Operation management 9e stevenson mcgrwhill chap012

12 Inventory Management McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc All Learning Objectives      Define the term inventory and list the major reasons for holding inventories; and list the main requirements for effective inventory management Discuss the nature and importance of service inventories Discuss periodic and perpetual review systems Discuss the objectives of inventory management Describe the A-B-C approach and explain how it is useful 12-2 Learning Objectives      Describe the basic EOQ model and its assumptions and solve typical problems Describe the economic production quantity model and solve typical problems Describe the quantity discount model and solve typical problems Describe reorder point models and solve typical problems Describe situations in which the singleperiod model would be appropriate, and solve typical problems 12-3 Inventory Inventory: a stock or store of goods Dependent Demand A C(2) B(4) D(2) Independent Demand E(1) D(3) F(2) Independent demand is uncertain Dependent demand is certain 12-4 Inventory Models  Independent demand – finished goods, items that are ready to be sold  E.g a computer  Dependent demand – components of finished products  E.g parts that make up the computer 12-5 Types of Inventories  Raw materials & purchased parts  Partially completed goods called work in progress  Finished-goods inventories  (manufacturing firms) or merchandise (retail stores) 12-6 Types of Inventories (Cont’d)  Replacement parts, tools, & supplies  Goods-in-transit to warehouses or customers 12-7 Functions of Inventory  To meet anticipated demand  To smooth production requirements  To decouple operations  To protect against stock-outs 12-8 Functions of Inventory (Cont’d)  To take advantage of order cycles  To help hedge against price increases  To permit operations  To take advantage of quantity discounts 12-9 Objective of Inventory Control  To achieve satisfactory levels of customer service while keeping inventory costs within reasonable bounds  Level of customer service  Costs of ordering and carrying inventory Inventory turnover is the ratio of average cost of goods sold to average inventory investment 12-10 Total Costs with Purchasing Cost Annual Annual Purchasing + TC = carrying + ordering cost cost cost Q H TC = + DS Q + PD 12-27 Cost Figure 12.7 Total Costs with PD Adding Purchasing cost doesn’t change EOQ TC with PD TC without PD PD EOQ Quantity 12-28 Total Cost with Constant Carrying Costs Figure 12.9 Total Cost TCa TCb Decreasing Price TCc CC a,b,c OC EOQ Quantity 12-29 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 12-30 Determinants of the Reorder Point     The rate of demand The lead time Demand and/or lead time variability Stockout risk (safety stock) 12-31 Quantity Figure 12.12 Safety Stock Maximum probable demand during lead time Expected demand during lead time ROP Safety stock reduces risk of stockout during lead time Safety stock LT Time 12-32 Reorder Point Figure 12.13 The ROP based on a normal Distribution of lead time demand Service level Risk of a stockout Probability of no stockout Expected demand ROP Quantity Safety stock z z-scale 12-33 Fixed-Order-Interval Model  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  Risk of stockout  Fill rate – the percentage of demand filled by the stock on hand 12-34 Fixed-Interval Benefits  Tight control of inventory items  Items from same supplier may yield savings in:  Ordering  Packing  Shipping costs  May be practical when inventories cannot be closely monitored 12-35 Fixed-Interval Disadvantages  Requires a larger safety stock  Increases carrying cost  Costs of periodic reviews 12-36 Single Period Model  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 12-37 Single Period Model  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 12-38 Optimal Stocking Level Service level = Cs Cs + Ce Cs = Shortage cost per unit Ce = Excess cost per unit Ce Cs Service Level Quantity So Balance point 12-39 Example 15     Ce = $0.20 per unit Cs = $0.60 per unit Service level = Cs/(Cs+Ce) = 6/(.6+.2) Service level = 75 Ce Cs Service Level = 75% Quantity Stockout risk = 1.00 – 0.75 = 0.25 12-40 Operations Strategy  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 12-41 ... effective inventory management Discuss the nature and importance of service inventories Discuss periodic and perpetual review systems Discuss the objectives of inventory management Describe the... To decouple operations  To protect against stock-outs 12-8 Functions of Inventory (Cont’d)  To take advantage of order cycles  To help hedge against price increases  To permit operations ... the ratio of average cost of goods sold to average inventory investment 12-10 Effective Inventory Management  A system to keep track of inventory  A reliable forecast of demand  Knowledge of