Chapter 8

Inventory Management

Introduction

Chapter 8 - Inventory Management 3

Radio Frequency Identification (RFID)

Conventional bar codes are replaced with computer chips or smart tags.

Use wireless technology to track inventory.

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Wal-Mart RFID Early adopter of RFID is Wal-Mart. By January 2005, 53 of its top 100

suppliers were sending RFID-tagged goods to its three distribution centers in the Dallas, Texas area.

Wal-Mart’s goal is to have all top 100 suppliers shipping RFID-tagged goods by the end of February 2005 in addition to 37 other suppliers.

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Wal-Mart RFID continued The impetus for Wal-Mart’s investment in

RFID was the lack of visibility it had into its backroom storage areas.

The major drawback to RFID is its cost. In 2005, the cost of smart tags was

$0.25 each if purchased in volume, and $0.75 if purchased in smaller quantities.

The stated goal in the industry is to get the price of smart tags down to $.05

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Vendor-Managed Inventory (VMI) With VMI, suppliers are given

responsibility for managing the inventory carried by their retail or wholesale customers.

Rich Products, a $2 billion family-owned food company headquartered in Buffalo, NY, has a partnership with IBM to provide VMI services to the grocery industry for its frozen food items. 

General Considerations

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Functions of Inventories Transit Inventories Buffer Inventories (safety stocks) Anticipation Inventories Decoupling Inventories Cycle Inventories

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Forms of Inventories Raw materials Maintenance, repair, and operating

supplies Work-in-process (WIP) Finished goods

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Inventory-Related Costs Ordering or setup costs Inventory carrying or holding costs Stockout costs Opportunity costs Cost of goods

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Decisions in Inventory Management

When to order?

How much to order?

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Types of Inventory Management Systems

Reorder point systems time between orders varies constant order quantity

Periodic review systems time between orders fixed order quantity varies

Material requirements planning (MRP) dependent demand items

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Fluctuations in Inventory

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Reorder Point Systems Reorder point Lead time Two-bin system Perpetual inventory system

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A Reorder Point System

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Periodic Review System maximum inventory level - on-hand inventory - on-order quantity + demand over lead time reorder quantity

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Periodic Review System Without Considering On-Order Quantity

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Periodic Review System (Assumes None On Order at Time of Reorder)

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Priorities for Inventory Management: The ABC Concept

A items 15-20% of items that account for 75-80% of

annual inventory value B items

30-40% of items that account for 15% of annual inventory value

C items 40-50% of items that account for 10-15% of

annual inventory value

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ABC Inventory Categories

The Economic Order Quantity (EOQ)

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Assumptions Constant rate of demand Shortages not allowed Stock replenishment can be scheduled to

arrive exactly when inventory drops to zero Purchase price, ordering cost, and per unit

holding cost are independent of quantity ordered

Items are ordered independently of each other

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Notation Q = order quantity

U = annual usage

CO = order cost per order

CH = annual holding cost per unit

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Water Distributor’s Inventory Pattern

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Water Distributor’s Inventory Graph

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Annual Order Cost

$

Q

U

QCO

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Annual Holding Cost

$

Q

HC 2

Q

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Graph of Annual Inventory Costs

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Finding an Optimal Policy

Q

2C

U

QCH O

Q

2C UC

2

H O

QUC

C2 O

H

2

EOQ =2UC

CO

H

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Alternative Way of Deriving EOQ

TAC =Q

2C

U

QC

TAC

Q

C

2

U

QC

H O

H2 O

0

C

2

U

QC

H

2 O

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Alternative Way of Deriving EOQ continued

U

QC

C

2

UCQ C

2UC

CQ

UC

C Q

2 OH

O

2H

O

H

2

H

2

2 O

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EOQ Example Given:

25,000 annual demand $3 per unit per year holding cost $100 ordering costs

EOQ = 2(25,000)(100)

31291

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Cautions Regarding EOQ GIGO Exclude “sunk” costs Very small EOQ values my not be valid

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34