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Week 12B – Inventory Management (Chapter 12)

Definition, objectives, historical evolution, EOQ, ABC, Inventory counting

systems

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What Is Inventory? Material owned for use in product or

as operating supply Has value (usually) Need for product or to support

production Other?

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Some Terminology Item Stock-keeping unit (SKU) Part Stockout Shortage Decoupling Safety stock Safety time

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Inventory Types - 1 Raw Material (RM) – purchased

“true” raw material Component parts

Work-in-process (WIP) – manufactured in-house Assemblies Sub-assemblies Fabricated parts

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Inventory Types - 2 Finished Goods (FGI)

Completed products Raw Materials in Process (RIP)

Found in lean operations (JIT) environments

Combines RM and WIP Maintenance, Repair & Operating

(MRO) Goods in transit

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Major Objectives Never have a stockout

Customer dissatisfaction Production disruption

Never carry excess inventory Inventory is an asset but it is not free

In other words – walk a tightrope!

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Inventory Related Costs Carrying costs

Obvious Capital Various

holding*

Semi-obvious Obsolescence Inventory

management Hidden

Idle stock Scrap and

rework* Next slide

Ordering costs People

Purchasing staff Receiving Inspection

Order transmission

Purchasing supplies

Occupancy Purchasing Receiving

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Holding costs – Stock Related

Personnel Equipment Occupancy (rent and utilities) Interest Insurance Taxes Security Shrinkage and damage

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Historical Evolution of I/C - 1

Record keeping Answer 2 questions

When to order How much to order

When? Sawtooth diagram & ROP (see next slide) ROP = d x LT , where d = demand per

period and LT = lead time in periods

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Sawtooth diagram & ROPProfile of Inventory Level Over Time

Quantityon hand

Q

Receive order

Placeorder

Receive order

Placeorder

Receive order

Lead time

Reorderpoint

Usage rate

Time

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ROP Limitations Assumes demand is known and linear Relies on instantaneous replenishment

when inventory reaches zero Assumes lead time is known and

constant Has no relationship to future usage Treats each item independently Encourages safety stock

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Historical Evolution of I/C - 2

How Much? Cost of inventory & EOQ Balance carrying (holding) and ordering costs EOQ = square root of 2DS/IC, where

D = quantity demand or usage for a period of time S = setup and/or ordering cost I = inventory carrying rate (percentage in decimal

form) C = cost of 1 unit of the item Text: “H” which is the product of I times

C

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Historical Evolution of I/C - 3

EOQ variations Multiple delivery (manufacturing: EMQ or

EPQ) See pp. 489-492

Quantity discounts (price breaks) See pp. 492-494

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EOQ Limitations Assumes ordering costs are

accurately known Assumes carrying costs are

accurately known Results in always carrying a certain

amount of inventory Focuses on mechanics, not basics

No emphasis on changing costs

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Additional ordering models Fixed-order interval

Frequency is set Quantity varies with each order

Single-period model One-time order Perishables, refurbishing contracts

Alternative: ABC approach (Pareto!) Based on dollar usage over a fixed period Order “A” often, “C” rarely, “B” in

between

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ABC Classification System - 1

Classifying inventory according to some measure of importance and allocating control efforts accordingly.

A - very important

B - mod. important

C - least important

Annual $ volume of items

A

B

C

High

Low

Few ManyNumber of Items

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ABC Classification System - 2

A items 70-80% of the annual dollar usage 5-15% of the number of items

B items 10-20% of the annual dollar usage 30-35% of the number of items

C items 5-10% of the annual dollar usage 50-60% of the number of items

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ABC Classification System - 2

CategoryOr Class

% of Annual$ Usage

% of NumberOf Items

A 70-80 % 5-15%

B 10-20% 30-35%

C 5-10% 50-60%

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Inventory Counting Systems - 1

Periodic Full physical (“wall-to-wall”)

Two bin Bulk and shelf Stockroom minimum (SRM)

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Inventory Counting Systems - 2

Perpetual Transaction recording and balance

maintenance Historical evolution Cycle counting

Based on quantity usage Based on $ usage using Pareto Principle

(ABC) Block counting