FUNDAMENTALS OF INVENTORY MANAGEMENT AND CONTROL

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1 FUNDAMENTALS OF INVENTORY MANAGEMENT AND CONTROL

3 FUNDAMENTALS OF INVENTORY MANAGEMENT AND CONTROL SECOND EDITION RICHARD E. WARD

5 CONTENTS ABOUT THIS COURSE xi HOW TO TAKE THIS COURSE xiii PART I CONTROL CONCEPTS 1 1 THE FIRST LESSON IN INVENTORY MANAGEMENT 3 A REAL EYE OPENER THE FINANCIAL IMPLICATIONS OF INVENTORY MANAGEMENT THE INCOME STATEMENT AND BALANCE SHEET TOO MUCH, TOO LITTLE, OR JUST ENOUGH? CAN THE BILLS BE PAID? HOW INVENTORY IS VALUED FIFO ACCOUNTING PRACTICES LIFO ACCOUNTING PRACTICES FIFO VERSUS LIFO OTHER VALUATION METHODS THE POINT HOW RECORDS ARE KEPT THE PERPETUAL SYSTEM THE PERIODIC SYSTEM INSTRUCTIONAL PROGRAMMING 1 2 THE STRATEGIC ROLE OF INVENTORY 15 AMES DISTRIBUTORS -A HALLMARK OF SERVICE INVENTORY: WHO NEEDS IT AND WHY UNPREDICTABILITY TIME DEPENDENCY ECONOMICS A HAPPY MEDIUM INTERNAL FACTORS IN INVENTORY MANAGEMENT ENGINEERING/DESIGN FACTORS MARKETING FACTORS MATERIALS PLANNING FACTORS PRODUCTION PLANNING FACTORS PRODUCTION OPERATION FACTORS PURCHASING FACTORS STOREROOM FACTORS EXTERNAL FACTORS IN INVENTORY MANAGEMENT INSTRUCTIONAL PROGRAMMING 2

6 3 THE PRINCIPLES AND PRACTICES OF CONTROL 31 A CLOSER LOOK AT THE STORAGE CYCLE TYPES OF STOCK LOCATOR SYSTEMS INFORMAL SYSTEMS RANDOM LOCATION SYSTEMS FIXED LOCATION SYSTEMS A CLOSER LOOK AT THE STOCK KEEPING UNIT POLICIES AND PROCEDURES AIMED AT IMPROVING RECORD ACCURACY HOW TO CONTROL ACCESS AND SHRINKAGE INSTRUCTIONAL PROGRAMMING 3 4 MEASURING PERFORMANCE AND ESTABLISHING GOALS THE PROBLEM WITH SYMPTOMS 47 THE ABCs OF INVENTORY MANAGEMENT INVENTORY ACCURACY APPLYING ACCURACY TO INVENTORY RECORDS CASE I -A SINGLE LINE ITEM CASE Z-A GROUP OF LINE ITEMS THE UNWEIGHTED AVERAGE ACCURACY METHOD THE WEIGHTED AVERAGE ACCURACY METHOD THE UNWEIGHTED ACCURATE ITEMS METHOD FOR CATEGORIES B AND C THE WEIGHTED ACCURATE ITEMS METHOD FOR CATEGORIES B AND C ACCURACY GOALS AND THEIR PURPOSE METHODS OF SETTING INVENTORY ACCURACY GOALS THE MANAGEMENT DECISION METHOD THE AVERAGE ACCURACY METHOD THE SIGNIFICANT VARIABLE METHOD INVENTORY INTERVAL METHODS CYCLE COUNTING OTHER MEASURES OF PERFORMANCE SERVICE PER ORDER CYCLE SERVICE PER YEAR FRACTION OF UNITS DEMANDED FRACTION OF OPERATING DAYS AND FURTHER SUGGESTIONS INSTRUCTIONAL PROGRAMMING 4 PART II PLANNING AND REPLENISHMENT CONCEPTS 69 5 UNDERSTANDING DEMAND 71 UNIFORM DEMAND NONUNIFORM DEMAND BATCHED, OR LUMPY, DEMAND THE INDEPENDENT DEMAND CONCEPT THE DEPENDENT DEMAND CONCEPT PREDICTING DEMAND LEVELS FORECASTING AND THE MASTER PRODUCTION SCHEDULE TIME-PHASED NET REQUIREMENTS CALCULATIONS MATERIALS REQUIREMENT PLANNING INSTRUCTIONAL PROGRAMMING 5

7 6 REPLENISHMENT POLICIES FOR UNIFORM DEMAND 91 THE IMAGINARY CONCEPT ONE ORDER VERSUS MANY ORDERS THE OPERATING SYSTEM FIXED ORDER SIZE FIXED ORDER INTERVAL OPTIONAL REPLENISHMENT THE TRIAL-AND-ERROR APPROACH TOTAL REPLENISHMENT COST TOTAL CARRYING COST PURCHASE COST TOTAL COST AN ILLUSTRATION TAKING A SHORTCUT SETTING UP A FIXED-ORDER-INTERVAL SYSTEM ESTIMATING UNIT COST VALUES ORDERING COST CARRYING COST THE EFFECT OF IMPRECISION INSTRUCTIONAL PROGRAMMING 6 7 REPLENISHMENT POLICIES FOR NONUNIFORM DEMAND 111 A CASE STUDY: SECURITY HORIZONS ANALYSIS OF SECURITY HORIZONS A SIMPLE ALTERNATIVE TO THE EOQ ALTERNATIVE APPROACHES TO PLANNED ORDER RELEASES TRADING CARRYING COSTS FOR REPLENISHMENT COSTS IMPROVING THE RESULTS OF PART-PERIOD BALANCING VARIATIONS ON LOT-SIZING TECHNIQUES A FRAMEWORK FOR COMPARISON COEFFICIENT OF VARIATION EOQ/NR RATIO BERRY'S EXPERIMENT INSTRUCTIONAL PROGRAMMING 7 PART III ADVANCED REPLENISHMENT CONCEPTS THE TOTAL COST APPROACH TO INVENTORY POLICIES 131 MANUFACTURING LOT SIZES THE FORMULA AN ILLUSTRATION BACKORDERING QUANTITY DISCOUNTS STEP ONE STEP TWO STEP THREE STEP FOUR ONE DISCOUNT LEVEL HAS ONLY THREE CHOICES A CASE OF INFLATION NOT PLACING A SPECIAL ORDER TAKING; ADVANTAGE OF A SPECIAL ORDER INSTRUCTIONAL PROGRAMMING 8

8 9 MANAGING SAFETY STOCKS 151 DEMAND PATTERNS: A REVIEW VARIABILITY AND TYPES OF DEMAND INDEPENDENT DEMAND DEPENDENT DEMAND WHAT THIS CHAPTER DEALS WITH AND WHY WHAT IS THE COST OF BEING OUT OF STOCK? A GRAPHIC PORTRAYAL OF SAFETY STOCK DETERMINING COMPANY POLICY THE APPLICATION OF STATISTICS AN EXAMPLE OF APPLYING A TABLE OF STANDARD DEVIATIONS OTHER WAYS OF CALCULATING STANDARD DEVIATION HOW TO DEAL WITH A LEAD TIME THAT DIFFERS FROM SIGMA ESTIMATING THE COST OF OPERATION USING EXPECTED COST CALCULATIONS TO EVALUATE SAFETY STOCK POLICIES ZERO SAFETY STOCK A SAFETY STOCK OF 500 UNITS A SAFETY STOCK OF 1,000 UNITS MONTE CARLO SIMULATION FIXED-ORDER-INTERVAL VERSUS FIXED-ORDER-SIZE SYSTEMS THE IMPACT OF HOLDING SAFETY STOCKS IN MULTIPLE LOCATIONS SAFETY STOCKS IN MATERIALS REQUIREMENT PLANNING SYSTEMS FIXED QUANTITY SAFETY STOCKS SAFETY TIME INCREASES IN GROSS REQUIREMENTS COMMONALITY AND THE SAFETY STOCK PROBLEM INSTRUCTIONAL PROGRAMMING 9 PART IV CONCEPTS OF TOTAL MANAGEMENT MANAGING TOTAL INVENTORIES 185 HOW TO MANAGE LOT-SIZE INVENTORIES USING LIMIT TO STAY WITHIN WAREHOUSE SPACE CONSTRAINTS SOME COMMENTS ON THE LIMIT TECHNIQUE APPLICATION OF THE LIMIT CONCEPT TO QUANTITY DISCOUNTS THE COORDINATED REPLENISHMENT OF INVENTORY CALCULATING A COMPANY STANDARD FOR INVENTORY LEVELS INSTRUCTIONAL PROGRAMMING 10

9 11 INFORMATION FLOW CONTROL 205 SOME DEFINITIONS BAR CODING MARK SENSE OPTICAL CHARACTER READING (OCR) MACHINE VISION OTHER OPTICAL PATTERNS OR SPECIAL CODES MAGNETIC STRIPE SURFACE ACOUSTIC WAVE (SAW) RADIO FREQUENCY (RF) VOICE RECOGNITION AUTO ID APPLICATIONS IN INVENTORY CONTROL WAREHOUSING: STORAGE AND RETRIEVAL CYCLE COUNTING WORK-IN-PROCESS INVENTORY INSTRUCTIONAL PROGRAMMING THE MATERIALS MANAGEMENT CONCEPT 217 THE PROBLEM OF CONFLICTING GOALS A COMPANY WITHOUT CONFLICT IS YOUR COMPANY IN CONFLICT? THE MATERIALS MANAGEMENT ORGANIZATIONAL CONCEPT INSTRUCTIONAL PROGRAMMING 12 BIBLIOGRAPHY 229 POST TEST 231 CASE STUDY SELECTED READINGS 255 INDEX 277

Beyond Pareto: 12 Standard Principles of Inventory and Forecasting. Thomas L. Freese, Principal. Freese & Associates, Inc. Freese & Associates, Inc.

Beyond Pareto: 12 Standard Principles of Inventory and Forecasting. Thomas L. Freese, Principal. Freese & Associates, Inc. Freese & Associates, Inc. Beyond Pareto: 12 Standard Thomas L. Freese, Principal Twelve Steps Inventory Carrying costs Concepts Make-to-order or stock A B C Accuracy Cycle counting Reordering Valuation Safety stocks Demand Variability