Slide Chapter 12 Inventory management

Transcription

1 Slide 12.1 Chapter 12 Inventory management

2 Slide 12.2 Inventory management Direct Design Operations management Develop Inventory management Deliver The market requires a quantity of products and services at a particular time The operation supplies... the delivery of a quantity of products and services when required Figure 12.1 This chapter covers inventory management

3 Slide 12.3 Key operations questions In Chapter 12 Inventory planning and control Slack et al. identify the following key questions What is inventory? Why should there be any inventory? How much should be ordered? When should an order be placed? How can inventory be controlled?

4 Slide 12.4 Summary Inventory or 'stock is the stored accumulation of material resources in a transformation system. Inventory is necessary because it gives ability to respond quickly, more choices, and protects stockout. Inventory is also important to balance the difference between supply and demand

5 Slide 12.5 Inventory management Inventory is created to compensate for the differences in timing between supply and demand Inventory accumulating In-flow (supply from previous process) Time Inventory reducing Time Inventory Out-flow (rate of demand from output process) Figure 12.2 Inventory is created to compensate for the differences in timing between supply and demand Time

6 Slide 12.6 What are the disadvantages of holding inventory? Cost Inventories Physical inventories Queues of customers Digital information in databases Ties up working capital and there could be high administrative and insurance costs Primarily time-cost to the customer, i.e. wastes customers time. Space Requires storage space Requires areas for waiting or phone lines for held calls Cost of set-up, access, update and maintenance Requires memory capacity. May require secure and/or special environment Quality Operational/ organizational May deteriorate over time, become damaged or obsolete May hide problems (see lean synchronization Chapter 15) May upset customers if they have to wait too long. May lose customers May put undue pressure on the staff and so quality is compromised for throughput Data may be corrupted or lost or become obsolete Databases need constant management; access control, updating and security Table 12.2 Some reasons to avoid inventories

7 Slide 12.7 Decisions on inventory? How much to order? (EOQ & EBQ) When to order & how to control the system? Re-order level system Periodic review system How to calculate safety stock?

8 Slide 12.8 Inventory profiles chart the variation in inventory level Inventory level Order quantity = Q Steady and predictable demand (D) Slope = demand rate Average inventory = Q 2 Q D Time Instantaneous deliveries at a rate of Figure 12.5 Inventory profiles chart the variation in inventory level D Q per period

9 Inventory level Slide 12.9 How much to order which one is better? Demand (D) = 1000 items per year 400 Plan A Q = 400 Average inventory for plan A = Plan B Q = 100 Average inventory for plan B = 50 Time 1 mth 4 mths

10 Costs Slide Traditional view of inventory-related costs Total costs Holding costs Economic order quantity (EOQ) Order costs Order quantity

11 Slide How much to order EOQ = 2 C o D Pi C o = Cost per order D = Demand over the period P = Purchase cost per unit i = Inventory carrying cost C h = P * i Total Ordering costs (O) = (C 0 ) x (D/Q) Total Holding costs (H) = (P) x ( i ) x (Q/2)

12 Slide How much to order Calculating the EOQ A company purchases material for its production line at $650 per MT. Its yearly requirement is 288 MT. Inventory carrying costs are calculated at 25% of the average value of inventory, and the cost of placing each order has been set at $50. Calculate the EOQ

13 Slide When to order Inventory level Demand (D) = 100 items per week Order quantity (Q) = 400 Re-order level Re-order point Order lead time Time But lead-times & rates of demand are usually not fixed And so, generally, safety stock is needed.

14 Inventory level Slide Safety stock helps to avoid stock-outs when demand and/or order lead-time are uncertain How to do this under a re-order level system... Safety stock! Q Re-order level Safety stock d 1 d 2 t 1 t 2 Time IT C t = lead-time d = demand rate over the lead-time

15 Slide Determining the re-order level and safety stock Thirst Ltd. has calculated its economic order quantity (EOQ) at 900 units. It can never be sure, however, when a delivery will arrive after placing an order. Its experience over the last two years has shown the following pattern of delivery lead-times from its supplier. Thirst Ltd. needs to decide what its inventory re-order level should be if its probability of a stock-out is to be less than ten per cent. Lead-time: Delivery lead-time Percentage of orders 1 week 10% 2 weeks 20% 3 weeks 40% 4 weeks 20% 5 weeks 10% Weighting Average Lead-time = 3 weeks Weighting Average Usage rate = 125 valves Usage rate: No. of valves used per week Probability % % % % % % IT C M11:U4:4.7-4

16 Slide Calculate lead-time usage probabilities Usage rate probabi- Lead-time probabilities 0.10 * week 2 weeks 3 weeks 4 weeks 5 weeks lities (0.01) 200 (0.02) 300 (0.04) 400 (0.02) 500 (0.01) (0.015) 220 (0.03) 330 (0.06) 440 (0.03) 550 (0.015) (0.025) 240 (0.05) 360 (0.1) 480 (0.05) 600 (0.025) (0.025) 260 (0.05) 390 (0.1) 520 (0.05) 650 (0.025) (0.015) 280 (0.03) 420 (0.06) 560 (0.03) 700 (0.015) (0.01) 300 (0.02) 450 (0.04) 600 (0.02) 750 (0.01) Lead-time usage Probability

17 Slide Calculate the re-order level Maximum level of stockout desired 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Minimum re-order level needed Lead-time usage >99 >199 >299 >399 >499 > Probability of usage being greater than this Lead-time usage Probability This table shows that, if the company wishes to keep its stockouts lower than 10 per cent, it must place its orders when the inventory level is at 600 units.

18 Slide Calculate safety stock The weighted average lead-time usage = 375 units (3 weeks X 125 units per week) Re-order level 600 units 225 units Safety stock (average) Wtd. average usage rate = 125/wk Maximum usage rate = 150/wk Average safety stock therefore = 225 units (600 units ROL units average lead-time usage) Wtd. average lead-time (3 wks) Maximum leadtime (5 wks) Stockout risk = 9.5%

19 Slide How to do this under a periodic review system Thirst Ltd decides to change from a re-order level stock replenishment system to a periodic review system. The question it now asks itself is: "What should be the maximum inventory level to aim at through our orders, so as to continue to keep our stockout risk for the valves at no more than 10%." Its EOQ is 900 units and as the average yearly demand is 6,500 units (125 units x 52 weeks), the review interval: Review interval = 900 / 6,500 = years = 7 weeks.

20 Slide As the review interval is 7 weeks, and the delivery lead-time varies from 1-5 weeks, the period to consider will range from 8-12 weeks Usage Review interval (7 weeks) + Lead-time probabilities rate probabi- 8 weeks 9 weeks 10 weeks 11 weeks 12 weeks lities (0.01) 900 (0.02) 1,000 (0.04) 1,100 (0.02) 1,200 (0.01) (0.015) 990 (0.03) 1,100 (0.06) 1,210 (0.03) 1,320 (0.015) (0.025) 1,080 (0.05) 1,200 (0.1) 1,320 (0.05) 1,440 (0.025) ,040 (0.025) 1,170 (0.05) 1,300 (0.1) 1,430 (0.05) 1,560 (0.025) ,120 (0.015) 1,260 (0.03) 1,400 (0.06) 1,540 (0.03) 1,680 (0.015) ,200 (0.01) 1,350 (0.02) 1,500 (0.04) 1,650 (0.02) 1,800 (0.01) Usage ,085 1,086-1,228 1,229-1,371 1,372-1,514 1,515-1,657 1,658-1,800 Probability

21 Slide Calculate I max levels Maximum level of stockout desired 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Minimum I max level needed ,085 1,228 1,371 1,514 1,657 1,800 Usage >799 >942 >1,085 >1,228 >1,371 >1,514 >1,657 >1,800 Probability of usage being greater than this Usage ,085 1,086-1,228 1,229-1,371 1,372-1,514 1,515-1,657 1,658-1,800 Probability

22 Slide Calculate safety stock I max.: 1,514 units The weighted average review period + lead-time usage = 1,250 units (10 weeks X 125 units per week) Q1 Wtd. average usage rate = 125/wk 264 units Safety stock (average) Maximum usage rate = 150/wk T 0 T 1 T 2 Average safety stock therefore = 264 units (1,514 units I max - 1,250 units average usage) Review interval (7 weeks) Wtd. average lead-time:3 wks Stockout Maximum risk =10% lead-time: 5 wks IT C M11:U4:4.7-17

23 Slide Inventory classifications and measures Class A items the 20% or so of highvalue items which account for around 80% of the total stock value Class B items the next 30% or so of medium-value items which account for around 10% of the total stock value Class C items the remaining 50% or so of low-value items which account for around the last 10% of the total stock value

24 Slide The Two-bin and Three-bin systems of reordering Two-bin system Three-bin system Bin 1 Bin 2 Bin 1 Bin 2 Bin 3 Items being used Reorder level + safety inventory Items being used Reorder level inventory Safety inventory Figure The two-bin and three-bin systems of re-ordering