Inventory Management Models

12 - 1
Copyright © 2017 Pearson Education, Ltd.
PowerPoint presentation to accompany
Heizer, Render, Munson
Operations Management, Twelfth Edition, Global Edition
Principles of Operations Management, Tenth Edition, Global Edition
PowerPoint slides by Jeff Heyl
Inventory
Management
12

12 - 2
Learning Objectives
When you complete this chapter you
should be able to:
1 Explain types of inventory
2 Apply the EOQ model for
independent inventory demand
3 Identify the importance of
inventory management using ABC
analysis

12 - 3
But before that, let’s recap on
SCM
▶Recap on SCM (previous topic)

12 - 4
Return or reverse logistics –
there can be business in ‘returns’
▶Sending returned products back up the supply
chain for resale, repair, reuse, remanufacture,
recycling, or disposal

12 - 5
Warehousing
▶May be expensive, but
alternatives may be more so
▶Fundamental purpose is to
store goods
▶May provide other functions
▶Consolidation
▶Break-bulk
▶Cross-docking
▶Channel assembly

12 - 6
What is a cross docking
facility and drop-shipping?
▶Cross-docking is a practice in
logistics of unloading materials
from an incoming semi-trailer
truck or railroad car and loading
these materials directly into
outbound trucks, trailers, or rail
cars, with little or no storage in
between. Just exchange the
goods/transit

12 - 7
Example : Cross-docking
Dairy
farms
fruits
Frozen
food

12 - 8
Cross Docking

12 - 9

12 - 10
Quick Quiz time!
ACTIVITY:
‘Do it now’ as QUICK QUIZ.
Answer the above questions by uploading your
images in the chat column/sharescreen/upload ppt
slides on pc and show on screen for f2f classes
1. Explain the following terms in SCM:
a.Cross-docking
b.Dropshipping
Use the aid of a image

12 - 11
2. Explain the various mode of
shipments, the cost and Speed of
Shipments
Faster shipping is generally more expensive than
slower shipping. Faster methods tend to involve
smaller shipment sizes while slower methods
involve very large shipment sizes in supply chain.
▶a.List the different types of shipment in logistics
▶b.For each type, explain the cost and the reason
for opting for such shipments.
▶c.Explain what is multimodal in logistics
▶d. Explain 3rd party logistics

12 - 12
Third-Party Logistics (3PL)
▶ Outsourcing logistics can
reduce inventory, costs,
and improve delivery
reliability and speed
▶ Coordinate supplier
inventory with delivery
services
▶ May provide
warehousing,
assembly, testing,
shipping, customs

12 - 13
SCM homework – WATCH THE VIDEOS
TO GET AN UNDERSTANDING HOW SCM
IS IMPORTANT IN THE INDUSTRY
▶https://edpuzzle.com/media/5e9debbe20854
53fb4658e6b
▶https://www.bing.com/videos/search?q=ARN
OLD+PALMER+SUPPLY+CHAIN+HEIZER&
&view=detail&mid=60E85E649CA002EA52D
960E85E649CA002EA52D9&rvsmid=D85DE
8E5C9804CB0194CD85DE8E5C9804CB019
4C&FORM=VDQVAP

12 - 14
Class Activity – SCM
▶VIEWING YT AND READING ON SCM
MINI CASES >>>>>>>>>>>(Refer SUEZ
CANAL CASE AND ARNOLD PALMER
VIDEO CASE).
Let us check out your answers in GOOGLE
JAM BOARD!!
https://jamboard.google.com/d/1DyzW37tTU
YJDghyj5ueoGdNQkzFZCiMoIAnT52w_qO
U/viewer?f=7

12 - 15
Inventory Management at
Amazon.com
1.Each order is assigned by computer to the
closest distribution center that has the
product(s)
2.A “flow meister” at each distribution center
assigns work crews
3.Technology helps workers pick the correct
items from the shelves with almost no errors
4.Items are placed in crates on a conveyor, bar
code scanners scan each item 15 times to
virtually eliminate errors

12 - 16
Inventory Management at
Amazon.com
5. Crates arrive at central point where items
are boxed and labeled with new bar code
6. Gift wrapping is done by hand at 30
packages per hour
7. Completed boxes are packed, taped,
weighed and labeled before leaving
warehouse in a truck
8. Order arrives at customer within 1 - 2 days

12 - 17
Amazon Video Clip on
Inventory Management
▶ Edpuzzle
▶ https://www.google.com/search?q=amazon+video+warehouse&oq=
amazon+video+warehouse&aqs=chrome..69i57j0i22i30l9.6022j0j3&
sourceid=chrome&ie=UTF-
8#fpstate=ive&vld=cid:479051ec,vid:IMPbKVb8y8s
VIDEO QUIZ:
What did you learn about the warehousing activities in Amazon?
Video on Distribution:
https://www.youtube.com/watch?v=b3Gh2tffHxE
Explain Parcel Sorting Solutions for E-commerce, Logistics, 3rd
Party Logistics and Express Companies with examples

12 - 18
Inventory Management
The objective of inventory
management is to strike a balance
between inventory investment and
customer service

12 - 19
Importance of Inventory
▶One of the most expensive assets of
many companies representing as
much as 50% of total invested capital
▶Understock : Less inventory lowers
costs but increases chances of
running out
▶Overstock: More inventory raises
costs but always keeps customers
happy

12 - 20

12 - 21
The Material Flow Cycle
Figure 12.1
Input Wait for Wait to Move Wait in queue Setup Run Output
inspection be moved time for operator time time
Cycle time
95% 5%

12 - 22
Managing Inventory
1) How inventory items can be classified
(ABC analysis)
2) How accurate inventory records can
be maintained

12 - 23
ABC Analysis
▶Divides inventory into three classes based
on annual dollar volume
▶Class A - high annual dollar volume
▶Class B - medium annual dollar volume
▶Class C - low annual dollar volume
▶Used to establish policies that focus on the
few critical parts and not the many trivial
ones

12 - 24
ABC Analysis
A Items
B Items
| | | | | | | | | |
10 20 30 40 50 60 70 80 90 100
Percentage
of
annual
dollar
usage
80 –
70 –
60 –
50 –
40 –
30 –
20 –
10 –
0 –
Percentage of inventory items
Figure 12.2
C Items

12 - 25
ABC Analysis
ABC Calculation
(1) (2) (3) (4) (5) (6) (7)
ITEM
STOCK
NUMBER
PERCENT
OF
NUMBER
OF ITEMS
STOCKED
ANNUAL
VOLUME
(UNITS) x
UNIT
COST =
ANNUAL
DOLLAR
VOLUME
PERCENT
OF ANNUAL
DOLLAR
VOLUME CLASS
#10286 20% 1,000 $ 90.00 $ 90,000 38.8% A
#11526 500 154.00 77,000 33.2% A
#12760 1,550 17.00 26,350 11.3% B
#10867 30% 350 42.86 15,001 6.4% B
#10500 1,000 12.50 12,500 5.4% B
#12572 600 14.17 8,502 3.7% C
#14075 2,000 .60 1,200 .5% C
#01036 50% 100 8.50 850 .4% C
#01307 1,200 .42 504 .2% C
#10572 250 .60 150 .1% C
8,550 $232,057 100.0%
72%
23%
5%

12 - 26
ABC Analysis
▶ Other criteria than annual dollar volume
may be used
▶ High shortage or holding cost
▶ Anticipated engineering changes
▶ Delivery problems
▶ Quality problems

12 - 27
ABC Analysis
▶Policies employed may include
1. More emphasis on supplier development
for A items
2. Tighter physical inventory control for
A items
3. More care in forecasting A items

12 - 28
Record Accuracy
► Accurate records are a
critical ingredient in
production and inventory
systems
► Periodic systems require
regular checks of inventory
► Two-bin system
► Perpetual inventory tracks receipts
and subtractions on a continuing basis
► May be semi-automated

12 - 29
Record Accuracy
► Incoming and outgoing
record keeping must be
accurate
► Stockrooms should be secure
► Necessary to make precise decisions
about ordering, scheduling, and
shipping

12 - 30
Control of Service Inventories
▶Can be a critical component of profitability
▶Losses may come from shrinkage or
pilferage
▶Applicable techniques include
1. Good personnel selection, training, and
discipline
2. Tight control of incoming shipments
3. Effective control of all goods leaving facility

12 - 31
Inventory Models
▶Independent demand - the demand for
item is independent of the demand for any
other item in inventory
▶Dependent demand - the demand for
item is dependent upon the demand for
some other item in the inventory

12 - 32
Inventory Models
▶Holding costs - the costs of holding or
“carrying” inventory over time
▶Ordering cost - the costs of placing an
order and receiving goods
▶Setup cost - cost to prepare a machine or
process for manufacturing an order
▶May be highly correlated with setup time

12 - 33

12 - 34
Holding Costs
TABLE 12.1 Determining Inventory Holding Costs
CATEGORY
COST (AND RANGE)
AS A PERCENT OF
INVENTORY VALUE
Housing costs (building rent or depreciation,
operating costs, taxes, insurance)
6% (3 - 10%)
Material handling costs (equipment lease or
depreciation, power, operating cost)
3% (1 - 3.5%)
Labor cost (receiving, warehousing, security) 3% (3 - 5%)
Investment costs (borrowing costs, taxes, and
insurance on inventory)
11% (6 - 24%)
Pilferage, space, and obsolescence (much
higher in industries undergoing rapid change like
tablets and smart phones)
3% (2 - 5%)
Overall carrying cost 26%

12 - 35
Holding Costs
TABLE 12.1 Determining Inventory Holding Costs
CATEGORY
COST (AND RANGE)
AS A PERCENT OF
INVENTORY VALUE
Housing costs (building rent or depreciation,
operating costs, taxes, insurance)
6% (3 - 10%)
Material handling costs (equipment lease or
depreciation, power, operating cost)
3% (1 - 3.5%)
Labor cost (receiving, warehousing, security) 3% (3 - 5%)
Investment costs (borrowing costs, taxes, and
insurance on inventory)
11% (6 - 24%)
Pilferage, space, and obsolescence (much
higher in industries undergoing rapid change like
PCs and cell phones)
3% (2 - 5%)
Overall carrying cost 26%

12 - 36
Inventory Model for Independent
Demand
Basic economic order quantity
(EOQ) model
Need to determine when and
how much to order

12 - 37
Basic EOQ Model
1. Demand is known, constant, and independent
2. Lead time is known and constant
3. Receipt of inventory is instantaneous and
complete
4. Quantity discounts are not possible
5. Only variable costs are setup (or ordering)
and holding
6. Stockouts can be completely avoided
Important assumptions

12 - 38
Inventory Usage Over Time
Figure 12.3
Order
quantity = Q
(maximum
inventory
level)
Usage rate
Average
inventory
on hand
Q
2
Minimum
inventory
Inventory
level
Time
0
Total order received

12 - 39
Minimizing Costs
Objective is to minimize total costs
Table 12.4(c)
Annual
cost
Order quantity
Total cost of
holding and
setup (order)
Holding cost
Setup (order) cost
Minimum
total cost
Optimal order
quantity (Q*)

12 - 40
Minimizing Costs
▶By minimizing the sum of setup (or
ordering) and holding costs, total costs are
minimized
▶Optimal order size Q* will minimize total
cost
▶A reduction in either cost reduces the total
cost
▶Optimal order quantity occurs when
holding cost and setup cost (ordering
costs) are equal

12 - 41
Minimizing Costs
Q = Number of units per order
Q* = Optimal number of units 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
Annual setup cost = (Number of orders placed per year)
x (Setup or order cost per order)
Annual demand
Number of units in each order
Setup or order
cost per order
=
=
D
Q
æ
è
ç
ö
ø
÷S

12 - 42
Minimizing Costs
Annual setup cost = (Number of orders placed per year)
x (Setup or order cost per order)
Annual demand
Number of units in each order
Setup or order
cost per order
=
=
D
Q
æ
è
ç
ö
ø
÷S
Q = Number of pieces per order
Q* = Optimal number of pieces per order (EOQ)
Annual setup cost =
D
Q
S

12 - 43
Q = Number of pieces per order
Q* = Optimal number of pieces per order (EOQ)
Minimizing Costs
Annual holding cost = (Average inventory level)
x (Holding cost per unit per year)
Order quantity
2
(Holding cost per unit per year)
=
=
Q
2
æ
è
ç
ö
ø
÷H
Annual setup cost =
D
Q
S
Annual holding cost =
Q
2
H

12 - 44
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*
=
2DS
H
Q*
=
2(1,000)(10)
0.50
= 40,000 = 200 units

12 - 45
An EOQ Example
Determine expected number of orders
D = 1,000 units Q* = 200 units (EOQ order size)
S = $10 per order
N = = 5 orders per year
1,000
200
= N = =
Expected
number of
orders
Demand
Order quantity
D
Q*

12 - 46
An EOQ Example
Determine optimal time between orders
D = 1,000 units Q* = 200 units
S = $10 per order N = 5 orders/year
T = = 50 days between orders
250
5
= T =
Expected
time between
orders
Number of working days per year
Expected number of orders
Note: Number of working days per year = 250 days

12 - 47
An EOQ Example
Determine the total annual cost
D = 1,000 units Q* = 200 units
S = $10 per order N = 5 orders/year
H = $.50 per unit per year T = 50 days
Total annual cost = Setup cost + Holding cost
TC =
D
Q
S +
Q
2
H
=
1,000
200
($10)+
200
2
($.50)
= (5)($10)+(100)($.50)
= $50+$50 = $100

12 - 48
Robust Model
▶The EOQ model is robust
▶It works even if all parameters and
assumptions are not met
▶The total cost curve is relatively flat in
the area of the EOQ
▶HW: Reading activity
https://www.slideshare.net/swathinidi35
/cost-inventory

12 - 49

12 - 50

12 - 51
1. Explain what is Economic Order
Quantity?
2. Describe the following terms:
(i) Ordering costs
(ii) Holding costs

12 - 52
EOQ is the optimal
inventory size that should
be ordered with the
supplier to minimize the
total annual inventory cost
of the business.
Explain what is Economic Order Quantity

12 - 53
Describe the following terms:
(i) Ordering costs
The ordering costs are the costs that are incurred every time an
order for inventory is placed with the supplier.
Examples of these costs include:
• telephone charges
• delivery charges
• invoice verification expenses
• payment processing expenses etc.

12 - 54
Describe the following terms:
(ii) Holding costs
The holding costs (also known as carrying costs) are the
costs that are incurred to hold the inventory in a store or
warehouse. Examples INCLUDE:
• occupancy of storage space,
• Rent
• Shrinkage
• Deterioration
• obsolescence
• insurance
• property tax

12 - 55
Holding Costs
Ordering
Costs
Including
Set- up
costs
Total Inventory Costs

12 - 56
ANY QUESTIONS?
TQ

Inventory Management Models

Recommended

Recommended

More Related Content

Similar to Inventory Management Models

Similar to Inventory Management Models (20)

More from Jesilin James

More from Jesilin James (11)

Recently uploaded

Recently uploaded (20)

Inventory Management Models