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24867879 inventory-management-control-lecture-3
24867879 inventory-management-control-lecture-3
24867879 inventory-management-control-lecture-3
24867879 inventory-management-control-lecture-3
24867879 inventory-management-control-lecture-3
24867879 inventory-management-control-lecture-3
24867879 inventory-management-control-lecture-3
24867879 inventory-management-control-lecture-3
24867879 inventory-management-control-lecture-3
24867879 inventory-management-control-lecture-3
24867879 inventory-management-control-lecture-3
24867879 inventory-management-control-lecture-3
24867879 inventory-management-control-lecture-3
24867879 inventory-management-control-lecture-3
24867879 inventory-management-control-lecture-3
24867879 inventory-management-control-lecture-3
24867879 inventory-management-control-lecture-3
24867879 inventory-management-control-lecture-3
24867879 inventory-management-control-lecture-3
24867879 inventory-management-control-lecture-3
24867879 inventory-management-control-lecture-3
24867879 inventory-management-control-lecture-3
24867879 inventory-management-control-lecture-3
24867879 inventory-management-control-lecture-3
24867879 inventory-management-control-lecture-3
24867879 inventory-management-control-lecture-3
24867879 inventory-management-control-lecture-3
24867879 inventory-management-control-lecture-3
24867879 inventory-management-control-lecture-3
24867879 inventory-management-control-lecture-3
24867879 inventory-management-control-lecture-3
24867879 inventory-management-control-lecture-3
24867879 inventory-management-control-lecture-3
24867879 inventory-management-control-lecture-3
24867879 inventory-management-control-lecture-3
24867879 inventory-management-control-lecture-3
24867879 inventory-management-control-lecture-3
24867879 inventory-management-control-lecture-3
24867879 inventory-management-control-lecture-3
24867879 inventory-management-control-lecture-3
24867879 inventory-management-control-lecture-3
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24867879 inventory-management-control-lecture-3

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  • 1. Logistics management INVENTORY MANAGEMENT - CONTROL Joanna Oleśków-Szłapka
  • 2. What Is Inventory?
    • Stock of items kept to meet future demand
    • Purpose of inventory management
      • how many units to order ?
      • when to order ?
  • 3. Types of Inventory
    • Inputs
      • Raw Materials
      • Purchased parts
      • Maintenance and Repair Materials
    • Outputs
      • Finished Goods
      • Scrap and Waste
    Process
    • In Process
      • Partially Completed Products and Subassemblies
    (in warehouses, or “in transit”) (often on the factory floor)
  • 4. Water Tank Analogy for Inventory Supply Rate Inventory Level Demand Rate Inventory Level Buffers Demand Rate from Supply Rate
  • 5. Two Forms of Demand
    • 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
  • 6. Inventory Hides Problems Poor Quality Unreliable Supplier Machine Breakdown Inefficient Layout Bad Design Lengthy Setups
  • 7. Inventory and Supply Chain Management - problems
    • Bullwhip effect
      • demand information is distorted as it moves away from the end-use customer
      • higher safety stock inventories to are stored to compensate
    • Seasonal or cyclical demand
    • Inventory provides independence from vendors
    • Take advantage of price discounts
    • Inventory provides independence between stages and avoids work stop-pages
  • 8. Inventory Costs
    • Carrying cost
      • cost of holding an item in inventory
    • Ordering cost
      • cost of replenishing inventory
    • Shortage cost
      • temporary or permanent loss of sales when demand cannot be met
  • 9. 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
    • Investment costs:
      • Borrowing costs
      • Taxes on inventory
      • Insurance on inventory
    • Pilferage, scrap, and obsolescence
    • Overall carrying cost
    • 6%
    • (3% - 10%)
    • 3%
    • (1% - 4%)
    • 3%
    • (3% - 5%)
    • 10%
    • (6% - 24%)
    • 5%
    • (2% - 10%)
    • (15% - 50%)
    Costs as % of Inventory Value
  • 10. INVENTORY CONTROL
    • Inventory control is concerned with minimizing the total cost of inventory.
    • The three main factors in inventory control decision making process are:
    • The cost of holding the stock (e.g., based on the interest rate).
    • The cost of placing an order (e.g., for row material stocks) or the set-up cost of production.
    • The cost of shortage , i.e., what is lost if the stock is i nsufficient to meet all demand.
    • The third element is the most difficult to measure and is often handled by establishing a " service level " policy, e. g, certain percentage of demand will be met from stock without delay.
  • 11. Inventory Control Systems
    • Continuous system (fixed-order-quantity)
      • constant amount ordered when inventory declines to predetermined level
    • Periodic system (fixed-time-period)
      • order placed for variable amount after fixed passage of time
  • 12. Zero Inventory?
    • Reducing amounts of raw materials and purchased parts and subassemblies by having suppliers deliver them directly.
    • Reducing the amount of works-in process by using just-in-time production.
    • Reducing the amount of finished goods by shipping to markets as soon as possible.
  • 13. How to Measure Inventory
    • The Dilemma : closely monitor and control inventories to keep them as low as possible while providing acceptable customer service.
    • Average Aggregate Inventory Value: how much of the company’s total assets are invested in inventory?
    • Ford:6.825 billion
    • Sears: 4.039 billion
  • 14. Inventory Measures
    • Weeks of Supply
      • Ford: 3.51 weeks
      • Sears: 9.2 weeks
    • Inventory Turnover (Turns)
      • Ford: 14.8 turns
      • Sears: 5.7 turns
      • GM: 8 turns
      • Toyota: 35 turns
  • 15. ABC CLASSIFICATION
  • 16. ABC Classification
    • The ABC Classification The ABC classification system is to grouping items according to annual sales volume, in an attempt to identify the small number of items that will account for most of the sales volume and that are the most important ones to control for effective inventory management.
  • 17. ABC Classification
    • Class A
      • 5 – 15 % of units
      • 70 – 80 % of value
    • Class B
      • 30 % of units
      • 15 % of value
    • Class C
      • 50 – 60 % of units
      • 5 – 10 % of value
  • 18. ABC Classification: 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
  • 19. ABC Classification: Example (cont.) Example 10.1 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
  • 20. ABC Analysis
    • Recognizes fact some inventory items are more important than others.
    • Purpose of analysis is to divide all of company's inventory items into three groups: A, B, and C.
    • Depending on group, decide how inventory levels should be controlled.
  • 21. Silicon Chips, Inc. Example
    • Maker of super-fast DRAM chips, has organized its 10 inventory items on an annual dollar-volume basis.
    • Parts are identified by item number, part number, annual demands, and unit costs.
    • How should company classify items into groups A, B, and C?
  • 22. Silicon Chips, Inc. Example
    • How should company classify items into groups A, B, and C?
  • 23. 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)
  • 24. Economic Order Quantity Model
  • 25. Economic Order Quantity (EOQ) Models
    • EOQ
      • optimal order quantity that will minimize total inventory costs
    • Basic EOQ model
    • Production quantity model
  • 26. Assumptions of Basic EOQ Model
    • Demand is known with certainty and is constant over time
    • No shortages are allowed
    • Lead time for the receipt of orders is constant
    • Order quantity is received all at once
  • 27. 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.
  • 28. EOQ Inventory Order Cycle Demand rate 0 Time Lead 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
  • 29. Total Cost of Inventory – EOQ Model
  • 30. Answer to Inventory Management Questions for 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 sell the last item as the new order comes in:
      • R = DL
  • 31. The EOQ Model Q = Number of pieces per order Q* = Optimal number of pieces per order (EOQ) D = Annual demand in units for the Inventory item S = Setup or ordering cost for each order H = Holding or carrying cost per unit per year
  • 32. An EOQ Example Determine optimal number of needles to order D = 1,000 units S = $10 per order H = $.50 per unit per year Q* = 2 DS H Q* = 2(1,000)(10) 0.50 = 40,000 = 200 units
  • 33. An EOQ Example Determine optimal number of needles to order D = 1,000 units Q* = 200 units S = $10 per order H = $.50 per unit per year = N = = Expected number of orders Demand Order quantity
  • 34. An EOQ Example Determine optimal number of needles to order D = 1,000 units Q* = 200 units S = $10 per order N = 5 orders per year H = $.50 per unit per year = T = Expected time between orders Number of working days per year N
  • 35. An EOQ Example Determine optimal number of needles to order D = 1,000 units Q* = 200 units S = $10 per order N = 5 orders per year H = $.50 per unit per year T = 50 days Total annual cost = Setup cost + Holding cost TC = S + H D Q * Q * 2
  • 36. Reorder Point
    • EOQ answers the “how much” question
    • The reorder point (ROP) tells when to order
    = d x L ROP = Lead time for a new order in days Demand per day d = D Number of working days in a year
  • 37. Reorder Point: Example Demand = 10,000 kg /year Store open 311 days/year Daily demand = 10,000 / 311 = 32.154 kg /day Lead time = L = 10 days R = dL = (32.154)(10) = 321.54 kg = 322 kg
  • 38. Safety Stocks
    • Safety stock
      • buffer added to on hand inventory during lead time
    • Stockout
      • an inventory shortage
    • Service level
      • probability that the inventory available during lead time will meet demand
  • 39. Variable Demand with a Reorder Point Reorder point, R Q LT Time LT Inventory level 0
  • 40. Reorder Point with a Safety Stock Reorder point, R Q LT Time LT Inventory level 0 Safety Stock
  • 41. 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 (service factor) z  d L = safety stock
  • 42. Reorder Point for a Service Level Probability of meeting demand during lead time = service level Probability of a stockout R Safety stock d L Demand z  d L
  • 43. Safety factor values for CSL
  • 44. Reorder Point for Variable Demand The carpet store wants a reorder point with a 95% service level and a 5% stockout probability For a 95% service level, z = 1.6 4 d = 30 m per day L = 10 days  d = 5 m per day R = dL + z  d L = 30(10) + (1.6 4 )(5)( 10) = 32 5.9 m Safety stock = z  d L = (1.6 4 )(5)( 10) = 2 5 . 9 m

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