Materials and inventory management


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Materials and inventory management

  1. 1. Materials And Inventory Management Zeynep Çıkın Production/ Operations Management
  2. 2. INDEX • • • • • • The Strategic Importance of Inventory Materials Management Classifying Inventory Problems Inventory Costs Inventory Management Systems Modeling Inventory Decisions
  3. 3. The Strategic Importance of Inventory Materials Management • Planning , coordinating and contolling acqusition, storage, handling and movement of raw materials, purchased parts, supplies, tools and other materials that are needed in production process.
  4. 4. The Strategic Importance of Inventory Inventory • Any idle goods or materials that are held for future are called inventory. • Inventory represents a major financial investment for any company when costs of transportation, warehousing, and capital are considered.
  5. 5. The Strategic Importance of Inventory Inventory types; • Lot –size Inventory • Work-in- Process (WIP) Inventory • Finished – goods Inventory • Fluctuation Inventory (safety stock ) • Anticipation Inventory
  6. 6. The Strategic Importance of Inventory Marketing Department • Prefers high inventory levels to provide the best possible customer service . • Production managers want high inventories to prevent production delays. Financial Depatment • Financial personnel seek to minimize inventory investment and warehousing costs.
  7. 7. TQM Inventory should be managed to support strategic customer satisfaction and Operational goals such as; - Availability - Quick responce - Manufacturing flexibility
  8. 8. Materials Management Purchasing Purchasing function is responsible for getting raw materials, component parts, tools and any other items from suppliers. • • • • • • • Receive purchase requisitions Review and evaluate requisitions Select qualified suppliers Aggregate and place orders Follow up and expedite Authorize payments Keep records
  9. 9. Materials Management • Physical Distribution Physical Distribution is responsible for selecting transportation carriers, managing company own fleets and vehicles and movement of materials and goods. – Plays key role in customer satisfaction - The term traffic is often used to refer daily operations of managing the transportation function.
  10. 10. Materials Management Comparison of Transportation Modes Characteristics Rail Truck Air Speed 3 2 1 Accessibility 2 1 3 Cost 1 2 3 Load capability 1 2 3
  11. 11. Materials Management • Supplier Management and Partnership - When closed relationships are developed, total supplier number can be reduced. The older practise of having many suppliers bid on each other – lowest price accepted. With larger contracts, suppliers benefit from economies on scale and customer benefit from volume discount.
  12. 12. Materials Management • GTE Directories Yelow pages publisher Employee exchange programme, to help paper manufacturers undertsand GTE business and they can better meet its needs. Strong relationship with suppliers and increased both parties’ awareness of the effects of poor quality on productivity.
  13. 13. Materials Management • Florida Power and Light Three supplier – certification programme ;  Quality Vendors basic requirements on quality, cost,delivery, safety  Certified Vendor must additionally prove its processes can meet FPL’s special requirements  Excellent Vendor must prove ability to exceed FLP’s special requirements,employ reliability, show that quality improvement is a central part of its management system.
  14. 14. Materials Management • Information Technology in Materials Management Bar- code Read the symbols on the label, reduces human error and improves data correctness. The use of bar code streamliness the ordering and inventory control. Radio frequency ( RF ) communications Hardware allow information to be sent workers electronically from a central computer.
  15. 15. Classifying Inventory Problems Characteristic Attributes Number of Items One or many Number of demand Independent or dependent;deterministic or stochatic; static or dynamic Number of time periods in planning horizon One or many Lead Time Deterministic or stoachastic Stockouts Back orders or lost sales
  16. 16. Inventory Costs Item Costs Direct cost for getting an item. Purchase cost for outside orders, manufacturing cost for internal orders. Inventory/ Holding Costs Costs associated with carrying items in inventory. Storage and other related costs. Cost of the capital, interest rate. Order/Set Up Costs Shortage Costs Fixed costs associated with placing an order (either an ordering cost for outside orders, or a setup cost for internal orders). Costs associated with not having enough inventory to meet demand. Additional costs for shipping, invoicing etc.
  17. 17. Inventory Costs • How to monitor Inventory • How much should be ordered • When orders should be placed Three primary decisions must be made in relation to inventory, each has an important impact on cost.
  18. 18. Inventory Management Systems • ABC Inventory Analysis ABC Classification , according to their total annual dollar usage. A items account for a large dollar value but small percentage of total items. C items account for a small dollar value but large percentage of total items. B items are between A and C.
  19. 19. Inventory Management Systems • ABC Inventory Analysis ABC analysis gives managers useful information. Class A : Represents a important inventory investment and typically have limited availability. In many cases they are single – sourced thus need close control, record keeping, continuous monitoring and maximum attention to order sizes and frequency of ordering. This items large costs, small lot size and frequent deliveries from suppliers are common and result in very short lead times.
  20. 20. Inventory Management Systems • ABC Inventory Analysis Class C : Large quaintities of this items might be ordered to reduce transportation costs. Simply be checked periodically without maintaining any formal records. Easy to get from many suppliers and have short lead times. Class B: These items are in the middle. Ordered very infrequently and consist mainly of service parts for older products still in use. Their availability might be limited thus long lead times can be expected.
  21. 21. CONTROL SYSTEMS Continuous –review system Inventory position : amount on hand plus amount ordered but havent received yet minus back orders. Inventory position continuously monitored. Whenever inventory position falls or below r , an order for Q units is placed. Values for Q and r are determined in advance.
  22. 22. CONTROL SYSTEMS Periodic-review system Inventory position is checked only at fixed intervals. If the inventory position is at or below the reorder point when checked, an order is placed to bring the inventory position up to R. In such systems usually clerks checking inventory levels physically . If the lead time is always shorter than the time between reviews the reorder point can be based on inventory level rather than inventory position.
  23. 23. Cycle Counting • Alternative to closing for inventory is cycle counting, a system for continuous physical counting of inventory through the year. • Benefits; errors can be investigated and corrected and loss of productive time is minimized. • The ABC classification is usually used to determine the frequency of cycle counting. Clearly errors are made more critical for A items, since their values are higher.
  24. 24. Measuring Inventory – System Performance Classify inventory into five categories to measuring performance. • • • • • Operating Inventory Surplus Inventory Excess Inventory Obsolete Inventory New- Product Inventory
  25. 25. Economic Order Quantity (EOQ) • Developed in the early 1990s. • The constant-demand rate and lead time • No stockouts.
  26. 26. Economic Order Quantity (EOQ) • How much to order decision Compromise between; 1) 2) Keeping small inventories and ordering frequently Keeping large inventories and ordering infrequently
  27. 27. Economic Order Quantity (EOQ) EOQ model is concerned two basic questions; How much to order ? When to place an order ? EOQ model minimizes the total cost equal to the sum of the inventory –holding cost and ordering cost.
  28. 28. Economic Order Quantity (EOQ) Inventory pattern for the EOQ Inventory –decision model • Q to be the size of order • The average Inventory level is ½ Q
  29. 29. (EOQ) Formula How much to order ?
  30. 30. Economic Order Quantity (EOQ) When to order decision r= reorder point d= demand m= lead time * r= dm D/Q = as the number of orders placed in a year. Where N= number of days of operation for the years. In general in EOQ ; Total ordering costs equal to the total holding costs with the small difference.
  31. 31. Thank you for your attention