Kattareeya Prompreing 白雅欣 iD:DA61G209 (Student in Ph.D. Business and Management, College Business, STUST email:da61g209@stust.edu.tw : katt.rmutl@gmail.com

1. Inventory
Management
Advance Operation Management
Instructor: Professor Wurong Shih, Ph.D.
Present By: Kattareeya Prompreing
ID: DA61G209

2. Whatis theInventorymanagement[Video]

3. Chapter 13: Learning
ObjectivesYou should be able to:
1. Define the term inventory, list the major reasons for holding inventories,
and list the main requirements for effective inventory management
2. Discuss the nature and importance of service inventories.
3. Explain periodic and perpetual review systems
4. Explain the objectives of inventory management
5. Describe the A-B-C approach and explain how it is useful

4. 7. Describe the basic EOQ model and its assumptions
and solve typical problems
8. Describe the quantity discount model and solve
typical problems
9. Describe reorder point models and solve typical
problems
10.Describe situations in which the single-period model
would be appropriate, and solve typical problems

5. • Inventory
A stock or store of goods
Inventory
Inventories are a vital part of business:
(1)necessary for operations
(2) contribute to customer satisfaction
A “typical” firm has roughly 30% of its current
assets and as much as 90% of its working capital invested in inventory
Independent demand items
Items that are ready to be sold or used

6. • Raw materials and purchased parts
• Work-in-process (WIP)
• Finished goods inventories
or merchandise
• Tools and supplies
• Maintenance and repairs (MRO) inventory
• Goods-in-transit to warehouses or customers (pipeline inventory)
Types of Inventory
Example Product is Wood Furniture

7. Objectivesof Inventory Control
Inventory management has two main concerns:
1. Level of customer service
Having the right goods available
in the right quantity in the right place at the right time
1. Costs of ordering and carrying inventories
 The overall objective of inventory management is to achieve
satisfactory levels of customer service while keeping inventory costs
within reasonable bounds
1.Measures of performance
2.Customer satisfaction
Number and quantity of backorders
Customer complaints
3.Inventory turnover

8. Example; By initiating a program that utilizes barcodes and scanners, such as this one by Motorola,
hospitals can control inventory supply areas, as well as keep track of all equipment in use across the
enterprise. Stockroom inventory applications track consumable items such as
medication and supplies, while check in/out applications track shared or re-usable items such
as X-rays, lab results, diagnostic tools, and other medical equipment.

9. The Important of Inventory control.[Video]

10. Inventory Management
• Management has two basic functions concerning inventory:
1. Establish a system for tracking items in inventory
2. Make decisions about
• When to order
• How much to order

11. Effective Inventory Management
• Requires:
1. A system keep track of inventory
2. A reliable forecast of demand
3. Knowledge of lead time and lead time variability
4. Reasonable estimates of
• holding costs
• ordering costs
• shortage costs
5. A classification system for inventory items

12. Periodic System
 Physical count of items in inventory made at periodic intervals
Inventory Counting Systems
Perpetual Inventory System
 System that keeps track of removals from inventory
continuously, thus monitoring current levels of each item
 An order is placed when inventory drops to a predetermined minimum
level

13. Demand Forecasts and Lead Time
• Forecasts
• Inventories are necessary to satisfy
customer demands, so it is important
to have a reliable estimates of the
amount and timing of demand
• Point-of-sale (POS) systems
• A system that electronically records
actual sales
• Such demand information is very useful
for enhancing forecasting and inventory
management
• Lead time
• Time interval between ordering and
receiving the order

14. Inventory Costs
 Purchase cost
 The amount paid to buy the
inventory
 Holding (carrying) costs
 Cost to carry an item in inventory
for a length of time, usually a year
 Ordering costs
 Costs of ordering and receiving
inventory
 Setup costs
 The costs involved in preparing
equipment for a job
 Analogous to ordering costs
 Shortage costs
 Costs resulting when demand
exceeds the supply of inventory;
often unrealized profit per unit

15. Two-bin system Two containers
of inventory; reorder when
the first is empty.

16. Universal product code
(UPC) Bar code printed on a
label that has information about
the item to which it is attached.
Example: The zero on the left of the bar code
identifies this as a grocery item, the first five numbers
(14800) indicate the manufacturer (Mott’s), and the
last five numbers (23208) indicate the specific item
(natural-style applesauce). Items in small packages,
such as candy and gum, use a six-digit number.
Example:

17. • Poor inventory accuracy leads
to too much inventory or
shortages.
• Software systems maintain
enormous amounts of data
and have a great amount of
functionality.
• Systems can analyze
inventory levels, allocate stock
plan purchases, and
allocate deliveries .
• They can identify key
suppliers of each stocked item
and can give lead times and
dock-to-stock times for
realistic time-phasing.
Bar coding is important for other sectors of
business besides retailing. Manufacturing and
service industries benefit from the simplified
production and inventory control it provides.

18. Radio Frequency Identification (RFID) Tags and
supply chain management(SCM)
Radio frequency identification (RFID) is a promising technology which can potentially assist in
enhancing the efficiency of manufacturing by Reorganizing and Optimizing internal operations,
such as purchasing, warehousing, management, and distribution of materials in the production, as
well as in external supply chain management(SCM). RFID makes it possible to identify individual
objects in the production automatically and wirelessly, so it has an increasing potential in various
applications which can make manufacturing more efficient and productive.
RFID can enable
“process
freedoms” and
real-time
visibility into
supply chains.
RFID tags transmit product
information or other data to
network connected RFID
readers via radio waves.

19. Just In Time and Supply Chain Management
– 5 Salient Features
1. 3 JIT system principles
2. 6 JIT system Inventory Management Principle
3. Implications of JIT System for logistics interaction.
4. Benefit of Implementing JIT system.
5. Problems Related with the Implementation of a JIT system.
History
The management technique originated in Japan and is
often attributed to Toyota. However, many believe that
Japan's shipyards were the first to develop and
successful implement this approach. Its origins are seen
as three-fold: Japan's post-war lack of cash, lack of
space for big factories and inventory and Japan's lack of
natural resources.
Thus the Japanese "leaned out" their processes. "
News about JIT/TPS reached western shores in 1977
with implementations in the US and other developed
countries beginning in 1980.
• What is JIT• Just-in-time (JIT) manufacturing is
a way of managing manufacturing systems that
could reduce waste, and lower cost, thus
increasing profit•
• Today's competitive environment, markets are becoming
more international, dynamic, and customer‐driven.
Customers are demanding more variety, better quality and
service, including both reliability and faster delivery.
• Technological developments are occurring at a faster pace,
resulting in new product innovations and improvements in
manufacturing processes. The resulting competitive
environment requires low cost, high quality products in
increasing varieties. These changes have instigated changes
in business and manufacturing strategies.

20. ABC
Classification
System
• A-B-C approach
Classifying inventory according to some
measure of importance,
and allocating control efforts accordingly
• A items (very important)
10 to 20 percent of the number of items in
inventory and about 60 to 70 percent of the
annual dollar value
• B items (moderately important)
• C items (least important)
50 to 60 percent of the number
of items in inventory but only
about 10 to 15 percent of the
annual dollar value

21. Cycle Counting
• A physical count of items in inventory
Cycle counting management
How much accuracy is needed?
• A items: ± 0.2 percent
• B items: ± 1 percent
• C items: ± 5 percent
• When should cycle counting be performed?
• Who should do it?

22. One way to lower inventory
holding costs is to improve space
utilization through narrow aisle
handling equipment, mezzanines,
layout, or other appropriate
storage modes.
Another is an inventory management
system that allows companies
to maintain tight control over
inventory levels.
This allows process planners to optimize
material and maintain accurate
quantities.

23. How Much to Order: EOQ Models
•Economic order quantity models identify the
optimal order quantity by minimizing the sum
of annual costs that vary with order size and
frequency
1. The basic economic order quantity model(
EOQ)
2. The economic production quantity model
(EPQ)
3. The quantity discount model

24. Basic EOQ Model
• The basic EOQ model is used to find a fixed order quantity that
will minimize total annual inventory costs
• Assumptions:
1. Only one product is involved
2. Annual demand requirements are known
3. Demand is even throughout the year
4. Lead time does not vary
5. Each order is received in a single delivery
6. There are no quantity discounts

25. The Inventory Cycle
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
X axis= Time
Y axis= Quantityon hand

26. Total AnnualCost
orderpercostOrdering
yearperunitsinusuallyDemand,
yearperusuallyunit,percost(carrying)Holding
unitsinquantityOrder
where
2
CostOrderingAnnualCostHoldingAnnualCostTotal






S
D
H
Q
S
Q
D
H
Q

27. Goal: Total Cost Minimization
Order Quantity (Q)
The Total-Cost Curve is U-Shaped
Ordering Costs
QO
AnnualCost
(optimal order quantity)
Holding Costs
S
Q
D
H
Q
TC 
2
X axis= Order Quantity
Y axis= Annual Cost

28. Deriving EOQ
• Using calculus, we take the derivative of the total cost function
and set the derivative (slope) equal to zero and solve for Q.
• The total cost curve reaches its minimum where the carrying and
ordering costs are equal.
costholdingunitperannual
cost)derdemand)(orannual(22
O 
H
DS
Q
Economic Order Quantity is a formula that calculates the number of units your
business should be adding to inventory order.
This question is aimed at reducing the total costs of inventory management
including factors like order costs, holding costs, and shortage costs.

29. • The batch mode is widely used in production. In certain
instances, the capacity to produce a part exceeds its usage
(demand rate)
• Assumptions
1. Only one item is involved
2. Annual demand requirements are known
3. Usage rate is constant
4. Usage occurs continually, but production occurs
periodically
5. The production rate is constant
6. Lead time does not vary
7. There are no quantity discounts
EconomicProduction Quantity (EPQ)

30. EPQ: Inventory Profile
Q
Qp
Imax
Production
and usage
Production
and usage
Production
and usage
Usage
only
Usage
only
Cumulative
production
Amount
on hand
Time X axis= Time
Y axis= Quantityon hand

31.  
rateUsage
ratedeliveryorProduction
inventoryMaximum
where
2
CostSetupCostCarryingTC
max
max
min












u
p
up
p
Q
I
S
Q
D
H
I
p
EPQ – Total Cost

32. EPQ
up
p
H
DS
Qp


2
orderpercostOrdering
yearperunitsinusuallyDemand,
yearperusuallyunit,percost(carrying)Holding
unitsinquantityOrder
where
2
CostOrderingAnnualCostHoldingAnnualCostTotal
=
=
=
=
+=
+=
S
D
H
Q
S
Q
D
H
Q

33. EPQ like limitedfor produce per – day , weeks , month,year etc..
Or limitedfor delivered per - dar, weeks ,moth, year etc...

34. • Quantity discount
• Price reduction for larger orders offered to customers
to induce them to buy in large quantities
QuantityDiscountModel
priceUnit
where
2
CostPurchasingCostOrderingCostCarryingCostTotal



P
PDS
Q
D
H
Q

35. Quantity Discounts
Adding PD does not change EOQ
X axis= Quantity
Y axis= Cost

36. Quantity Discounts
The total-cost curve with
quantity discounts is
composed of a portion of the
total-cost curve for each price
X axis= Quantity
Y axis= Cost

37. Opening backorders offers a way to deal with out-of-stock situations, but there’s a chance your
customers will prefer looking elsewhere to find the products that they want. So, you always want to
make sure you’ve got stock on hand, which is where your reorder point comes into play.
When it comes to calculating your reorder point, you need to account for:
•The time it takes to get your items picked
•The time it takes to get your items packed
•The time it takes to get your items to be shipped (lead time)
When to Reorder
• Reorder point
When the quantity on hand of an item drops to this amount, the item is reordered.
Determinants of the reorder point
1. The rate of demand
2. The lead time
3. The extent of demand and/or lead time variability
4. The degree of stockout risk acceptable to management

38. )asunitstimesame(intimeLeadLT
per week)day,perperiod,per(unitsrateDemand
where
LTROP
d
d
d



Reorder Point: Under Certainty

39. • Demand or lead time uncertainty creates the possibility that
demand will be greater than available supply
• To reduce the likelihood of a stockout, it becomes necessary to
carry safety stock
• Safety stock
• Stock that is held in excess of expected demand due to variable
demand and/or lead time
Reorder Point: Under Uncertainty
StockSafety
timeleadduring
demandExpected
ROP 

40. Safety Stock
X axis= Time
Y axis= Quantity

41. • As the amount of safety stock carried increases, the risk of stockout
decreases.
• This improves customer service level
• Service level
• The probability that demand will not exceed supply during lead time
• Service level = 100% - Stockout risk
Safety Stock?
But wait. What is safety stock and why is it important? Safety
stock is the emergency stock you need to endure unexpected
occurrences - like seasonal acts of nature like blizzards and typhoons. And if
you’re curious about how to calculate your safety stock,

42. This safety stock formula aims to cover the difference between extreme
situations and the everyday - which should be enough to keep you safe.
• The amount of safety stock that is appropriate for a given
situation depends upon:
1. The average demand rate and average lead time
2. Demand and lead time variability
3. The desired service level
How Much Safety Stock?
demandtimeleadofdeviationstandardThe
deviationsstandardofNumber
where
timeleadduring
demandExpected
ROP
LT
LT



d
d
z
z



43. Reorder Point: Demand Uncertainty
)asunitstime(sametimeLeadLT
)asunitstime(sameperiodperdemandofstdev.The
per week)day,(perperiodperdemandAverage
deviationsstandardofNumber
where
LTROP
d
d
d
z
zLTd
d
d







LTLT dd  Note: If only demand is variable, then

44. Reorder Point: Lead Time Uncertainty
)asunitstime(sametimeleadAverageLT
)asunitstime(sametimeleadofstddev.The
per week)day,(perperiodperDemand
deviationsstandardofNumber
where
LTROP
LT
LT
d
d
d
z
zdd







LTLT  dd Note: If only lead time is variable, then

45. Inventory control system where stock level is reviewed regularly at fixed
intervals (not continuously), and whenever it falls below a certain level, an
order to replenish it to the required level is placed.
Read more: http://www.businessdictionary.com/definition/fixed-interval-inventory-model.html
• Fixed-order-interval (FOI) model
• Orders are placed at fixed time intervals
• Reasons for using the FOI model
• Supplier’s policy may encourage its use
• Grouping orders from the same supplier can produce savings in shipping costs
• Some circumstances do not lend themselves to continuously monitoring inventory
position
How Much to Order: FOI
• Fix Time
• Fix order
• Fix System

46. Fixed-Quantity vs. Fixed-Interval Ordering
Fixed Interval
Fixed Quantity
X axis= Time
Y axis= Annual onhand

47. mereorder tiathandonAmount
orders)betweentimeof(lengthintervalOrderOI
where
LTOILT)OI(
mereorder tiat
handonAmount
stock
Safety
interval
protectionduring
demandExpected
Orderto
Amount




A
Azd d
FOI Model

48. A single period inventory model is a business scenario faced by companies that order seasonal or
one-time items. There is only one chance to get the quantity right when ordering, as the product
has no value after the time it is needed. There are costs to both ordering too much or too little, and
the company's managers must try to get the order right the first time to minimize the chance of
loss.
Single-Period Model
• Single-period model
• Model for ordering of perishables and other items with limited useful lives
• Shortage cost
• Generally, the unrealized profit per unit
• Cshortage = Cs = Revenue per unit – Cost per unit
• Excess cost
• Different between purchase cost and salvage value of items left over at the end of the
period
• Cexcess = Ce = Cost per unit – Salvage value per unit
For example likecan order just one time ,when amount less than demand It will
have shortage cost or amount have more then demand it willhave Excesscost

49. Single-Period Model
• The goal of the single-period model is to identify the order quantity that
will minimize the long-run excess and shortage costs
• Two categories of problem:
• Demand can be characterized by a continuous distribution
• Demand can be characterized by a discrete distribution
while at the same time avoiding costly "overstock" situations. Inventory control
poses special challenges for companies that operate on a "single-period" inventory
model, in which you get only one chance to set your inventory.

50. Stocking Levels
Service level
So
Balance Point
Quantity
Cs Ce
So =Optimum
Stocking Quantity
unitpercostexcess
unitpercostshortage
where
levelService




e
s
es
s
C
C
CC
C

51. Operations Strategy
• Improving inventory processes can offer significant cost
reduction and customer satisfaction benefits.
• Areas that may lead to improvement:
• Record keeping
• Records and data must be accurate and up-to-date
• Variation reduction
• Lead variation
• Forecast errors
• Lean operations
• Supply chain management

52. Thank you for your attention.
Any Questions.?