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Mastering Inventory Management: Enhancing Competitive Edge in Operations

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This module delves into the vital components of inventory management within the framework of operations management. Students will explore various inventory functions, types, systems, and the significance of dependability in project management. The course employs concepts like JIT (Just-in-Time), cost analysis, and quality assurance methodologies, such as TQM and SQC. By the end, participants will be equipped to discuss inventory fundamentals, calculate inventory parameters, and apply different inventory systems effectively to optimize supply chain efficiency.

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Mastering Inventory Management: Enhancing Competitive Edge in Operations

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  1. Operations Management as a Competitive Weapon Module: Independent Inventory

  2. OM Course Framework 3. Dependability - Project Management - JIT 1. Cost - Design & Selection 4. Flexibility - Inventory - Supply Chain - Location - Forecasting - Aggregate Planning 2. Quality - TQM - SQC

  3. Learning Objectives At the end of this module, each student will be able to: • Discuss basic functions of inventory • Describe two basic inventory systems • Calculate inventory parameter values Module: Independent Inventory

  4. 1. Functions of Inventory • Anticipate customer demand • Decouple • Quantity discounts • Inflation • WIP • Delivery variation Module: Independent Inventory

  5. Types of Inventory • Cycle inventory Module: Independent Inventory

  6. Receive order Inventory depletion (demand rate) On-hand inventory (units) Average cycle inventory Q 2 Time 1 cycle Cycle Inventory Q Module: Independent Inventory

  7. Types of Inventory • Cycle inventory • Safety Stock inventory • Anticipation inventory • Pipeline inventory Module: Independent Inventory

  8. 2. Inventory Systems • Fixed-order quantity models • Fixed-time period models Module: Independent Inventory

  9. Q Fixed amount q Variable amount T Time between orders R Reorder level Basic System Comparison Low priced Less important “C” items High-priced Critical “A” items Module: Independent Inventory

  10. Comparative Advantages Fixed-amount systems (Q systems) • Individualized review frequency • Quantity discounts • Lower safety stocks Fixed-period systems (P systems) • Convenient administration • Multiple items on single purchase order • Inventory known only at review period Module: Independent Inventory

  11. Individual Cost Elements D Demand (annual) C Unit cost S Setup cost (manufactured item) Ordering cost (purchased item) H Holding cost (annual) i Holding rate (H = iC) Q Optimal low-cost amount to order Module: Independent Inventory

  12. Inventory Cost Equations Total Annual Cost = DC + (Q/2)H + (D/Q)S Annual Purchase Cost: (DC) Annual Holding Cost: (Q/2)(H) Annual Ordering Cost: (D/Q)(S) Module: Independent Inventory

  13. C O S T Total Cost TC* Holding Costs: (Q/2)(H) Item Cost: (DC) Ordering Costs: (D/Q)S Q* Order Quantity (Q) Economic Order Quantity Module: Independent Inventory

  14. D S 2 Optimal Order Quantity = Q = H Fixed-Order Inventory Equations Total Annual Cost = DC + (Q/2)(H) + (D/Q)(S) R = dL D = Demand per year C = Unit cost S = Setup (order) cost per order H = Annual holding cost L = Lead time d = Average daily demand Module: Independent Inventory

  15. Fixed-Order Model Example D = 21,900 C = $5 L = 6 days S = $10 H = $0.50 d = 60 units Total Annual Cost = DC + (Q/2)(H) + (D/Q)(S) = (21,900)(5) + (936/2)(.5) + (21,900/936)(10) = $109, 968 Module: Independent Inventory

  16. Q = D S 2 H Fixed-Period Inventory Equations Total Annual Cost = DC + (Q/2)(H) + (D/Q)(S) q = quantity to be ordered T = time between orders I = current inventory amount D = Demand per year C = Unit cost S = Setup (order) cost per order H = Annual holding cost L = Lead time d = Average daily demand T = Q / D q = d(L + T) - I Module: Independent Inventory

  17. Fixed-Period Model Example D = 21,900 C = $5 L = 6 days S = $10 H = $0.50 d = 60 units Module: Independent Inventory

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