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Chapter 12 – Inventory Management. Definition, objectives, historical evolution, EOQ, service levels, models. What Is Inventory?. Material owned for use in product or as operating supply Has value (usually) Need for product or to support production Other?. Inventory Types - 1.

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chapter 12 inventory management

Chapter 12 – Inventory Management

Definition, objectives, historical evolution, EOQ, service levels, models

SJSU Bus 140 - David Bentley

what is inventory
What Is Inventory?
  • Material owned for use in product or as operating supply
  • Has value (usually)
  • Need for product or to support production
  • Other?

SJSU Bus 140 - David Bentley

inventory types 1
Inventory Types - 1
  • Raw Material (RM) – purchased
    • “true” raw material
    • Component parts
  • Work-in-process (WIP) – manufactured in-house
    • Assemblies
    • Sub-assemblies
    • Fabricated parts

SJSU Bus 140 - David Bentley

inventory types 2
Inventory Types - 2
  • Finished Goods (FGI)
    • Completed products
  • Raw Materials in Process (RIP)
    • Found in lean operations (JIT) environments
    • Combines RM and WIP
  • Operating supplies
  • Goods in transit

SJSU Bus 140 - David Bentley

major objectives
Major 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!

SJSU Bus 140 - David Bentley

inventory related costs
Carrying costs

Obvious

Capital

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

Inventory Related Costs

SJSU Bus 140 - David Bentley

holding costs stock related
Holding costs – Stock Related
  • Personnel
  • Equipment
  • Occupancy (rent and utilities)
  • Interest
  • Insurance
  • Taxes
  • Security
  • Shrinkage and damage

SJSU Bus 140 - David Bentley

historical evolution of i c 1
Historical 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

SJSU Bus 140 - David Bentley

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

Sawtooth diagram & ROP

SJSU Bus 140 - Source: Stevenson

rop limitations
ROP 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

SJSU Bus 140 - David Bentley

historical evolution of i c 2
Historical Evolution of I/C - 2
  • How Much?
    • Cost of inventory & EOQ
    • Balance carrying (holding) and ordering costs
    • EOQ = square root of 2DS/IC
    • Variations
      • Multiple delivery (manufacturing: EMQ or EPQ)
      • Quantity discounts

SJSU Bus 140 - David Bentley

eoq limitations
EOQ 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

SJSU Bus 140 - David Bentley

additional ordering models
Additional 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

SJSU Bus 140 - David Bentley

abc classification system

High

A

Annual

$ volume

of items

B

C

Low

Few

Many

Number of Items

ABC Classification System
  • Classifying inventory according to some measure of importance and allocating control efforts accordingly.
    • A-very important
    • B- mod. important
    • C- least important

SJSU Bus 140 - Source: Stevenson

inventory counting systems 1
Inventory Counting Systems - 1
  • Periodic
    • Full physical (“wall-to-wall”)
  • Two bin
    • Bulk and shelf
    • Stockroom minimum (SRM)

SJSU Bus 140 - David Bentley

inventory counting systems 2
Inventory Counting Systems - 2
  • Perpetual
    • Transaction recording and balance maintenance
    • Historical evolution
    • Cycle counting (using ABC)

SJSU Bus 140 - David Bentley

inventory metrics
Inventory Metrics
  • Inventory Turnover
    • T = CGS

AI

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

Q

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

SJSU Bus 140 - David Bentley