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Week 10B – Inventory Management. (Chapter 12) Definition , objectives, historical evolution, EOQ, ABC, Inventory counting systems. What Is Inventory?. Material owned for use in product or sometimes as an operating supply Has value (usually) Need for product or to support production

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week 10b inventory management
SJSU Bus 140 - David Bentley

Week 10B – Inventory Management

(Chapter 12)

Definition, objectives, historical evolution, EOQ, ABC, Inventory counting systems

what is inventory
SJSU Bus 140 - David BentleyWhat Is Inventory?
  • Material owned for use in product or sometimes as an operating supply
  • Has value (usually)
  • Need for product or to support production
  • Other?
some terminology
SJSU Bus 140 - David BentleySome Terminology
  • Item
  • Stock-keeping unit (SKU)
  • Part
  • Stockout
  • Shortage
  • Decoupling
  • Safety stock
  • Safety time
inventory types 1
SJSU Bus 140 - David BentleyInventory Types - 1
  • Raw Material (RM) – purchased
    • “true” raw material
    • Component parts
  • Work-in-process (WIP) – manufactured in-house
    • Assemblies
    • Sub-assemblies
    • Fabricated parts
inventory types 2
SJSU Bus 140 - David BentleyInventory Types - 2
  • Finished Goods (FGI)
    • Completed products
  • Raw Materials in Process (RIP)
    • Found in lean operations (JIT) environments
    • Combines RM and WIP
  • Maintenance, Repair & Operating (MRO)
  • Goods in transit
major objectives
SJSU Bus 140 - David BentleyMajor 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!
inventory related costs
SJSU Bus 140 - David BentleyInventory Related Costs
  • Carrying costs
    • Obvious
      • Capital
      • Various 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
holding costs stock related
SJSU Bus 140 - David BentleyHolding costs – Stock Related
  • Personnel
  • Equipment
  • Occupancy (rent and utilities)
  • Interest
  • Insurance
  • Taxes
  • Security
  • Shrinkage and damage
historical evolution of i c 1
SJSU Bus 140 - David BentleyHistorical 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, where d = demand per period and LT = lead time in periods
sawtooth diagram rop

Profile of Inventory Level Over Time

Q

Usage

rate

Quantity

on hand

Reorder

point

Time

Place

order

Place

order

Receive

order

Receive

order

Receive

order

Lead time

SJSU Bus 140 - David Bentley

Sawtooth diagram & ROP
rop limitations
SJSU Bus 140 - David BentleyROP 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
historical evolution of i c 2
SJSU Bus 140 - David BentleyHistorical Evolution of I/C - 2
  • How Much?
    • Cost of inventory & EOQ
    • Balance carrying (holding) and ordering costs
    • EOQ = square root of 2DS/IC, where
      • D = quantity demand or usage for a period of time
      • S = setup and/or ordering cost
      • I = inventory carrying rate (percentage in decimal form)
      • C = cost of 1 unit of the item
      • Text: “H” which is the product of I times C
historical evolution of i c 3
SJSU Bus 140 - David BentleyHistorical Evolution of I/C - 3
  • EOQ variations
    • Multiple delivery (manufacturing: EMQ or EPQ)
      • See pp. 489-492
    • Quantity discounts
      • See pp. 492-494
eoq limitations
SJSU Bus 140 - David BentleyEOQ 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
additional ordering models
SJSU Bus 140 - David BentleyAdditional 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
abc classification system 1

High

A

Annual

$ volume

of items

B

C

Low

Few

Many

Number of Items

SJSU Bus 140 - David Bentley

ABC Classification System - 1
  • Classifying inventory according to some measure of importance and allocating control efforts accordingly.
    • A-very important
    • B- mod. important
    • C- least important
abc classification system 2
SJSU Bus 140 - David BentleyABC Classification System - 2
  • A items
    • 70-80% of the annual dollar usage
    • 5-15% of the number of items
  • B items
    • 10-20% of the annual dollar usage
    • 30-35% of the number of items
  • C items
    • 5-10% of the annual dollar usage
    • 50-60% of the number of items
inventory counting systems 1
SJSU Bus 140 - David BentleyInventory Counting Systems - 1
  • Periodic
    • Full physical (“wall-to-wall”)
  • Two bin
    • Bulk and shelf
    • Stockroom minimum (SRM)
inventory counting systems 2
SJSU Bus 140 - David BentleyInventory Counting Systems - 2
  • Perpetual
    • Transaction recording and balance maintenance
    • Historical evolution
    • Cycle counting
      • Based on quantity usage
      • Based on $ usage using Pareto Principle (ABC)
    • Block counting
inventory metrics
SJSU Bus 140 - David BentleyInventory Metrics
  • Inventory Turnover
    • T = CGS

AI

  • Expected Annual Shortages
    • E(N) = E(n) x D

Q

  • Service Level
    • SLANNUAL = 1 - (E(N)/D)
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