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WHAT IS INVENTORY ?. stock of items kept to meet future demand. purpose of inventory management -how many units to order -when to order

INVENTORY

.definition - a phsysical resource that a firm holds in stock with the intent of selling it or transforming it into a more valuable state. raw materials. work in process. finished goods. maintenance, repair and operating (MRO)

Inventories in the Supply Chain

INVENTORY COST

carrying cost - capital costs - space costs - inventory service costordering cost - order processing costs - shipping costs - handling costsshortage costs

IMPORTANCE OF INVENTORY CONTROL

. ımprove customer service

. economies of purchasing

. economies of production

. transportation savings

. unplanned stocks

. to maintain independence of supply chain

Modeling Inventory in a Supply Chain…

WarehouseRetail

Supplier

. ABC classification is a method for determining level of control and frequency of review of inventory item

.Basis is usually annual $ volume =Annual demand x Unit cost

. A items - typically 20% of the items acounting for 80% of the inventory value use Q system

. B items - typically an additional 30% of the items accounting for 15% of the inventory value use Q or P

. C items - typically the remaining 50% of the items accounting for only 5% of the inventory value use P

12 - 9© 2011 Pearson Education, Inc. publishing as Prentice Hall

ABC Analysis

Item Stock

Number

Percent of Number of

Items Stocked

Annual Volume (units) x

Unit Cost =

Annual Dollar

Volume

Percent of Annual Dollar

Volume Class

#10286 20% 1,000 $ 90.00 $ 90,000 38.8% A

#11526 500 154.00 77,000 33.2% A

#12760 1,550 17.00 26,350 11.3% B

#10867 30% 350 42.86 15,001 6.4% B

#10500 1,000 12.50 12,500 5.4% B

72%

23%

12 - 10© 2011 Pearson Education, Inc. publishing as Prentice Hall

ABC Analysis

Item Stock

Number

Percent of Number of

Items Stocked

Annual Volume (units) x

Unit Cost =

Annual Dollar

Volume

Percent of Annual Dollar

Volume Class

#12572 600 $ 14.17 $ 8,502 3.7% C

#14075 2,000 .60 1,200 .5% C

#01036 50% 100 8.50 850 .4% C

#01307 1,200 .42 504 .2% C

#10572 250 .60 150 .1% C

8,550 $232,057 100.0%

5%

12 - 11© 2011 Pearson Education, Inc. publishing as Prentice Hall

C Items

ABC Analysis

A Items

B Items

Percent of annual dollar usage

80 –70 –60 –50 –40 –30 –20 –10 –

0 – | | | | | | | | | |

10 20 30 40 50 60 70 80 90 100

Percent of inventory itemsFigure 12.2

BENEFITS OF INVENTORY

. Hedge against uncertain demand

. Hedge aganist uncertain supply

. Economize on ordering costs

. SmoothingTo summarize, we build and keep inventory in order to match supply and demand in the most cost effective way.

DISADVANTAGES OF INVENTORY

.higher costs -Item cost (if purchased) -Ordering (or setup) cost -Holding (or carrying) cost . Building lease, insurance, taxes etc.Difficult to control.Hides production problems

Multiperiod model – The Economic Order Quantity

• Demand is known and deterministic: D units/year

• We have a known ordering cost, S, and immediate replenishment

• Annual holding cost of average inventory is H per unit

• Purchasing cost C per unit

Supplier DemandRetailer

Economic Order Quantity - EOQ

Q* = 2SD

H

Example:

Assume a car dealer that faces demand for 5,000 cars per year, and that it costs $15,000 to have the cars shipped to the dealership. Holding cost is estimated at $500 per car per year. How many times should the dealer order, and what should be the order size?

548500

)000,5)(000,15(2* Q

REORDER POINT Level of inventory at which a new order is placedR = dLWhere d = demand rate per period L = lead timeEXAMPLE ; Demand = 10.000 yards / yearStore open 311 days / yearDaily demand = 10.000 / 311 = 32.154 yards / dayLead time = L= 10 daysR = dL = ( 32.154)(10) = 321.54 yards

Independent Versus Dependent Demand

. Independent Demand - the demand for items is independent of the demand for any other items in inventory. Depedent Demand - the demand for items is dependent upon the demand for some other item in the inventory

WHAT IS MRP ?

. Computerized ınventory control

. Production planning system

. Management ınformation system

. Manufacturing control system

WHEN TO USE MRP?Job shop production. Complex products. Assemble to order enverionments. Discrete and dependent demant items

WHAT CAN MRP DO? . Improve customer service. ımprove productivity. reduce inventory levels. reduce manufacturing cost. ımprove plant efficiency. ımprove competition position

• MRP INPUTS • MRP OUTPUTS

. Product structure file

. Master production schedule

. Inventory master file

. Manufacturing orders

. Purchasing orders

. various reports