Week 10b inventory management
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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 Bentley

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

  • Other?


Some terminology

SJSU Bus 140 - David Bentley

Some Terminology

  • Item

  • Stock-keeping unit (SKU)

  • Part

  • Stockout

  • Shortage

  • Decoupling

  • Safety stock

  • Safety time


Inventory types 1

SJSU Bus 140 - David Bentley

Inventory 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 Bentley

Inventory 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 Bentley

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!


Inventory related costs

SJSU Bus 140 - David Bentley

Inventory 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 Bentley

Holding 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 Bentley

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, 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 Bentley

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


Historical evolution of i c 2

SJSU Bus 140 - David Bentley

Historical 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 Bentley

Historical 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 Bentley

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


Additional ordering models

SJSU Bus 140 - David Bentley

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


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 Bentley

ABC 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


Abc classification system 21

SJSU Bus 140 - David Bentley

ABC Classification System - 2


Inventory counting systems 1

SJSU Bus 140 - David Bentley

Inventory 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 Bentley

Inventory 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 Bentley

Inventory Metrics

  • Inventory Turnover

    • T = CGS

      AI

  • Expected Annual Shortages

    • E(N) = E(n) x D

      Q

  • Service Level

    • SLANNUAL = 1 - (E(N)/D)