inventory management. inventory is one of the most expensive assets of many companies. it...
TRANSCRIPT
Inventory Management
Inventory is one of the most expensive assets of many companies.
It represents as much as 60% of total invested capital.
Inventory Management
Inventory is any stored resource that is used to satisfy a current or future need.
Raw materials, work-in-process, and finished goods are examples of inventory.
Why do we hold Inventory? Improve customer service Reduce certain costs such as
◦ ordering costs◦ stockout costs◦ acquisition costs
Contribute to the efficient and effective operation of the production system
Why we do not hold Inventory? Certain costs increase such as
◦ Carrying costs, Handling cost◦ Labor Cost◦ Warehouse Cost◦ Logistics Cost◦ cost of return on investment◦ reduced-capacity costs (Storage, warehouse)◦ cost of production problems (Excess Inventory)
Two Fundamental Inventory Decisions
How much to order of each material when orders are placed with either outside suppliers or production departments within organizations
When to place the orders
Independent Demand Inventory Systems
Demand for an item carried in inventory is independent of the demand for any other item in inventory
Finished goods inventory is an example Demands are estimated from forecasts and/or
customer orders
Dependent Demand Inventory Systems
Items whose demand depends on the demands for other items
For example, the demand for raw materials and components can be calculated from the demand for finished goods
The systems used to manage these inventories are different from those used to manage independent demand items
Independent vs. Dependent Demand
Inventory Costs Costs associated with ordering too much
(represented by carrying costs) Costs associated with ordering too little
(represented by ordering costs) These costs are opposing costs, i.e., as one
increases the other decreases
Inventory Costs (continued) The sum of the two costs is the total stocking cost
(TSC) This cost behavior is the basis for answering the
first fundamental question: how much to order It is known as the economic order quantity (EOQ)
Economic Order Quantities (EOQ)
Behavior of EOQ Systems As demand for the inventoried item occurs, the
inventory level drops When the inventory level drops to a critical point,
the order point, the ordering process is triggered The amount ordered each time an order is placed
is fixed or constant When the ordered quantity is received, the
inventory level increases
inventory
cost
Serv
ice level
100%
Reorder point should balancethe risks of stockouts against costs of overstocking
Company needs to balance ordering costs vs inventory carrying costs
Inventory v/s Service levels
Economic Order Quantities Typical assumptions made
◦ annual demand (D), carrying cost (C) and ordering cost (S) can be estimated
◦ average inventory level is the fixed order quantity (Q) divided by 2 which implies no safety stock orders are received all at once demand occurs at a uniform rate no inventory when an order arrives
CDS /2 = EOQ CDS /2 = EOQ
Example of EOQZartex Co. produces fertilizer to sell to wholesalers.
One raw material – calcium nitrate – is purchased from a nearby supplier at $22.50 per ton. Zartex estimates it will need 5,750,000 tons of calcium nitrate next year.
The annual carrying cost for this material is 40% of the acquisition cost, and the ordering cost is $595. a) What is the most economical order quantity?b) How many orders will be placed per year?
Economical Order Quantity (EOQ)
D = 5,750,000 tons/yearC = .40(22.50) = $9.00/ton/yearS = $595/order
EOQ= √2DS/C
EOQ=√2(5750000)(595)/9.00 (27,573.135) tons per order
ABC Classification of Inventory Typical observations
◦ A small percentage of the items (Class A) make up a large percentage of the inventory value
◦ A large percentage of the items (Class C) make up a small percentage of the inventory value
These classifications determine how much attention should be given to controlling the inventory of different items
Copyright 2006 John Wiley & Sons, Inc.18
Class A◦ 5 – 15 % of units◦ 70 – 80 % of value
Class B◦ 30 % of units◦ 15 % of value
Class C◦ 50 – 60 % of units◦ 5 – 10 % of value
ABC Classification
Copyright 2006 John Wiley & Sons, Inc.21
11 $ 60$ 60 909022 350350 404033 3030 13013044 8080 606055 3030 10010066 2020 18018077 1010 17017088 320320 505099 510510 6060
1010 2020 120120
PARTPART UNIT COSTUNIT COST ANNUAL USAGEANNUAL USAGE
Supply Chain Management
Copyright 2006 John Wiley & Sons, Inc.22
Example 10.1Example 10.1
11 $ 60$ 60 909022 350350 404033 3030 13013044 8080 606055 3030 10010066 2020 18018077 1010 17017088 320320 505099 510510 6060
1010 2020 120120
PARTPART UNIT COSTUNIT COST ANNUAL USAGEANNUAL USAGETOTAL % OF TOTAL % OF TOTALPART VALUE VALUE QUANTITY % CUMMULATIVE
9 $30,600 35.9 6.0 6.08 16,000 18.7 5.0 11.02 14,000 16.4 4.0 15.01 5,400 6.3 9.0 24.04 4,800 5.6 6.0 30.03 3,900 4.6 10.0 40.06 3,600 4.2 18.0 58.05 3,000 3.5 13.0 71.0
10 2,400 2.8 12.0 83.07 1,700 2.0 17.0 100.0
$85,400
AA
BB
CC
% OF TOTAL % OF TOTALCLASS ITEMS VALUE QUANTITY
A 9, 8, 2 71.0 15.0B 1, 4, 3 16.5 25.0C 6, 5, 10, 7 12.5 60.0
Supply Chain Management
In ABC classification, items kept in inventory are not of equal importance in terms of:
◦ dollars invested
◦ profit potential
◦ sales or usage volume
◦ stock-out penalties
Dynamics of Inventory Planning Continually review ordering practices and
decisions Modify to fit the firm’s demand and supply
patterns Constraints, such as storage capacity and
available funds, can impact inventory planning Computers and information technology are used
extensively in inventory planning