ch.7 inventory management. - iems. inventor management.pdf · inventory levels, or by accumulating...

Part 1 : System Management.

Ch.7 Inventory Management.

Edited by Dr. Seung Hyun Lee (Ph.D., CPL)

IEMS Research Center, E-mail : [email protected]

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■ Functions of Inventory. [Other Resource]

Functions of Inventory. ￭ Uncertainty. ․ Uncertainty can take two forms, variation in quantity and variation in timing.

․ Quantity uncertainty can be caused by back ordering by the supplier, defects received for the supplier, or industry standard variable quantities. The usual method for dealing with quantity uncertainty is to use safety stock.

․ For timing uncertainty, the most appropriate tool is safety leadtime. Safety leadtime involves looking at the supplier's variation in leadtime and ordering far enough in advance to reduce the risk of late delivery.

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Functions of Inventory. ￭ Decoupling. ․ Decoupling is the use of inventory to isolate one internal process from another. By putting inventory between two processes, each process is unaffected by the performance of the other process.

￭ Anticipation. ․ Anticipated inventories are created for a special purpose, such as seasonality, special promotions, anticipated of shortages, anticipated of strikes, political instabilities, end-of-life runs, or anticipated price increases.

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Functions of Inventory. ￭ Economies of Scale. ․ Economies of scale inventories are created by ordering or producing in quantities to obtain the lowest unit cost.

￭ Transportation. ․ Transportation inventories, also called pipeline inventories, are the inventories that are in transit between supplier and purchaser.

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■ Inventory Classification. [Other Resource]

Inventory Classification. ￭ Raw Materials. ․ Raw materials are input goods intended for combination and/or conversion through the manufacturing process into semi-finished or finished goods.

￭ In-process Goods or Work-In-Process(WIP) ․ These are goods in the process of being manufactured and are only partially completed.

￭ Finished Goods. ․ These represents the completed conversion of raw materials and components into the final product.

￭ Maintenance, Repair, and Operating Supplies (MRO). ․ These inventories include parts, supplies, and materials used in or consumed by routine maintenance and repair of operating equipment.

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■ Inventory Replenishment System. [Other Resource]

Order Point System. ￭ Economic Order Quantity (EOQ). ․ EOQ is the order quantity where the time period cost of ordering equals the time period cost of holding that inventory, thereby minimizing the sum of the total of these two costs.

․ EOQ = 2ASH

(where, A = Annual demand, S = Cost to place an order.

H = Cost to hold one unit of the item)

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Order Point System. ￭ Determining Order Point. ․ The greater the stability in usage or item demand, the easier it is to plan order timing. If an item has a wide variation in usage quantities, it is much more difficult to determine when the item's demand may create an out-of-stock situation.

․ Calculating Order point : ROP = DDLT + SS.

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Order Point System. ￭ Safety Stock Determination. ․ Safety stock is intended to protect against uncertainty in supply and demand.

․ Safety stock Calculation.

1. SS = Sigma( σ) × safety factor (if LTI = FI)

2. SS = Sigma( σ) × LTIFI

× safety factor (if LTI ≠ FI)

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Periodic Review Systems. ￭ Fixed Time Systems. ․ Time-based systems are designed so that each inventoried item is reviewed and reorders are placed after a predetermined time interval.

․ Orders are placed for each item equal to the difference between current inventory level and a predetermined maximum.

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■ Just In Time Philosophy. [Other Resource]

Just-In-Time (JIT). ￭ JIT Concepts. ․ JIT is an operations management philosophy of continuous improvement whose dual objectives are to reduce waste and reduce cycle time.

․ Waste is anything that does not add value for the customer. In general, reducing the various forms of waste will result in a reduction of inventories that are held to deal with the cause of the waste.

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Just-In-Time (JIT). ￭ JIT Concepts and Waste ․ Overproduction. Purchasing can reduce inventories by developing contract with regular releases to the supplier to eliminate receiving large orders. ․ Waiting. Reducing order processing time shorten leadtime, thus reducing the required inventory levels.

․ Transportation. Using local suppliers reduces the transit time for delivery.

․ Processing. Through standardization it can reduce the number of part numbers, thereby reducing inventories.

․ Quality. Using early supplier involvement, supplier evaluation, supplier development, and certification, purchasing can improve the quality of goods coming into the organization, reducing the uncertainty of supply and lowering inventories.

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Just-In-Time (JIT). ￭ Kanban Production. ․ A popular type of inventory control system is the use of 'Kanbans.' Loosely translated, kanban means "card" and is used to authorize the replacement of material as it is consumed.

․ The inventory level is controlled by setting the number of kanbans to be used in a process.

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■ ABC Classification. [Other Resource]

ABC Classification. ￭ ABC Concept. ․ Pareto's Rule is applied to inventory management as a rule-of-thumb. Essentially, it says that about 80 % of the dollar value of an inventory will be contained in about 20% of the items.

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■ VMI and VOI. [Other Resource]

Supplier Managed System. ￭ Supplier Managed Inventory System ․ When business volumes is sufficient large, suppliers may operate an organization's supply or inventory storage facility using supplier personnel, under contract with the using organization.

․ Vendor Managed Inventory (VMI). VMI are inventories the supplier delivers to the work area or store and replenishes on a regular basis.

․ Consignment. Consignment inventories are inventories that are owned by the supplier.

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■ Inventory Performance System. [Other Resource]

Inventory Performance. ￭ Inventory Turnover Rate. ․ A convenient measure of how effectively inventories are being used is the inventory turns ratios.

Inventory Turnover = Annual cost of goods soldAverage inventory in dollars

￭ Service Level. ․ Service level can be measured in a number of ways.

․ Order periods without a stockout, units supplied on time, operating days without a stockout, expediting expense, and number of production stoppage.

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■ Materials Management System. [Other Resource]

Material Requirement Planning (MRP). ￭ Material Requirement Planning. ․ MRP is a system of determining the quantity and timing of various materials and components required to produce a specified quantity of a finished product over a given period of time.

․ MRP Inputs : MPS, Bill of Materials, and Inventory Record.

․ Order Quantity ․ On-hand Balance․ Safety Stock ․ Allocated Qty ․ Lead-Time․ Low Level Code

: 50 units: 10: 0 : 0: 1 weeks: 0

Periods

1 2 3 4 5

A

Gross Requirements 25 0 15 20 30Scheduled Receipts 50Projected Available 10 35 35 20 0 20Net Requirements 30Planned Order Receipt 50Planned Order Release 50

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■ Materials Management System. [Other Resource]

Distribution Requirement Planning (DRP). ￭ Distribution Requirement Planning. ․ DRP optimizes planning for product distribution by determining time phased net requirements for distribution points.

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■ Inventory Cost. [Other Resource]

Inventory Cost. ￭ Inventory Carrying Cost. ․ Finance Costs. Finance costs recognize that capital is required to finance the inventory.

․ Ownership Costs. Ownership costs are those associated with having material on hand. The two main components of ownership are insurance and taxes.

․ Overhead Costs. Overhead costs are costs associated with space, handling, and control.

․ Risk Costs. Risk costs are costs associated with having material on hand for a period of time. Examples include obsolescence, theft, damage, and shrinkage.

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■ Inventory Cost. [Other Resource]

Inventory Cost. ￭ Ordering Costs. ․ Ordering costs are the costs incurred to place an order with an external supplier. Ordering costs are incurred in the process of identifying suppliers and placing replenishment orders.

․ When the order is to be produced internally, the term "setup cost" is used in place of order cost. Setup costs may include direct setup labor, setup scrap, lost productivity and tooling costs.

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■ Inventory Control. [Other Resource]

Inventory Control. ￭ Perpetual vs. Periodic. ․ A periodic system is so named because inventory level records are updated on a periodic basis. Inventory level records are maintained by periodically checking inventory levels, or by accumulating transaction documents and regularly posting then on a card file or into a computerized system.

․ Perpetual inventory systems are current because they are updated after each receiving or withdrawal transaction is posted to a card file, or entered into an on-line computer system.

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■ Inventory Control.[Other Resource]

Inventory Control. ￭ Cycle Counting. ․ Cycle counting is a physical counting process performed to verify inventory levels and to audit the accuracy of inventory records.

․ It refers to routinely counting quantities on hand of inventories items. Differences between inventory records and actual physical counts must then be accounted for and the records must be adjusted, with respect to both value and quantity.

․ Cycle counting schemes typically are used after inventories are classified according to ABC analysis, or some other system designed to focus management policy.

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■ Performance Check.

1. Which of the following seeks to transfer inventory responsibility to suppliers ? A. FIFO B. Ship to WIP. C. Stockless buying D. Stores management systems.

2. All of the following are inventory control systems EXCEPT A. Order point. B. JIT C. TQM D. Cyclical.

3. For which of the following is the two bin inventory control system LEAST appropriate ? A. Low value items. B. High-value production materials. C. MRO supplies. D. Items with a short leadtime.

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4. In most organizations, safety stock is used to prevent stockouts when A. Materials is used sooner than expected. B. Leadtimes are met. C. Material arrives as scheduled. D. Inflation is increasing.

5. In ABC analysis, "C" item usually account for what percentage of the total dollar volume ? A. 5 - 10% B. 30 - 40% C. 50 - 60% D.70 - 80%

6. Which of the following is NOT require to run an MRP systems ? A. Bill of materials. B. Sales forecast. C. Purchase price history. D. Current on-hand and on-order status.

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7. Which of the following would be considered a risk cost of inventory ? A. Insurance. B. Handling. C. Taxes. D. Obsolescence.

8. The key to improving inventory performance is based on A. Managing the supplier base. B. Improving the organization's processes. C. Minimizing theft and demage. D. Maintaining sufficient safety stock.

9. Which of the following is LEAST likely to be the result of poor receiving and storeroom operations ? A. Under ordering. B. Excess inventory. C. Increased price. D. Rush orders.

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10. All of the following action are peformed in a properly operating cycle counting system EXCEPT. A. Selecting different items to be counted each day. B. Selecting FIFO or LIFO for pricing items. C. Counting items to resolve discrepancies. D. Taking action to reduce or eliminate causes of errors.

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Solutions

1 2 3 4 5 6 7 8 9 10C C B A A C D B C B

ch.7 inventory management. - iems. inventor management.pdf · inventory levels, or by accumulating...

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