chapter 12 inventory management 8th ed 2011kleong.faculty.unlv.edu/scm352powerpoint_files/chapter 12...

© 2011 Pearson Education, Inc. publishing as Prentice Hall

12 Inventory Management

SCM 352


Outline

• Global Company Profile: AMAZON.COM• Types of Inventory• Inventory Management

– ABC Analysis– Cycle Counting

• Ten Ways to Reduce Inventory• Inventory Models

– Independent versus Dependent Demand– Holding, Ordering, and Setup Costs– EOQ model


AMAZON.com

• Jeff Bezos, in 1995, started AMAZON.com as a “virtual” retailer – no inventory, no warehouses, no overhead; just computers taking orders to be filled by others

• Growth forced AMAZON.com to become a world leader in warehousing and inventory management


Amazon.com

• Each order is assigned by computer to the closest distribution center that has the product(s)

• A “flow meister” at each distribution center assigns work crews

• Lights indicate products that are to be picked and the light is reset

• Items are placed in crates on a conveyor. Bar code scanners scan each item 15 times to virtually eliminate errors.


Amazon.com

• Crates arrive at central point where items are boxed and labeled with new bar code

• Gift wrapping is done by hand at 30 packages per hour

• Completed boxes are packed, taped, weighed and labeled before leaving warehouse in a truck

• Order arrives at customer within a week


Inventory Management

• The objective of inventory management is to strike a balance between inventory investment and customer service

• Inventory is one of the most expensive assets of many companies representing as much as 50% of total invested capital


• Stock of materials• Raw Materials, Work-In-

Progress, Finished Goods, Maintenance/Repair/Operating supplies

• Stored capacity• Examples

© 1995 Corel Corp.© 1984-1994 T/Maker Co.© 1984-1994 T/Maker Co.

© 1995 Corel Corp.

What is Inventory?


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 & not the many trivial ones

• Basis is usually annual $ volume– $ volume = Annual demand x Unit cost


A items

B itemsC items

Class % $ Vol % ItemsA 80 20B 15 30C 5 50

Classifying Items as ABC

2000 by Prentice Hall, Inc., Upper Saddle River, NJ 07458

0

% Annual $ Usage

020406080

100

50 100% of Inventory Items


Cycle Counting

• Items are counted and records updated on a periodic basis

• Often used with ABC analysis to determine cycle

• Has several advantages– Eliminates shutdowns and interruptions– Eliminates annual inventory adjustment– Trained personnel audit inventory accuracy– Allows causes of errors to be identified and

corrected in a timely manner– Maintains accurate inventory records


• Independent demand - demand for item is independent of demand for any other item in inventory– EOQ

• Dependent demand - demand for item is dependent upon the demand for some other item in inventory– MRP

Independent vs Dependent Demand


• Holding costs - associated with holding or “carrying” inventory over time

• Ordering costs - associated with costs of placing order and receiving goods

• Setup costs - cost to prepare a machine or process for manufacturing an order

Inventory Costs


Holding Costs

Category

Cost (and range) as a Percent of Inventory Value

Housing costs (building rent or depreciation, operating costs, taxes, insurance)

6% (3 - 10%)

Material handling costs (equipment lease or depreciation, power, operating cost)

3% (1 - 3.5%)

Labor cost 3% (3 - 5%)Investment costs (borrowing costs, taxes, and insurance on inventory)

11% (6 - 24%)

Pilferage, space, and obsolescence 3% (2 - 5%)

Overall carrying cost 26%

Table 12.1


Ten Ways to Reduce Inventory

• Classify inventory into ABC categories• Reduce lead time• Reduce order quantity/production lot size• Improve forecasting• Eliminate obsolete stock• Centralize inventory• Reduce number of SKUs• Reduce variation – match supply and demand• Vendor managed inventory (VMI)• Align performance metrics


EOQ Assumptions

• Demand is known, constant, and independent• Lead time is known and constant• Receipt of inventory is instantaneous and

complete• Quantity discounts are not possible• Only variable costs are setup and holding• Stockouts can be completely avoided


Figure 12.3

Order quantity = Q (maximum inventory

level)

Usage rate Average inventory on hand

Q2

Inventory Usage Over TimeIn

vent

ory

leve

l

Time

Minimum inventory 0

ROP

Lead time


Objective is to minimize total costs

Table 11.5

Ann

ual c

ost

Order quantity

Curve for total cost of holding

and setup

Holding cost curve

Setup (or order) cost curve

Minimum total cost

Optimal order

quantity

Minimizing Costs


Q = Number of pieces per orderQ* = Optimal number of pieces per order (EOQ)D = Annual demand in units for the inventory itemS = Setup or ordering cost for each orderH = Holding or carrying cost per unit per year

Annual setup cost = (Number of orders placed per year) x (Setup or order cost per order)

Annual demandNumber of units in each order

Setup or order cost per order=

Annual setup cost = SDQ

= (S)DQ

The EOQ Model



Annual holding cost = (Average inventory level) x (Holding cost per unit per year)

Order quantity2= (Holding cost per unit per year)

= (H)Q2

The EOQ Model Annual setup cost = SDQ

Annual holding cost = HQ2



Optimal order quantity is found when annual setup cost equals annual holding cost

Annual setup cost = SDQ

Annual holding cost = HQ2

DQ

S = HQ2

Solving for Q* 2DS = Q2HQ2 = 2DS/HQ* = 2DS/H

The EOQ Model


Determine optimal number of needles to orderD = 1,000 unitsS = $10 per orderH = $0.50 per unit per year

Q* = 2DSH

Q* = 2(1,000)(10)0.50

= 40,000 = 200 units

An EOQ Example


Determine number of ordersD = 1,000 units Q* = 200 unitsS = $10 per orderH = $0.50 per unit per year

= N = =Expected number of

orders

DemandOrder quantity

DQ*

N = = 5 orders per year 1,000200

An EOQ Example


Determine expected time between orderD = 1,000 units Q* = 200 unitsS = $10 per order N = 5 orders per yearH = $.50 per unit per year 250 working days/year

= T =Expected

time between orders

Number of working days per year

N

T = = 50 days between orders2505

An EOQ Example


Determine total costD = 1,000 units Q* = 200 unitsS = $10 per order N = 5 orders per yearH = $.50 per unit per year T = 50 days

Total annual cost = Setup cost + Holding cost

TC = S + HDQ

Q2

TC = ($10) + ($.50)1,000200

2002

TC = (5)($10) + (100)($.50) = $50 + $50 = $100

An EOQ Example


Determine the reorder pointD = 1,000 units Q* = 200 unitsS = $10 per order N = 5 orders per yearH = $.50 per unit per year T = 50 days1 year = 50 weeks or 250 working days

Reorder Point (ROP) = Demand during lead time

An EOQ Example

Reorder Point (ROP) = 20 x 2 = 40 units

Lead time = 2 weeks

Demand = 1000/50 per week = 20 units per week


Suppose demand is 4 times what was forecasted.What is the optimal order quantity?D = 1,000 units Q1* = 200 unitsS = $10 per orderH = $.50 per unit per year

4,000 units

An EOQ Example

Q2* =2DS

H

Q2* =2(4,000)(10)

0.50 = 160,000 = 400 units

Q2* = 2Q1*

Thank You

Questions? ?

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