Principles of Inventory and Materials Management

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1 Principles of Inventory and Materials Management Second Edition Richard J. Tersine The University of Oklahoma m North Holland New York Amsterdam Oxford TECHNISCHE HOCHSCHULE DARMSTADT Fochbereich 1 Gesamthiblio-thek B e t r i e b s w i r i s c h a i t s I e h i e Invsniar-Nr. : Absteil-Nr. : Sactigebiete:

2 Contents Preface xi Overview of the Book 1 Chapter 1 Introduction 3 Inventory 5 Types of Inventory 6 Organizational Categories and Inventory Problems 7 Functions of Inventory 9 Inventory Problem Classifications 10 Properties of Inventory 13 Inventory Costs 16 Conflicting Goals 17 The Inventory Flow Cycle 20 Financial Considerations 22 Business Cycle Influence 24 Conclusion 25 Questions 26 Cases 27 Chapter 2 Forecasting and Market Analysis 31 The Forecasting Function 33 Time Series Analysis 35 Last.period demand 38 Arithmetic average 38 Moving average 39 Regression analysis 40 Exponentially weighted moving average (EWMA) 45 EWMA with trend correction 50 EWMA with seasonal correction 51 EWMA with trend and seasonal corrections 53 EWMA overview 55 Box-Jenkins models 59

3 vi Contents Soliciting Opinions 60 Economic Indicators 61 Econometric Models ' 65 Conclusion 66 Questions 67 Problems 68 Cases 70 Selected Bibliography 75 Chapter 3 Fixed Order Size Systems: Deterministic Models 77 Economic Order Quantity (EOQ) Single Items 79 Economic Order Quantity (EOQ) Multiple Items 82 Backordering 83 Quantity Discounts 86 Special Sale Prices 89 Known Price Increases 92 EOQ Sensitivity 95 Economic Production Quantity (EPQ) Single Items 100 Backordering 104 Economic Production Quantity (EPQ) Multiple Items 105 Make or Buy Decisions 108 Conclusion 109 Questions 110 Problems 111 Cases 115 Appendix A: Determination of Single Variable Maximum and Minimum Points 120 Appendix B: EOQ Quantity Discount Approximation 121 Appendix C: Derivation of EOQ with Backordering 123 Chapter 4 Fixed Order Size Systems: Probabilistic Models 125 Safety Stock 126 Statistical Considerations 131 Normal distribution 133 Poisson distribution 134 Negative exponential distribution 134 Known Stockout Costs 135 Constant demand and constant lead time 135 Variable demand and constant lead time 135 Constant demand and variable lead time 147 Variable demand and variable lead time 148 Service Levels 149 Service per order cycle 151

4 Contents vii Service per year Fraction of units demanded Fraction of operating days Imputed service level stockout costs Conclusion Questions Problems Cases Appendix A: Chi-Square Goodness-of-Fit Test Poisson distribution example Normal distribution example Appendix B: Order Quantity and Reorder Point Dependence Backorder case: stockout cost per unit Lost sales case: stockout cost per unit Summary Appendix C: Probability Distribution Convolutions Appendix D: Joint Probability Distributions Chapter 5 Fixed Order Interval Systems Deterministic Models Economic order interval (EOI) single items Economic order interval (EOI) multiple items Quantity discounts on individual items Quantity discounts on joint orders EOI sensitivity Probabilistic Models Known stockout costs Service levels Imputed service level stockout costs Conclusion Questions Problems Cases Chapter 6 Inventory System Changes and Limitations Inventory System Redesign Releasing Working Capital Inventory System Constraints Working capital restrictions Storage space restrictions Working capital and storage space restrictions Overview of constraints Questions Problems Cases

5 viii Contents Appendix A: Optimizing Constrained Functions 259 One equality constraint 259 More than one equality constraint 260 One inequality constraint 260 More than one inequality constraint 261 Tests for convexity 261 Chapter 7 Single Order Quantities 262 Known Demand, Known Lead Time 265 Known Demand, Variable Lead Time 265 Variable Demand, Known Lead Time 266 Marginal analysis 269 Cost analysis 271 Variable Demand, Variable Lead Time 274 Conclusion 275 Questions 275 Problems 276 Cases 279 Chapter 8 Material Requirements Planning (MRP) 286 MRP Inputs 289 MRP Outputs 291 Product Structures 292 Modular bills of materials 295 Low level coding 297 MRP Computations 298 An EOQ-MRP Comparison 311 MRP Types 323 MRP Overview 323 Capacity Planning and Control 325 Conclusion 329 Questions 330 Problems 331 Cases 336 Selected Bibliography 339 Appendix A: MRP Lot Sizing 340 (f Lot-for-lot ordering 341 Wagner-Whitin algorithm 341 Silver-Meal heuristic algorithms 341 Silver-Meal heuristic I 342 Silver-Meal heuristic II 344 Part-period algorithm 346 GrofFs marginal cost algorithm 351 Conclusion 354

6 Contents ix Chapter 9 In-Process Inventory 355 Lead Time 358 Time- Cycle Charts 360 Input/Output Control 362 Critical Ratio Technique 366 Conclusion 367 Questions 368 Problems 369 Cases 370 Chapter 10 Inventory Valuation 374 Flow of Costs 376 FIFO 377 LIFO 379 Average cost 381 Specific cost 383 Inventory Records 385 Periodic count method 387 Cycle count method 389 Inventory Security 391 Questions 391 Problems 392 Cases 394 Chapter 11 Simulation 400 Simulation Categories 402 Monte Carlo Simulation 403 Perpetual Inventory Simulation Problem 406 Periodic Inventory Simulation Problem 410 Simulation of Joint Probability Distributions 412 Length of Simulation Run 415 Conclusion 417 Questions 417 Problems 418 Cases 421 Chapter 12 Inventory Control Systems 427 Types of Control Systems 429 Perpetual inventory system 429 Two-bin inventory system 431 Periodic inventory system 432 Optional replenishment inventory system 434 Material requirements planning inventory system 435 Overview of inventory systems 435

7 x Contents Selective Inventory Control 438 Inventory System Development 442 Excess Materials 445 Inventory System Improvement 447 Aggregate Inventory Measurement 450 Conclusion 451 Questions 452 Problems 453 Cases 454 Bibliography 461 Index 467

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