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O peration M anagement INVENTORY MANAGEMENT. Rachmat A. Anggara PMBS, BOPR 5301, Session 5. INVENTORY??. INVENTORY is…. One of the most expensive assets of many companies representing as much as 50% of total invested capital - PowerPoint PPT Presentation
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Rachmat A. AnggaraPMBS, BOPR 5301, Session 5
Operation Management
INVENTORY MANAGEMENT
INVENTORY??
INVENTORY is…
One of the most expensive assets of many companies representing as much as 50% of total invested capital
Operations managers must balance inventory investment and customer service
Type of INVENTORY … Raw material
Purchased but not processed Work-in-process
Undergone some change but not completed
A function of cycle time for a product Maintenance/repair/operating (MRO)
Necessary to keep machinery and processes productive
Finished goods Completed product awaiting shipment
Material Flow Cycle..
Input Wait for Wait to Move Wait in queue Setup Run Outputinspection be moved time for operator time time
Cycle time
95% 5%
INVENTORY Management..
How inventory items can be classified How accurate inventory records can
be maintained How inventory cost can be minimized
while keep customer order fulfilled
INVENTORY Management..• Record Accuracy.
– Manual.– Automate.
• Cycle Counting.– Reconciliation of inventory.– ABC analysis system.
• Control of Service Inventories.– Good personnel selection, training, and discipline– Tight control on incoming shipments– Effective control on all goods leaving facility
ABC-Analysis
B5.4%12,50012.501,000#10500B23%6.4%15,00142.8635030%#10867B11.3%26,35017.001,550#12760
A33.2%77,000154.00500#11526A72%38.8%$ 90,000$ 90.001,00020%#10286
Class
Percent of Annual Dollar
Volume
Annual Dollar
Volume=Unit Costx
Annual Volume (units)
Percent of Number of
Items Stocked
Item Stock
Number
C.1%150.60250#10572C.2%504.421,200#01307C5%.4%8508.5010050%#01036C.5%1,200.602,000#14075C3.7%$ 8,502$ 14.17600#12572
17.5 %
33.9 %
48.5 %
ABC-AnalysisPareto rule..
A Items
B ItemsC Items
Per
cent
of a
nnua
l dol
lar u
sage
80 –70 –60 –50 –40 –30 –20 –10 –
0 – | | | | | | | | | |
10 20 30 40 50 60 70 80 90 100
Percent of inventory items
Control of Inventory
Can be a critical component of profitability Losses may come from shrinkage or
pilferage Applicable techniques include
1. Good personnel selection, training, and discipline2. Tight control on incoming shipments3. Effective control on all goods leaving facility
Inventory ModelsINPUT MODEL
(Independent) OUTPUT
Demand Type:-Independent-Dependent
Economic Order Quantity Order size
Inventory Cost:-holding
-order/setup-product
Production Order Quantity Reorder point
Forecasted Demand Quantity Discount
Order time
Probabilistic Model Total Inventory Cost
1. Economic Order Quantity
Order quantity = Q
(maximum inventory
level)
Inve
ntor
y le
vel
Time
Usage rate Average inventory on
handQ2
Minimum inventory
Inventory Usage overtime
1. Economic Order QuantityObjective Minimise Cost
Table 11.5
Ann
ual c
ost
Order quantity
Curve for total cost of holding
and setup
Holding cost curve
Setup (or order) cost curve
Minimum total cost
Optimal order
quantity
1. Economic Order Quantity
Q = Number of pieces per orderQ* = 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
Annual setup cost = (Number of orders placed per year) x (Setup or order cost per order)
Annual demandNumber of units in each order
Setup or order cost per order
=
= (S)DQ
Calculate Setup Cost
1. Economic Order Quantity
Q = Number of pieces per orderQ* = 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
Calculate Holding Cost
Annual holding cost = (Average inventory level) x (Holding cost per unit per year)
Order quantity2
= (Holding cost per unit per year)
= (H)Q2
1. Economic Order Quantity
Optimal order quantity is found when annual setup cost equals annual holding cost
DQ
S = HQ2
Solving for Q* 2DS = Q2HQ2 = 2DS/H
Q* = 2DS/H
Annual setup cost = SDQ
Annual holding cost = HQ2
1. Economic Order Quantity(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
1. Economic Order Quantity(Example)
Determine optimal number of needles to orderD = 1,000 units Q* = 200 unitsS = $10 per orderH = $.50 per unit per year
= N = =Expected number of
orders
DemandOrder quantity
DQ*
N = = 5 orders per year 1,000200
1. Economic Order Quantity(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
Q2
TC = ($10) + ($.50)1,000200
2002
TC = (5)($10) + (100)($.50) = $50 + $50 = $100
1. Economic Order Quantity(Reorder Point)
EOQ answers the “how much” question The reorder point (ROP) tells when to
order
ROP = Lead time for a new order in days
Demand per day
= d x L
d = D
Number of working days in a year
1. Economic Order Quantity(Reorder Point)
Demand = 8,000 DVDs per year250 working day yearLead time for orders is 3 working days
ROP = d x L
d = D
Number of working days in a year
= 8,000/250 = 32 units
= 32 units per day x 3 days = 96 units
2. Production Order Quantity
Used when inventory builds up over a period of time after an order is placed
Used when units are produced and sold simultaneously
2. Production Order QuantityIn
vent
ory
leve
l
Time
Demand part of cycle with no production
Part of inventory cycle during which production (and usage) is taking place
t
Maximum inventory
2. Production Order QuantityQ = Number of pieces per order p = Daily production rateH = Holding cost per unit per year d = Daily demand/usage
ratet = Length of the production run in days
= (Average inventory level) xAnnual inventory holding cost
Holding cost per unit per year
= (Maximum inventory level)/2Annual inventory level
= –Maximum inventory level
Total produced during the production run
Total used during the production run
= pt – dt
2. Production Order QuantityQ = Number of pieces per order p = Daily production rateH = Holding cost per unit per year d = Daily demand/usage ratet = Length of the production run in days
Setup cost = (D/Q)SHolding cost = 1/2 HQ[1 - (d/p)]
(D/Q)S = 1/2 HQ[1 - (d/p)]
Q2 = 2DSH[1 - (d/p)]
Q* = 2DSH[1 - (d/p)]
2. Production Order Quantity(example)
D = 1,000 units p = 8 units per dayS = $10 d = 4 units per dayH = $0.50 per unit per year
Q* = 2DSH[1 - (d/p)]
= 282.8 or 283 hubcaps
Q* = = 80,0002(1,000)(10)0.50[1 - (4/8)]
3. Quantity Discount Model
Reduced prices are often available when larger quantities are purchased
Trade-off is between reduced product cost and increased holding cost
Total cost = Setup cost + Holding cost + Product cost
TC = S + + PDDQ
QH2
3. Quantity Discount Model
Discount Number Discount Quantity Discount (%)
Discount Price (P)
1 0 to 999 no discount $5.00
2 1,000 to 1,999 4 $4.80
3 2,000 and over 5 $4.75
A typical quantity discount schedule
3. Quantity Discount Model
1. For each discount, calculate Q*, I= holding cost, P= percentage
2. If Q* for a discount doesn’t qualify, choose the smallest possible order size to get the discount
3. Compute the total cost for each Q* or adjusted value from Step 2
4. Select the Q* that gives the lowest total cost
Steps in analyzing a quantity discount
Q* = 2DSIP
3. Quantity Discount Model(example)
Calculate Q* for every discount Example 9
Q1* = = 700 cars order2(5,000)(49)
(.2)(5.00)
Q2* = = 714 cars order2(5,000)(49)
(.2)(4.80)
Q3* = = 718 cars order2(5,000)(49)
(.2)(4.75)
3. Quantity Discount Model(example)
Adjusting Q* for every discount
Q1* = = 700 cars order2(5,000)(49)
(.2)(5.00)
Q2* = = 714 cars order2(5,000)(49)
(.2)(4.80)
Q3* = = 718 cars order2(5,000)(49)
(.2)(4.75)
1,000 — adjusted
2,000 — adjusted
3. Quantity Discount Model(example)
Discount Number
Unit Price
Order Quantity
Annual Product
Cost
Annual Ordering
Cost
Annual Holding
Cost Total
1 $5.00 700 $25,000 $350 $350 $25,700
2 $4.80 1,000 $24,000 $245 $480 $24,725
3 $4.75 2,000 $23.750 $122.50 $950 $24,822.50
Choose the price and quantity that gives the lowest total cost
Buy 1,000 units at $4.80 per unit
4. Probabilistic Model
Used when demand is not constant or certain
Use safety stock to achieve a desired service level and avoid stockouts
ROP = d x L + ss
Annual stockout costs = the sum of the units short x the probability x the stockout cost/unit
x the number of orders per year
4. Probabilistic Model
Number of Units Probability30 .240 .2ROP
50 .3
60 .270 .1
1.0
ROP = 50 units Stockout cost = $40 per frameOrders per year = 6 Carrying cost = $5 per frame per year
4. Probabilistic ModelROP = 50 units Stockout cost = $40 per frameOrders per year = 6 Carrying cost = $5 per frame per year
Safety Stock
Additional Holding Cost Stockout Cost
Total Cost
20 (20)($5) = $100 $0 $100
10 (10)($5) = $50 (10)(.1)($40)(6) = $240 $290
0 $0 (10)(.2)($40)(6) + (20)(.1)($40)(6) =$960 $960
A safety stock of 20 frames gives the lowest total cost
ROP = 50 + 20 = 70 frames
4. Probabilistic ModelAnother method for calculating safety stock..
ROP = demand during lead time + Zsdlt
where Z = number of standard deviationssdlt = standard deviation of demand during lead time
Safety stock
4. Probabilistic ModelExample…
Average demand = m = 350 kitsStandard deviation of demand during lead time = sdlt = 10 kits5% stockout policy (service level = 95%)
Using Appendix I, for an area under the curve of 95%, the Z = 1.65
Safety stock = Zsdlt = 1.65(10) = 16.5 kits
Reorder point = expected demand during lead time + safety stock= 350 kits + 16.5 kits of safety stock= 366.5 or 367 kits
Resume of Inventory ModelMODEL CONDITION FORMULA
Economic Order Quantity
Demand is known, constant, and independent
Lead time is known and constant
Production Order Quantity
units are produced and sold
simultaneously
Quantity Discount
There is quantity
discount
Probabilistic Model
demand is not constant or certain
Q* =2DS
H
Q* = 2DSH[1 - (d/p)]
Q* = 2DSIP
ROP = d x L + ss
