Inventory Management

Transcription

1 Inventory Management

2 Inventory Inventory is the stock of any item or resource used in an organization. Inventory include: raw materials, finished products, component parts, supplies, and work-in-process

3 Purposes of Inventory 1. To maintain independence of operations 2. To meet variation in product demand 3. To allow flexibility in production scheduling 4. To provide a safeguard for variation in raw material delivery time 5. To take advantage of economic purchaseorder size/quantity discounts

4 Types of Inventory Raw materials Purchased parts and supplies Work-in-process (partially completed) products (WIP) Items being transported Tools and equipment

5 Inventory Costs Holding (or carrying) costs Costs for storage, handling, insurance, obsolescence, depreciation, opportunity cost of capital,etc Holding costs tend to favor low inventory levels and frequent replenishment Ordering costs Costs of placing an order, etc Shortage costs temporary or permanent loss of sales when demand cannot be met

6 Two Forms of Demand Dependent Demand for items used to produce final products Tires for autos are a dependent demand item Independent Demand for items used by external customers Cars, appliances, computers, and houses are examples of independent demand inventory

7 Independent vs. Dependent Demand Independent Demand (Demand for the final end-product or demand not related to other items) Finishe d product Component parts E(1) Dependent Demand (Derived demand items for component parts, subassemblie s,

8 The Role of Inventory In Supply Chain Management Since demand is usually not known with certainty, it is not possible to produce exactly the amount demanded So an additional amount of inventory, called safety or buffer is kept on hand to meet variations in product demand The bullwhip effect: The distortion of demand information as it moves away from end-user customer This effect causes distributers, manufacturers and suppliers to stock increasingly higher safety stocks

9 Inventory and Quality Management Level of customer service: The ability to meet effectively internal or external customer demand in a timely and efficient manner Customer for finished goods perceive quality service as availability of goods they want at the time when they want them To provide this level of quality customer service, the tendency is to maintain large stocks of all types of items However, there is a cost associated with carrying items in inventory, which creates a trade-off between the quality level of customer service and the cost of that service

10 Conti.. As the level of inventory increases to provide better customer service, inventory costs increase, whereas quality-related customer service costs, such as lost sales and loss of customers decrease The conventional approach to inventory management is to maintain a level of inventory that reflects a compromise between inventory costs and customer service But according to the contemporary zero defects philosophy of quality management, the long term benefits of quality in terms of large market share outweigh lower shot-term production-related costs such as inventory costs

11 Inventory Control System An inventory system is the set of policies and controls that monitor levels of inventory and determines what levels should be maintained, when stock should be replenished, and how large orders should be There are two basic inventory systems: Continuous system Periodic system

12 Continuous Inventory Systems In a continuous inventory system, a continual record of the inventory level for every item is maintained It is also referred to as a perpetual system or a fixed-order-quantity system Whenever the inventory at hand decreases to a predetermined level, referred to as the reorder point, a new order is placed to replenish the stock of inventory

13 Continuous Inventory Systems The order that is placed is for a fixed amount that minimizes the total inventory costs This amount of order placed is called the economic order quantity Continuous inventory systems often incorporate information technology tools to improve the speed and accuracy of data entry. E.g. Barcodes

14 Continuous Inventory Systems Since inventory level is continuously monitored, so management always knows the inventory status This is advantageous for critical items such as replacement parts or raw material supplies However, maintaining a continual record of the amount of inventory on hand can also be costly

15 Periodic Inventory Systems It is also referred to as fixed-time-period system or periodic review system In a periodic inventory system, the inventory on hand is counted at specific time intervals-every week or at the end of each month After the inventory in stock is determined, an order is placed for an amount that will bring inventory back up to a desired level Since inventory level is not monitored at all during the time interval between orders, little or no record keeping is required

16 Periodic Inventory Systems Disadvantage is less direct control Results in larger inventory levels to guard against unexpected stock outs early in the fixed period Also requires that a new order quantity be determined each time a periodic order is made Used in college library, small retail stores, drug stores, grocery stores, and offices

17 The ABC Classification System The ABC system is a method for classifying inventory according to several criteria including its dollar value to the firm About 5 % - 15% of all inventory item account for 70% to 80% of the total dollar value of inventory. These are classifies as class A items B items represent approximately 30% of total inventory units but only about 15% of the total inventory dollar value C items account for 50% - 60% of all inventory units but represent only 5% - 10% of total dollar value

18 The ABC Classification System In ABC analysis each class of inventory requires a different levels of inventory monitoring and controlthe higher the value of the inventory, the tighter the control Class A items require tight inventory control, minimized safety stocks, accurate demand forecasting and detailed record keeping B and C items require less stringent inventory control Since carrying costs are usually lower for C items, higher inventory levels can sometimes be maintained with larger safety stocks

19 The ABC Classification System A items require a continuous control system, while for B and C items periodic review system with less monitoring Items kept in inventory are not of equal importance in terms of: Dollars invested Profit potential Sales or usage volume Stock-out penalties

20 Illustration of ABC The maintenance department for a small manufacturing firm has responsibility for maintaining an inventory of spare parts for the machinery it services. The parts inventory, unit cot and annual usage Part are as follow: Unit Cost $ Annual Usage

21 The department manager wants to classify the inventory parts according to the ABC system to determine which stocks of parts should most closely be monitored Part Total Value % of Total Value % of Total Quantity % Cumulativ e 9 30, , , , , , , , , ,

22 Conti.. ABC Classification of the items: Class Items % of Total Value % of Total Quantity A 9, 8, B 1, 4, C 6, 5, 10,

23 The Basic EOQ Model In a continuous system, when inventory reaches a specific level, referred to as the reorder point, a fixed amount is ordered The most widely used and traditional means of determining how much to order in a continuous system is the Economic Order Quantity (EOQ) Model The function of EOQ Model is to determine the optimal order size that minimizes total inventory costs

24 The Basic EOQ Model - Assumptions 1. Demand is known with certainty and is constant over time 2. No shortages are allowed 3. Lead time for the receipt of orders is constant 4. The order quantity is received all at once

25 Basic Fixed-Order Quantity Model and Reorder Point Behavior 1. You receive an order quantity Q. 4. The cycle then repeats. umber f units n hand Q Q Q R L 2. Your start using them up over time. Time R = Reorder point Q = Economic order quantity L = Lead time L 3. When you reach down to a level of inventory of R, you place your next Q sized order.

26 Cost Minimization Goal By By adding the the item, holding, and ordering costs together, we we determine the the total cost curve, which in in turn is is used to to find the the Q opt inventory opt order point that minimizes total costs C O S T Total Cost Holding Costs Ordering Costs Q OPT Order Quantity (Q)

27 EOQ Cost Model CC o - cost of placing order o - cost of placing order CC c - annual per-unit carrying cost c - annual per-unit carrying cost D D - annual - annual demand demand Q Q - order - order quantity quantity CC o D Annual ordering cost = o D Annual ordering cost = QQ CC c Q Annual carrying cost = c Q Annual carrying cost = 22 CC o D C c Q Total cost = o D C Total cost = + c Q Q + Q 22

28 EOQ Cost Model Deriving Q opt C o D TC = + Q TC C o D = + Q Q 2 C 0 D 0 = + Q 2 Q opt = 2C o D C c C c Q 2 C c 2 C c 2 Proving equality of costs at optimal point C o D C c Q = Q 2 Q 2 = 2C o D C c Q opt = 2C o D C c

29 EOQ Cost Model Annual cost ($) Minimum total cost Slope = 0 Total Cost Carrying Cost = C c Q 2 Ordering Cost = C o D Q Optimal order Q opt Order Quantity, Q

30 EOQ Example c = $0.75 per gallon C o = $150 D = 10,000 gallo Q opt = 2C o D C c C o D C c Q TC min = + Q 2 Q opt = 2(150)(10,000) (0.75) Q opt = 2,000 gallons (150)(10,000) TC min = + 2,000 (0.75)(2,000) TC min = $750 + $750 = $1,500 2 Orders per year = D/Q opt Order cycle time = 311 days/(d/q opt ) = 10,000/2,000 = 311/5 = 5 orders/year = 62.2 store days

31 Sum 1 The epaint stocks paint in its warehouse and sells it online on its Internet Website. The store stocks several brands of paints; however, its biggest seller is Sharman-Wilson Ironcoat paint. The company wants to determine the optimal order size and total inventory cost for Ironcoat paint given an estimated annual demand of 10,000 gallons of paint, an annual carrying cost of $0.75 per gallon, and an ordering cost of $150 per order. They would also like to know the number of orders that will be made annually and time between orders (i.e. order cycle)

32 Sum 2 Electronic Village stocks and sells a particular brand of personal computer. It costs the store $450 each time it places and order with the manufacturer for the personal computers. The annual cost of carrying the PCs in inventory is $170. the store manager estimates that annual demand for the PCs will be 1200 units. Determine the optimal order quantity, total minimum cost and order cycle time.

33 Sum 3 The EastCoasters Bicycle Shop operates 364 days a year, closing only on Christmas Day. The shop pays $300 for a particular bicycle purchased from the manufacturer. The annual holding cost per bicycle is estimated to be 25% of the dollar value of inventory. The shop sells an average of 18 bikes per week. The ordering cost for each order is $250. Determine the optimal order quantity and the total minimum cost.

34 The Production Quantity Model In this EOQ model the assumption that orders are received all at once is relaxed The order quantity is received gradually is over time and the inventory level is depleted at the same time it is being replenished This situation is commonly found when the inventory user is also the producer as in a manufacturing operation where a part is produced to use in larger assembly

35 Sum 4 Assume that the epaint Store has its own manufacturing facility in which it produces Ironcoat paint. The ordering cost is the cost of setting up the production process to make paint. The manufacturing facility remains open for the same number of days as the store is open and produces 150 gallons of paint per day. Determine the optimal order size, total inventory cost, the length of time to receive an order, the number of orders per year and the maximum inventory level.

36 Sum 5 I-75 Discount Carpets manufactures Cascade carpet, which it sells in its adjoining showroom store near the interstate. Estimated annual demand is 20,000 yards of carpet with an annual carrying cost of $2.75 per yard. The manufacturing facility operates 360 days and produces 400 yards of carpet per day. The cost of setting up the manufacturing process for a production run is $720. determine the optimal order size, total inventory cost, length of time to receive an order and maximum inventory level.

37 Quantity Discounts A quantity discount is a price discount on an item if predetermined numbers of units are ordered Determining if an order size with a discount is more cost effective than optimal Q is the main task When a discount price is available, it is associated with a specific order size, which may be different from the optimal order size and the customer must evaluate the trade off between possibly higher carrying costs with the discount

38 Quantity Discounts Price per unit decreases as order quantity increases where C o D C c Q TC = + + PD Q 2 P = per unit price of the item D = annual demand

39 Quantity Discount Model Inventory cost ($) ORDER SIZE PRICE 0-99 $ (d 1 ) (d 2 ) TC = ($10 ) TC (d 1 = $8 ) TC (d 2 = $6 ) Carrying cost Ordering cost Q(d 1 ) = 100 Q(d 2 ) = 200 Q opt

40 Sum 6 Avtek, a distributor of audio and video equipment, wants to reduce a large stock of televisions. It has offered a local chain of stores a quantity discount pricing schedule, as follows: Quantity Price 1-49 $1, , The annual carrying cost for the stores for a TV is $190, the ordering cost is &2,500, and annual demand for this particular model TV is estimated to be 200 units. The chain wants to determine if it should take advantage of this

41 Quantity Discount QUANTITY PRICE 1-49 $1, , C o =$2,500 C c =$190 per TV D = 200 TVs per year 2C o D 2(2500)(200) Q opt = = = 72.5 TVs C c 190 For Q = 72.5 C o D C c Q opt TC = + + PD = $233,784 2 Q opt For Q = 90 C o D C c Q TC = + + PD = $194,105 Q 2

42 Sum 7 The bookstore at Tech purchases jackets emblazoned with the school name and logo from a vendor. The vendor sells the jackets to the store for $38 a piece. The cost to the bookstore for placing an order is $120 and the annual carrying cost is 25% of the cost of jacket. The bookstore manager estimates that 1700 jackets will be sold during the year. The vendor has offered bookstore the following volume discount schedule. What is the bookstore s optimal order quantity? Order Size Discount % % % %

43 Reorder Point The Reorder Point is the determinant of when to order in a continuous inventory system, i.e. the inventory level at which a new order is placed Reorder point for basic EOQ model with constant demand and a constant lead time is: R = dl Where d = demand rate per period (daily demand) L = Lead Time

44 Example of Reorder Point with Constant Demand and Lead Time The epaint Store is open 311 days per year. If annual demand is 10,000 gallons of Ironcoat paint and the lead time to receive an order is 10 days. Determine the reorder point for paint.

45 Stockout, Safety Stock and Service Level Stockout: An inventory shortage Safety Stock: A buffer added to the inventory on hand during lead time Service Level: the service level is the probability that the amount of inventory on hand during the lead time is sufficient to meet the expected demand-i.e. that the customer will e served For E.g. A service level of 90% means that there is a 0.90 probability that the demand will be met during the lead time, and the probability that a stockout will occur is 10%

46 Variable Demand With Reorder Point Inventory level Q Reorder point, R 0 LT Time LT

47 Reorder Point With Safety Stock Inventory level Reorder point, R Q Safety Stock 0 LT Time LT

48 Reorder Point With Variable Demand where R = dl + z d L d= average daily demand L= lead time d = the standard deviation of daily demand z= number of standard deviations corresponding to the service level probability z d L= safety stock

49 Reorder Point For a Service Level Probability of meeting demand during lead time = service level Probability of a stockout Safety stock z d L dl Demand R

50 Reorder Point For Variable Demand The paint store wants a reorder point with a 95% service level and a 5% stockout probability d = 30 gallons per day L = 10 days d = 5 gallons per day For a 95% service level, z = 1.65 R = dl + z d L = 30(10) + (1.65)(5)( 10) = gallons Safety stock = z d L = (1.65)(5)( 10) = 26.1 gallons

51 Sum 8 (Reorder Point with Variable Demand) Kelly s Tavern serves Shamrock draft beer to its customers. The daily demand for beer is normally distributed, with an average of 20 gallons and a standard deviation of 4 gallons. The lead time required to receive an order of beer from the local distributor is 12 days. Determine the safety stock and reorder point if the restaurant wants to maintain a 90% service level. What would be the increase in the safety stock if a 95% service level were desired?

52 Sum 9 The amount of denim used daily by the Southwest Apparel Company in its manufacturing process to make jeans is normally distributed with an average of 4000 yards of denim and a standard deviation of 600 yards. The lead time required to receive an order of denim from the textile mill is constant 7 days. Determine the safety stock and reorder point if the company wants to limit the probability of a stock out and work stoppage to 5%? What level of service would a safety stock of 2000 yards provide?

53 Order Quantity For Periodic Inventory System A periodic inventory system is one in which the time between the orders is constant and the order size varies Small retailers often use this system of inventory management; E.g. Drugstore In this case the vendors who provide stock of materials make periodic visits-every few weeks or every month-and count the stock of inventory on hand If the inventory is exhausted or at some predetermined reorder point, a new order will be placed for an amount of inventory that will bring the inventory level back up to the desired level

54 Order Quantity For Periodic Inventory System In periodic inventory system, usually the manager does not monitor the inventory level between vendor visits but instead will rely on the vendor to take inventory Since the items are generally of low value, larger safety stocks will not pose a significant cost However, if the inventory becomes exhausted early in the time period between visits, resulting in a stockout that will not be remedied until the next scheduled order

55 Order Quantity For Periodic Inventory System If the demand rate and lead time are constant, then the fixed-period model will have a fixed-order quantity that will be made at specified time intervals, which is same as the fixed-order (basic EOQ) model But the fixed-period model reacts differently than the fixed-order model when the demand is variable

56 Order Quantity for a Periodic Inventory System Q = d(t b + L) + z d t b + L - I where z d d = average demand rate = the fixed time between orders L = lead time = standard deviation of demand t b d t b + L = safety stock I = inventory level

57 Periodic Inventory System

58 Fixed-Period Model With Variable Demand d = 6 packages per day d = 1.2 packages t b = 60 days L = 5 days I = 8 packages z = 1.65 (for a 95% service level) Q = d(t b + L) + z d t b + L - I = (6)(60 + 5) + (1.65)(1.2) = packages

59 Sum 10 KVS Pharmacy fills prescriptions for a popular children s antibiotic, Amoxycilin. The daily demand for Amoxycilin is normally distributed with a mean of 200 ounces and a standard deviation of 80 ounces. The vendor for the pharmaceutical firm that supplies the drug calls the drugstore s pharmacist every 30 days and checks the inventory of Amoxycilin. During a call the druggist indicated the store had 60 ounces of the antibiotic in stock. The lead time to receive an order is four days. Determine the order size that will enable the drug store to maintain a 99% service level.

60 Sum 11 Food Place Market stocks frozen pizzas in a refrigerated display case. The average daily demand for the pizzas is normally distributed, with a mean of 8 pizzas and a standard deviation of 2.5 pizzas. A vendor for a packaged food distributor checks the market s inventory of frozen foods every 10 days. During a particular visit there were no pizzas in stock. The lead time to receive an order is 3 days. Determine the order size for this order period that will result in a 98% service level. During the vendor s following visit there were 5 frozen pizzas in stock. What is the order size for the next order period?