18115_pp12.pptx

Slack, Brandon-Jones and Johnston, Operations Management PowerPoints on the Web, 7th edition © Nigel Slack, Alistair Brandon-Jones and Robert Johnston 2014
Slide 12.1
Chapter 12
Inventory
management

Slide 12.2
Direct
Design Develop
Deliver
Operations
management
Inventory
management
Inventory management
The operation supplies...
the delivery of a quantity of
products and services when
required
The market requires… a
quantity of products and
services at a particular time
Figure 12.1 This chapter covers inventory management

Slide 12.3
In Chapter 12 – Inventory planning and control – Slack et
al. identify the following key questions…
What is inventory?
Why should there be any inventory?
How much should be ordered?
When should an order be placed?
How can inventory be controlled?
Key operations questions

Slide 12.4
Inventory
Time
In-flow (supply from
previous process)
Time
Out-flow (rate of demand
from output process)
Time
Inventory
accumulating
Inventory
reducing
Inventory is created to compensate for the differences in timing
between supply and demand
Inventory management
Figure 12.2 Inventory is created to compensate for the differences in timing between supply and demand

Slide 12.5
Process,
operation or
supply network
‘Inventories’
Physical inventories Queues of customers Information in
databases
Hotel Food items, drinks,
toilet items
At check in and check
out
Customer details,
loyalty card holders,
catering suppliers
Hospital Dressings, disposable
instruments, blood
Patients on a waiting
list, patients in bed
waiting for surgery,
patients in recovery
wards
Patient medical
records
Credit card
application
process
Blank cards, form
letters
Customers waiting on
the phone
Customer’s credit and
personal information
Computer
manufacturer
Components for
assembly, packaging
materials, finished
computers ready for
sale
Customers waiting for
delivery of their
computer
Customers’ details,
supplier information
Examples of inventory
Table 12.1 Examples of inventory held in processes, operations or supply networks

Slide 12.6
‘Inventories’
Physical inventories Queues of customers Digital information in
databases
Cost Ties up working capital
and there could be high
administrative and
insurance costs
Primarily time-cost to the
customer, i.e. wastes
customers’ time.
Cost of set-up, access,
update and
maintenance
Space Requires storage space Requires areas for
waiting or phone lines for
held calls
Requires memory
capacity. May require
secure and/or special
environment
Quality May deteriorate over time,
become damaged or
obsolete
May upset customers if
they have to wait too
long. May lose
customers
Data may be corrupted
or lost or become
obsolete
Operational/
organizational
May hide problems (see
lean synchronization –
Chapter 15)
May put undue pressure
on the staff and so
quality is compromised
for throughput
Databases need
constant management;
access control,
updating and security
Some reasons to avoid inventories
Table 12.2 Some reasons to avoid inventories

Slide 12.7
Reason for
holding inventory
Example How inventory could be
reduced
As an insurance
against
uncertainty
Safety stocks for when
demand or supply is not
perfectly predictable
Improve demand forecasting
Tighten supply, e.g. through
service level penalties
To counteract a
lack of flexibility
Cycle stock to maintain supply
when other products are being
made
Increase flexibility of
processes, e.g. by reducing
changeover times (see
Chapter 11)
Using parallel processes
producing output
simultaneously (see
Chapter 7)
To take advantage
of relatively short-
term opportunities
Suppliers offer ‘time limited’
special low cost offers
Persuade suppliers to adopt
‘everyday low prices’ (see
Chapter 13)
Some ways in which physical inventory may be reduced
Table 12.3 Some ways in which physical inventory may be reduced

Slide 12.8
Reason for
holding inventory
Example How inventory could be reduced
To anticipate
future demands
Build up stocks in low
demand periods for use in
high demand periods
Increase volume flexibility by
moving towards a ‘chase
demand’ plan (see Chapter 11)
To reduce overall
costs
Purchasing a batch of
products in order to save
delivery and administration
costs
Reduce administration costs
through purchasing process
efficiency gains
Investigate alternative delivery
channel that reduce transport
costs.
To fill the
processing
‘pipeline’
Items being delivered to
customer
Reduce process time between
customer request and dispatch
of items
Reduce throughput time in the
downstream supply chain (see
Chapter 13)
Some ways in which physical inventory may be reduced
(Continued)
Table 12.3 Some ways in which physical inventory may be reduced (Continued)

Slide 12.9
Inventory has a significant effect on return on assets
Return on
Assets
Profit
Total assets
Revenues  Costs
Working capital + Fixed assets
= =
Ability to
supply from
stock
Obsolescence,
damage, loss
Cost of
funding
inventory
Storage
costs
Ordering
costs
Amount you
owe suppliers
Amount
customers owe
you
Figure 12.4 Inventory management has a significant effect on return on assets

Slide 12.10
Inventory profiles chart the variation in inventory level
Time
per period
D
Q
Instantaneous deliveries at a rate of
Q
D
Inventory
level Steady and
predictable
demand (D) Slope = demand rate
=
Average inventory
Q
2
Order
quantity = Q
Figure 12.5 Inventory profiles chart the variation in inventory level

Slide 12.11
Two alternative inventory plans with different order
quantities (Q)
Time
Inventory
level
Plan A
Q = 400
Demand (D) = 1,000 items per year
Average inventory
for plan A = 200
Average inventory
for plan B = 50
0.1 yr 0.4 yr
100
400
Plan B
Q = 100
Figure 12.6 Two alternative inventory plans with different order quantities (Q)

Slide 12.12
400
350
300
250
200
150
100
50
400
350
300
250
200
150
100
50
Order quantity
Costs
Economic order
quantity (EOQ)
Total costs
Holding costs
Order costs
Traditional view of inventory-related costs
Figure 12.7 Graphical representation of the economic order quantity

Slide 12.13
Cycle inventory in a bakery
Inventory
level
Deliver
A
Produce A
Deliver
B
Produce B
Deliver
C
Produce C
Deliver
A
Produce A Produce B
Deliver
B
Produce C
Deliver
C
Time
Figure 12.3 Cycle inventory in a bakery

Slide 12.14
Time
Inventory
level
Inventory profile for gradual replacement of inventory
Order
quantity
Q
Q
P
M
Slope = P  D
Slope = D
Figure 12.8 Inventory profile for gradual replacement of inventory

Slide 12.15
Inventory
level
Time
Shortages
Inventory planning allowing for shortages

Slide 12.16
The re-order point
400
300
200
100
Inventory
level
0
0 1 2 3 4 5 6 7 8
Re-order level
Re-order point
Time
Demand (D) = 100 items per week
Order lead time
Figure 12.11 Re-order level (ROL) and re-order point (ROP) are derived from the order lead time and
demand rate
Order quantity (Q) = 400

Slide 12.17
Safety stock(s) helps to avoid stock-outs when demand
and/or order lead times are uncertain
Inventory
level
S
Q
Time
t1 t2
d1
d2
Re-order level (ROL)
Distribution of
lead-time
usage
?
Figure 12.12 Safety stock (s) helps to avoid stock-outs when demand and/or order lead time are
uncertain

Slide 12.18
The probability distributions for order lead time and
demand rate combine to give the lead-time usage
distribution
0.4
0.3
0.2
0.1
0
110 120 130 140
Probability
Demand rate
0.4
0.3
0.2
0.1
0
1 2 3 4 5
Probability
Order lead time
0.4
0.3
0.2
0.1
0
Probability
100–199
Lead-time usage
120–299 300–399 400–499 500–599 600–699 700–799
Figure 12.13 The probability distributions for order lead time and demand rate combine to give the
lead-time usage distribution

Slide 12.19
A periodic review approach to order timing with
probabilistic demand and lead time
Inventory
level
Qm
T0 T1 T2 T3 Time
t1 t2 t3
tf tf tf
Q1 Q2 Q3
Figure 12.14 A periodic review approach to order timing with probabilistic demand and lead time

Slide 12.20
A paper merchant must get its inventory planning and
control right
Figure 12.10 The role of the paper merchant

Slide 12.21
100
90
80
70
60
50
40
30
20
10
100
90
80
70
60
50
40
30
20
10
Class C
items
Class B
items
Class A
items
Pareto curve for stocked items
Percentage of types of items
Percentage
of
value
of
items
Figure 12.16 Pareto curve for items in a warehouse

Slide 12.22
Inventory classifications and measures
Class A items – the
20% or so of high-
value items which
account for around
80% of the total
stock value
Class B items – the
next 30% or so of
medium-value items
which account for
around 10% of the
total stock value
Class C items – the
remaining 50% or so
of low-value items
which account for
around the last 10%
of the total stock
value

Slide 12.23
If the true costs of stock holding are taken into account, and if the cost of ordering (or
changeover) is reduced, the economic order quantity (EOQ) is much smaller
Original
holding costs
Original total
costs
Revised
holding
costs
Order quantity
Costs
Original
EOQ
Revised
EOQ
Revised order
costs
Revised total
costs
Original order
costs
Criticism of the EOQ approach
Figure 12.9 If the true costs of stock holding are taken into account, and if the cost of ordering (or changeover)
is reduced, the economic order quantity (EOQ) is much smaller

Slide 12.24
Two-bin system Three-bin system
The ‘Two-bin’ and ‘Three-bin’ systems of reordering
Bin 2
Bin 1 Bin 1 Bin 2 Bin 3
Items being
used
Reorder level
+ safety
inventory
Items being
used
Reorder
level
inventory
Safety
inventory
Figure 12.15 The two-bin and three-bin systems of re-ordering

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