Chapter 7 inventory

Chapter INVENTORY MANAGEMENT LEARNING OBJECTIVES You should be able to:  Distinguish dependent from independent demand inventories  Describe the four basic types of inventories & their functions  Understand the costs of inventory & inventory turnovers  Understand ABC classification, ABC inventory matrix & cycle counting MBA Nguyen Phi Hoang©2015_SCM LEARNING OBJECTIVES (Continued)  Know RFID & how it can be used in inventory management  Understand the EOQ model & its underlying assumptions  Understand the Quantity Discounts & the EMQ Models & their relationships with the basic EOQ model  Understand & able to distinguish among the various statistical ROP models  Describe the continuous review & periodic review systems MBA Nguyen Phi Hoang©2015_SCM CHAPTER OUTLINE • • • • Introduction Dependent and Independent Demand Concepts and Tools of Inventory Management Inventory Models MBA Nguyen Phi Hoang©2015_SCM Introduction  Inventory can be one of the most expensive assets of an organization  Inventory may account for more than 10% of total revenue or 20% of total assets  Management must reduce inventory levels yet avoid stockouts and other problems This chapter will discuss:  Dependent & independent demand  Tools for managing inventory  Basic types of inventories  Various inventory management approaches MBA Nguyen Phi Hoang©2015_SCM Matching Supply & Demand  Suppliers must accurately forecast demand so they can produce & deliver the right quantities at the right time at the right cost  Suppliers must find ways to better match supply & demand to achieve optimal levels of cost, quality, & customer service to enable them to compete with other supply chains  Problems that affect product & delivery will have ramifications/sources throughout the chain MBA Nguyen Phi Hoang©2015_SCM Dependent & Independent Demand Inventory management models – Generally classified as dependent demand and independent demand models  Dependent Demand – Describes the internal demand for parts based on the demand of the final product in which the parts are used Subassemblies, components, & raw materials are examples of dependent demand items  Independent Demand – The demand for final products & has a demand pattern affected by trends, seasonal patterns, & general market conditions MBA Nguyen Phi Hoang©2015_SCM Concepts and Tools of Inventory Management Functions and Basic Types of Inventory  The primary functions of inventory are to –  Buffer from uncertainty in the marketplace &  Decouple/limit dependencies in the supply chain (e.g., safety stock)  Four broad categories of inventories  Raw materials- unprocessed purchase inputs  Work-in-process (WIP)- partially processed materials not yet ready for sales  Finished goods- products ready for shipment  Maintenance, repair & operating (MRO)- materials used in production (e.g., cleaners & brooms) MBA Nguyen Phi Hoang©2015_SCM Concepts and Tools of Inventory Management (Continued) Inventory Costs  Direct costs- directly traceable to unit produced (e.g., labor)  Indirect costs- cannot be traced directly to the unit produced (e.g., overhead expenses)  Fixed costs- independent of the output quantity (e.g, buildings, equipment, & plant security)  Variable costs- vary with output level (e.g., materials)  Order costs- direct variable costs for making an order In mfg, setup costs are related to machine setups  Holding or carrying costs- incurred for holding inventory in storage MBA Nguyen Phi Hoang©2015_SCM Concepts and Tools of Inventory Management (Continued) Inventory Investment  Firms should diligently/hard working measure inventory investment to ensure that it does not adversely/bad affect competitiveness Measures include:  Absolute value of inventory (found on balance sheet)  Inventory turnover or turnover ratio- how many times inventory “turns” in an accounting period More is better because its faster! Inventory Turnover Ratio = MBA Nguyen Phi Hoang©2015_SCM Cost of Revenue Average Inventory 10 Concepts and Tools of Inventory Management (Continued) ABC Inventory Control System Determines which inventories should be counted & managed more closely than others  Groups inventory as A, B, & C Items  A items : Account for approximately 20% of the total items, are about 80% of the total inventory cost  B items: account for 40% of the total items, are about 15% of the total inventory cost  C items : account for 40% of the total items, are about 5% of the total inventory cost MBA Nguyen Phi Hoang©2015_SCM 11 Concepts and Tools of Inventory Management (Continued Meaning of ABC method  A items : Must be given the highest priority with larger safety stocks  B items: B items require closer management since they are relatively more expensive (per unit), require more effort to purchase/make, & may be more prone to obsolescence  C items have the lowest value and hence lowest priority MBA Nguyen Phi Hoang©2015_SCM 12 An example of ABC analysis MBA Nguyen Phi Hoang©2015_SCM 13 Concepts and Tools of Inventory Management (Continued) Radio Frequency Identification (RFID) Successor to the barcode for tracking individual unit of goods RFID does not require direct line of sight to read a tag and information on the tag is updatable RFID Tags (Transponders) Readers Information Infrastructure (Local/ERP Servers) Item Box Hand Held Readers Shelf Readers Fixed Portal Readers Database RFID Middleware Local / ERP Server Pallet Crate MBA Nguyen Phi Hoang©2015_SCM (Fig 7.4) 14 Concepts and Tools of Inventory Management (Continued) RFID  Automates the supply chain:  Materials Management – goods automatically counted and logged as they enter the supply warehouse  Manufacturing – assembly instructions encoded on RFID tag provide information to computer controlled assembly devices  Distribution Center – shipment leaving DC automatically updates ERP to trigger( start a process) a replenishment order and notify customer for delivery tracking  Retail Store – no check out lines as scanners link RFID tagged goods in shopping cart with buyers credit card MBA Nguyen Phi Hoang©2015_SCM 15 Inventory Models  The Economic Order Quantity (EOQ) Model – A quantitative decision model based on the trade-off /balance between annual inventory holding costs & annual order costs The EOQ model seeks to determine an optimal order quantity, where the sum of the annual order cost & the annual inventory holding cost is minimized • Order Cost is the direct variable cost associated with placing an order • Holding Cost or carrying cost is the cost incurred for holding inventory in storage MBA Nguyen Phi Hoang©2015_SCM 16 Inventory Models (Continued)  Assumptions of the EOQ Model  Demand must be known & constant  Delivery time is known & constant  Replenishment is instantaneous  Price is constant  Holding cost is known & constant  Ordering cost is known & constant  Stock-outs are not allowed MBA Nguyen Phi Hoang©2015_SCM 17 Inventory Models (Continued) EOQ Model MBA Nguyen Phi Hoang©2015_SCM (Fig 7.5) 18 Inventory Models (Continued) Illustration Inventory on hand & relationships to – EOQ, average inventory, lead time, reorder point, & order cycle MBA Nguyen Phi Hoang©2015_SCM (Fig 7.6) 19 Inventory Models (Continued)  The Statistical Reorder Point (ROP)  The lowest inventory level at which a new order must be placed to avoid a stockout  Demand and delivery lead time are never certain and require safety stock MBA Nguyen Phi Hoang©2015_SCM 20 ... Hoang©2015_SCM 17 Inventory Models (Continued) EOQ Model MBA Nguyen Phi Hoang©2015_SCM (Fig 7. 5) 18 Inventory Models (Continued) Illustration Inventory on hand & relationships to – EOQ, average inventory, ... holding inventory in storage MBA Nguyen Phi Hoang©2015_SCM Concepts and Tools of Inventory Management (Continued) Inventory Investment  Firms should diligently/hard working measure inventory. .. Absolute value of inventory (found on balance sheet)  Inventory turnover or turnover ratio- how many times inventory “turns” in an accounting period More is better because its faster! Inventory Turnover