operations management inventory management
DESCRIPTION
Operations Management Inventory Management. The Functions of Inventory. To have a stock of goods that will provide a “selection” for customers To take advantage of quantity discounts To hedge against inflation and upward price changes. Disadvantages of Inventory. Higher costs - PowerPoint PPT PresentationTRANSCRIPT
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Operations Management
Inventory Management
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The Functions of Inventory
To have a stock of goods that will
provide a “selection” for customers
To take advantage of quantity
discounts
To hedge against inflation and
upward price changes
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Higher costs Item cost (if purchased) Ordering (or setup) cost
Costs of forms, clerks’ wages etc.
Holding (or carrying) cost Building lease, insurance, taxes etc.
Difficult to control
Hides production problems
Disadvantages of Inventory
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Types of Inventory
Raw material
Work-in-process (WIP)
Maintenance/repair/operating
supplies (MRO)
Finished goods
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Inventory Management
Two ingredients of inventory mgmt
systems
Classification of inventory items
Basis for establishing inventory policies
Maintenance of accurate inventory
records
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ABC Analysis
Divides on-hand inventory into 3 classes A class, B class, C class
Basis is usually annual $ volume $ volume = Annual demand x Unit cost A (70%-80% of total annual $ volume); B
(15-25%), C (5%) Other criteria could include
Delivery problems Quality problems High unit cost
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Classifying Items as ABC
% of Inventory Items
0
20
40
60
80
100
0 50 100
% Annual $ Usage
AABB
CC
Class % $ Vol % ItemsA 80 15B 15 30C 5 55
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ABC Analysis
Policies then established for each class
after analysis
Policies based on ABC analysis could
include
Focus more on development of class A
suppliers
Have tighter physical control of A items
Forecast A items more carefully
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Independent versus Dependent Demand
Independent demand - demand for item is
independent of demand for any other item Demand for cars is independent of demand for
TV’s
Dependent demand - demand for item is
dependent upon the demand for some
other item Demand for car tires is dependent on demand
for cars
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Inventory Costs
Holding costs - associated with holding or
“carrying” inventory over time
Ordering costs - associated with costs of
placing order and receiving goods
Setup costs - cost to prepare a machine
or process for manufacturing an order
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Inventory Models
When to order and how much to order
Fixed order-quantity models Economic order quantity
Production order quantity
Quantity discount
Probabilistic models
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EOQ Assumptions
Known, constant and independent demand
Known and constant lead time
Instantaneous and complete receipt of material
No quantity discounts
Only order (setup) cost and holding cost considered
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Inventory Usage Over Time
Time
Inve
ntor
y Le
vel
AverageInventory
(Q*/2)
0Minimum inventory
Order quantity = Q (maximum inventory level)
Usage Rate
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EOQ ModelHow Much to Order?
Order quantity
Annual Cost
Holding Cost CurveTotal Cost Curve
Order (Setup) Cost Curve
Optimal Order Quantity (Q*)
Minimum total cost
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Deriving an EOQ
1. Develop an expression for setup or
ordering costs
2. Develop an expression for holding
cost
3. Set setup cost equal to holding cost
4. Solve the resulting equation for the
best order quantity
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EOQ Model When To Order
Reorder Point
(ROP)
Time
Inventory LevelAverageInventory
(Q*/2)
Lead Time
Optimal Order
Quantity(Q*)
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The Reorder Point (ROP) Curve
Q*
ROP (Units)
Slope = units/day = d
Lead time = LTime (days)
Inve
ntor
y le
vel (
units
)
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Production Order Quantity Model
Answers how much to order and when to order
Allows partial receipt of material – no instantaneous receipt of materials
Other EOQ assumptions apply
Suited for production environment Material produced, used immediately Provides production lot size
Lower holding cost than EOQ model
Production Order Quantity Model
Answers how much to order and when to order
Allows partial receipt of material – no instantaneous receipt of materials
Other EOQ assumptions apply
Suited for production environment Material produced, used immediately Provides production lot size
Lower holding cost than EOQ model
Quantity Discount Model
Answers how much to order & when to
order
Allows quantity discounts
Reduced price when item is purchased in
larger quantities
Other EOQ assumptions apply
Trade-off is between lower price &
increased holding cost
Quantity Discount Schedule
Discount
Number
Discount Quantity
Discount (%)
Discount Price (P)
1 0 to 999 No discount
$5.00
2 1,000 to 1,999
4 $4.80
3 2,000 and over
5 $4.75
Quantity Discount Model
Compute the common EOQ and identify the feasible range.
If the feasible EOQ is on the lowest price range, that is the optimal order quantity.
If the EOQ is below the allowable range, adjust the EOQ to the lowest price break qty of that range
If the EOQ is above the allowable range, discard that EOQ
Compare the total costs (including total cost of product) for the feasible EOQ and price break quantity.
Select the quantity that yields the lowest total costs.
Probabilistic models
When demand is not known, but can
be expressed as a probabilistic
distribution
Uncertain demand raises possibility
of stock out
Service level – complement of
probability of stock out