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Week 10B – Inventory Management

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

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  1. SJSU Bus 140 - David Bentley Week 10B – Inventory Management (Chapter 12) Definition, objectives, historical evolution, EOQ, ABC, Inventory counting systems

  2. 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?

  3. SJSU Bus 140 - David Bentley Some Terminology • Item • Stock-keeping unit (SKU) • Part • Stockout • Shortage • Decoupling • Safety stock • Safety time

  4. 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

  5. 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

  6. 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!

  7. 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

  8. SJSU Bus 140 - David Bentley Holding costs – Stock Related • Personnel • Equipment • Occupancy (rent and utilities) • Interest • Insurance • Taxes • Security • Shrinkage and damage

  9. 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

  10. 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

  11. 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

  12. 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

  13. 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

  14. 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

  15. 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

  16. 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

  17. 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

  18. SJSU Bus 140 - David Bentley ABC Classification System - 2

  19. SJSU Bus 140 - David Bentley Inventory Counting Systems - 1 • Periodic • Full physical (“wall-to-wall”) • Two bin • Bulk and shelf • Stockroom minimum (SRM)

  20. 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

  21. 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)

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