COMPLEX INVENTORY SYSTEMS

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Frederick Cooper
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1 COMPLEX INVENTORY SYSTEMS

2 RECALL

3 VARIOUS METHODS Modified/Hybrid of simple methods (e.g., EOQ, EBQ) Mathematical Programming (e.g., Dynamic Programming) Discrete-event simulations System Dynamics

6 SIMPLE EXAMPLE Sales Inventory 2 Distributor Inventory 1 Supplier

7 SIMPLE EXAMPLE Q 1 Q 2 Q 3 D 1 D 2 D 3 Inventory 2 Reorder 1 Reorder 2 Reorder 3 Inventory 1 Reorder 1 Reorder 2 Reorder 3 Reorder 4

8 SIMPLE EXAMPLE Q 1 Q 2 Q 3 D 1 D 2 D 3 Inventory 2 Reorder 1 Reorder 2 Reorder 3 Inventory 1 Reorder 1 Reorder 2

9 SIMPLE EXAMPLE Q 1 Q 2 Q 3 D 1 D 2 D 3 Inventory 2 Reorder 1 Reorder 2 Reorder 3 Inventory 1 Reorder 1 Reorder 2 Reorder 3 Reorder 1 Reorder 2 Reorder 3 Reorder 4

10 ABC METHOD INVENTORY PRIORITIES

11 Class A items are those 20 per cent or so of high-usage-value items which account for around 80 per cent of the total usage value. Class B items are those of medium usage value, usually the next 30 per cent of items which often account for around 10 per cent of the total usage value. Class C items are those low-usage-value items which, although comprising around 50 per cent of the total types of items stocked, probably only account for around 10 per cent of the total usage value of the operation. Usage value can be interpreted as sales value

12 PARETO LAW (80/20 RULE) a relatively small proportion of the total range of items contained in an inventory will account for a large proportion of the total usage value

13 E X A M P L E

14 E X A M P L E Pareto Curve

15 In essence, Class C items are those slow-moving items, which often pose the greatest challenge in inventory management. Often these slow-moving items, although only accounting for 20 per cent of sales, require a large part of the total investment in stock. If errors in forecasting or ordering result in excess stock in A class fastmoving items, it is relatively unimportant in the sense that excess stock can be sold quickly. However, excess stock in a slow-moving C item will be there a long time. In monitoring and control, Class C must be prioritized than B, and than A.

16 Other criteria that may contribute towards the (higher) classification of an item: Consequence of stock-out. High priority might be given to those items which would seriously delay or disrupt other operations, or the customers, if they were not in stock. Uncertainty of supply. Some items, although of low value, might warrant more attention if their supply is erratic or uncertain. High obsolescence or deterioration risk. Items which could lose their value through obsolescence or deterioration might need extra attention and monitoring. Some more complex stock classification systems might include these criteria by classifying on an A, B, C basis for each. For example, a part might be classed as A/B/A meaning it is an A category item by value, a class B item by consequence of stock-out and a class A item by obsolescence risk.

17 OTHER IMPORTANT TOPICS Capacity and Aggregate Planning and Control capacity is the maximum amount of production that an organization is capable of completing in a given period. Capacity Management involves setting up a system to fulfill all manufacturing orders on time. Aggregate Capacity Planning and Control is the management of the overall capacity of an organization's resources, considering a resource such as manpower or production capacity in total, without distinguishing between different types. For example, in a plant that manufactures various types of computers and accessories, aggregate capacity management would take into account the total number of computers and accessories to be manufactured over a three-month period, without considering the composition of the product mix desktop, laptop, mouse, keyboard etc.

18 OTHER IMPORTANT TOPICS Supply Chain Management management of the flow of goods and services, involves the movement and storage of raw materials, of work-in-process inventory, and of finished goods from point of origin to point of consumption

OTHER IMPORTANT TOPICS Enterprise Resource Planning (ERP) systems and software packages used by organizations to manage day-to-day business activities, such as

20 OTHER IMPORTANT TOPICS Enterprise Resource Planning (ERP) systems and software packages used by organizations to manage day-to-day business activities, such as accounting, procurement, project management and manufacturing. ERP systems tie together and define a plethora of business processes and enable the flow of data between them

21 OTHER IMPORTANT TOPICS MRP (Material Requirements Planning) and MRP II (Manufacturing Resource Planning) are systems that control production and inventory they are usually only utilized by the purchasing, production, and delivery departments

22 OTHER IMPORTANT TOPICS Just-in-time (JIT) inventory philosophy/strategy companies employ to increase efficiency and decrease waste by receiving goods only as they are needed in the production process, thereby reducing inventory costs. requires producers to forecast demand accurately.

23 OTHER IMPORTANT TOPICS Just-in-time (JIT) Lean management an approach/philosophy to running an organization that supports the concept of continuous improvement (Kaizen), that is demand driven, and that is focused on waste reduction flexible system of operation that uses considerably fewer resources (i.e., activities, people, inventory, and floor space) than a traditional system. achieve greater productivity, lower costs, shorter cycle times, and higher quality than nonlean systems

24 OTHER IMPORTANT TOPICS Just-in-time (JIT) Lean management

MBF1223 Financial Management Prepared by Dr Khairul Anuar

MBF1223 Financial Management Prepared by Dr Khairul Anuar L10 - Working Capital Management www.mba638.wordpress.com Learning Objectives 1. Model the cash conversion cycle and explain its components. 2.