INVENTORY MANAGEMENT: Principles, Concepts and Techniques

INVENTORY MANAGEMENT: Principles, Concepts and Techniques

Materials Management I Logistics Series Eugene L. Magad, Series Editor Previously vublished by Chavman & Hall Total Materials Management: Achieving Maximum Profits through Materials! Logistics Operations, 2nd Edition by Eugene L. Magad and John M. Amos International Logistics by Donald Wood, Anthony Barone, Paul Murphy & Daniel Wardlow Global Purchasing: Reaching for the World by Victor Pooler Practical Handbook of Warehousing, 3rd Edition by Kenneth B. Ackerman Handbook of Customer Service Operations by Warren Blanding Transportation Logistics Dictionary by Joseph L. Cavinato Lift Truck Fleet Management and Operator Training by Bud Cohan Bulk Materials Handbook by Jacob Fruchtbaum Practical Handbook of Industrial Traffic Management, 7th Edition by Leon W. Morse MRPII by John W. Toomey Distribution: Planning and Control by David F. Ross Automatic Indentification by T.H. Allegri, P.E. Competing Through Supply Chain Management: Creating Market-Winning Strategies through Supply Chain Partnerships by David F. Ross

INVENTORY MANAGEMENT: Principles, Concepts and Techniques by John W. Toomey l1li... " Springer Science+Business Media, LLC

Library of Congress Cataloging-in-Publication Toomey, John W., 1932- Inventory management: principles, concepts and techniques / by John W. Toomey. p. cm. -- (Materials management/logistics series) Includes bibliographical references and index. ISBN 978-1-4613-6961-5 ISBN 978-1-4615-4363-3 (ebook) DOI 10.1007/978-1-4615-4363-3 1. Inventory control. 1. Title. ll. Series. TS160.T662000 658.7'87--dc21 00-025875 Copyright 2000 by Springer Science+Business Media New York Originally published by Kluwer Academic Publishers, New York in 1998 Softcover reprint ofthe hardcover Ist edition 1998 Ali rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher, Springer Science+Business Media, LLC. Printed an acid-free paper.

CONTENTS PREFACE / ix 1. OVERVIEW / 1 Inventory Management Defined / Inventory Functions / 3 Inventory Goals / 4 Functional Classifications / 5 Independent and Dependent Demand / 7 Inventory Systems / 8 Case Study / 9 2. COST CONCEPTS / 13 Cost Accounting / 13 Variance Analysis / 14 Activity-Based Costing / 15 LIFO and FIFO / 17 Inventory Valuation / 19 Inventory-Profit Relationship / 21 Accounting-Based Decisions / 22 Case Study / 23 3. FORECASTING / 29 Forecast Reasoning / 29 Principles of Forecasting / 29 Demand Patterns / 30 Forecasting Methods / 31 System Design / 32 Forecasting Techniques / 33 Error Measurement / 38 Tracking Signal / 40 Demand Filter / 41 Case Study / 41

VI 4. INVENTORY RELIABILITY / 45 Service Levels / 45 Cause and Effect / 46 Safety Stock and Safety Lead Time / 47 Safety Stock Calculation / 48 Cost OfSafety Stock / 51 Cycle Counting / 52 Case Study / 55 5. ORDER QUANTITIES / 61 Lot Size Considerations / 61 The Economic Lot Size / 64 Fixed Order Quantities / 66 Fixed Period Quantities / 67 Lot-For-Lot Quantities / 67 Economic Order Quantity Variations / 68 Noninstantaneous Receipt Lot Sizes / 70 Case Study / 72 6. REPLENISHING INDEPENDENT DEMAND / 77 Independent Demand Defined / 77 The Reorder Point / 78 Time-Phased Order Points / 79 Periodic Review Systems / 80 Visual Review Systems / 82 Replenishment Variations / 83 Joint Replenishment Systems / 86 Case Study / 87 7. REPLENISIDNG DEPENDENT DEMAND / 91 Dependent Demand Characteristics / 91 The Bill ofmaterial / 93 Material Requirements Planning (MRP) Logic / 95 Input To MRP / 97 MRP Output / 99 Regeneration and Net Change MRP / 101 Manufacturing Resource Planning (MRP II) / 101 Case Study / 102

vii 8. MASTER PRODUCTION SCHEDULING / 107 Master Scheduling / 107 MPS Calculations / 108 Utilizing Planning Bills / 110 Managing the MPS / 113 Capacity Planning / 114 Case Study / 117 9. DISTRIBUTION MANAGEMENT / 123 Distribution Networks / 123 Costs ofdistribution / 125 Site Location Planning / 126 Modes oftransportation / 127 Distribution Center Control / 128 Freight Control / 130 Case Study / 131 10. DISTRIBUTION RESOURCE PLANNING / 135 Reorder Point Pull Systems / 135 Centralized DRP System / 136 DRP Use ofmrp Logic / 138 Integrating DRP with MRP / 141 Managing the DRP System / 142 Case Study / 145 11. PURCHASING MANAGEMENT / 151 The Role OfPurchasing / 151 Purchasing Quantities / 153 Extension ofthe Manufacturing Function / 155 Supplier Relationships / 156 Performance Measurements / 159 Case Study / 160 12. MANUFACTURING MANAGEMENT / 165 Job Shop Manufacturing / 165 Process Manufacturing / 167 Repetitive Manufacturing / 171 System Requirements / 174 Case Study / 176

viii 13. SUPPLY CHAIN MANAGEMENT / 181 The Supply Chain / 181 Supply Chain Goals / 183 Required Capacities / 186 Supply Chain Control Systems / 187 Performance Measurements / 189 Case Study / 190 14. INVENTORY MANAGEMENT ORGANIZATION / 195 Basic Functions / 195 Materials Management Organization / 199 Centralized and Decentralized Management / 202 Case Study / 204 GLOSSARY / 209 INDEX / 223

PREFACE While teaching the APICS Certification Review Course for Inventory Management, I am reminded of the changes in the field since I took the exam over twenty years ago. At that time emphasis was placed on lot sizing, safety stocks, forecasting methods, and ordering techniques. Material requirements planning was in its early days and the dependent demand time-phased logic was covered to a greater degree in the MRP module. The present day review course, published in 1994, devotes about one-third of its contents to distribution, manufacturing environments, and Just-in-Time; factors not considered an important part of inventory management in the 1970's. These changes reflect today's business goals calling for efficient lean operations across the entire supply chain from raw material to the final customer. The goal of this book will be to explain the dynamics of inventory management's principles, concepts, and techniques as they relate t) the entire supply chain (customer demand, distribution, and product transformation processes). The interrelationships of all functions will be defined. The book concentrates on understanding the many ramifications of inventory management. In today's competitive business environment, inventory management has proven to be most critical. This book is directed to inventory management practitioners to assist them in better understanding the body of knowledge required to operate in today's competitive environment. It is also directed to those in related fields of the business world. Almost all functions such as sales, engineering, and accounting have an impact and are impacted by inventory management. The book will assist in the training of four year and community college students as well as APICS CPIM (Certified in Production and Inventory Management) candidates. As such it will not only be a textbook but also a desk reference for those employees responsible for controlling inventories, and thereby assist in reducing cost, improving customer service, and maximizing capacity. The book is organized to first overview the basics of inventory management (Chapter I). Cost concepts which both drive and measure inventory management decisions are explained in Chapter 2. The basics of independent demand control are covered with Forecasting (Chapter 3), Inventory Reliability (Chapter 4), Order Quantities (Chapter 5), and Replenishing Independent Demand (Chapter 6). Systems controlling dependent demand are explained in Replenishing Dependent Demand (Chapter 7) and Master Production Scheduling (Chapter 8). Distribution Management and Distribution Resource Planning are detailed in Chapters 9 and 10. The activity or execution functions of inventory management

x (Purchasing and Manufacturing) are spelled out in Chapters 11 and 12. Supply Chain Management is outlined in Chapter 13. Chapter 14 defines the many interrelationships of all the related functions. Each chapterconcludes with a case study and suggested solution. The case studies tell the story of a growing company, Smith Industries, and the related inventory management problems it had to address. The problems addressed relate to the subject matter of the chapter. I would like to acknowledge the encouragement received from Eugene Magad of Harper College and Gary Folven and Carolyn Ford of Kluwer Academic Publishers. After two books I have learned that it can be a long road to completion. I want to also give special thanks to those who were ofso much assistance in their technical reviews of the subject matter. They are Brian Carroll of Engineering Systems Associates, Roger Dykstra of Manufacturing Management Associates, Robert (Pat) O'Donnell of Hearth & Home, and Tom Setlik of Tempel Steel Company. The reviewers have been invaluable in their suggestions and corrections. Finally, I would like to give special thanks to Joan Toomey, proof reader extraordinaire. John W. Toomey