Operations Operations ManagementManagement

Inventory ManagementInventory Management

Types of InventoryTypes of Inventory

Raw materialRaw material Work-in-processWork-in-process Maintenance/repair/operating suppliesMaintenance/repair/operating supplies Finished goodsFinished goods

The Functions of InventoryThe Functions of Inventory

Decouple suppliers from production and production Decouple suppliers from production and production from distribution. from distribution. Decoupling means that inventory is Decoupling means that inventory is used to break a direct dependency that one part of the used to break a direct dependency that one part of the supply chain may have on another. If disruption occurs supply chain may have on another. If disruption occurs in any part of the system, inventory is used to cushion in any part of the system, inventory is used to cushion that impact.that impact.

Allows one to take advantage of quantity discountsAllows one to take advantage of quantity discounts To provide a hedge against inflationTo provide a hedge against inflation To protect against shortages due to delivery variation To protect against shortages due to delivery variation

(safety stock)(safety stock)

Inventory

Process stage

Demand Type

Number & Value Other

Raw Material WIP

Finished Goods

Independent Dependent

A Items B Items C Items

Maintenance Dependent Operating

© 1984-1994 T/Maker Co.

Inventory ClassificationsInventory Classifications

Divides on-hand inventory into 3 classesDivides on-hand inventory into 3 classes A class, B class, C classA class, B class, C class

Basis is usually annual $ volumeBasis is usually annual $ volume $ volume = Annual demand x Unit cost$ volume = Annual demand x Unit cost

Policies based on ABC analysisPolicies based on ABC analysis Develop class A suppliers moreDevelop class A suppliers more Give tighter physical control of A itemsGive tighter physical control of A items Forecast A items more carefullyForecast A items more carefully

ABC AnalysisABC Analysis

ABC CLASSIFICATION

Item Annual Stock Volume Unit Number (Units) Cost ===================================#10286 1,000 $ 90.00#11526 500 $154.00 #12760 1,550 $ 17.00#10867 350 $ 42.86#10500 1,000 $ 12.50#12572 600 $ 14.17#14075 2,000 $ .60#01036 100 $ 8.50#01307 1,200 $ 0.42#10572 250 $ 0.60===================================

ABC CLASSIFICATION

Percent ofItem Annual Annual Annual Stock Volume Unit Dollar DollarNumber (Units) Cost Volume Volume Class==============================================================#10286 1,000 $ 90.00 $ 90,000 38.8% A#11526 500 $154.00 $ 77,000 33.2% A#12760 1,550 $ 17.00 $ 26,350 11.4% B#10867 350 $ 42.86 $ 15,001 6.5% B#10500 1,000 $ 12.50 $ 12,500 5.4% B#12572 600 $ 14.17 $ 8,502 3.7% C#14075 2,000 $ .60 $ 1,200 .5% C#01036 100 $ 8.50 $ 850 .4% C#01307 1,200 $ 0.42 $ 504 .2% C#10572 250 $ 0.60 $ 150 .1% C==============================================================

$232,057

TYPICAL DECISION TABLE FOR TYPICAL DECISION TABLE FOR ABC ABC CLASSIFICATION CLASSIFICATION

Is annual usage more than $50,000? Is annual usage more than $50,000? A AIs annual usage between $10,000 and $50,000?Is annual usage between $10,000 and $50,000? B BIs annual usage less than $10,000? CIs annual usage less than $10,000? CIs the unit cost more than $500? Is the unit cost more than $500? A AIs the unit cost between $100 and $500? Is the unit cost between $100 and $500? B BDoes the physical nature of the item cause special storage Does the physical nature of the item cause special storage

problems? Bproblems? BIs the lead time longer than 6 months? Is the lead time longer than 6 months? A AIs the lead time between 3 and 6 months? BIs the lead time between 3 and 6 months? BIs shelf life less that 3 months? Is shelf life less that 3 months? A AIs shelf life greater than 3 months but less than 6 months? B Is shelf life greater than 3 months but less than 6 months? B

Control of A - Items Control of A - Items

- Close Control on inventory - Close Control on inventory

- Frequent Check of Schedule Revision - Frequent Check of Schedule Revision

- Little or zero Safety stock - Little or zero Safety stock

- High turnover goals (sales/inventory), 12 - High turnover goals (sales/inventory), 12 to 24 times a year to 24 times a year

- Frequent check of inventory- Frequent check of inventory

- Proper authorization - Proper authorization

- Long-term relationship with supplier - Long-term relationship with supplier

Control of B - Items Control of B - Items

- Moderate control on inventory- Moderate control on inventory

- Moderate safety stock - Moderate safety stock

- Moderate turnover - six to fifteen times a - Moderate turnover - six to fifteen times a yearyear

- Moderate authorization procedure- Moderate authorization procedure

- Limited authorization required - Limited authorization required

Control on C - items Control on C - items

- No or lose control- No or lose control

- Large safety stock - Large safety stock

- Low turnover - One to five times a year - Low turnover - One to five times a year

- No authorization require - No authorization require

- No supplier relationship - No supplier relationship

- Buy when needed - Buy when needed

Independent versus Independent versus Dependent DemandDependent Demand

Independent demand - demand for item is Independent demand - demand for item is independent of demand for any other itemindependent of demand for any other item

Dependent demand - demand for item is Dependent demand - demand for item is dependent upon the demand for some dependent upon the demand for some other itemother item

Known and constant demandKnown and constant demand Known and constant lead timeKnown and constant lead time Instantaneous receipt of materialInstantaneous receipt of material No quantity discountsNo quantity discounts No stockouts (shortage)No stockouts (shortage)

EOQ AssumptionsEOQ Assumptions

Cost of InventoryCost of Inventory

Holding Ordering TotalHolding Ordering Total

QQ Cost Cost Cost Cost CostCost

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100 100/2 (1) = 50 1000/100 (2) =20 70100 100/2 (1) = 50 1000/100 (2) =20 70

200 200/2 (1) =100 1000/200 (2) =10 110200 200/2 (1) =100 1000/200 (2) =10 110

300 300/2 (1) =150 1000/300 (2) = 6.67 156.67300 300/2 (1) =150 1000/300 (2) = 6.67 156.67

Order QuantityOrder Quantity

Annual CostAnnual Cost

Holding Cost Curve

Holding Cost Curve

Total Cost Curve

Total Cost Curve

Order (Setup) Cost CurveOrder (Setup) Cost Curve

Optimal Optimal Order Quantity (Q*)Order Quantity (Q*)

EOQ ModelEOQ ModelHow Much to Order?How Much to Order?

Deriving an EOQDeriving an EOQ

Develop an expression for setup or Develop an expression for setup or ordering costsordering costs

Develop an expression for holding costDevelop an expression for holding cost Set setup cost equal to holding costSet setup cost equal to holding cost Solve the resulting equation for the best Solve the resulting equation for the best

order quantityorder quantity

Answers how much to order and when to Answers how much to order and when to orderorder

Allows partial receipt of materialAllows partial receipt of material Other EOQ assumptions applyOther EOQ assumptions apply

Suited for production environmentSuited for production environment Material produced, used immediatelyMaterial produced, used immediately Provides production lot sizeProvides production lot size

Lower holding cost than EOQ modelLower holding cost than EOQ model

Production Order Quantity Production Order Quantity ModelModel

Make Make InformationInformation

Working days = 240 Days a year

Holding Ordering

Product Cost Demand Production Cost Cost

A 10.00 100000 130000 1.00 305.00

B 15.00 110000 140000 1.20 305.10

C 16.00 90000 120000 1.30 304.50

D 19.00 75000 105000 0.90 310.00

E 21.00 80000 110000 1.50 312.00

F 25.00 120000 150000 2.00 308.50

G 28.00 95000 125000 0.75 309.00

H 14.00 130000 160000 0.65 312.50

I 9.00 65000 95000 1.24 310.50

J 13.00 55000 85000 1.10 308.00

MAKE

EOQ Purchasing Holding Ordering Total

Product Q Cost Cost Cost Cost

A 16258 1000000.00 1875.96 1875.96 1003751.92

B 16156 1650000.00 2077.25 2077.25 1654154.51

C 12986 1440000.00 2110.29 2110.29 1444220.57

D 13447 1425000.00 1728.96 1728.96 1428457.91

E 11047 1680000.00 2259.53 2259.53 1684519.05

F 13605 3000000.00 2721.03 2721.03 3005442.06

G 18060 2660000.00 1625.41 1625.41 2663250.82

H 25820 1820000.00 1573.40 1573.40 1823146.80

I 10153 585000.00 1987.84 1987.84 588975.69

J 9342 715000.00 1813.38 1813.38 718626.76

Buy Information

Price Ordering Cost Holding Cost Demand

A 25.00 5.00 1.00 100000

B 30.00 5.10 1.20 110000

C 31.00 4.50 1.30 90000

D 34.00 10.00 0.90 75000

E 36.00 12.00 1.50 80000

F 40.00 8.50 2.00 120000

G 43.00 9.00 0.75 95000

H 29.00 12.50 0.65 130000

I 24.00 10.50 1.24 65000

J 28.00 8.00 1.10 55000

BUY

EOQ Purchasing Holding Ordering Total

Product Q Cost Cost Cost Cost

A 1000 2500000.00 500.00 500.00 2501000.00

B 967 3300000.00 580.17 580.17 3301160.34

C 789 2790000.00 513.08 513.08 2791026.16

D 1291 2550000.00 580.95 580.95 2551161.90

E 1131 2880000.00 848.53 848.53 2881697.06

F 1010 4800000.00 1009.95 1009.95 4802019.90

G 1510 4085000.00 566.24 566.24 4086132.48

H 2236 3770000.00 726.72 726.72 3771453.44

I 1049 1560000.00 650.50 650.50 1561301.00

J 894 1540000.00 491.93 491.93 1540983.87

Make Buy

Total Total

Product Cost Cost

F 3005442.06 4802019.90

G 2663250.82 4086132.48

H 1823146.80 3771453.44

E 1684519.05 2881697.06

B 1654154.51 3301160.34

C 1444220.57 2791026.16

D 1428457.91 2551161.90

A 1003751.92 2501000.00

J 718626.76 1540983.87

I 588985.69 1561301.00