Chapter 11 Inventory Management

1
Chapter 11 Inventory Management

• Definition, objectives, historical evolution,
  EOQ, service levels, models

2
What Is Inventory?

• Material owned for use in product or as operating
  supply
• Has value (usually)
• Need for product or to support production
• Other?

3
Inventory Types - 1

• Raw Material (RM) purchased
• true raw material
• Component parts
• Work-in-process (WIP) manufactured in-house
• Assemblies
• Sub-assemblies
• Fabricated parts

4
Inventory Types - 2

• Finished Goods (FGI)
• Completed products
• Raw Materials in Process (RIP)
• Found in lean operations (JIT) environments
• Combines RM and WIP
• Operating supplies
• Goods in transit

5
Major Objectives

• Never have a stockout
• Customer dissatisfaction
• Production disruption
• Never carry excess inventory
• Inventory is an asset but it is not free
• In other words walk a tightrope!

6
Inventory Related Costs

• Carrying costs
• Obvious
• Capital
• Holding
• Semi-obvious
• Obsolescence
• Inventory management
• Hidden
• Idle stock
• Scrap and rework
• Next slide

• Ordering costs
• People
• Purchasing staff
• Receiving
• Inspection
• Order transmission
• Purchasing supplies
• Occupancy
• Purchasing
• Receiving

7
Holding costs Stock Related

• Personnel
• Equipment
• Occupancy (rent and utilities)
• Interest
• Insurance
• Taxes
• Security
• Shrinkage and damage

8
Historical Evolution of I/C - 1

• Record keeping
• Answer 2 questions
• When to order
• How much to order
• When?
• Sawtooth diagram ROP (see next slide)
• ROP d X LT

9
Sawtooth diagram ROP
10
ROP Limitations

• Assumes demand is known and linear
• Relies on instantaneous replenishment when
  inventory reaches zero
• Assumes lead time is known and constant
• Has no relationship to future usage
• Treats each item independently
• Encourages safety stock

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Historical Evolution of I/C - 2

• How Much?
• Cost of inventory EOQ
• Balance carrying (holding) and ordering costs
• EOQ square root of 2DS/IC
• Variations
• Multiple delivery (manufacturing EMQ or EPQ)
• Quantity discounts

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EOQ Limitations

• Assumes ordering costs are accurately known
• Assumes carrying costs are accurately known
• Results in always carrying a certain amount of
  inventory
• Focuses on mechanics, not basics
• No emphasis on changing costs

13
Additional ordering models

• Fixed-order interval
• Frequency is set
• Quantity varies with each order
• Single-period model
• One-time order
• Perishables, refurbishing contracts
• Alternative ABC approach (Pareto!)
• Based on dollar usage over a fixed period
• Order A often, C rarely, B in between

14
ABC Classification System
Classifying inventory according to some measure
of importance and allocating control efforts
accordingly. A - very important B - mod.
important C - least important
15
Inventory Counting Systems

• Periodic
• Full physical (wall-to-wall)
• Two bin
• Bulk and shelf
• Stockroom minimum (SRM)
• Perpetual
• Transaction recording and balance maintenance
• Historical evolution
• Cycle counting (using ABC)

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Inventory Metrics

• Inventory Turnover
• T CGS
• AI
• Expected Annual Shortages
• E(N) E(n) x D
• Q
• Service Level
• SLANNUAL 1 - (E(N)/D)