INVENTORY Systems & Models

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1 INVENTORY Systems & Models OPERATIONS MANAGEMENT Lecture 13 Prepared by: A.H.M Fazle Elahi, Lecturer, Dept. of ME, KUET

2 Elements of an Inventory System: Specification of an Inventory System (Cont d) I. Demand pattern for items held in stock II. The replenishment pattern III. The Operating Constraints IV. The Decision making mechanism concerning inventory replenishment V. The total Inventory cost that reflects system performance

3 Specification of an Inventory System (Cont d) I.Demand: Most Critical & uncontrollable component Without demand there is no necessity of inventory D= Demand rate (amount of stock removed from the inventory per unit time) II. Replenishment: It is the controllable component t=recover cycle time Q=Lot size tp = Replenishment period/production period L= Replenishment lead time P= Replenishment rate

4 Specification of an Inventory System (Cont d) III. Decision Making Mechanisms: (two questions) When inventory must be replenished How much must be ordered IV. Operating Constraints: Limited warehouse space Limited Budget available Replenishment may be limited Difficult to arrive at an optimum feasible inventory policy V. Total Inventory cost: Type of costs: 1. Holding cost: (CH) 2. Procurement cost (CP) 3. Shortage cost (CS) 4. Replenishment cost (CR) 5. Total Cost TC= CH)+(CP)+(CS)+(CR)

5 Inventory Costs Procurement costs: reorder costs (fixed): order processing or production setup Purchasing/manufacturing costs (variable) transportation costs (we assume are included in purchase) Holding costs, including ( CH=IH * ch ) opportunity costs (return of investment for money used) Warehousing costs (space, equipment, personnel ) Shortage costs (Cs=Is * cs) lost sales (if items purchased from competitors) backorder costs (if not easy to replace, delayed sale) Obsolescence costs /Salvage value/replenishment Cost( CR=IR * cr)

6 Effective Inventory Management A system to keep track of inventory A reliable forecast of demand Knowledge of lead times Reasonable estimates of Holding costs Ordering costs Shortage costs A classification system

7 Inventory Systems -- Objective: minimize total inventory cost and maintain satisfied service level. Fundamental Questions: - How much to order? - When to order?

8 Inventory Systems 1. Continuous Review System: (event-triggered) Monitor the inventory level all the time, order a fixed quantity (Q) when the inventory level is below the reorder point(rop) Calculate: Q and ROP 2. Periodic Review System: (time-triggered) Place an order every fixed period T. Each time bring the current inventory to a target level M Calculate: T and M Advantages and Disadvantages?

9 A crucial component and the basic starting point for the management of inventory is customer demand, because it exists for the purpose of meeting the demand of customers. Demand Classification The demand for items in inventory is classified as Dependent and Independent Demand: Dependent demand: derived demand, lumpy (subassemblies and components) Independent demand: from customer side, smooth (end items and finished goods)

10 Inventory Control System An Inventory System is a structure for controlling the level of inventory by determining how much to order (the level of replenishment) and when to order. There are two basic types of inventory systems: a continuous (or fixed order quantity) system and a periodic (or fixed time period) system. The primary difference in the two systems is that in a: Continuous system - an order for the same amount is placed whenever the inventory decreases to a certain level. Periodic system - order is placed for a variable after an established passage of time.

11 Inventory Control System (Cont d) Continuous Inventory System In a continuous inventory system, (alternatively referred to as a perpetual system or a fixed order quantity system) a constant amount is ordered when inventory declines to a predetermined level, referred to as the reorder point. This fixed order quantity is called the economic order quantity The inventory level is closely and continuously monitored so that management always knows the inventory status. However, the cost of maintaining a continual record of the amount of inventory on hand can also be a disadvantage of this type of system.

12 Inventory Control System (Cont d) Periodic Inventory System In a periodic inventory system, (also referred to as a fixed time period system or periodic review system) an order is placed for a variable amount The inventory level is not monitored at all during the time interval between orders. It has the advantage of requiring little or no record keeping It has the disadvantage of less direct control after a fixed passage of time

13 Next Class: Inventory Management System THANK YOU ALL

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