lesson 122014 short
TRANSCRIPT
Lesson 12: Inventory management
Operations Management
Maintenance/repair/operating (MRO)
Inventory
Types of inventory
An inventory is a stock of an item or idle resource held for future usage in an organization (to satisfy present or future demand).
Raw Materials: Vendor-supplied items that have not had any labor added by the firm receiving the items.
Finished Goods: Completed products that are still in the possession of the firm that manufactured them.
Work-in-Process (WIP): Items that have been partially processed but are still incomplete.
Inventory management
Why inventory is important Is one of the most expensive assets of many companies (50%)Inventory management must balance inventory investment and customer service
Set of policies and controls that monitors levels of inventory and determines:What to keep? how much to keep? How much do we have? (inventory control)What to order? how large orders should be? When should be replenished?How much does this cost?
1. To separate (in time, in space, in technology) various parts of the production process
2. To decouple the firm from fluctuations in demand and provide a stock of goods that will provide a selection for customers
3. To take advantage of discounts and hedge against changes in price or supply interruptions
Rationales for inventory
Based on the Pareto principle (20-80) 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 (care in forecasting, physical inventory control and procurement)
ABC analysis
ABC analysis (Example)
Booker’s Book Bindery wants to divider SKUs into three classes, according to their dollar usage.
ABC analysis (Example)
Items are counted and records updated on a periodic basis
ABC analysis: cycle counting
5,000 items in inventory: 500 A items, 1,750 B items, 2,750 C items. Policy is to count A items every month (20 working days), B items every quarter (60 days), and C items every six months (120 days).
• A museum of natural history opened a gift shop which operates 52 weeks per year.
• Managing inventories has become a problem.• Top-selling SKU is a bird feeder.• Sales are 18 units per week, the supplier charges $60 per
unit.• Ordering cost is $45. • Annual holding cost is 25 percent of a feeder’s value.
The aim of inventory management
Compute the optimal order size. How frequently will orders be placed? How many orders per year? Compute the relevant costs.
Independent demand: the demand for this item is independent of the demand for any other item in inventory.Holding costs are the costs of holding or “carrying” inventory over time. Fixed costs (per order or batch): Ordering costs (the costs of placing a single order and receiving goods) or Setup costs (cost to prepare a machine or process for manufacturing an order).
the Economic Order Quantity (EOQ) model : glossary
1. Demand rate is known, uniform, and independent
2. Lead time is known and constant3. Receipt of inventory is instantaneous and
complete4. Price is constant. Quantity discounts do not
exist5. Only setup/ordering cost and holding cost
are considered. They are constant over time. 6. No stockouts
Assumptions underlying the EOQ model
Maximum inventory Q
Average inventory on hand
Q2
Minimum inventory
Inve
ntor
y le
vel
Time (t)0
The EOQ model: usage of inventory
Order quantityQ
S(t)
Time Between Orders (replenishment period)
The EOQ formula
The single-item EOQ formula finds the minimum point of the following cost function:
Total Cost (in a period) = purchase (or production) cost + ordering (setup) cost + holding cost
Purchase cost: purchase unit price × annual demand quantity. p × DOrdering cost: Each order has a fixed cost S, and we need to order D/Qtimes per period. Holding cost: the average quantity in stock is Q/2 and the holding cost per unit per period is H (sometimes H = i x P, where i is an interest rate).
H
The EOQ formula
To determine the minimum point of the total cost curve, differentiate the total cost with respect to Q and set to 0:Solving for Q gives Q* (the optimal order quantity)
• A museum of natural history opened a gift shop which operates 52 weeks per year.
• Managing inventories has become a problem.• Top-selling SKU is a bird feeder.• Sales are 18 units per week, the supplier charges $60 per
unit.• Ordering cost is $45. • Annual holding cost is 25 percent of a feeder’s value.
Inventory management: the Economic Order Quantity (EOQ) model
Compute the optimal order size. How frequently will orders be placed? How many orders per year? Compute the relevant costs.
Using the formula for EOQ we get
We begin by computing the annual demand and the holding cost D = 18 units/week · 52 weeks/year = 936 units
N= = 12.5 orders93675TBO =
7518 = 4.2 weeks
TRC = (H) + (S) = Q2
DQ ·15 + ·45 = $562 + $562 = $1124
752
93675
H = 0.25 · $60/unit) = $15
SOLUTION
Let us return to the bird feeder example. If the lead time is constant at two weeks. Determine the reorder point.
Reorder point
The reorder point (ROP) tells “when” to order
ROP = 18 x 2 = 36 units
Inventory control systems
R = 25 x 4 = 100 cases= 10 + 200 – 0 = 210 cases > RIP = OH + SR – BO
EXAMPLEDemand for chicken soup at a supermarket is 25 cases a day. Supplylead time is 4 days. Now the on-hand inventory is 10 cases. Nobackorders currently exist but there is an order in the pipeline for 200cases. What is the reorder point? What is the inventory position?Should a new order be placed?
Continuous review (Q) systemTracks inventory position (IP)Reorder point system (ROP) Fixed order quantity system (FOQ EOQ)
Reorder point for variable demand
Safety stock is used to achieve a desired service level and avoid stockoutsReorder point = Average demand during lead time + Safety stock
d = average demand per week (or day or months)L = constant lead time in weeks (or days or months)
Z = number of standard deviationssdLT = standard deviation of demand during lead timeσdLT = σ L
The order quantity remains constant (Q*) but the time between orders (TBO) varies.
Let us return to the bird feeder example. The average demand is 18 units perweek with a standard deviation of 5 units per week. The lead time is constantat 2 weeks. Determine the safety stock and reorder point if managementwants a 90 percent cycle-service level*.
*For service level based upon individual unit shortages see J.G. Monks(1996) Operations management 2nd ed. pp. 262-264
SOLUTION
Average demand during lead time
Service level = 90%
Probabilityof stockout(1.0 – 0.90 = 0.10)
Z·σdLT
Rd·L
Safety stock = z · σdLT = 1.28 x 7.07 = 9 units
2 x 18 + 9 = 45 unitsReorder point = d ·L + Safety stock =
In this case, σd = 5, d = 18 units, and L = 2 weeks, so
Consult the body of the Normal Distribution for 0.90 (90% service level). The closest number is 0.8997, which corresponds to z = 1.28.
σdLT = σd · L = 5· 2 = 7.07