Inventory Management Control Imp

7/31/2019 Inventory Management Control Imp

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INVENTORY MANAGEMENT -

CONTROL


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What Is Inventory?

Stock of items kept to

meet future demand

Purpose of inventory

management how many units to

order?

when to order?


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Types of Inventory

Inputs Raw Materials

Purchased parts

Maintenance andRepair Materials

Outputs Finished Goods

Scrap and Waste

Process

In Process Partially CompletedProducts andSubassemblies

(in warehouses, orin transit)

(often on the factoryfloor)

PROCESS


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Water Tank Analogy for Inventory

Supply Rate

Inventory Level

Demand Rate

Inventory Level

Buffers Demand Ratefrom Supply Rate

N


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Two Forms of Demand

Dependent

Demand for items used to producefinal products

Tires stored at a Goodyear plant arean example of a dependent demanditem

Independent

Demand for items used by externalcustomers

Cars, appliances, computers, andhouses are examples of independentdemand inventory


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Inventory Hides Problems

Poor

Quality

UnreliableSupplier

MachineBreakdown

InefficientLayout

BadDesign

Lengthy

Setups


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Inventory and Supply Chain Management -problems

Bullwhip effect demand information is distorted as it moves away from

the end-use customer

higher safety stock inventories to are stored to

compensate Seasonal or cyclical demand

Inventory provides independence from vendors

Take advantage of price discounts

Inventory provides independence between stagesand avoids work stop-pages

N


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Inventory Costs

Carrying cost

cost of holding an item in inventory

Ordering cost

cost of replenishing inventory

Shortage cost temporary or permanent loss of sales

when demand cannot be met


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Typical Inventory Carrying Costs

Housing cost:

Building rent or depreciation Building operating cost Taxes on building Insurance

Material handling costs: Equipment, lease, or depreciation Power Equipment operating cost

Manpower cost from extra handling and supervision

Investment costs: Borrowing costs Taxes on inventory Insurance on inventory

Pilferage, scrap, and obsolescence

Overall carrying cost

6%

(3% - 10%)

3%(1% - 4%)

3%(3% - 5%)

10%(6% - 24%)

5%

(2% - 10%)(15% - 50%)

Costs as % ofInventory Value


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INVENTORY CONTROL

Inventory control is concerned with minimizing the totalcost of inventory.

The three main factors in inventory control decision makingprocess are:

The cost of holding the stock(e.g., based on the

interest rate).The cost of placing an order(e.g., for row material

stocks) or the set-up cost of production.

The cost of shortage, i.e., what is lost if the stock isinsufficient to meet all demand.

The third element is the most difficult to measure and isoften handled by establishing a "service level" policy, e. g,certain percentage of demand will be met from stockwithout delay.

N


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Inventory Control Systems

Continuous system (fixed-order-quantity)

constant amount orderedwhen inventory declines topredetermined level

Periodic system (fixed-time-period)

order placed for variableamount after fixed passage oftime


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Zero Inventory?

Reducing amounts ofraw materials and

purchased parts and subassemblies by having

suppliers deliver them directly.

Reducing the amount ofworks-in process byusing just-in-time production.

Reducing the amount offinished goods by

shipping to markets as soon as possible.


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How to Measure Inventory

The Dilemma: closely monitor and control

inventories to keep them as low as possible while

providing acceptable customer service.

Average Aggregate Inventory Value: howmuch of the companys total assets are invested in

inventory?

Ford:6.825 billion

Sears: 4.039 billion

Code N


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Inventory Measures

Weeks of Supply

Ford: 3.51 weeks

Sears: 9.2 weeks

Inventory Turnover (Turns)

Ford: 14.8 turns

Sears: 5.7 turns

GM: 8 turns

Toyota: 35 turns

Code N


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ABC CLASSIFICATION

Code N


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ABC Classification

The ABC Classification The ABC classification

system is to grouping items according to

annual sales volume, in an attempt to identify

the small number of items that will accountfor most of the sales volume and that are the

most important ones to control for effective

inventory management.

Code N


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ABC Classification

Class A

5 15 % of units

70 80 % of value

Class B 30 % of units

15 % of value

Class C 50 60 % of units

5 10 % of value

Code N


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ABC Classification: Example

1 $ 60 902 350 40

3 30 1304 80 605 30 1006 20 180

7 10 1708 320 509 510 60

10 20 120

PART UNIT COST ANNUAL USAGE

Code N


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ABC Classification: Example

(cont.)

Example 10.1

1 $ 60 902 350 403 30 1304 80 605 30 1006 20 180

7 10 1708 320 509 510 60

10 20 120

PART UNIT COST ANNUAL USAGETOTAL % OF TOTAL % OF TOTAL

PART VALUE VALUE QUANTITY % CUMMULATIVE

9 $30,600 35.9 6.0 6.08 16,000 18.7 5.0 11.0

2 14,000 16.4 4.0 15.01 5,400 6.3 9.0 24.04 4,800 5.6 6.0 30.03 3,900 4.6 10.0 40.06 3,600 4.2 18.0 58.0

5 3,000 3.5 13.0 71.010 2,400 2.8 12.0 83.07 1,700 2.0 17.0 100.0

$85,400

A

B

C

% OF TOTAL % OF TOTALCLASS ITEMS VALUE QUANTITY

A 9, 8, 2 71.0 15.0B 1, 4, 3 16.5 25.0C 6, 5, 10, 7 12.5 60.0

Code N


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ABC Analysis

Recognizes fact some inventory items are more important

than others.

Purpose of analysis is to divide all of company's inventory

items into three groups: A, B, and C.

Depending on group, decide how inventory levels should

be controlled.

Code N


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Economic Order Quantity

Model


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Economic Order Quantity (EOQ)

Models

EOQ

optimal order quantity that will

minimize total inventory costs

Basic EOQ model

Production quantity model


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Assumptions of Basic EOQ Model

Demand is known with certainty and

is constant over time No shortages are allowed

Lead time for the receipt of orders isconstant

Order quantity is received all at once


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EOQ Lot Size Choice

There is a trade-off between lot size and

inventory level.

Frequent orders (small lot size): higher ordering

cost and lower holding cost. Fewer orders (large lot size): lower ordering cost

and higher holding cost.


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EOQ Inventory Order Cycle

Demandrate

0 TimeLeadtime

Leadtime

OrderPlaced

OrderPlaced

OrderReceived

OrderReceived

Inventory

L

evel

Reorder point, R

Order qty, Q

As Q increases, average

inventory level increases,

but number of orders

placed decreases

ave = Q/2


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Total Cost of Inventory EOQ Model


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Answer to Inventory Management

Questions for EOQ Model

Keeping track of inventory Implied that we track continuously

How much to order? Solve for when the derivative of total cost with respect to Q

= 0: -SD/Q^2 + iC/2 = 0 Q = sqrt ( 2SD/iC)

When to order? Order when inventory falls to the Reorder Point-level R so

we will just sell the last item as the new order comes in: R = DL


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The EOQ Model

Q = Number of pieces per order

Q* = Optimal number of pieces per order (EOQ)D = Annual demand in units for the Inventory itemS = Setup or ordering cost for each orderH = Holding or carrying cost per unit per year


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An EOQ Example

Determine optimal number of needles to orderD= 1,000 unitsS= $10 per orderH= $.50 per unit per year

Q* =2DS

H

Q* =2(1,000)(10)

0.50= 40,000 = 200 units


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An EOQ Example

Determine optimal number of needles to orderD= 1,000 units Q* = 200 unitsS= $10 per orderH= $.50 per unit per year

= N = =Expectednumber of

orders

Demand

Order quantity


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An EOQ Example

Determine optimal number of needles to orderD= 1,000 units Q* = 200 unitsS= $10 per order N = 5 orders per yearH= $.50 per unit per year

= T =Expected

time betweenorders

Number of workingdays per year

N= 250/5

=50 days


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An EOQ Example

Determine optimal number of needles to orderD= 1,000 units Q* = 200 unitsS= $10 per order N = 5 orders per yearH= $.50 per unit per year T = 50 days

Total annual cost = Setup cost + Holding cost

TC = S + HDQ*

Q*2

= 5(10) + (200/2)(#50) = $100


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Reorder Point

EOQ answers the how much question

The reorder point (ROP) tells when toorder

ROP=Lead time for a

new order in daysDemandper day

= d x L

d =D

Number of working days in a year


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Reorder Point: Example

Demand = 10,000 kg/year

Store open 311 days/yearDaily demand = 10,000 / 311 = 32.154 kg/day

Lead time = L = 10 days

R = dL = (32.154)(10) = 321.54 kg = 322 kg


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Safety Stocks

Safety stock

buffer added to on hand inventory during leadtime

Stockout an inventory shortage

Service level

probability that the inventory available duringlead time will meet demand

N


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Variable Demand witha Reorder Point

Reorderpoint, R

Q

LT

Time

LT

Inventory

level

0

N


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Reorder Point witha Safety Stock

Reorderpoint, R

Q

LT

Time

LT

Inventory

level

0

Safety Stock

N


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Reorder Point WithVariable Demand

R= dL + z d L

whered= average daily demandL = lead time

d= the standard deviation of daily demand

z= number of standard deviationscorresponding to the service levelprobability (service factor)

zd L = safety stock

N


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Reorder Point fora Service Level

Probability ofmeeting demand duringlead time = service level

Probability ofa stockout

R

Safety stock

dLDemand

z d L

N


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Safety factor values for CSL

Code N


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Reorder Point forVariable Demand

The carpet store wants a reorder point with a 95%service level and a 5% stockout probability

d= 30 m per dayL = 10 daysd

= 5 m per day

For a 95% service level, z= 1.64

R= dL + zd L

= 30(10) + (1.64)(5)( 10)

= 325.9 m

Safety stock = zd L

= (1.64)(5)( 10)

= 25.9 m

N

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Inventory Management Control Imp