Lecture Principle of inventory and material management - Lecture 22

Lecture 22 - Inventory Fundamentals (Continued). The contents of this chapter include all of the following: ABC controls, ABC analysis, records accuracy, cycle counting, independent vs. dependent demand, managing inventory in the face of uncertainity.

Lecture 22 Inventory Fundamentals (Continued) Books • Introduction to Materials Management, Sixth Edition, J. R. Tony Arnold, P.E., CFPIM, CIRM, Fleming  College, Emeritus, Stephen N. Chapman, Ph.D., CFPIM, North Carolina State University, Lloyd M.  Clive, P.E., CFPIM, Fleming College • Operations Management for Competitive Advantage, 11th Edition, by Chase, Jacobs, and Aquilano, 2005,  N.Y.: McGraw­Hill/Irwin • Operations Management, 11/E, Jay Heizer, Texas Lutheran University, Barry Render, Graduate School of  Business, Rollins College, Prentice Hall Objectives • • • • • • ABC Controls ABC analysis Records accuracy Cycle counting Independent vs. dependent demand Managing inventory in the face of uncertainity ABC Inventory Control • • • Control of inventory is exercised by controlling  individual items called stock­keeping units (SKUs) An SKU is an individual item in a specific inventory Four questions must be answered in controlling  inventory: – – – – What is the importance of the inventory item? How are they to be controlled? How much should be ordered at one time? When should an order be placed? ABC Inventory Control • • ABC inventory classification answers the first  two questions by determining the importance  of items and thus allowing different levels of  control based on the importance of items Factors affecting the importance of an item  include annual dollar usage, unit cost, and  scarcity of material ABC Inventory Control • • • The ABC principle is based on the observation that a  small number of items often dominate the results  achieved in any situation and represent the most  critical values (“Pareto” principle) ABC inventory control separates the more  significant items from the less important It is used to determine the degree and level of control  required ABC Inventory Control Methodology • • • • Calculate the annual dollar usage for each item List the items according to their annual dollar  usage Calculate the cumulative annual dollar usage and  the cumulative percent of items Group items into an A, B, C classification ABC Inventory Control • Control Based on ABC Classification – Two general rules: • • Have plenty of low­value items ­ C items are only  important if there is a shortage of one of them ­ then  they become extremely important ­ so a supply  should always be on hand Use the money and control effort saved to reduce  the inventory of high­value items ­ A items are  extremely important and deserve the tightest control  and the most frequent review ABC Inventory Control A Items 20% of the items account for 80% of the total dollar usage B Items 30% of the items account for 15% of the total dollar usage C Items 50% of the items account for 5% of the total dollar usage ABC Inventory Control A  Items Tight Control • • • • Complete, accurate records Regular, frequent review by management Frequent review of forecasts Close follow­up Normal Control B Items • • C  Items Good records Normal processing Simplest possible control • • • Makesurethereareplenty Simpleornorecords Largeorderquantities ABCAnalysis ỵ Divides inventory into three classes based on annual dollar volume Class A - high annual dollar volume ỵ Class B - medium annual dollar volume þ Class C - low annual dollar volume þ þ Used to establish policies that focus on the few critical parts and not the many trivial ones Marginal analysis x Probabili­ ty that  demand =  x 40 P = Prob.  of  (1­P)=Prob.  P x $0.3 selling the  of NOT  =Expected  xth unit selling the  profit   xth unit from  selling xth  unit (1­P) x  $0.5 =Expected  loss from  NOT  selling xth  unit Expected  NET  profit  from  stocking  xth unit 1.0 $0 $0.30 $0.30 Marginal analysis x Probabili­ ty that  demand =  x P = Prob.  of  (1­P)=Prob.  P x $0.3 selling the  of NOT  =Expected  xth unit selling the  profit   xth unit from  selling xth  unit (1­P) x  $0.5 =Expected  loss from  NOT  selling xth  unit Expected  NET  profit  from  stocking  xth unit 40 Marginal analysis x Probabili­ ty that  demand =  x P = Prob.  of  (1­P)=Prob.  P x $0.3 selling the  of NOT  =Expected  xth unit selling the  profit   xth unit from  selling xth  unit (1­P) x  $0.5 =Expected  loss from  NOT  selling xth  unit Expected  NET  profit  from  stocking  xth unit 40 Marginal analysis x Probabili­ ty that  demand =  x P= Prob.  of  selling the  xth unit (1­P)=Prob.  of NOT  selling the  xth unit P x $0.3 =Expected  profit   from  selling xth  unit (1­P) x  $0.5 =Expected  loss from  NOT  selling xth  unit Expected  NET  profit  from  stocking  xth unit 40 0 $0.0 $0.50 $­0.50 Marginal analysis P= Prob.  of  selling the xth  unit (1­P)=Prob.  of NOT  selling the  xth unit P x $0.3 =Expected  profit  from  selling xth  unit (1­P) x $0.5 =Expected  loss from  NOT selling  xth unit Expected  NET profit  from  stocking xth  unit 0.1 1.0 $0.30 $0 $0.30 36 0.15 0.9 0.1 $0.27 $0.05 $0.22 37 0.25 0.75 0.25 $0.225 $0.125 $0.10 38 0.25 0.50 0.50 $0.15 $0.25 $­0.10 39 0.15 0.25 0.75 $0.075 $0.375 $­0.30 40 0.1 0.1 0.9 $0.03 $0.45 $­0.42 >40 0 $0.0 $0.50 $­0.50 x 40 0 $0.0 $0.50 $­0.50 x