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Sfe inventory management
Sfe inventory management
Sfe inventory management
Sfe inventory management
Sfe inventory management
Sfe inventory management
Sfe inventory management
Sfe inventory management
Sfe inventory management
Sfe inventory management
Sfe inventory management
Sfe inventory management
Sfe inventory management
Sfe inventory management
Sfe inventory management
Sfe inventory management
Sfe inventory management
Sfe inventory management
Sfe inventory management
Sfe inventory management
Sfe inventory management
Sfe inventory management
Sfe inventory management
Sfe inventory management
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Sfe inventory management

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  • 1. INVENTORY MANAGEMENT 2 Feb 2010 Arif Mahmood
  • 2. Inventory Inputs Raw material Purchased Parts Maintenance and Repair Material Out Puts Finished Goods Scrap, Waste In Process Partially completed Subassemblies
  • 3. Analogy for Inventory Supply Rate Inventory Level Demand Rate Inventory Level Buffers Demand Rate from Supply Rate
  • 4. Inventory Cost Structures  Ordering (or setup) cost  Carrying (or holding) cost:  Cost of capital  Cost of storage  Cost of obsolescence, deterioration, and loss  Stock out cost  Item costs, shipping costs and other cost subject to volume discounts
  • 5. Typical Inventory Carrying Costs Housing cost:  Building rent or depreciation  Building operating cost  Taxes on building  Insurance Material handling costs:  Equipment, lease, or depreciation  Power  Equipment operating cost Manpower cost from extra handling and supervision  Borrowing costs  Taxes on inventory  Insurance on inventory Pilferage, scrap, and obsolescence Overall carrying cost Costs as % of Inventory Value
  • 6. Inventory Management Systems  Functions of Inventory Management – Track inventory – How much to order – When to order  Prioritization  Inventory Management Approach – EOQ – Continuous / Periodic
  • 7. ABC Prioritization  „A‟ items: 20% of SKUs, 80% of Rupee  „B‟ items: 30 % of SKUs, 15% of Rupee  „C‟ items: 50 % of SKUs, 5% of Rupee  Three classes is arbitrary; could be any number.  Percents are approximate.  Danger: Rs use may not reflect importance of any given SKU!
  • 8. ABC ANALYSIS EXAMPLE 10 20 30 40 50 60 70 80 90 100 Percentage of items PercentageofRsvalue 100 — 90 — 80 — 70 — 60 — 50 — 40 — 30 — 20 — 10 — 0 — +Class C Class A +Class B
  • 9. Annual Usage of Items by Rs Value Annual Usage in Units Unit Cost RsUsage %of Total Rs Usage 5,000 1.50 7,500 2.9% 1,500 8.00 12,000 4.7% 10,000 10.50 105,000 41.2% 6,000 2.00 12,000 4.7% 7,500 0.50 3,750 1.5% 6,000 13.60 81,600 32.0% 5,000 0.75 3,750 1.5% 4,500 1.25 5,625 2.2% 7,000 2.50 17,500 6.9% 3,000 2.00 6,000 2.4% 254,725.00 100.0%
  • 10. Inventory Management Approaches  A-items – Track carefully (e.g. continuous review) – Sophisticated forecasting to assure correct levels  C-items – Track less frequently (e.g. periodic review) – Accept risks of too much or too little (depending on the item)
  • 11. Economic Order Quantity (EOQ) Model  Demand rate D is constant, recurring, and known  Amount in inventory is known at all times  Ordering (setup) cost S per order is fixed  Lead time L is constant and known.  Unit cost C is constant (no quantity discounts)  Annual carrying cost is i time the average RS value of the inventory  No stockouts allowed.  Material is ordered or produced in a lot or batch and the lot is received all at once
  • 12. EOQ Lot Size Choice  There is a trade-off between lot size and inventory level.  Frequent orders (small lot size): higher ordering cost and lower holding cost.  Fewer orders (large lot size): lower ordering cost and higher holding cost.
  • 13. EOQ Inventory Order Cycle Demand rate 0 TimeLead time Lead time Order Placed Order Placed Order Received Order Received Inventory Level Reorder point, R Order qty, Q As Q increases, average inventory level increases, but number of orders placed decreases ave = Q/2
  • 14. Inventory Management EOQ Model Keeping track of inventory  Implied that we track continuously How much to order?  Solve for when the derivative of total cost with respect to Q = 0: -SD/Q^2 + iC/2 = 0  Q = sqrt ( 2SD/iC) When to order?  Order when inventory falls to the “Reorder Point-level” R so we will just at the last item as the new order comes in:  R = DL
  • 15. Re-order Point Example Demand = 10,000 yds/year Lead time = L = 10 days When inventory falls to R, we order so as not to run out before the new order comes in. R = ?
  • 16. Re-order Point Demand = 10,000 yds/year Daily demand = 10,000 / 365 = 27.4 yds/day Lead time = L = 10 days R = D*L = (27.4)(10) = 274 yds Don’t forget to convert to consistent time units!
  • 17. EOQ Summary How much to order?  Q = sqrt(2DS/iC) When to order?  R = DL
  • 18. Annual Demand = 1,000 units Days per year considered in average daily demand = 365 Cost to place an order = Rs 10 Holding cost per unit per year = Rs 2.50 EOQ and reorder point? units90orunits89.443= 2.50 )(10)2(1,000 = H 2DS =QOPT units/day2.74= days/year365 units/year1,000 =d Lead time = 7 days Cost per unit = Rs15 units20or19.18=(7days)day2.74units/=Ld=Rpoint,Reorder _
  • 19. EOQ Example
  • 20. Tug of war between acquisition costs and inventory carrying costs  ROP = SSQ + (QUD x ALT) Where, ROP = Reorder Point SSQ = Safety Stock Quantity QUD = Quantity Used Daily ALT = Average Lead Time (in days)  How much to order.  Acquisition costs and inventory carrying costs:  when you order bigger quantities less frequently, your aggregate acquisition costs are low but your inventory costs are high due to higher inventory levels.  Conversely, when order smaller quantities more often, your inventory costs are low but your acquisition costs are higher because you are expending more resources on ordering.  The EOQ is the order quantity that minimizes the sum of these two costs
  • 21. Safety Stock Formula order)onitems(includeslevelinventorycurrent=I timeleadandreviewover thedemandofdeviationstandard= yprobabilitservicespecifiedafordeviationsstandardofnumberthe=z demanddailyaverageforecast=d daysintimelead=L reviewsbetweendaysofnumberthe=T orderedbetoquantitiy=q :Where I-Z+L)+(Td=q L+T L+T   q = Average demand + Safety stock – Inventory currently on hand 17-21
  • 22. Cost Regular Fast Review Local Forecast Inventory
  • 23. Gain Life a balance
  • 24. Take the Service to the Patient Thanks

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