Upload
rkumar225
View
225
Download
0
Embed Size (px)
Citation preview
7/31/2019 Inventory Management Control Imp
1/41
INVENTORY MANAGEMENT -
CONTROL
7/31/2019 Inventory Management Control Imp
2/41
What Is Inventory?
Stock of items kept to
meet future demand
Purpose of inventory
management how many units to
order?
when to order?
7/31/2019 Inventory Management Control Imp
3/41
Types of Inventory
Inputs Raw Materials
Purchased parts
Maintenance andRepair Materials
Outputs Finished Goods
Scrap and Waste
Process
In Process Partially CompletedProducts andSubassemblies
(in warehouses, orin transit)
(often on the factoryfloor)
PROCESS
7/31/2019 Inventory Management Control Imp
4/41
Water Tank Analogy for Inventory
Supply Rate
Inventory Level
Demand Rate
Inventory Level
Buffers Demand Ratefrom Supply Rate
N
7/31/2019 Inventory Management Control Imp
5/41
Two Forms of Demand
Dependent
Demand for items used to producefinal products
Tires stored at a Goodyear plant arean example of a dependent demanditem
Independent
Demand for items used by externalcustomers
Cars, appliances, computers, andhouses are examples of independentdemand inventory
7/31/2019 Inventory Management Control Imp
6/41
Inventory Hides Problems
Poor
Quality
UnreliableSupplier
MachineBreakdown
InefficientLayout
BadDesign
Lengthy
Setups
7/31/2019 Inventory Management Control Imp
7/41
Inventory and Supply Chain Management -problems
Bullwhip effect demand information is distorted as it moves away from
the end-use customer
higher safety stock inventories to are stored to
compensate Seasonal or cyclical demand
Inventory provides independence from vendors
Take advantage of price discounts
Inventory provides independence between stagesand avoids work stop-pages
N
7/31/2019 Inventory Management Control Imp
8/41
Inventory Costs
Carrying cost
cost of holding an item in inventory
Ordering cost
cost of replenishing inventory
Shortage cost temporary or permanent loss of sales
when demand cannot be met
7/31/2019 Inventory Management Control Imp
9/41
Typical Inventory Carrying Costs
Housing cost:
Building rent or depreciation Building operating cost Taxes on building Insurance
Material handling costs: Equipment, lease, or depreciation Power Equipment operating cost
Manpower cost from extra handling and supervision
Investment costs: Borrowing costs Taxes on inventory Insurance on inventory
Pilferage, scrap, and obsolescence
Overall carrying cost
6%
(3% - 10%)
3%(1% - 4%)
3%(3% - 5%)
10%(6% - 24%)
5%
(2% - 10%)(15% - 50%)
Costs as % ofInventory Value
7/31/2019 Inventory Management Control Imp
10/41
INVENTORY CONTROL
Inventory control is concerned with minimizing the totalcost of inventory.
The three main factors in inventory control decision makingprocess are:
The cost of holding the stock(e.g., based on the
interest rate).The cost of placing an order(e.g., for row material
stocks) or the set-up cost of production.
The cost of shortage, i.e., what is lost if the stock isinsufficient to meet all demand.
The third element is the most difficult to measure and isoften handled by establishing a "service level" policy, e. g,certain percentage of demand will be met from stockwithout delay.
N
7/31/2019 Inventory Management Control Imp
11/41
Inventory Control Systems
Continuous system (fixed-order-quantity)
constant amount orderedwhen inventory declines topredetermined level
Periodic system (fixed-time-period)
order placed for variableamount after fixed passage oftime
7/31/2019 Inventory Management Control Imp
12/41
Zero Inventory?
Reducing amounts ofraw materials and
purchased parts and subassemblies by having
suppliers deliver them directly.
Reducing the amount ofworks-in process byusing just-in-time production.
Reducing the amount offinished goods by
shipping to markets as soon as possible.
7/31/2019 Inventory Management Control Imp
13/41
How to Measure Inventory
The Dilemma: closely monitor and control
inventories to keep them as low as possible while
providing acceptable customer service.
Average Aggregate Inventory Value: howmuch of the companys total assets are invested in
inventory?
Ford:6.825 billion
Sears: 4.039 billion
Code N
7/31/2019 Inventory Management Control Imp
14/41
Inventory Measures
Weeks of Supply
Ford: 3.51 weeks
Sears: 9.2 weeks
Inventory Turnover (Turns)
Ford: 14.8 turns
Sears: 5.7 turns
GM: 8 turns
Toyota: 35 turns
Code N
7/31/2019 Inventory Management Control Imp
15/41
ABC CLASSIFICATION
Code N
7/31/2019 Inventory Management Control Imp
16/41
ABC Classification
The ABC Classification The ABC classification
system is to grouping items according to
annual sales volume, in an attempt to identify
the small number of items that will accountfor most of the sales volume and that are the
most important ones to control for effective
inventory management.
Code N
7/31/2019 Inventory Management Control Imp
17/41
ABC Classification
Class A
5 15 % of units
70 80 % of value
Class B 30 % of units
15 % of value
Class C 50 60 % of units
5 10 % of value
Code N
7/31/2019 Inventory Management Control Imp
18/41
ABC Classification: Example
1 $ 60 902 350 40
3 30 1304 80 605 30 1006 20 180
7 10 1708 320 509 510 60
10 20 120
PART UNIT COST ANNUAL USAGE
Code N
7/31/2019 Inventory Management Control Imp
19/41
ABC Classification: Example
(cont.)
Example 10.1
1 $ 60 902 350 403 30 1304 80 605 30 1006 20 180
7 10 1708 320 509 510 60
10 20 120
PART UNIT COST ANNUAL USAGETOTAL % OF TOTAL % OF TOTAL
PART VALUE VALUE QUANTITY % CUMMULATIVE
9 $30,600 35.9 6.0 6.08 16,000 18.7 5.0 11.0
2 14,000 16.4 4.0 15.01 5,400 6.3 9.0 24.04 4,800 5.6 6.0 30.03 3,900 4.6 10.0 40.06 3,600 4.2 18.0 58.0
5 3,000 3.5 13.0 71.010 2,400 2.8 12.0 83.07 1,700 2.0 17.0 100.0
$85,400
A
B
C
% OF TOTAL % OF TOTALCLASS ITEMS VALUE QUANTITY
A 9, 8, 2 71.0 15.0B 1, 4, 3 16.5 25.0C 6, 5, 10, 7 12.5 60.0
Code N
7/31/2019 Inventory Management Control Imp
20/41
ABC Analysis
Recognizes fact some inventory items are more important
than others.
Purpose of analysis is to divide all of company's inventory
items into three groups: A, B, and C.
Depending on group, decide how inventory levels should
be controlled.
Code N
7/31/2019 Inventory Management Control Imp
21/41
Economic Order Quantity
Model
7/31/2019 Inventory Management Control Imp
22/41
Economic Order Quantity (EOQ)
Models
EOQ
optimal order quantity that will
minimize total inventory costs
Basic EOQ model
Production quantity model
7/31/2019 Inventory Management Control Imp
23/41
Assumptions of Basic EOQ Model
Demand is known with certainty and
is constant over time No shortages are allowed
Lead time for the receipt of orders isconstant
Order quantity is received all at once
7/31/2019 Inventory Management Control Imp
24/41
EOQ Lot Size Choice
There is a trade-off between lot size and
inventory level.
Frequent orders (small lot size): higher ordering
cost and lower holding cost. Fewer orders (large lot size): lower ordering cost
and higher holding cost.
7/31/2019 Inventory Management Control Imp
25/41
EOQ Inventory Order Cycle
Demandrate
0 TimeLeadtime
Leadtime
OrderPlaced
OrderPlaced
OrderReceived
OrderReceived
Inventory
L
evel
Reorder point, R
Order qty, Q
As Q increases, average
inventory level increases,
but number of orders
placed decreases
ave = Q/2
7/31/2019 Inventory Management Control Imp
26/41
Total Cost of Inventory EOQ Model
7/31/2019 Inventory Management Control Imp
27/41
Answer to Inventory Management
Questions for EOQ Model
Keeping track of inventory Implied that we track continuously
How much to order? Solve for when the derivative of total cost with respect to Q
= 0: -SD/Q^2 + iC/2 = 0 Q = sqrt ( 2SD/iC)
When to order? Order when inventory falls to the Reorder Point-level R so
we will just sell the last item as the new order comes in: R = DL
7/31/2019 Inventory Management Control Imp
28/41
The EOQ Model
Q = Number of pieces per order
Q* = Optimal number of pieces per order (EOQ)D = Annual demand in units for the Inventory itemS = Setup or ordering cost for each orderH = Holding or carrying cost per unit per year
7/31/2019 Inventory Management Control Imp
29/41
An EOQ Example
Determine optimal number of needles to orderD= 1,000 unitsS= $10 per orderH= $.50 per unit per year
Q* =2DS
H
Q* =2(1,000)(10)
0.50= 40,000 = 200 units
7/31/2019 Inventory Management Control Imp
30/41
An EOQ Example
Determine optimal number of needles to orderD= 1,000 units Q* = 200 unitsS= $10 per orderH= $.50 per unit per year
= N = =Expectednumber of
orders
Demand
Order quantity
7/31/2019 Inventory Management Control Imp
31/41
An EOQ Example
Determine optimal number of needles to orderD= 1,000 units Q* = 200 unitsS= $10 per order N = 5 orders per yearH= $.50 per unit per year
= T =Expected
time betweenorders
Number of workingdays per year
N= 250/5
=50 days
7/31/2019 Inventory Management Control Imp
32/41
An EOQ Example
Determine optimal number of needles to orderD= 1,000 units Q* = 200 unitsS= $10 per order N = 5 orders per yearH= $.50 per unit per year T = 50 days
Total annual cost = Setup cost + Holding cost
TC = S + HDQ*
Q*2
= 5(10) + (200/2)(#50) = $100
7/31/2019 Inventory Management Control Imp
33/41
Reorder Point
EOQ answers the how much question
The reorder point (ROP) tells when toorder
ROP=Lead time for a
new order in daysDemandper day
= d x L
d =D
Number of working days in a year
7/31/2019 Inventory Management Control Imp
34/41
Reorder Point: Example
Demand = 10,000 kg/year
Store open 311 days/yearDaily demand = 10,000 / 311 = 32.154 kg/day
Lead time = L = 10 days
R = dL = (32.154)(10) = 321.54 kg = 322 kg
7/31/2019 Inventory Management Control Imp
35/41
Safety Stocks
Safety stock
buffer added to on hand inventory during leadtime
Stockout an inventory shortage
Service level
probability that the inventory available duringlead time will meet demand
N
7/31/2019 Inventory Management Control Imp
36/41
Variable Demand witha Reorder Point
Reorderpoint, R
Q
LT
Time
LT
Inventory
level
0
N
7/31/2019 Inventory Management Control Imp
37/41
Reorder Point witha Safety Stock
Reorderpoint, R
Q
LT
Time
LT
Inventory
level
0
Safety Stock
N
7/31/2019 Inventory Management Control Imp
38/41
Reorder Point WithVariable Demand
R= dL + z d L
whered= average daily demandL = lead time
d= the standard deviation of daily demand
z= number of standard deviationscorresponding to the service levelprobability (service factor)
zd L = safety stock
N
7/31/2019 Inventory Management Control Imp
39/41
Reorder Point fora Service Level
Probability ofmeeting demand duringlead time = service level
Probability ofa stockout
R
Safety stock
dLDemand
z d L
N
7/31/2019 Inventory Management Control Imp
40/41
Safety factor values for CSL
Code N
7/31/2019 Inventory Management Control Imp
41/41
Reorder Point forVariable Demand
The carpet store wants a reorder point with a 95%service level and a 5% stockout probability
d= 30 m per dayL = 10 daysd
= 5 m per day
For a 95% service level, z= 1.64
R= dL + zd L
= 30(10) + (1.64)(5)( 10)
= 325.9 m
Safety stock = zd L
= (1.64)(5)( 10)
= 25.9 m
N