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Inventory Management
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Inventory Management

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    Inventory Management Inventory Management Presentation Transcript

    • CHAPTER 11 Inventory Management Er.Sartaj Singh Bajwa
    • Types of Inventories
      • Raw materials & purchased parts
      • Partially completed goods called work in progress
      • Finished-goods inventories
      Er.Sartaj Singh Bajwa
    • Functions of Inventory
      • To meet anticipated demand
      • To smooth production requirements
      • To protect against stock-outs
      • To take advantage of order cycles
      • To hedge against price increases
      • To take advantage of quantity discounts
      Er.Sartaj Singh Bajwa
      • Lead time : time interval between ordering and receiving the order
      • Holding (carrying) costs : cost to carry an item in inventory for a length of time
      • Ordering costs : costs of ordering and receiving inventory
      • Shortage costs : costs when demand exceeds supply
      Key Inventory Terms Er.Sartaj Singh Bajwa
    • Inventory Counting Systems
      • Periodic System
        • Physical count of items made at periodic intervals
      • Perpetual Inventory System System that keeps track of removals from inventory continuously, thus monitoring current levels of each item
      Er.Sartaj Singh Bajwa
    • Inventory Counting Systems
      • Two-Bin System - Two containers of inventory; reorder when the first is empty
      • Universal Bar Code - Bar code printed on a label that has information about the item to which it is attached
      Er.Sartaj Singh Bajwa 0 214800 232087768
    • ABC Classification System
      • ALWAYS BETTER CONTROL
      • Classifying inventory according to some measure of importance and allocating control efforts accordingly.
        • A - very important
        • B - mod. important
        • C - least important
      Er.Sartaj Singh Bajwa Annual $ value of items A B C High Low Few Many Number of Items
    • ABC Item Classification
      • Class A Items: 20% of items which account for approximately 60-80% of the total inventory cost
        • Tight control, keep inventories as low as possible;
        • Monitor continuously (continuous review);
        • Purchase/manufacture in small, frequent batches.
      • Class B Items: 30% of items which account for approximately 20-30% of the total inventory cost
        • Moderate control;
        • Good records, monitor periodically (periodic review);
        • Purchase/manufacture in medium size batches.
      • Class C Items: 50 % of items which account for remaining 5-15% of total inventory cost
        • Minimal control;
        • Simple manual records, occasional review;
        • Purchase/manufacture in large, infrequent batches.
      Er.Sartaj Singh Bajwa
    • Economic Order Quantity Er.Sartaj Singh Bajwa
      • Only one product is involved
      • Annual demand requirements known
      • Demand is even throughout the year
      • Lead time does not vary
      • Each order is received in a single delivery
      • There are no quantity discounts
      Assumptions of EOQ Model Er.Sartaj Singh Bajwa
    • The Inventory Cycle Er.Sartaj Singh Bajwa Profile of Inventory Level Over Time Quantity on hand Q Receive order Place order Receive order Place order Receive order Lead time Reorder point Usage rate Time
    • Total Cost ACC = average number of units * carrying cost per unit per year AOC = (number of orders per year) * (ordering cost) Number Of Orders per year = annual demand(D) ordered quantity(Q) Average number of Units = Q/2 Er.Sartaj Singh Bajwa Annual carrying cost Annual ordering cost Total cost = + Q 2 H D Q S TC = +
    • Cost Minimization Goal Order Quantity (Q) The Total-Cost Curve is U-Shaped Ordering Costs Q O Annual Cost ( optimal order quantity) Er.Sartaj Singh Bajwa
    • Deriving the EOQ
      • Using calculus, we take the derivative of the total cost function and set the derivative (slope) equal to zero and solve for Q.
      Er.Sartaj Singh Bajwa
    • Example
      • A toy manufacturer uses approximately 32,000 silicon chips annually. The chips are used at a steady rate during the 240 days a year that the plant operates. Annual holding cost is $3 per chip, and ordering cost is $120. Determine
        • The optimal order quantity.
        • Holding cost, ordering cost, and the total cost.
        • The number of workdays in an order cycle.
      Er.Sartaj Singh Bajwa
    • When to Reorder with EOQ Ordering
      • Reorder Point - When the quantity on hand of an item drops to this amount, the item is reordered
      • Safety Stock - Stock that is held in excess of expected demand due to variable demand rate and/or lead time.
      • Service Level - Probability that demand will not exceed supply during lead time.
      Er.Sartaj Singh Bajwa
    • Reorder Point
      • ROP = Expected demand during lead time + safety stocks
      • We discuss several models:
        • An estimate of expected demand during lead time and its standard deviation are available.
        • Data on lead time demand is not available: we consider three cases:
          • Demand is variable, lead time is constant
          • Lead time is variable, demand is constant
          • Both demand and lead time are variable
      Er.Sartaj Singh Bajwa