Fixed Time Order Inventory Systems

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Fixed Time Order Inventory Systems

• Slide presentation by Steven Cheney
• Final project for Operations Management 345
• Boise State University
• Instructor Dr.Tom Foster

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Inventory Control Systems

• 1. Fixed quantity re-order inventory system.
• Re-order quantities are predetermined, and the
  re-order takes place when predetermined low
  levels of inventory are reached.
• The re-order date varies.
• 2. Fixed time re-order inventory system.
• The re-order date is predetermined and an order
  is placed once a consistent passage of time
  occurs.
• Orders are given and received consistently.
• The re-order quantity varies

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Fixed Time Re-order System

• Ideal for use in
• Smaller businesses with single or a low number of
  vendors and or lower volume sales.
• Small to medium retail.
• Restaurants.
• Job shop manufacturing.
• Light industry.
• Construction.
• Service firm.

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Advantages of Fixed Time Re-order System

• Ideal fixed re-order and distribution dates can
  be negotiated with vendor and distributor to
  ensure desired management of inventory.
• Inventory levels can be minimized during low
  demand periods easily.
• Communication between a small number of vendors
  or with a wholesaler is consistent and reliable.
• Wholesale distributors may have salespersons who
  place orders for the retailers, eliminating
  inventory costs.

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Different Applications

• Business start ups.
• Can negotiate and determine ideal re-order
  intervals.
• Low volume retail and job shop.
• Low number of vendors, custom quantity ordering,
  with strict scrutiny.
• Larger volume retail and job shops.
• Utilizing of ABC method of prioritizing inventory
  management and minimizing inventory expenses.

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Determine Order Interval

• In a business start up, Vendor and wholesale
  distributors may negotiate with a small firm in
  regards to ordering and distribution dates.
• Changing or establishing ideal order intervals
  may be a great way to improve quality in an
  existing firm.

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Order Interval DeterminationFor Multiple Items

• The economic order interval can be obtained by
  minimizing the total annual cost. Neglecting
  stock out cost, the formulation is
• Total annual cost (purchase cost) (order
  cost) (holding cost)
• The minimum cost order is obtained by taking the
  first derivative of the total annual cost with
  respect to the order interval (T) and setting it
  equal to zero.
• Ri annual requirement for item i.
  
  Formula
• Pi purchase cost of item i.
• N total number of joint order items.
• C order cost for the joint order
• C order cost associated with each individual
  item.
• T order interval in years.
• F annual holding cost as a fraction of purchase
  cost.

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Difficulties in Order Intervals

• It is not common for a business start up to have
  access to the information required to determine
  the optimal re-order interval dates.
• Managerial experience and adequate market
  exposure is the best way to determine re-order
  dates in start ups.
• Wholesalers and vendors should also be able to
  provide valuable input when determining a
  re-order schedule.

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How It Works Fixed Time Re-order Inventory
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Fixed Time Re-order
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Low Inventory Costs!High Inventory Control!

• Quantity levels are quickly adjusted for
  fluctuating demand.
• Inventory management and ordering are monitored
  only on order days, eliminating daily supervision
  of inventory.
• Seasonal demand and demand trends are difficult
  to forecast. Each inventory items demand is
  analyzed on a routine basis by a department
  manager.

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ABC Fixed Time Re-order Intervals

• Demand for a large variety of goods
• with different values vary significantly.
• ABC classification system divides inventory into
  three different groups.
• 1. Close inventory control (continuous).
• 2. Moderate inventory control (less stringent).
• 3. Low scrutiny inventory control (periodic
  review).

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ABC Classification

• The first step in ABC classification is to
  associate each class with a different dollar
  valuation.
• The next step is to determine the inventory
  scrutiny level to be assigned for each
  classification.

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Why ABC classification?

• Typically the majority of a firms profit comes
  from a small number of items in inventory, and
  sometimes these items are sold in large volume.
• Moderately profitable items need less inventory
  scrutiny
• Low profitable inventory requires little
  management, minimizing inventory costs.

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Perfect ExampleRusss Trusses

• Ruses trusses is a large truss producer/constructi
  on company that purchases truss kits and the kits
  are custom assembled to engineered
  specifications. They are used by the firm in
  construction or sold to outside construction
  companies.
• Ruses trusses utilizes an ABC classification
  inventory management system. It is beneficial
  because one employee supervises all inventory of
  materials.

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Russs TrussesABC Inventory System

• Russ Jr. Re-orders class A kits every day from
  vendor A direct over the internet.
• He orders class B kits once a week from vendor B
  via fax machine.
• Wholesaler C comes one a month to do the
  inventory of
• C kits and re-orders. The salesperson tries
  to sell different new items to Russ Sr.

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Russs TrussesAnnual Inventory Value and
Consumption
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Contribution to Value

• Compute each items percentage of total value and
  quantity.
• Q x P Value for
  item
• Value for item / total value of
  total value
• Then rank the inventory in terms of of total
  value.

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ABC Inventory ClassificationRusss Trusses
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Classification Results

• Class A items provide gt71 to profit and are
  reviewed each day.
• Class B items provide approximately 20.7 to
  profit and are reviewed weekly.
• Items that contribute lt8. of profit are
  automatically ordered once a month by the
  wholesaler, at no cost to Ruses Trusses.

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Fixed Time Re-order Inventory

• Limited applications such as
• Small retail where demand is seasonal and it
  fluctuates greatly.
• Great for simple inventory systems and floor
  level inventory management applications.
• Perfect for job shop applications where inventory
  is limited and seldom reviewed.

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Practical Limitations of Fixed Time

• Not suited for large SKU counts.
• Requires daily to weekly manual supervision in
  various departments.
• Generally less automation than fixed quantity
  re-order system.
• Focuses on minimum inventory which may promote
  stock outs.

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Practical Advantages of Fixed time

• Quickly adjusts to variations in demand.
• Utilizes services provided by vendors at no cost
  to the firm.
• Assures minimum inventory when needed.
• Minimizes inventory labor and costs.
• Allocates resources where needed.
• Establishes good relationships with distributors.

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Sources Referenced

• Richard J. Tersine, Principles of Inventory and
  Materials Management, third edition,
  North-Holland , New York. 1988.
• R. Fetter, Decision Models for Inventory
  Management, Ann Arbor London, 1978
• Roberta S. Russel, Bernard W. Taylor 3rd,
  Operations Management, third edition, Prentice
  Hall, Inc. Upper Saddle River, New Jersey. 2000