Inventory Management. Learning Objectives. Inventory. Dr. Richard Jerz

Transcription

1 Inventory Management Dr. Richard Jerz 1 Learning Objectives Describe The functions of inventory and basic inventory models Define ABC analysis Record accuracy Cycle counting Independent and dependent demand Holding, ordering, and setup costs 2 Inventory 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 7 1

2 Types 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 Finished goods Completed product awaiting shipment Goods in transit to warehouses or customers Maintenance/repair/operating (MRO) Necessary to keep machinery and processes productive Goods in transit to warehouses or customers 9 Functions of Inventory To meet anticipated demand To smooth production requirements To decouple or separate various parts of the production process To protect against stock outs To hedge against inflation To take advantage of quantity discounts To permit operations 10 Effective Inventory Management An accurate system to keep track of inventory A reliable forecast of demand Knowledge of lead times Reasonable estimates of costs, including Holding costs Ordering costs Shortage costs A classification system to help focus on most important inventory 12 2

3 ABC Classification System Divides inventory into three classes based on importance, using annual dollar volume Class A very important (high annual dollar volume Class B moderately important (medium annual dollar volume) Class C least important (low annual dollar volume) Used to establish policies that focus on the few critical parts and not the many trivial ones 14 ABC Analysis Percent of annual dollar usage A Items B Items 10 C Items Percent of inventory items 15 ABC Analysis Other criteria than annual dollar volume may be used Anticipated engineering changes Delivery problems Quality problems High unit cost 16 3

4 Record Accuracy Accurate records are a critical ingredient in production and inventory systems Necessary to make precise decisions about ordering, scheduling, and shipping Stockrooms should be secure 17 Cycle Counting Items are counted and records updated on a periodic basis Often used with ABC analysis to determine cycle Has several advantages Eliminates shutdowns and interruptions Eliminates annual inventory adjustment Trained personnel audit inventory accuracy Allows causes of errors to be identified and corrected Maintains accurate inventory records 18 Independent vs Dependent Demand Independent demand the demand for item is independent of the demand for any other item in inventory Dependent demand the demand for item is dependent upon the demand for some other item in the inventory 19 4

5 Inventory Control There is a cost associated with procuring materials There is a cost associated with holding materials These costs are inversely proportional What is the lowest cost solution? 21 The Inventory Cycle Q Quantity on hand Usage rate Profile of Inventory Level Over Time Reorder point Receive order Place Receive order order Lead time Place order Receive order Time 22 Examples of Ordering (Procurement/Setup) Costs Fixed Staffing Office & Equipment Variable Shipping Ordering Setup cost Lost materials Receiving & inspection 23 5

6 Examples of Inventory Holding (Carrying) Costs Fixed Warehouse capital Property taxes Warehouse operating Personnel Variable Interest (cost of capital) Insurance Losses/breakage/theft Inventory taxes Rental costs 24 Economic Order Quantity (EOQ) A mathematical approach to determining how much to order based upon minimizing costs. 26 EOQ Solution Q opt 2DS 2( Annual Demand)( Order or Setup Cost) H Holding Cost 27 6

7 Cost Minimization Goal The Total-Cost Curve is U-Shaped Annual Cost TC Q H D 2 Q S Holding Costs Ordering Costs Q O (optimal order quantity) Order Quantity (Q) 28 Total Cost Annual Total cost = carrying + cost Annual ordering cost Q 2 H D TC = + Q S 29 Deriving the EOQ Using calculus, we take the derivative of the total cost function and set the derivative (slope) equal to zero and solve for Q. Q opt 2DS 2( Annual Demand)( Order or Setup Cost) H Holding Cost 30 7

8 An EOQ Example Determine optimal number of needles to order D = 1,000 units S = $10 per order H = $.50 per unit per year Q* = Q* = 2DS H 2(1,000)(10) = 40,000 = 200 units Assumptions of EOQ Model Only one product is involved Annual demand requirements known Demand is even throughout the year Lead time does not vary Each order is received in a single delivery There are no quantity discounts 32 When to Reorder Reorder Point When the quantity on hand of an item drops to this amount, the item is reordered Safety Stock Stock that is held in excess of expected demand due to variable demand rate and/or lead time. Service Level Probability that demand will not exceed supply during lead time. 33 8

9 Safety Stock Quantity Maximum probable demand during lead time Expected demand during lead time ROP LT Safety stock Time 34 Operations Strategy Too much inventory Tends to hide problems Easier to live with problems than to eliminate them Costly to maintain Wise strategy Reduce lot sizes Reduce safety stock 35 9