Chapter 5 - Inventory management. Inventory management is presented in Chapter 5. Inventory is the life blood of any business. Most firms store thousands of different items. There are many inexpensive supply or operating type items. The type of business a firm is in will usually determine how much of the firm’s assets are invested in inventories.
Chapter5: InventoryManagement PurchasingandSupplyChainManagement 3rdedition PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013, TheNatureofDemand ã ã Independent demand • Demands unrelated to other finished items • Independently forecasted Dependent demand • Demands directly derived from demand for another inventoried item • Raw materials, components parts, and subassemblies Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved. 5 Primary Inventory Functions Pipeline inventory Cycle stocks Seasonal inventories Safety stocks Decoupling stocks Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved. ABC Classification Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved. ABC Analysis Curve PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. EconomicOrderSize(EOQ)Model ã ã EOQistheoptimallotsizeforpurchasing ã Minimizesthetotalcostoforderingandholdinginventory ã PlaceanorderofEOQwhentheinventorylevelsfallbelowreorder point(R) Simplified total cost associated with inventory Total Cost (TC)= Ordering Cost (CP) +Holding Cost(CH) Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved. Economic Order Size (EOQ) Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved. Reorder Point (ROP) Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved. Classical EOQ model Assumptions Demand is continuous at a constant rate Constant lead time Constant unit price Fixedorder cost per order Fixed holding cost per unit Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved. Classical EOQ model Assumptions (cont.) Instantaneous replenishment No shortages allowed Nodemanduncertainty Noquantitydiscountsavailable 10 PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. 2.DemandUncertaintyandSafetyStock ã ã Relaxation ã Nodemanduncertainty ã Constantdemandassumptions Aprobabilitydistributionofdemands ã E.g.,Normaldistributionofdemandsduringleadtime 11 PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. DemandUncertaintyandSafetyStock (cont.) • Safety stock • • Extra inventory carried to protect against stocking out because of demand uncertainty What is the appropriate level of safety stock to carry? 12 Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved. Safety Stock (SS) and Reorder Point (ROP) 13 PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. LumpyDemands ã Forcomponentsofassembledproducts: ã Demandsarenotusuallyconstant ã Inventorydepletionforcomponentpartstendstooccurindiscrete lumpsbecauseoflotsizingofthefinalproduct • Requirements dependent on the final product are usually discontinuous 14 Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved. Questions? 15 Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved. ... Requirements dependent on the final product are usually discontinuous 14 Purchasing? ?and? ?Supply? ?Chain? ?Management, 3rd edition, Copyright © 2013,? ?W.? ?C.? ?Benton? ?Jr., All rights reserved. Questions? 15 Purchasing? ?and? ?Supply? ?Chain? ?Management, 3rd edition, Copyright © 2013,? ?W.? ?C.? ?Benton? ?Jr., All rights reserved. ... +Holding Cost(CH) Purchasing? ?and? ?Supply? ?Chain? ?Management, 3rd edition, Copyright © 2013,? ?W.? ?C.? ?Benton? ?Jr., All rights reserved. Economic Order Size (EOQ) Purchasing? ?and? ?Supply? ?Chain? ?Management, 3rd edition, Copyright © 2013,? ?W.? ?C.? ?Benton? ?Jr., All rights reserved. ... Decoupling stocks Purchasing? ?and? ?Supply? ?Chain? ?Management, 3rd edition, Copyright © 2013,? ?W.? ?C.? ?Benton? ?Jr., All rights reserved. ABC Classification PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved.