Inventory Management

Inventory Management

Overview • To hold or not to hold • Types of inventory • Pareto principal • ABC analysis • Cycle counting

To hold: Customer service Ordering or setup costs Labor and equipment utilization Transportation cost Not to hold: Inventory holding cost Interest or opportunity cost Storage and handling cost Taxes, insurance, shrinkage Hide production problems To hold or not to hold – that is the question.

Types of inventory • Raw material • WIP inventory – Work In Process • MRO inventory – Maintenance, Repair, Operating supplies • Finished goods inventory

Located in Tucson, Arizona • Produce furniture for: • Healthcare industry • Hospitals • Government http://www.caseworksfurniture.com/healthcare/hcfactory.htm

Raw material inventory

Finished goods inventory

WIP

Pareto Principle • 80/20 rule • Based on the work of an economist & avid horticulturalist, V. Pareto in late 19th century Italy. • 80% of the land was owned by 20% of the people. • 80% of the peas were produced by 20% of the pods • Applied to business by quality guru Dr. Juran

Pareto principle applied: • Applied to Meetings: 80% of decisions come from 20% of meeting time. • Applied to product defects: 20% of the quality problems cause 80% of the defects. • Applied to Salespeople: Roughly 20% of a sales force will develop 80% of the annual results • Applied to Business Units: Roughly 20% of a company's business units will produce 80% of the annual revenue. • Applied to time-management…

Moral of the Pareto principle • Find the significant 20% • Manage that 20%

Pareto principal + Inventory = ABC Analysis • “critical few and the trivial many” • Create a Pareto chart for the inventory dollars per year of each item – dollar-volume • Generally the top 80% of dollars are from approximately 20% of the items. • Categorize all items into • Class A items – top ~20% items by dollar-volume • Class B items • Class C items

100 — 90 — 80 — 70 — 60 — 50 — 40 — 30 — 20 — 10 — 0 — Percentage of dollar value 10 20 30 40 50 60 70 80 90 100 Percentage of items ABC Analysis

100 — 90 — 80 — 70 — 60 — 50 — 40 — 30 — 20 — 10 — 0 — ABC Analysis Percentage of dollar value 10 20 30 40 50 60 70 80 90 100 Percentage of items

Class C 100 — 90 — 80 — 70 — 60 — 50 — 40 — 30 — 20 — 10 — 0 — Class B ABC Analysis Class A Percentage of dollar value 10 20 30 40 50 60 70 80 90 100 Percentage of items

ABC Analysis • Policies based on ABC analysis • Develop Class A suppliers more • Implement tighter physical control of Class A items • Forecast Class A items more carefully • Model inventory for Class A items

Cycle counting • Physically counting a sample of total inventory on a regular basis • Used often with ABC classification • Class A items counted most often (e.g., daily) • Class B items counted less frequently (e.g. weekly) • Class C items counted least often (e.g. monthly)

Advantages of Cycle Counting • Eliminates shutdown and interruption of production necessary for annual physical inventories • Eliminates annual inventory adjustments • Provides trained personnel to audit the accuracy of inventory • Allows the cause of errors to be identified and remedial action to be taken • Maintains accurate inventory records

Inventory Costs • Holding costs - associated with holding or “carrying” inventory over time • Ordering costs - associated with costs of placing order and receiving goods; retail & distribution • Setup costs - cost to prepare a machine or process for manufacturing an order; production

Holding Costs • Storage • Obsolescence • Insurance • Extra staffing • Interest • Pilferage • Damage • Warehousing • Etc.

Ordering Costs • Supplies • Forms • Order processing • Clerical support • Transportation/shipping • Etc.

Setup Costs • Machine setup costs • Clean-up costs • Re-tooling costs • Adjustment costs • Etc.

Inventory Management