PRODUCTION MANAGEMENT MANAGING INVENTORY farrah detuya
INVENTORY MANAGEMENT’S OBJECTIVE TO STRIKE A BALANCE BETWEEN INVENTORY INVESTMENT   AND  CUSTOMER SERVICE
<ul><ul><ul><li>Improve customer service </li></ul></ul></ul><ul><ul><ul><li>Economies of purchasing </li></ul></ul></ul><...
TYPES OF INVENTORIES <ul><li>Raw Materials Inventory </li></ul><ul><li>Work-In-Process Inventory </li></ul><ul><li>MRO (ma...
INVENTORY CLASSIFICATION <ul><li>ABC analysis  </li></ul><ul><ul><ul><li>A method which divides inventory into 3 groups (A...
ABC analysis (con’t)… <ul><li>Class A </li></ul><ul><ul><li>5 – 15 % of units </li></ul></ul><ul><ul><li>70 – 80 % of valu...
ABC analysis example 1 $ 60 90 2 350 40 3 30 130 4 80 60 5 30 100 6 20 180 7 10 170 8 320 50 9 510 60 10 20 120 PART UNIT ...
MAINTAINING ACCURATE RECORDS <ul><li>Cycle Counting </li></ul><ul><li>A continuing reconciliation of inventory with  inven...
CONTROL OF SERVICE INVENTORIES <ul><li>SHRINKAGE AND PILFERAGES  </li></ul><ul><li>Applicable techniques: </li></ul><ul><l...
INVENTORY MODELS <ul><li>COSTS: </li></ul><ul><li>Holding cost  </li></ul><ul><li>Ordering cost </li></ul><ul><li>Setup co...
ECONOMIC ORDER QUANTITY (EOQ) <ul><li>Demand is known with certainty and is constant over time </li></ul><ul><li>No shorta...
INVENTORY ORDER CYCLE Demand rate Time Lead time Lead time Order placed Order placed Order receipt Order receipt Inventory...
EOQ COST MODEL C o  - cost of placing order D  - annual demand C c  - annual per-unit carrying cost Q  - order quantity An...
EOQ (con’t)… Order Quantity,  Q Annual cost ($) Total Cost Carrying Cost = C c Q 2 Slope = 0 Minimum total cost Optimal or...
EOQ example C c  = $0.75 per yard C o  = $150 D  = 10,000 yards Orders per year = D / Q opt = 10,000/2,000 = 5 orders/year...
PRODUCTION QTY MODEL <ul><li>An EOQ technique applied to production orders </li></ul><ul><li>An inventory system in which ...
PRODUCTION QTY MODEL ( con’t)… Q (1- d/p ) Inventory level (1- d/p ) Q 2 Time 0 Order receipt period Begin order receipt E...
PRODUCTION QTY MODEL (con’t)… p  = production rate d  = demand rate Maximum inventory level = Q  -  d = Q  1 - Q p d p Ave...
PRODUCTION QTY MODEL (con’t)… C c  = $0.75 per yard C o  = $150 D  = 10,000 yards d  = 10,000/311 = 32.2 yards per day p  ...
PRODUCTION QTY MODEL (con’t)… Number of production runs =  =  = 4.43 runs/year D Q 10,000 2,256.8 Maximum inventory level ...
QUANTITY DISCOUNTS Price per unit decreases as order quantity increases TC  =  +  +  PD C o D Q C c Q 2 where P  = per uni...
QUANTITY DISCOUNTS (con’t)… ORDER SIZE  PRICE 0 - 99   $10 100 – 199  8 ( d 1 ) 200+  6 ( d 2 ) Q opt Carrying cost  Order...
QUANTITY DISCOUNTS (con’t)… C o  = $2,500  C c  = $190 per computer  D  = 200 QUANTITY PRICE 1 - 49 $1,400 50 - 89 1,100 9...
PROBABILISTIC MODELS Reorder Point  = Level of inventory at which a new order is placed  R = dL where d  = demand rate per...
Safety Stock <ul><li>Safety stock - buffer added to on hand inventory during lead time </li></ul>Reorder Point with  a Saf...
Reorder point with variable demand R  =  dL  +  z  d   L where d = average daily demand L = lead time  d = the standard ...
Reorder Point with variable demand (con’t)… Probability of  meeting demand during  lead time = service level Probability o...
Reorder Point with variable demand example The carpet store wants a reorder point with a 95% service level and a 5% stocko...
Order Quantity for a Periodic Inventory System Q  =  d ( t b  +  L ) +  z  d   t b  +  L   -  I where d = average demand ...
Fixed-Period Model with Variable Demand d = 6 bottles per day s d = 1.2 bottles t b = 60 days L = 5 days I = 8 bottles z =...
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Inventory management

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  • How do you manage your inventory? We‘ve been talking about inventory management in almost all our subjects..noh? Share about Junrex inventory.
  • Inventory investment by achieving low cost strategy. And you can never achieve a low cost strategy without a good inventory management.. Bottom line is still all about increasing profitability
  • No stockout. Like in retail stores when clients look for a certain item and its always available. Volume discounts, or ordering costs - Order processing, shipping and handling, 3. Economies of production?? Maybe carrying cost ( capital or investment-opportunity cost, Inventory risk costs , Space costs, Inventory service costs 4. Freight savings 5. Provide enough stock to protect from inflation 6. Oks 7. Maintain independence of supply chain??
  • Rm – purchased materials still to be processed Wip – items or components that are not yet completed Mro – supplies necessary to keep machineries and processed productive FG – items ready to be sold
  • You think 100% accuracy of inventory records is possible? Companies are buying software applications to maintain records of inventory.
  • In retail or service businesses, extensive amount of inventory is being held and it deserves special amount of attention.
  • But this chapter focuses on managing inventory where demand is INDEPENDENT We first need to understand costs associated with inventory management models Dependent Demand for items used to produce final products Tires stored at a Goodyear plant are an example of a dependent demand item Independent Demand for items used by external customers Cars, appliances, computers, and houses are examples of independent demand inventory
  • We need to account daily production rate and the daily demand rate
  • You will order when your inventory level reaches 321.54 yards
  • For a service level: Stockout - an inventory shortage Service level - probability that the inventory available during lead time will meet demand
  • What is periodic inventory system? When records are not maintained?
  • Periodic system (fixed-time-period) = order placed for variable amount after fixed passage of time
  • Inventory management

    1. 1. PRODUCTION MANAGEMENT MANAGING INVENTORY farrah detuya
    2. 2. INVENTORY MANAGEMENT’S OBJECTIVE TO STRIKE A BALANCE BETWEEN INVENTORY INVESTMENT AND CUSTOMER SERVICE
    3. 3. <ul><ul><ul><li>Improve customer service </li></ul></ul></ul><ul><ul><ul><li>Economies of purchasing </li></ul></ul></ul><ul><ul><ul><li>Economies of production </li></ul></ul></ul><ul><ul><ul><li>Transportation savings </li></ul></ul></ul><ul><ul><ul><li>Hedge against future </li></ul></ul></ul><ul><ul><ul><li>Unplanned shocks (labor strikes, natural disasters, surges in demand, etc.) </li></ul></ul></ul><ul><ul><ul><li>To maintain independence of supply chain </li></ul></ul></ul>REASONS FOR INVENTORIES
    4. 4. TYPES OF INVENTORIES <ul><li>Raw Materials Inventory </li></ul><ul><li>Work-In-Process Inventory </li></ul><ul><li>MRO (maintenance/repair/operating) </li></ul><ul><li>Finished Goods Inventory </li></ul>
    5. 5. INVENTORY CLASSIFICATION <ul><li>ABC analysis </li></ul><ul><ul><ul><li>A method which divides inventory into 3 groups (A, B, and C) in descending order of importance and level of monitoring on the basis of the investment in each. </li></ul></ul></ul>
    6. 6. ABC analysis (con’t)… <ul><li>Class A </li></ul><ul><ul><li>5 – 15 % of units </li></ul></ul><ul><ul><li>70 – 80 % of value </li></ul></ul><ul><li>Class B </li></ul><ul><ul><li>30 % of units </li></ul></ul><ul><ul><li>15 % of value </li></ul></ul><ul><li>Class C </li></ul><ul><ul><li>50 – 60 % of units </li></ul></ul><ul><ul><li>5 – 10 % of value </li></ul></ul>
    7. 7. ABC analysis example 1 $ 60 90 2 350 40 3 30 130 4 80 60 5 30 100 6 20 180 7 10 170 8 320 50 9 510 60 10 20 120 PART UNIT COST ANNUAL USAGE 1 $ 60 90 2 350 40 3 30 130 4 80 60 5 30 100 6 20 180 7 10 170 8 320 50 9 510 60 10 20 120 PART UNIT COST ANNUAL USAGE TOTAL % OF TOTAL % OF TOTAL PART VALUE VALUE QUANTITY % CUMMULATIVE 9 $30,600 35.9 6.0 6.0 8 16,000 18.7 5.0 11.0 2 14,000 16.4 4.0 15.0 1 5,400 6.3 9.0 24.0 4 4,800 5.6 6.0 30.0 3 3,900 4.6 10.0 40.0 6 3,600 4.2 18.0 58.0 5 3,000 3.5 13.0 71.0 10 2,400 2.8 12.0 83.0 7 1,700 2.0 17.0 100.0 $85,400 A B C % OF TOTAL % OF TOTAL CLASS ITEMS VALUE QUANTITY A 9, 8, 2 71.0 15.0 B 1, 4, 3 16.5 25.0 C 6, 5, 10, 7 12.5 60.0
    8. 8. MAINTAINING ACCURATE RECORDS <ul><li>Cycle Counting </li></ul><ul><li>A continuing reconciliation of inventory with inventory records </li></ul><ul><li>Advantages: </li></ul><ul><li>Eliminates the shutdown and interruption of production for annual physical counts </li></ul><ul><li>Eliminates annual inventory adjustments </li></ul><ul><li>Trained personnel audit the accuracy of inventory </li></ul><ul><li>Cause of errors are identified and remedial actions are taken </li></ul><ul><li>Maintains accurate inventory records </li></ul>
    9. 9. CONTROL OF SERVICE INVENTORIES <ul><li>SHRINKAGE AND PILFERAGES </li></ul><ul><li>Applicable techniques: </li></ul><ul><li>Good personnel selection, training, and discipline </li></ul><ul><li>Tight control of incoming shipments </li></ul><ul><li>Effective control of all goods leaving the facility </li></ul>Items unaccounted between receipt and time of sale Inventory theft
    10. 10. INVENTORY MODELS <ul><li>COSTS: </li></ul><ul><li>Holding cost </li></ul><ul><li>Ordering cost </li></ul><ul><li>Setup cost/set up time </li></ul>Assume that demand for an item is either Independent of or Dependent on the demand for the other item.
    11. 11. ECONOMIC ORDER QUANTITY (EOQ) <ul><li>Demand is known with certainty and is constant over time </li></ul><ul><li>No shortages are allowed </li></ul><ul><li>Lead time for the receipt of orders is constant </li></ul><ul><li>Order quantity is received all at once </li></ul>Optimal order quantity that will minimize total inventory costs Assumptions of EOQ:
    12. 12. INVENTORY ORDER CYCLE Demand rate Time Lead time Lead time Order placed Order placed Order receipt Order receipt Inventory Level Reorder point, R Order quantity, Q 0
    13. 13. EOQ COST MODEL C o - cost of placing order D - annual demand C c - annual per-unit carrying cost Q - order quantity Annual ordering cost = C o D Q Annual carrying cost = C c Q 2 Total cost = + C o D Q C c Q 2
    14. 14. EOQ (con’t)… Order Quantity, Q Annual cost ($) Total Cost Carrying Cost = C c Q 2 Slope = 0 Minimum total cost Optimal order Q opt Ordering Cost = C o D Q
    15. 15. EOQ example C c = $0.75 per yard C o = $150 D = 10,000 yards Orders per year = D / Q opt = 10,000/2,000 = 5 orders/year Order cycle time = 311 days/( D / Q opt ) = 311/5 = 62.2 store days Q opt = 2 C o D C c Q opt = 2(150)(10,000) (0.75) Q opt = 2,000 yards TC min = + C o D Q C c Q 2 TC min = + (150)(10,000) 2,000 (0.75)(2,000) 2 TC min = $750 + $750 = $1,500
    16. 16. PRODUCTION QTY MODEL <ul><li>An EOQ technique applied to production orders </li></ul><ul><li>An inventory system in which an order is received gradually, as inventory is simultaneously being depleted </li></ul><ul><li>p - daily rate at which an order is received over time, a.k.a. production rate </li></ul><ul><li>d - daily rate at which inventory is demanded </li></ul>
    17. 17. PRODUCTION QTY MODEL ( con’t)… Q (1- d/p ) Inventory level (1- d/p ) Q 2 Time 0 Order receipt period Begin order receipt End order receipt Maximum inventory level Average inventory level
    18. 18. PRODUCTION QTY MODEL (con’t)… p = production rate d = demand rate Maximum inventory level = Q - d = Q 1 - Q p d p Average inventory level = 1 - Q 2 d p TC = + 1 - d p C o D Q C c Q 2 Q opt = 2 C o D C c 1 - d p
    19. 19. PRODUCTION QTY MODEL (con’t)… C c = $0.75 per yard C o = $150 D = 10,000 yards d = 10,000/311 = 32.2 yards per day p = 150 yards per day Q opt = = = 2,256.8 yards 2 C o D C c 1 - d p 2(150)(10,000) 0.75 1 - 32.2 150 TC = + 1 - = $1,329 d p C o D Q C c Q 2 Production run = = = 15.05 days per order Q p 2,256.8 150
    20. 20. PRODUCTION QTY MODEL (con’t)… Number of production runs = = = 4.43 runs/year D Q 10,000 2,256.8 Maximum inventory level = Q 1 - = 2,256.8 1 - = 1,772 yards d p 32.2 150
    21. 21. QUANTITY DISCOUNTS Price per unit decreases as order quantity increases TC = + + PD C o D Q C c Q 2 where P = per unit price of the item D = annual demand
    22. 22. QUANTITY DISCOUNTS (con’t)… ORDER SIZE PRICE 0 - 99 $10 100 – 199 8 ( d 1 ) 200+ 6 ( d 2 ) Q opt Carrying cost Ordering cost Inventory cost ($) Q ( d 1 ) = 100 Q ( d 2 ) = 200 TC ( d 2 = $6 ) TC ( d 1 = $8 ) TC = ($10 )
    23. 23. QUANTITY DISCOUNTS (con’t)… C o = $2,500 C c = $190 per computer D = 200 QUANTITY PRICE 1 - 49 $1,400 50 - 89 1,100 90+ 900 Q opt = = = 72.5 PCs 2 C o D C c 2(2500)(200) 190 TC = + + PD = $233,784 C o D Q opt C c Q opt 2 For Q = 72.5 TC = + + PD = $194,105 C o D Q C c Q 2 For Q = 90
    24. 24. PROBABILISTIC MODELS Reorder Point = Level of inventory at which a new order is placed R = dL where d = demand rate per period L = lead time Demand = 10,000 yards/year Store open 311 days/year Daily demand = 10,000 / 311 = 32.154 yards/day Lead time = L = 10 days R = dL = (32.154)(10) = 321.54 yards Applicable when product demand or any other variable is not known but can be specified by means of a probability distribution
    25. 25. Safety Stock <ul><li>Safety stock - buffer added to on hand inventory during lead time </li></ul>Reorder Point with a Safety Stock Reorder point, R Q LT Time LT Inventory level 0 Safety Stock
    26. 26. Reorder point with variable demand R = dL + z  d L where d = average daily demand L = lead time  d = the standard deviation of daily demand z = number of standard deviations corresponding to the service level probability z  d L = safety stock
    27. 27. Reorder Point with variable demand (con’t)… Probability of meeting demand during lead time = service level Probability of a stockout R Safety stock d L Demand z  d L
    28. 28. Reorder Point with variable demand example The carpet store wants a reorder point with a 95% service level and a 5% stockout probability For a 95% service level, z = 1.65 Safety stock = z  d L = (1.65)(5)( 10) = 26.1 yards d = 30 yards per day L = 10 days  d = 5 yards per day R = dL + z  d L = 30(10) + (1.65)(5)( 10) = 326.1 yards
    29. 29. Order Quantity for a Periodic Inventory System Q = d ( t b + L ) + z  d t b + L - I where d = average demand rate t b = the fixed time between orders L = lead time s d = standard deviation of demand z  d t b + L = safety stock I = inventory level
    30. 30. Fixed-Period Model with Variable Demand d = 6 bottles per day s d = 1.2 bottles t b = 60 days L = 5 days I = 8 bottles z = 1.65 (no. of sd for a 95% service level) Q = d ( t b + L ) + z  d t b + L - I = (6)(60 + 5) + (1.65)(1.2) 60 + 5 - 8 = 397.96 bottles
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