Inventory/ Material Management

Transcription

1 11-1 Inventory Management HAPTER 7 Inventory/ Material Management Prepared by Şevkinaz Gümüşoğlu using different references about POM McGraw-Hill/Irwin Operations Management, Eighth Edition, by William J. Stevenson Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

2 11-2 Inventory Management What Is Inventory? Stock of items kept to meet future demand Purpose of inventory management how many units to order when to order Copyright 2006 John Wiley & Sons, Inc.

3 11-3 Figure 1 Inventory Management The Inventory Cycle Q Quantity on hand Usage rate Profile of Inventory Level Over Time Reorder point Receive order Place order Receive order Place order Receive order Time Lead time

4 11-4 Inventory Management Types of Inventory Raw materials Purchased parts and supplies Work-in-process (partially completed) products (WIP) Items being transported Tools and equipment Copyright 2006 John Wiley & Sons, Inc.

5 11-5 Inventory Management Inventory is a traditional topic in P/O Management. The basic objective of inventory/material management has traditionally been to keep inventory at desired level that will meet product demand and also be cost effective. Whether a company buys parts and products or produces them, it is faced with decisions about inventory. Inventories are present whenever the inputs and outputs of a company are not used as soon as they become available. In general, most people think of inventory as a final product waiting to be sold to a retail customer. e.g. a new car, a can of ananas at a grocery store. This is of course one of its most important uses. Inventory can take on a number of different forms besides finished goods, such as raw materials, supplies, parts etc. 5

6 11-6 Inventory Management Inventory can be defined as a stock of materials created to satisfy some eventual demand. Inventory can be defined as a stock of materials created to satisfy some eventual demand. Inventories are idle resources of any kind that possesses economic value and held for future use. Inventories are idle resources of any kind that possesses economic value and held for future use. 6

7 11-7 Inventory Management The major goal of any inventory control system is to discover and maintain the best possible level of inventory in terms of both units of product and least possible cost. As stated above, in reaching this goal management seeks to avoid two common pitfalls: i. Management tries to avoid the problem inadequate levels of inventory since too little inventory disrupts production and may result in lost sales. ii. The existence of too many inventories increases the risk of obsolescence and creates unnecessary cost levels, both of which are the utmost concern to management. The best possible level of inventory is located somewhere between these two extremes. 7

8 11-8 Inventory Management To provide management with reasonable responses to the preceding questions, the initial model is generally modified to reflect operational situations. These modified models are then used as a basis for answering three principal questions; which constitute the purpose of inventory management: 1. When should an order be placed? 2. How much should be ordered? 3. What is the cost of inventory policy that has been selected? In order to solve these problems we can use different type of models ; Two bin system, single period system, EOQ etc. 8

9 11-9 Inventory Management Inventory and Quality Management Customers usually perceive quality service as availability of goods they want when they want them Inventory must be sufficient to provide highquality customer service in TQM Copyright 2006 John Wiley & Sons, Inc.

10 11-10 Inventory Management Inventory Control Systems Continuous system (fixed-orderquantity) constant amount ordered when inventory declines to predetermined level Periodic system (fixed-timeperiod) order placed for variable amount after fixed passage of time Copyright 2006 John Wiley & Sons, Inc.

11 11-11 Inventory Management One of the most important considerations of control is the value of annual consumption of inventory /material items in a year. Only a small number of inventory items consume a very large share of inventory consumption during the year. A little larger number of inventory items covers a moderate share of annual inventory consumption. A very large number of items just cover a very small share of annual inventory consumption. These facts gave birth to the concept of ABC analysis. We should use ABC Analysis especialy for «Buy & Produce Decisions» 11

12 11-12 Inventory Management ABC Inventory Classification ABC classification is a method for determining level of control and frequency of review of inventory items A Pareto analysis can be done to segment items into value categories depending on annual dollar volume A Items typically 20% of the items accounting for 80% of the inventory value-use Q system B Items typically an additional 30% of the items accounting for 15% of the inventory value-use Q or P C Items Typically the remaining 50% of the items accounting for only 5% of the inventory value-use P

13 11-13 Inventory Management ABC Classification Class A 5 15 % of units % of value Class B 30 % of units 15 % of value Class C % of units 5 10 % of value Copyright 2006 John Wiley & Sons, Inc.

14 11-14 Inventory Management

15 11-15 Inventory Management Policies For A group items Develop class A suppliers more Forecast A items more carefully Purchasing department make maximum efforts to expedite and delivery of these items Purchase of these items in hands of top officials The stock report of A items should be sent more frequently, say at least once in 15 days.

16 11-16 Inventory Management Policies for B group items Order quantities, re-order stocks and safety stock should be fixed and revised for B items at least one in every 4 to 6 months. B items should be ordered less frequently than A items

17 11-17 Inventory Management Policies for C group items Large quantities can be brought at a time, as total investment will be least. Paper work can be reduced considerably if orders are placed once or twice a year The source of supply can be one or two based on their reliability.

18 11-18 Inventory Management Advantages of ABC Analysis Helps to exercise selective control Gives rewarding results quickly Helps to point out obsolete stocks easily. In case of A items careful attention can be paid at every step such as estimate of requirements, purchase, safety stock, receipts, inspections, issues, etc. & close control is maintained. In case of C items, recording & follow up, etc. may be dispensed with or combined. Helps better planning of inventory control Provides sound basis for allocation of funds & human resources.

19 11-19 Inventory Management Disadvantages of ABC Analysis Proper standardization & codification of inventory items needed. Considers only money value of items & neglects the importance of items for the production process or assembly or functioning. Periodic review becomes difficult if only ABC analysis is recalled. When other important factors make it obligatory to concentrate on C items more, the purpose of ABC analysis is defeated.

20 11-20 Inventory Management STEPS IN ABC ANALYSIS The steps in computing ABC analysis are: a Determine the annual usage in units for each item for the past one-year. b. Multiply the annual usage quantity with the average unit price of each item to calculate the annual usage in US$ for each item. c. Item with highest dollar usage annually is ranked first. Then the next lower annual usage item is listed till the lowest item is listed in the last. d. Table 1 shows ranks of the items according to the annual usage in US$. for 10 items. e. Arrange the items in the inventory by cumulative annual usage (dollars) and by cumulative percentage. Categorize the items in A, B, and C categories. 20

21 11-21 Inventory Management TABLE 1: DETERMINATION OF RANKS BY ANNUAL USAGE IN US$ Item # Average usage (units) Unit cost (US$) Annual usage (US$) Rank 21

22 11-22 Inventory Management TABLE 1: DETERMINATION OF RANKS BY ANNUAL USAGE IN US$ Item # Average usage (units) Unit cost (US$) Annual usage (US$) Rank 22

23 11-23 Inventory Management TABLE 1: DETERMINATION OF RANKS BY ANNUAL USAGE IN US$ Item # Average usage (units) Unit cost (US$) Annual usage (US$) Rank A B C D E F G H I j

24 11-24 Inventory Management TABLE 2:CATEGORIZING THE ITEMS IN ABC RANKING Item # Annual usage (US$) Cumulative annual usage (US$) F B G D C E H A j I Total 8500 Annual usage % Category assigned 24

25 11-25 Inventory Management TABLE 2:CATEGORIZING THE ITEMS IN ABC RANKING Item # Annual usage (US$) Cumulative annual usage (US$) Annual usage % Total 8500 Category assigned 25

26 11-26 Inventory Management Item # TABLE 2:CATEGORIZING THE ITEMS IN ABC RANKING Annual usage (US$) Cumulative annual usage (US$) Annual usage % Category assigned A B B C C C C C C C Total

27 11-27 Inventory Management TABLE 3: ABC CATEGORY - SUMMARY category Item# % of items in inventory $ in the category % $ in the category A B 2, C 1, 3, 4,5,8,9, Total

28 11-28 Inventory Management ABC Classification: Example PART UNIT COST ANNUAL USAGE 1 $ Copyright 2006 John Wiley & Sons, Inc.

29 11-29 Inventory Management ABC Classification: Example (cont.) TOTAL % OF TOTAL % OF TOTAL PART VALUE PART UNIT VALUE COST QUANTITY ANNUAL % CUMMULATIVE USAGE 1 $ A B C $30, , , , % OF TOTAL 9.0 % OF TOTAL CLASS 4,800 ITEMS 5.6 VALUE 6.0 QUANTITY , A 3,600 9, 8, B 3,000 1, 4, C 2,400 6, 5, 10, , $85,400 Copyright 2006 John Wiley & Sons, Inc. Example 10.1

30 11-30 Inventory Management Some Basic Inventory Control Models Economic order quantity model Economic production model Quantity discount model

31 11-31 Inventory Management EOQ Economic Order Quantity (EOQ) Models optimal order quantity that will minimize total inventory costs Basic EOQ model Advance EOQ model ( back order model, stockout model) Copyright 2006 John Wiley & Sons, Inc.

32 11-32 Inventory Management 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

33 11-33 Inventory Management Inventory Level Inventory Order Cycle Order quantity, Q Demand rate Reorder point, R 0 Order placed Lead time Order receipt Order placed Lead time Order receipt Time Copyright 2006 John Wiley & Sons, Inc.

34 11-34 Inventory Management Inventory Costs Carrying cost cost of holding an item in inventory Ordering cost cost of replenishing inventory Shortage cost temporary or permanent loss of sales when demand cannot be met Copyright 2006 John Wiley & Sons, Inc.

35 11-35 Inventory Management Total Cost TC= Total annual cost Q= Order quantity in units H or Cc = Holding (carrying )cost per unit D= Annual Demand S or Co = Ordering cost Annual Total cost = carrying + cost Annual ordering cost Q D TC = + 2 Cc Q Co

36 11-36 Inventory Management Cost Minimization Goal Annual Cost The Total-Cost Curve is U-Shaped Ordering Costs Q O (optimal order quantity) Order Quantity (Q)

37 11-37 Inventory Management EOQ Cost Model Deriving Q opt C o D TC = + Q TC Q C o D = + 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 Q = C c Q 2 Q 2 = 2C od C c Q opt = 2C o D C c Copyright 2006 John Wiley & Sons, Inc.

38 11-38 Inventory Management EOQ MODEL EXAMPLE A local distributor for a national tire company expects to sell approximately 9600 steel-belted radial tires of a certain size and tread design next year. Annual carrying cost is $16 per tire, and ordering cost is $75. The distributor operates 288 days a year. D= 9600 H= $ 16 S= $ 75 a) What is the EOQ? Q OPT 2DS H 2(9600)75 16 b) No. Of orders per year=d/q=9600/300=32 = 300 tires

39 11-39 Inventory Management EOQ MODEL EXAMPLE D= $ 9600 H= $ 16 S= $ 75 c) Length of order cycle= Q/D= 300/9600 =1/32 of a year*288 =9 work days. d) Total Cost=Carrying cost+ordering cost =(Q/2)H+(D/Q)S =(300/2)16+(9600/300)75 = =$ 4800

40 11-40 Inventory Management Economic Production Quantity Assumptions Only one item is involved Annual demand is known Usage rate is constant Usage occurs continually Production rate is constant Lead time does not vary No quantity discounts

41 11-41 Inventory Management Inventory level Production Quantity Model (cont.) Q(1-d/p) Maximum inventory level Q 2 (1-d/p) Average inventory level 0 Order receipt period Begin order receipt End order receipt Time Copyright 2006 John Wiley & Sons, Inc.

42 11-42 Inventory Management Economic Run (Batch) Size Q I p TC max min Cycle time Run time 2DS H Carrying Cost Maximum Q Q p p p u u p p inventory Setup Cost Q p p ( p u) I max 2 H D / Q S Qp= Optimum production quantity H= Holding cost per unit D= Annual Demand S= Setup cost P= Production or delivery rate U= Usage rate

43 11-43 Inventory Management Economic Run (Batch) Size Example A toy manufacturer uses rubber wheels per year for its popular dump truck series. The firm makes its own wheels, which it can produce at a rate of 800 per day. The toy trucks are assembled uniformly over the entire year. Carrying cost is $ $1 per wheel a year. Setup cost for a production run of wheels is $45. The firm operates 240 days per year. D= S=$45 H=$1 per year wheels p=800 per day u= wheels per 240 days or 200 wheels per day. a) Optimal run size 2DS p 2(48000) Qp 2400wheels H p u b) Minimum total annual cost I max TC min Q p p ( p I max 2 u) H D Q S ( ) 1800wheels $1800

44 11-44 Inventory Management Economic Run (Batch) Size Example D= S=$45 H=$1 per year p=800 wheels per day u= wheels per 240 days or 200 wheels per day. c) Cycle time Q u p 2400 wheels / 200wheels per day Thus, a run of wheels will be made every 12 days. d) Run time Q p p 2400 wheels /800wheels Thus, each run will require three days to complete. per day 3days

45 11-45 Inventory Management Safety Stocks Safety stock buffer added to on hand inventory during lead time Stockout an inventory shortage Service level probability that the inventory available during lead time will meet demand Copyright 2006 John Wiley & Sons, Inc.