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Inventory

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  • BA 339 03/20/13
  • BA 339 03/20/13
  • BA 339 03/20/13 3
  • BA 339 03/20/13 4
  • BA 339 03/20/13 5
  • BA 339 03/20/13 7
  • BA 339 03/20/13
  • BA 339 03/20/13
  • BA 339 03/20/13
  • BA 339 03/20/13
  • BA 339 03/20/13
  • BA 339 03/20/13
  • BA 339 03/20/13
  • BA 339 03/20/13
  • BA 339 03/20/13
  • BA 339 03/20/13
  • BA 339 03/20/13
  • BA 339 03/20/13
  • BA 339 03/20/13
  • BA 339 03/20/13
  • BA 339 03/20/13
  • Transcript

    • 1. InventoryBA 339 1
    • 2. 2
    • 3. Inventory Definitions  Inventory vs. Inventory system  Dependent vs. Independent environments  Types  Safety Stock  Anticipation Inventory  Hedge inventory (unusual events)  Transportation or Pipeline Inventory 3
    • 4. Purposes of Inventory 1. Independence of operations. 2. Variation  Product demand  Material Delivery Time 3. Scheduling flexibility 4. Volume Discounts 5. Material price fluctuations 4
    • 5. Inventory Costs  Holding (or carrying) costs  Setup (or production change) costs  Ordering costs.  Shortage costs. 5
    • 6. Inventory Systems  Rules to manage inventory, specifically:  timing (when to order)  sizing (how much to order)  Continuous Review or Fixed-Order Quantity Models (Q)  Event triggered (Example: running out of stock)  Periodic Review or Fixed-Time Period Models (P)  Time triggered (Example: Monthly sales call by sales representative) 6
    • 7. Comparison of Periodic andContinuous Review Systems Periodic Review Continuous Review  Fixed order intervals  Varying order intervals  Variable order sizes  Fixed order sizes (Q)  Allows individual review  Convenient to frequencies administer  Possible quantity discounts  Inventory position only  Lower, less-expensive required at review safety stocks 7
    • 8. Inventory costsC = Unit cost or production cost: the additional cost for each unit purchased or produced. H = Holding costs: cost of keeping items in inventory(cost of lost capital, taxes and insurance for storage, breakage, etc., handling and storing) S = Setup or ordering costs: a fixed cost incurred every time you place an order or a batch is produced. 8
    • 9. Total costs of carrying inventory  Assumptions  demand is constant and uniform throughout the period for your products (5 cases per day)  Price per unit is constant for the period ($16/case)  Inventory holding cost is based on an average cost.  TotalInventory Policy Cost annually = annual purchase cost + annual order cost + annual holding cost 9
    • 10. Cost Minimization Goal C O Total Cost S T Holding Costs Annual Cost of Items (DC) Ordering Costs QOPT Order Quantity (Q)Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 1998 10
    • 11. Total cost of Inventory Policy= annual purchase cost (annual demand * Cost/item) + annual order cost (annual # orders * Cost to order) + annual holding cost (average units held*cost to carry one unit) 11
    • 12. Total Inventory Cost Equation D Q TC = D * C + S + H Q 2D = yearly demand of unitsC = cost of each unitQ = quantity orderedS = cost to place orderH = average yearly holding cost for each unit = storage+interest*CD/Q = number of orders per yearQ/2 = average inventory held during a given period assuming with start with Q and drop to zero before next order arrives (cycle inventory). 12
    • 13. Deriving the EOQ :Economic Order Quantity  Using calculus, we take the derivative of the total cost function and set the derivative (slope) equal to zero 2DS 2(Annual Demand)(Order or Setup Cost) Q = EOQ = = H Annual Holding Cost 13
    • 14. EOQ Model--Basic Fixed-Order Quantity Model (Q)Numberof unitson hand Q Q Q R L L Time R = Reorder point Q = Economic order quantity L = Lead time 14
    • 15. The Reorder PointReorder point = (average period demand)*Lead Time periods = d*L 15
    • 16. Another EOQ ExampleAnnual Demand = 1,000 unitsDays per year considered in average daily demand = 365Cost to place an order = $10Holding cost per unit per year = $2.50 ead time = 7 daysCost per unit = $15 Determine the economic order quantity & reorder point. 16
    • 17. Minor Deviations Here  What causes minor deviations from the ideal order size?  Assumptions behind the regular EOQ Model? 17
    • 18. Variations in lead time  If we have variations in lead time, how should we change the reorder point so we rarely run out? Reorder Point = Average demand during lead time(d*L) + safety stock (Z* σL) σL =σD L  where: d = average daily (or weekly) demand L = Lead time (matching days or weeks) σL = standard deviation of demand during lead time. σD = standard deviation of demand (days or weeks). 18
    • 19. Service Level or % of time inventory willmeet demand during lead time Z Value Resulting Service Level 1.28 90% 1.65 95% 2.33 99% 3.08 99.9% 19
    • 20. Example  Annual Demand = 1000 units  250 work days in the year d=1000/250 = 4 units/day  Q= 200 units L=9 days σL = 3 units  z=2 (97.7% likelihood that we won’t run out during lead time) Reorder point= d*L +z*σL = (4*9) + (2*3) = 42 units 20
    • 21. P Method (periodic review) You have a predetermined time (P) between orders (sales rep comes by every 10 days) or the average time between orders from EOQ = Q/D How much should you order to bring inventory level up to some predetermined level, R where: R = restocking level Current Inventory position = IP Order Quantity= R-IP 21
    • 22. Restocking Level Needs to meet most demand situations R= Restocking level = Average demand during lead time & review period+ safety stock = µP+L + z* σP+L where: µP+L = average demand during lead time and review period z = # of standard dev from mean above the average demand (higher z is lower probability of running out). σRP+L = standard deviation of demand during lead time + review period 22
    • 23. ABC Inventory Management  Based on “Pareto” concept (80/20 rule) and total usage in dollars of each item.  Classification of items as A, B, or C based on usage.  Purpose is to set priorities on effort used to manage different SKUs, i.e. to allocate scarce management resources.  SKU: Stock Keeping Unit 23
    • 24. ABC Inventory Management ‘A’ items: 20% of SKUs, 80% of dollars ‘B’ items: 30 % of SKUs, 15% of dollars ‘C’ items: 50 % of SKUs, 5% of dollars Three classes is arbitrary; could be any number. Percents are approximate. Danger: dollar use may not reflect importance of any given SKU! 24
    • 25. Example of SKU list for 10 items Percentage of Annual Usage Total Dollar Item in Units Unit Cost Dollar Usage Usage 1 5,000 $ 1.50 $ 7,500 2.9% 2 1,500 8.00 12,000 4.7% 3 10,000 10.50 105,000 41.2% 4 6,000 2.00 12,000 4.7% 5 7,500 0.50 3,750 1.5% 6 6,000 13.60 81,600 32.0% 7 5,000 0.75 3,750 1.5% 8 4,500 1.25 5,625 2.2% 9 7,000 2.50 17,500 6.9% 10 3,000 2.00 6,000 2.4% Total     $ 254,725 100.0% 25
    • 26. ABC Chart for SKU List 45.0% 120.0% 40.0% 100.0% Cumulative % Usage 35.0% A B C Percent Usage 30.0% 80.0% 25.0% 60.0% 20.0% 15.0% 40.0% 10.0% 20.0% 5.0% 0.0% 0.0% 3 6 9 2 4 1 10 8 5 7 Item No. Percentage of Total Dollar Usage Cumulative Percentage 26
    • 27. ABC Application  Jewelry Store  Fine Dining Restaurant  Outdoor Retailer  Large Department Store 27