based on inventory level rather than inventory position.

Cycle Counting

• Alternative to closing for inventory is cycle counting, a system for continuous physical counting of inventory through the year.

• Benefits; errors can be investigated and corrected and loss of productive time is minimized.

• The ABC classification is usually used to determine the frequency of cycle counting. Clearly errors are made more critical for A items, since their values are higher.

Measuring Inventory – System Performance

Classify inventory into five categories to measuring performance.

• Operating Inventory• Surplus Inventory• Excess Inventory• Obsolete Inventory• New- Product Inventory

Economic Order Quantity (EOQ)

• Developed in the early 1990s.• The constant-demand rate and lead time• No stockouts.

Economic Order Quantity (EOQ)• How much to order decision

Compromise between;

1) Keeping small inventories and ordering frequently 2) Keeping large inventories and ordering infrequently

Economic Order Quantity (EOQ)

EOQ model is concerned two basic questions;

How much to order ?When to place an order ?

EOQ model minimizes the total cost equal to the sum of the inventory –holding cost and ordering cost.

Economic Order Quantity (EOQ)

Inventory pattern for the EOQ Inventory –decision model

• Q to be the size of order• The average Inventory level is ½ Q

(EOQ) FormulaHow much to order ?

Economic Order Quantity (EOQ)When to order decision

r= reorder point * r= dm d= demandm= lead time

D/Q = as the number of orders placed in a year.Where N= number of days of operation for the years.

In general in EOQ ; Total ordering costs equal to the total holding costs with the small difference.

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