Chapter 9 Inventory management
Slack et al s model of operations management Direct Design Operations Management Deliver Develop Supply network management Capacity management Inventory management Planning and control Lean synchronisation
Key operations questions In Chapter 9 - Inventory planning and control Slack et. al. identify the following key questions. What is inventory? What are the reasons for holding inventory and what are the disadvantages? How much inventory should an operation hold? When should an operation replenish its inventory? How can inventory be managed?
Inventory is created to compensate for the differences in timing between supply and demand Rate of supply from input process Inventory Rate of demand from output process Input process Output process Inventory
Single-stage and two-stage inventory systems Single-stage inventory system Two-stage inventory system Stock Sales operation Central depot Distribution Local distribution point Sales operation Suppliers e.g. Local retail store Suppliers e.g. Automotive parts distributor
A Multi-stage inventory system Input Stock Stage 1 WIP Stage 2 WIP Stage 3 Finished goods stock Suppliers e.g. Television manufacturer
A paper merchant must get its inventory planning and control right
Inventory profiles chart the variation in inventory level Order quantity = Q Steady and predictable demand (D) Slope = demand rate (D) Inventory level Average inventory = Q 2 Q D Time Instantaneous deliveries at a rate of D Q per period
Two alternative inventory plans with different order quantities (Q) Demand (D) = 1000 items per year Inventory level 400 100 Plan A Q = 400 Plan B Q = 100 Average inventory for plan A = 200 Average inventory for plan B = 50 Time 0.1 yr 0.4 yr
Traditional view of inventory-related costs 400 350 300 250 Total costs Costs 200 150 Holding costs 100 50 Economic order quantity (EOQ) Order costs 50 100 150 200 Order quantity 250 300 350 400
Cycle inventory in a bakery Inventory level Produce A Deliver A Produce B Deliver B Produce C Deliver C Produce A Deliver A Produce B Deliver B Produce C Deliver C Time
Inventory profile for gradual replacement of inventory Order quantity Q Inventory level Slope = P - D M Slope = D Q P Time
Inventory planning allowing for shortages Inventory level Time Shortages
The re-order point Inventory level 400 300 200 100 Demand (D) = 100 items per week Re-order level Re-order point 0 0 1 2 3 4 5 6 7 8 Order lead time Time
Safety stock(s) helps to avoid stock-outs when demand and/or order lead times are uncertain Re-order level (ROL) Inventory level Q S d 1 d 2 Distribution of lead-time usage? t 1 t 2 Time
The probability distributions for order lead time and demand rate combine to give the lead-time usage distribution 0.4 0.4 Probability 0.3 0.2 0.1 Probability 0.3 0.2 0.1 0 1 2 3 4 5 Order lead time 0 110 120 130 140 Demand rate Probability 0.4 0.3 0.2 0.1 0 100-199 120-299 300-399 400-499 500-599 600-699 700-799 Lead-time usage
A periodic review approach to order timing with probabilistic demand and lead time Q m Inventory level Q 1 Q 2 Q 3 T o T 1 T 2 T 3 Time t 1 t 2 t 3 t f t f t f
If the true costs of stock holding are taken into account, and if the cost of ordering (or changeover) is reduced, the economic order quantity ( EOQ) is much smaller Revised total costs Revised holding costs Costs Original total costs Revised EOQ Original EOQ Revised order costs Original holding costs Original order costs Order quantity
The Two bin and Three bin systems of reordering system Two bin system Three bin system Bin 1 Bin 2 Bin 1 Bin 2 Bin 3 Items being used Reorder level + safety inventory Items being used Reorder level inventory Safety inventory
Pareto curve for stocked items 100 Percentage of value of items 90 80 70 60 50 40 30 20 10 Class A items Class B items Class C items 10 20 30 40 50 60 70 80 90 100 Percentage of types of items
Inventory classifications and measures Class A items the 20% or so of highvalue items which account for around 80% of the total stock value Class B items the next 30% or so of medium-value items which account for around 10% of the total stock value Class C items the remaining 50% or so of low-value items which account for around the last 10% of the total stock value