Inventory Management


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Inventory Management

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