Module 7 Inventory Management

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Module 7 - Inventory Management
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Course Framework

• 1. Cost
• - Design Selection
• 2. Quality
• - TQM
• - SQC
• 3. Speed
• - Project Management
• - Supply Chain

• 4. Flexibility
• - Inventory
• - Location
• - Forecasting
• - Aggregate Planning

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Learning Objectives

• 1. Understand the types and uses of inventory
• 2. Describe inventory management objectives
• 3. Understand and evaluate the relevant costs
  associated with the basic inventory model
• 4. Calculate inventory performance measures

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1. Types of Inventory
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1.Types of Inventory
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1. Types of Inventory
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1. Types of Inventory
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1. Types of Inventory
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1. Types of Inventory
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1. Uses of Inventory

• Anticipation or seasonal inventory
• Safety stock buffer demand fluctuations
• Lot-size or cycle stock take advantage of
  quantity discounts or purchasing efficiencies
• Pipeline or transportation inventory
• Speculative or hedge inventory protects against
  some future event, e.g. labor strike
• Maintenance, repair, and operating (MRO)
  inventories

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2. Inventory Management Objectives

• Provide desired customer service level
• Percentage of orders shipped on schedule
• Provide for cost-efficient operations
• Buffer stock for smooth production flow
• Maintain a level work force
• Allowing longer production runs quantity
  discounts
• Minimize inventory related investments
• Inventory turnover
• Weeks (or days) of supply

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3. Relevant Inventory Costs

• Unit Cost (C)
• Cost per item
• Holding Cost (H)
• Cost of holding one unit in inventory for one
  year
• Ordering Cost (S)
• Cost to place one order

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Annual Costs

• Annual Holding Cost (Q/2)(H)
• (Average inventory)(Holding cost)
• Annual Ordering Cost (D/Q)(S)
• (Number of orders)(Ordering cost)
• Total Annual Cost (Q/2)(H) (D/Q)(S)

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Basic Inventory Model

• Economic Order Quantity
• (EOQ or Q System)
• Part of continuous review system which tracks
  on-hand inventory each time a withdrawal is made

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EOQ Model
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EOQ Model
Annual Holding Costs
Cost ()
Annual Ordering Costs
Economic Order Quatity
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EOQ Model
Total Costs
Annual Holding Costs
Cost ()
Annual Ordering Costs
Economic Order Quatity
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Example Annual demand (D) of 10,000. Annual
holding cost (H) of 6 per unit, and an ordering
cost (S) of 75. Lead time (L) is 5 days.
EOQ (Q)
Reorder Point (R)
Total Inventory Cost (TC)
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4. Basic Performance Measures

• Measures of inventory policy effectiveness
• Level of customer demand satisfied by supply on
  hand
• Inventory Turnover
• Weeks of Supply

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Example The Coach Motor Home Company has annual
cost of goods sold of 10,000,000. The average
inventory value is 384,615.
Inventory Turnover
Weeks of Supply