Chapter 12 Inventory Control and Management

Transcription

1 Chapter 12 Inventory Control and Management Learning Outcomes Describe the functions and costs of an inventory system. Determine the order quantity and Economic Order Quantity. Determine the reorder point and safety stock for inventory systems with uncertain demand. Design a continuous or periodic review inventory-control system. Conduct an ABC analysis of inventory items. 1

2 Lecture Outline Elements of Inventory Management Inventory Control Systems Economic Order Quantity Models Order Quantity for a Periodic Inventory System What Is Inventory? Stock of items kept to meet future demand Purpose of inventory management how many units to order when to order 2

3 Inventories provide flexibility for the firm in: Purchasing Production scheduling Efficient servicing of customer demands Types of Inventory Raw materials Purchased parts and supplies Work-in-process (partially completed) products (WIP) Items being transported Tools and equipment 3

4 Role of Inventory in Services Decoupling inventories Seasonal inventories Speculative inventories Cyclical inventories In-transit inventories Safety stocks Objectives of inventory control Protection against fluctuations in demand; Better use of men, machines and material; Protection against fluctuations in output; Control of stock volume; Control of stock distribution. 4

5 Considerations in Inventory Systems Type of customer demand Planning time horizon Replenishment lead time Constraints and relevant costs Relevant Inventory Costs Ordering costs Receiving and inspections costs Holding or carrying costs Shortage costs 5

6 How Much to Order? The optimal quantity to order depends on: Forecast usage Ordering cost Carrying cost Ordering can mean either the purchase or production of the item. When to Order? Issues to consider: Lead Time -- The length of time between the placement of an order for an inventory item and when the item is received in inventory. Order Point -- The quantity to which inventory must fall in order to signal that an order must be placed to replenish an item. Order Point (OP) = Lead time X Daily usage 6

7 Inventory Management Questions What should be the order quantity (Q)? When should an order be placed, called a reorder point (ROP)? How much safety stock (SS) should be maintained? Reorder Point Level of inventory at which a new order is placed R = dl where d = demand rate per period L = lead time 7

8 Reorder Point: Example Demand = 10,000 yards/year Store open 311 days/year Daily demand = 10,000 / 311 = yards/day Lead time = L = 10 days R = dl = (32.154)(10) = yards Inventory Models Economic Order Quantity (EOQ) Special Inventory Models With Quantity Discounts Planned Shortages Demand Uncertainty - Safety Stocks Inventory Control Systems Continuous-Review (Q,r) Periodic-Review (order-up-to) Single Period Inventory Model 8

9 Safety Stocks Safety stock is inventory held at all times regardless of the quantity of inventory ordered using the EOQ model. Safety stock buffer added to on hand inventory during lead time Stock out an inventory shortage Service level probability that the inventory available during lead time will meet demand (other definition of safety stocks is the amount helds in reserve as a cushion against uncertain demand (or usage) and replenishment lead time. Economic-Order-Quantity: Decision Model Assumptions 1. The same quantity is ordered at each reorder point.. 2. Demand, ordering costs, carrying costs, and purchase-order lead time are known with certainty. 3. Purchasing costs per unit are unaffected by the quantity ordered. 4. No stock outs occur. 5. Quality costs are considered only to the extent that these costs affect ordering costs or carrying costs. 6. The EOQ minimizes the relevant ordering costs and carrying costs. 9

10 How Much Safety Stock? Depends on the: Amount of uncertainty in inventory demand Amount of uncertainty in the lead time Cost of running out of inventory Cost of carrying inventory Economic Order Quantity (EOQ) Models EOQ optimal order quantity that will minimize total inventory costs Basic EOQ model Production quantity model 10

11 Assumptions of Basic EOQ Model Demand is known with certainty and is constant over time No shortages are allowed Lead time for the receipt of orders is constant Order quantity is received all at once Determining Order Quantities Lot-for-lot Order exactly what is needed Fixed-order quantity Min-max system Order n periods Specifies the number of units to order whenever an order is placed Places a replenishment order when the onhand inventory falls below the predetermined minimum level. Order quantity is determined by total demand for the item for the next n periods 11

12 Periodic Review Systems Orders are placed at specified, fixed-time intervals (e.g. every Friday), for a order size (Q) to bring on-hand inventory (OH) up to the target inventory (TI), similar to the min-max system. Advantages are: No need for a system to continuously monitor item Items ordered from the same supplier can be reviewed on the same day saving purchase order costs Disadvantages: Replenishment quantities (Q) vary Order quantities may not quality for quantity discounts On the average, inventory levels will be higher than Q systems-more stockroom space needed 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 12

13 Inventory and Supply Chain Management Bullwhip effect (The bullwhip) effect (or whiplash effect) is an observed phenomenon in forecast-driven distribution channels. It refers to a trend of larger and larger swings in inventory in response to changes in demand, as one looks at firms further back in the supply chain for a product.) demand information is distorted (malformed) as it moves away from the end-use customer higher safety stock inventories to are stored to compensate Seasonal or cyclical demand Inventory provides independence from vendors Take advantage of price discounts Inventory provides independence between stages and avoids work stop-pages Bullwhip effect Illustration of the bullwhip effect: The final customer places an order (whip) and order fluctuations build up upstream the supply chain. 13

14 Two Forms of Demand Dependent Demand for items used to produce final products Tires stored at a Goodyear plant are an example of a dependent demand item Independent Demand for items used by external customers Cars, computers, and houses are examples of independent demand inventory 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 high-quality customer service in TQM 14

15 Inventory Costs Carrying cost: cost of holding an item in inventory Ordering cost: cost of refilling inventory Shortage cost: temporary or permanent loss of sales when demand cannot be met Appropriate Level of Inventories Employ a cost-benefit analysis Compare the benefits of economies of production, purchasing, and product marketing against the cost of the additional investment in inventories. ABC Method of Inventory Control 15

16 Classifying Inventory Items ABC Classification (Pareto Principle) A Items: very tight control, complete and accurate records, frequent review B Items: less tightly controlled, good records, regular review C Items: simplest controls possible, minimal records, large inventories, periodic review and reorder ABC Method of Inventory Control ABC method of inventory control Method which controls expensive inventory items more closely than less expensive items. Review A items most frequently Review B and C items less rigorously and/or less frequently. Cumulative Percentage of Inventory Value A B C Cumulative Percentage of Items in Inventory 16

17 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 ABC Classification: Example PART UNIT COST ANNUAL USAGE 1 $

18 ABC Classification: Example (cont.) PART VALUE TOTAL PART % UNIT OF VALUE TOTAL COST % QUANTITY OF ANNUAL TOTAL % CUMMULATIVE USAGE 9 $30, $ , A 2 14, , , B , , , % 10OF TOTAL 13.0 % 170 OF TOTAL CLASS 2,400 ITEMS 2.8 VALUE12.0 QUANTITY C A 1,700 9, 8, $85,400 B 1, 4, C 10 6, 5, 10, Example 10.1 End of Chapters (12) 18