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Operations Management. Inventory Management. Zaheer u din 01141 Ameer Hamza M.Fawad 13201. Inventory. One of the most expensive assets of many companies. Types of Inventory. Raw material Purchased but not processed Work-in-process Undergone some change but not completed

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Operations Management

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Operations Management

Inventory Management

Zaheer u din 01141


M.Fawad 13201

  • One of the most expensive assets of many companies
types of inventory
Types of Inventory
  • Raw material
    • Purchased but not processed
  • Work-in-process
    • Undergone some change but not completed
    • A function of cycle time for a product
  • Maintenance/repair/operating (MRO)
    • Necessary to keep machinery and processes productive
  • Finished goods
    • Completed product awaiting shipment
the material flow cycle

Cycle time

95% 5%

Input Wait for Wait to Move Wait in queue Setup Run Output

inspection be moved time for operator time time

The Material Flow Cycle

Figure 12.1

inventory management
Inventory Management
  • How inventory items can be classified
  • How accurate inventory records can be maintained
      • ABC Analysis
      • Record Accuracy
      • Cycle Counting
abc analysis
ABC Analysis
  • Divides inventory into three classes based on annual dollar volume
    • Class A - high annual dollar volume
    • Class B - medium annual dollar volume
    • Class C - low annual dollar volume
abc analysis1

A Items

80 –

70 –

60 –

50 –

40 –

30 –

20 –

10 –

0 –

Percent of annual dollar usage

B Items

C Items

| | | | | | | | | |

10 20 30 40 50 60 70 80 90 100

Percent of inventory items

ABC Analysis

Figure 12.2

abc analysis2
ABC Analysis
  • Other criteria than annual dollar volume may be used
    • Anticipated engineering changes
    • Delivery problems
    • Quality problems
    • High unit cost
abc analysis3
ABC Analysis
  • Policies employed may include
    • More emphasis on supplier development for A items
    • Tighter physical inventory control for A items
    • More care in forecasting A items
record accuracy
Record Accuracy
  • Accurate records are a critical ingredient in production and inventory systems
  • Allows organization to focus on what is needed
  • Necessary to make precise decisions about ordering, scheduling, and shipping
  • Incoming and outgoing record keeping must be accurate
  • Stockrooms should be secure
cycle counting
Cycle Counting
  • Items are counted and records updated on a periodic basis
  • Often used with ABC analysis to determine cycle
  • Has several advantages
    • Eliminates shutdowns and interruptions
    • Eliminates annual inventory adjustment
    • Trained personnel audit inventory accuracy
    • Allows causes of errors to be identified and corrected
    • Maintains accurate inventory records
cycle counting example
Cycle Counting Example

5,000 items in inventory, 500 A items, 1,750 B items, 2,750 C items

Policy is to count A items every month (20 working days), B items every quarter (60 days), and C items every six months (120 days)

control of service inventories
Control of Service Inventories
  • Can be a critical component of profitability
  • Losses may come from shrinkage or pilferage
  • Applicable techniques include
    • Good personnel selection, training, and discipline
    • Tight control on incoming shipments
    • Effective control on all goods leaving facility
independent versus dependent demand
Independent Versus Dependent Demand
  • Independent demand - the demand for item is independent of the demand for any other item in inventory
  • Dependent demand - the demand for item is dependent upon the demand for some other item in the inventory
holding ordering and setup costs
Holding, Ordering, and Setup Costs
  • Holding costs - the costs of holding or “carrying” inventory over time
  • Ordering costs - the costs of placing an order and receiving goods
  • Setup costs - cost to prepare a machine or process for manufacturing an order
holding costs
Holding Costs

Table 12.1

holding costs1

Holding costs vary considerably depending on the business, location, and interest rates. Generally greater than 15%, some high tech items have holding costs greater than 50%.

Holding Costs

Table 12.1

inventory models for independent demand
Inventory Models for Independent Demand

Need to determine when and how much to order

  • Basic economic order quantity
  • Production order quantity
  • Quantity discount model

Basic economic order quantity

  • An inventory-related equation that determines the optimum order quantity that a company should hold in its inventory given a set cost of production, demand rate and other variables. This is done to minimize variable inventory costs.   S = Setup costs D = Demand rate P = Production cost I = Interest rate (considered an opportunity cost, so the risk-free rate can be used) 

production order quantity

  • Production Order Quantity (POQ) is a model that answers how much to produce and when to order. In this model, the materials produced are used immediately and hence lowering the holding cost that in Economic Order Quantity (EOQ).

Quantity discount model

  • Quantity discounts are price reductions designed to induce large orders. If quantity discounts are offered, the buyer must weigh the potential benefits of reduced purchase price and fewer orders against the increase in carrying costs caused by higher average inventories. Hence, the buyer's goal in this case is to select the order quantity that will minimize total costs, where total cost is the sum of carrying cost, ordering cost, and purchase cost.