By: ATEEKH UR REHMAN 12-1

Transcription

1 12 Inventory Management By: ATEEKH UR REHMAN 12-1

2 Inventory Management The objective of inventory management is to strike a balance between inventory investment and customer service 12-2

3 Importance of 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 12-3

4 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 Maintenance/repair/operating (MRO) Necessary to keep machinery and processes productive Finished goods Completed product awaiting shipment 12-4

5 The Material Flow Cycle Cycle time 95% 5% Input Wait for Wait to Move Wait in queue Setup Run Output inspection be moved time for operator time time Figure

6 Managing Inventory 1. How inventory items can be classified 2. How accurate inventory records can be maintained 12-6

7 ABC Analysis Divides inventory into three classes based on annual dollar volume Class A - high annual dollar volume Class B - medium annual dollar volume Class C - low annual dollar volume Used to establish policies that focus on the few critical parts and not the many trivial ones 12-7

8 Percentage of dollar value ABC Analysis Class A Class B Class C Percentage of SKUs 12-8

9 Example Categorize the following SKUs as A, B, and C classes SKU # Dollar Value Annual Usage Annual $ Usage SKU # Annual $ Usage % of Total $ Value % of # SKUs Class 1 $0.01 1,200 $12 4 $44, % 12.5% A 2 $ ,000 $3,600 7 $21, % 25.0% A 3 $ $45 5 $4, % 37.5% B 4 $ ,000 5 $ $ $ ,000 8 $ $44,000 $4,050 $315 $21,000 $300 2 $3,600 6 $315 8 $300 3 $45 1 $ % 99.5% 99.9% 100.0% 100.0% 50.0% 62.5% 75.0% 87.5% 100.0% B C C C C Total $73,

10 Independent Versus 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 12-10

11 Holding, Ordering, and Setup Costs Holding costs - the costs of holding or carrying inventory over time Ordering costs - the costs of placing an order and receiving goods Setup costs - cost to prepare a machine or process for manufacturing an order 12-11

12 Inventory Models for Independent Demand Need to determine when and how much to order 1. Basic economic order quantity 2. Production order quantity 3. Quantity discount model 12-12

13 Basic EOQ Model Important assumptions 1. Demand is known, constant, and independent 2. Lead time is known and constant 3. Receipt of inventory is instantaneous and complete 4. Quantity discounts are not possible 5. Only variable costs are setup and holding 6. Stockouts can be completely avoided 12-13

14 Inventory level Inventory Usage Over Time Order quantity = Q (maximum inventory level) Usage rate Average inventory on hand Q 2 Minimum inventory 0 Time Figure

15 Annual cost Minimizing Costs Objective is to minimize total costs Minimum total cost Total cost of holding and setup (order) Holding cost Setup (or order) cost Optimal order quantity (Q*) Order quantity 12-15

16 The EOQ Model Annual setup cost = Q = Number of pieces per order Q* = Optimal number of pieces per order (EOQ) D = Annual demand in units for the inventory item S = Setup or ordering cost for each order H = Holding or carrying cost per unit per year D Q S Annual setup cost = (Number of orders placed per year) x (Setup or order cost per order) = Annual demand Number of units in each order Setup or order cost per order = (S) D Q 12-16

17 The EOQ Model Annual setup cost = Annual holding cost = Q = Number of pieces per order Q* = Optimal number of pieces per order (EOQ) D = Annual demand in units for the inventory item S = Setup or ordering cost for each order H = Holding or carrying cost per unit per year D S Q Q H 2 Annual holding cost = (Average inventory level) x (Holding cost per unit per year) Order quantity = (Holding cost per unit per year) 2 = Q (H)

18 The EOQ Model Annual setup cost = Annual holding cost = Q = Number of pieces per order Q* = Optimal number of pieces per order (EOQ) D = Annual demand in units for the inventory item S = Setup or ordering cost for each order H = Holding or carrying cost per unit per year D S Q Q H 2 Optimal order quantity is found when annual setup cost equals annual holding cost Solving for Q* D Q S = Q 2 H 2DS = Q 2 H Q 2 = 2DS/H Q* = 2DS/H 12-18

19 Example Suppose that you are reviewing the inventory policies on an $80 item stocked at a hardware store. The current policy is to replenish inventory by ordering in lots of 360 units. Additional information is: D = 60 units per week, or 3,120 units per year S = $30 per order H = 25% of selling price, or $20 per unit per year What is the EOQ? SOLUTION 2DS EOQ = = H 2(3,120)(30) 20 = 97 units 12-19

20 Example What is the total annual cost of the current policy (Q = 360), and how does it compare with the cost with using the EOQ? Current Policy Q = 360 units C = (360/2)(20) + (3,120/360)(30) C = 3, C = $3,860 EOQ Policy Q = 97 units C = (97/2)(20) + (3,120/97)(30) C = C = $1,

21 Example What is the time between orders (T) for the current policy and the EOQ policy, expressed in weeks? SOLUTION T 360 = 360 3,120 (52 weeks per year) = 6 weeks T EOQ = 97 3,120 (52 weeks per year) = 1.6 weeks 12-21

22 Reorder Points EOQ answers the how much question The reorder point (ROP) tells when to order ROP = Demand per day = d x L Lead time for a new order in days d = D Number of working days in a year 12-22

23 Inventory level (units) Reorder Point Curve Q* Resupply takes place as order arrives Slope = units/day = d ROP (units) Lead time = L Time (days) 12-23

24 Reorder Point Example Demand = 8,000 ipods per year 250 working day year Lead time for orders is 3 working days d = D Number of working days in a year = 8,000/250 = 32 units ROP = d x L = 32 units per day x 3 days = 96 units 12-24