Inventory

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Inventory

  1. 1. Chapter. 8Independent Demand -Inventory Prepared by : Arya Wirabhuana, ST, M.Sc
  2. 2. Inventory SystemDefined Inventory is the stock of any item or resource used in an organization. These items or resources can include: raw materials, finished products, component parts, supplies, and work-in-process. An inventory system is the set of policies and controls that monitor levels of inventory and determines what levels should be maintained, when stock should be replenished, and how large orders should be.
  3. 3. A Water Tank Analogy for Inventory Inventory Level Supply Rate Inventory Level Demand Rate
  4. 4. Inventory Cost Structures Item cost Ordering (or setup) cost Carrying (or holding) cost: – Cost of capital – Cost of storage – Cost of obsolescence, deterioration, and loss Stock out cost
  5. 5. Classifying Inventory Models Fixed-Order Quantity Models – Event triggered Fixed-Time Period Models – Time triggered 7
  6. 6. Economic Order Quantity (EOQ)Assumptions Demand rate is constant, recurring, and known. Lead time is constant and known. No stockouts allowed. Material is ordered or produced in a lot or batch and the lot is received all at once Unit cost is constant (no quantity discounts) Carrying cost depends linearly on the average level of inventory Ordering (setup) cost per order is fixed The item is a single product
  7. 7. EOQ Inventory Levels Order Interval Lot size = Q Average Inventory Level = Q/2 Time
  8. 8. Total Cost of Inventory
  9. 9. Basic Fixed-Order Quantity (EOQ) Model Formula Annual Annual Annual Total Annual Cost = Purchase + Ordering + Holding Cost Cost Cost TC = Total annual cost D = Demand C = Cost per unit D Q Q = Order quantityTC = DC + S + H S = Cost of placing an order Q 2 or setup cost R = Reorder point L = Lead time H = Annual holding and storage cost per unit of inventory
  10. 10. Continuous Review System Assumption of “constant demand” is relaxed. Monitoring of “on hand” stock position in a continuous system Q system (another name for continuous review system)
  11. 11. A Continuous Review (Q) System R = Reorder Point Q = Order Quantity L = Lead time
  12. 12. Periodic Review System All assumption of EOQ (except that demand is constant and “no stockout”) remains in effect. Also known as “P System” or “Fixed-order- Interval System”
  13. 13. A Periodic Review (P) System
  14. 14. “Time Between Orders (P) andTarget Level (T) Calculation 2S P iC D T  m  s Where: m’ = average demand over P+L s’ = safety stock
  15. 15. Using P and Q System in Practice Use P system when orders must be placed at specified intervals. Use P systems when multiple items are ordered from the same supplier (joint- replenishment). Use P system for inexpensive items.
  16. 16. Special Purpose Model: Price-BreakModel FormulaBased on the same assumptions as the EOQ model,the price-break model has a similar Qopt formula: 2DS 2(Annual Demand)(Order or Setup Cost)QOPT = = iC Annual Holding Cost i = percentage of unit cost attributed to carrying inventory C = cost per unit Since “C” changes for each price-break, the formula above will have to be used with each price-break cost value.
  17. 17. Price-Break Example Problem Data(Part 1)A company has a chance to reduce their inventoryordering costs by placing larger quantity orders using theprice-break order quantity schedule below. What shouldtheir optimal order quantity be if this company purchasesthis single inventory item with an e-mail ordering cost of$4, a carrying cost rate of 2% of the inventory cost of theitem, and an annual demand of 10,000 units? Order Quantity(units) Price/unit($) 0 to 2,499 $1.20 2,500 to 3,999 1.00 4,000 or more .98
  18. 18. Price-Break Example Solution (Part 2) First, plug data into formula for each price-break value of “C”. Annual Demand (D)= 10,000 units Carrying cost % of total cost (i)= 2% Cost to place an order (S)= $4 Cost per unit (C) = $1.20, $1.00, $0.98 Next, determine if the computed Qopt values are feasible or not.Interval from 0 to 2499, the 2DS 2(10,000)(4)Qopt value is feasible. QOPT = = = 1,826 units iC 0.02(1.20)Interval from 2500-3999, the 2DS 2(10,000)(4)Qopt value is not feasible. QOPT = = = 2,000 units iC 0.02(1.00)Interval from 4000 & more, the 2DS 2(10,000)(4)Qopt value is not feasible. QOPT = = = 2,020 units iC 0.02(0.98)
  19. 19. Price-Break Example Solution (Part 3)Since the feasible solution occurred in the first price-break,it means that all the other true Qopt values occur at thebeginnings of each price-break interval. Why? Because the total annual cost function is aTotal “u” shaped function.annualcosts So the candidates for the price-breaks are 1826, 2500, and 4000 units. 0 1826 2500 4000 Order Quantity
  20. 20. Annual Usage of Items by Dollar Value Percentage of Annual Usage in Total Dollar Item 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%
  21. 21. ABC Chart 45.0% 120.0% 40.0% A B C 100.0% Cumulative % Usage 35.0%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
  22. 22. Dependent Demand- Inventory
  23. 23. MRP versus Order-Point Systems Attribute Attribute M RP MRP Order Point Order PointDemandDemand Dependent Dependent Independent IndependentOrder philosophyOrder philosophy Requirements Requirements Replenishment Replenishment ForecastForecast Based on master schedule Based on master schedule Based on past demand Based on past demand Control conceptControl concept Control all items Control all items ABC ABCObjectivesObjectives Meet manufacturing needs Meet manufacturing needs Meet customer needs Meet customer needs Lot sizingLot sizing Discrete Discrete EOQ EOQDemand patternDemand pattern Lumpy but predictable Lumpy but predictable Random Random Types of inventory Work in process and rawTypes of inventory Work in process and raw Finished goods and spare Finished goods and spare materials materials parts parts
  24. 24. Material Requirements Planning How much of an item is needed? When is an item needed to complete – a specified number of units... – in a specified period of time? Dependent demand drives MRP 3
  25. 25. Introductory Example - Dependent Demand Lead Times A A 1 day B 2 days B(4) C(2) C 1 day D 3 days E 4 days F 1 dayD(2) E(1) D(3) F(2) Demand Product Structure Tree for Assembly A Day 10 50 A Day 8 20 B (Spares) Day 6 15 D (Spares) Create a schedule to satisfy demand. 4
  26. 26. Day: 1 2 3 4 5 6 7 8 9 10A Required 50 Order Placement 50 LT = 1 day 5
  27. 27. Day: 1 2 3 4 5 6 7 8 9 10A R e q u ire d 50 O rd e r P la c e m e n t 50B R e q u ire d 20 200 O rd e r P la c e m e n t 20 200 LT = 2 Spares A B(4) C(2) D(2) E(1) D(3) F(2) 6
  28. 28. Day: 1 2 3 4 5 6 7 8 9 10 A Required 50LT=1 Order Placement 50 B Required 20 200LT=2 Order Placement 20 200 C Required 100LT=1 Order Placement 100 D Required 55 400 300LT=3 Order Placement 55 400 300 E Required 20 200LT=4 Order Placement 20 200 F Required 200LT=1 Order Placement 200 A Part D: Day 6 B(4) C(2) 40 + 15 spares D(2) E(1) D(3) F(2) 7
  29. 29. Time Fences Frozen – No schedule changes allowed within this window Moderately Firm – Specific changes allowed within product groups as long as parts are available Flexible – Significant variation allowed as long as overall capacity requirements remain at the same levels 9
  30. 30. Time Fences Moderately Frozen Firm FlexibleCapacity Forecast and available capacity Firm Customer Orders 8 15 26 Weeks 10
  31. 31. Aggregate Forecasts Firm orders product of demand from known plan from random customers customers MasterEngineering production Inventory design schedule transactions changes (MPS) Bill of Material Inventory material planning record file (MRP) file Reports 12
  32. 32. Another MRP Example Item On-Hand Lead Time (Weeks) X X 50 2 A 75 3 B 25 1 A(2) B(1) C 10 2 D 20 2 C(3) C(2) D(5) Requirements include 95 units (80 firm orders and 15 forecast) of X in week 10 plus the following spares:Spares 1 2 3 4 5 6 7 8 9 10 A 12 B 7 C 10 D 15 18
  33. 33. Adding some more terminology Gross Requirements On-hand Net requirements Planned order receipt Planned order release 19
  34. 34. C Gross Requirements 45 36 64LT=2 On-Hand=10 10 Net Requirements 35 36 64 Planned Order Receipt 35 36 64 Planner Order Release 35 36 64 D Gross Requirements 15 135LT=2 On-Hand=20 15 5 Net Requirements 130 Planned Order Receipt 130 Planner Order Release 130 X A(2) B(1) C(3) C(2) D(5) 20
  35. 35. Day: 1 2 3 4 5 6 7 8 9 10 X Gross Requirements 95LT=2 On-Hand=50 50 Net Requirements 45 Planned Order Receipt 45 Planner Order Release 45 A Gross Requirements 90 12LT=3 On-Hand=75 75 Net Requirements 15 12 Planned Order Receipt 15 12 Planner Order Release 15 12 B Gross Requirements 7 45LT=1 On-Hand=25 7 18 Net Requirements 27 Planned Order Receipt 27 Planner Order Release 27 C Gross Requirements 45 36 54 10LT=2 On-Hand=10 10 Net Requirements 35 36 54 10 Planned Order Receipt 35 36 54 10 Planner Order Release 35 36 54 10 D Gross Requirements 15 135LT=2 On-Hand=20 15 5 Net Requirements 130 Planned Order Receipt 130 Planner Order Release 130 21
  36. 36. Manufacturing Resource Planning (MRP II) Goal: Plan and monitor all resources of a manufacturing firm (closed loop): – manufacturing – marketing – finance – engineering Simulate the manufacturing system 23
  37. 37. Next : Supply Chain Management

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