Inventory Management

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  • 1. CHAPTER 11 Inventory Management Er.Sartaj Singh Bajwa
  • 2. Types of Inventories
    • Raw materials & purchased parts
    • Partially completed goods called work in progress
    • Finished-goods inventories
    Er.Sartaj Singh Bajwa
  • 3. 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
  • 4.
    • 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
  • 5. 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
  • 6. 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
  • 7. 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
  • 8. 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
  • 9. Economic Order Quantity Er.Sartaj Singh Bajwa
  • 10.
    • 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
  • 11. 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
  • 12. 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 = +
  • 13. 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
  • 14. 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
  • 15. 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
  • 16. 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
  • 17. 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