©2006 pearson prentice hall — introduction to operations and supply chain management — bozarth...
TRANSCRIPT
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield
Chapter 13, Slide 1
Types of Inventory
• Transit stock or pipeline inventory
• Cycle stock
• Safety stock (buffer inventory)
• Anticipation inventory
• Others– Smoothing inventories– Hedge inventories
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield
Chapter 13, Slide 2
Four Inventory Drivers
1. Demand and Capacity Mismatches Smoothing inventories
2. Demand and Process Volume Mismatches Cycle stocks
3. Demand and Supply Uncertainties Safety stocks
4. Demand and Process Lead-Time Mismatches Anticipation inventories
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield
Chapter 13, Slide 3
Independent Demand
• Demand from outside the organization
• Unpredictable usually forecasted
Demand for tables . . .
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield
Chapter 13, Slide 4
Dependent Demand
• Tied to the production of another item
• Relevant mostly to manufacturers
Once we decide how many tables we want tomake, how many legs do we need?
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield
Chapter 13, Slide 5
Two “Classic” Systems for Independent Demand Items
• Periodic review systems
• Continuous (perpetual) review systems
– Fixed order quantity (Q)
– Reorder point (R)
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield
Chapter 13, Slide 6
Periodic Review System(Orders at regular intervals)
Inventorylevel
Time2 4 6
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield
Chapter 13, Slide 7
Continuous Review System(Orders when inventory drops to R)
L-T
Q
R
How is the reorder point R established?
Inventorylevel
Timelead time to get a new order in
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield
Chapter 13, Slide 8
Comparison of Periodic and Continuous Review Systems
Periodic Review• Fixed order intervals• Variable order sizes• Convenient to
administer• Orders may be
combined• Inventory position
only required at review
Continuous Review• Varying order intervals• Fixed order sizes (Q)• Allows individual review
frequencies• Possible quantity
discounts• Lower, less-expensive
safety stocks
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield
Chapter 13, Slide 9
Order Quantity Q and Average Inventory Level
As the order quantity doublesso does the average inventory (= Q/2)
Q1
Q2
Q22
Q12
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield
Chapter 13, Slide 10
What is the “Best” Order Size Q?
Determined by:
• Inventory related costs– Order preparation costs and setup costs– Inventory carrying costs– Shortage and customer service costs
• Other considerations– Out of pocket or opportunity cost?– Fixed, variable, or some mix of the two?
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield
Chapter 13, Slide 11
Economic Order Quantity (EOQ) Model
• Cost Minimizing “Q”
• Assumptions:
Uniform and known usage rate
Fixed item cost
Fixed ordering cost
Constant lead time
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield
Chapter 13, Slide 12
What are the Total Relevant Annual Inventory Costs?
Consider:D = Total demand for the yearS = Cost to place a single orderH = Cost to hold one unit in inventory for a yearQ = Order quantity
Then:
Total Cost = Annual Holding Cost + Annual Ordering Cost
= [(Q/2) × H] + [(D/Q) × S]
How do these costs vary as Q varies?Why isn’t item cost for the year included?
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield
Chapter 13, Slide 13
Holding Cost
$
Q
Holding cost increasesas Q increases . . .
(Q/2)×H
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield
Chapter 13, Slide 14
Ordering Costs
$
Q
Ordering costs per yeardecrease as Q increases
(why?)
(Q/2)×H
(D/Q)×S
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield
Chapter 13, Slide 15
Total Annual Costs and EOQ
0
500
1000
1500
2000
10 50 90 130
170
210
250
290
330
370
410
Order Quantity Q
Inve
nto
ry C
ost
($)
Holding Cost Ordering Cost Total Cost
EOQ at minimum total cost
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield
Chapter 13, Slide 16
EOQ Solution
HDS
QEOQ2*
When the order quantity = EOQ, the holding and setup costs are the same
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield
Chapter 13, Slide 17
Sample Problems
• Pam runs a mail-order business for gym equipment. Annual demand for the TricoFlexers is 16,000. The annual holding cost per unit is $2.50 and the cost to place an order is $50. What is the economic order quantity?
• Using the same holding and ordering costs as above, suppose demand for TricoFlexers doubles to 32,000. Does the EOQ also double? Explain what happens.
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield
Chapter 10, Slide 18
EOQ tells us how much to order...
…but when should we order?
Reorder point and safety stock analysis
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield
Chapter 13, Slide 19
Safety Stock
When both lead time and demand are constant, you know exactly when your reorder point is ...
Q
L
R
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield
Chapter 13, Slide 20
Safety Stock II
Under these assumptions:
Reorder point = total demand during the lead time between placement of the order and its receipt.
ROP = d × L, where
d = demand per unit time, and
L = lead time in the same time units
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield
Chapter 13, Slide 21
Safety Stock III(Uncertainties)
But what happens when either demand or lead time varies?
Q
L1
R
L2
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield
Chapter 13, Slide 22
Safety Stock IV
What causesthis variance?
Average demandduring lead time Ld
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield
Chapter 13, Slide 23
Safety Stock V
• Additional inventory beyond amount needed to meet “average” demand during lead time
• Protects against uncertainties in demand or lead time
• Balances the costs of stocking out against the cost of holding extra inventory
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield
Chapter 13, Slide 24
Shown Graphically …
Now, what is thechance of a stockout?
93%
SSLd
7%
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield
Chapter 13, Slide 25
Recalculating the Reorder Point to include Safety Stock
timeleadduringdemandaverage
theabovedeviationsdardtansofnumberz
timeleadofvariance
periodtimeduringdemandofvariance
timeleadaverageL
periodtimeperdemandaveraged
where
dLzLdSSLdROP
L
d
Ld
2
2
222
:
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield
Chapter 13, Slide 26
Determining “z” I
z = number of standard deviations above the average demand during lead time
The higher z is: The lower the risk of stocking out The higher the average inventory level
What is the average inventory level when we include safety stock?
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield
Chapter 13, Slide 27
Determining “z” II
Typical choices for z:
z = 1.29 90% service levelz = 1.65 95% service levelz = 2.33 99% service level
What do we mean by “service level”?
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield
Chapter 13, Slide 28
Reorder Point Formula:
What happens if lead time is constant? What happens if the demand rate is constant? What happens if both are constant? If you wanted to reduce the amount of safety stock
you hold, what is your best option?
222Ld dLzLdROP
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield
Chapter 13, Slide 29
Problems I
One of the products stocked by Sam’s Club is SamsCola. During the slow season, the demand rate is
approximately 650 cases a month, which is the same as a yearly demand rate of 650×12 = 7,800 cases.
During the busy season, the demand rate is approximately 1,300 cases a month, or 15,600 cases a year.
The cost to place an order is $5, and the yearly holding cost for a case of SamsCola is $12.
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield
Chapter 13, Slide 30
Problems II
According to the EOQ formula: How many cases of SamsCola should be
ordered at a time during the slow season? How many cases of SamsCola should be
ordered during the busy season?
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield
Chapter 13, Slide 31
Problems III
During the busy season, the store manager has decided that 98 percent of the time, he does not want to run out of SamsCola before the next order arrives. Use the following data to calculate the reorder point for SamsCola.
• Weekly demand during the busy season: 325 cases per week• Lead-time: 0.5 weeks• Standard deviation of weekly demand: 5.25• Standard deviation of lead-time: 0 (lead-time is
constant)• Number of standard deviations above the
mean needed to provide a 98% service level (z): 2.05
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield
Chapter 13, Slide 32
Volume Discounts I
What effect will volume discounts have on the EOQ?
D = 1,200 units (100×12 months)
K = 12% of unit cost
S = $8.00 ordering cost
Order Size Price
0 - 74 $35.00
75 and up $32.50
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield
Chapter 13, Slide 33
Volume Discounts II
1. Calculate the EOQ for the lowest price:
2. If we can order this quantity AND get the lowest price, we’re done. Otherwise ...
165.7050.32$12.08$12002
EOQ
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield
Chapter 13, Slide 34
Volume Discounts III
3. Calculate EOQ at the next lowest price, and keep repeating until you find an EOQ that is “feasible”:
We could order 68 at $35.00 each
612.6735$12.0
8$12002
EOQ
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield
Chapter 13, Slide 35
Volume Discounts IV
4. Compare total holding, carrying AND item cost for the year at:
Each price break The first feasible EOQ quantity
Do you understand why we must now look at item cost for the year?
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield
Chapter 13, Slide 36
Volume Discounts V
Total costs at an order quantity of 75:
(75/2)×(12%)×$32.50 + (1200/75)×$8.00 + 1200×$32.50 =
$146.25 + $128.00 + $39,000 = ??
Total costs at an order quantity of 68:
(68/2)×(12%)×$35.00 + (1200/68)×$8.00 + 1200×$35.00 =
$142.80 + $141.18 + $42,000 = ??
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield
Chapter 13, Slide 37
Conclusions:
• When all costs are considered, it is cheaper to order 75 at a time and take the price discount.
• When there are volume discounts, the EOQ calculation might be infeasible or might not result in lowest total cost.
• Hence, more detailed analysis is required.
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield
Chapter 13, Slide 38
ABC Classification Method
IDEA
Companies have thousands of items to track
Methods like EOQ only justifiable for most important items.
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield
Chapter 13, Slide 39
ABC Method
1. Determine annual $ usage for each item
2. Rank the items according to their annual $ usage
3. Let:
Top 20% “A” items roughly 80% of total $
Middle 30% “B” items roughly 15% of total $
Bottom “50% “C” item roughly 5% of total $
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield
Chapter 13, Slide 40
ABC Analysis Example
Total $ Usage = $98,500
Item Cost Demand $ Usage
A1 $46 200 $9,200
B2 $40 10 $400
C3 $5 6680 $33,400
D4 $81 100 $8,100
E5 $22 50 $1,100
F6 $6 100 $600
G7 $176 250 $44,000
H8 $6 150 $900
I9 $10 10 $100
J10 $14 50 $700
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield
Chapter 13, Slide 41
Ranking by Annual $ Usage
Item $ UsageCumulative
$ Usage% of Total $
Usage ClassG7 $44,000 $44,000 44.67% A
C3 $33,400 $77,400 78.58% A
A1 $9,200 $86,600 87.92% B
D4 $8,100 $94,700 96.14% B
E5 $1,100 $95,800 97.26% B
H8 $900 $96,700 98.17% C
J10 $700 $97,400 98.88% C
F6 $600 $98,000 99.49% C
B2 $400 $98,400 99.90% C
I9 $100 $98,500 100.00% C