INVENTORY MANAGEMENT

Importance of Inventory Management -- Good inventory management is essential to the successful operation for most organizations because of:

1. The amount of money invested in inventory represents, and2. The impact that inventories have on daily operations of an organization

Definitions:

Inventory – a stock or store of goodsIndependent vs. Dependent demand items

Independent demand items are the finished goods or other end items that are sold to someone

Dependent demand items are typically subassemblies or component parts that will be used in the production of a final or finished product

Our focus: inventory management of finished goods, raw materials, purchased parts, and retail items

Functions of Inventories

1. To meet anticipated demand2. To smooth production requirements3. To decouple components of the production4. To protect against stockouts5. To take advantage of order cycles6. To hedge against price increases, or to take advantage of quantity discounts7. To permit operations (work in process)

Objectives of Inventory Control

1. Maximize level of customer service2. Minimize costs (carrying costs and ordering costs)

Requirements for Effective Inventory Management

(1) A system to keep track of the inventory periodic, perpetual, two-bin, and universal product code (UPC)

(2) A reliable forecast of demand

(3) Knowledge of lead times and lead time variability-lead time time between submitting a purchase order and receiving it-lead time variability reliability of the supplier

(4) Estimates of inventory holding costs, ordering costs, and shortage costsHolding costOrdering costStockout cost

(5) A classification system for inventory itemsABC approach – classifies inventory according to some measure of importance ($ value) where A – very important, C – least important

Formula for EOQ with Non-instantaneous Replenishment

where: D – annual demand S – setup cost

H – Holding (carrying cost) per unit p – production or delivery rate

d – usage rate

C. Quantity Discounts Model

1. Compute the common EOQ

2. Only one of the unit prices will have the EOQ in its feasible range. Identify the range that:

If the feasible EOQ is on the lowest price range, that is the optimal order quantity

If the feasible EOQ is in any other range, compute the total cost for the EOQ and for the price breaks of all lower unit costs. Compare the total costs – EOQ is the one that yields the lowest total cost.

When to Order (reorder points - ROPs) Models

Objective: minimize the risk (probability) of stockouts

4 Determinants of the ROP1. rate of demand2. lead time3. extent of demand and/or lead time variability4. degree of stockout risk acceptable to management

Basic Formula for Computing ROP

A. Constant demand and constant lead time

B. Variability is present in demand during lead time

use this formula if an estimate of expected demand during lead time and its standard deviation are available

use this formula when data on lead time and demand are not readily available

Shortages and Service Levels

The ROP computation does not reveal the expected amount of shortage for a given lead time service level

Information on expected number of shortage per cycle, or per year can be determined using the following:

A. Expected number of units short per cycle, E(n)

B. Expected number of units short per year, E(N)

C. Annual Service Level

Service Level for Single-period Model

Used to handle ordering of perishables(fresh fruits, vegetables, seafood, flowers), and

Items that have a limited useful life(newspaper, magazines)

Analysis focuses on two costs: shortage and excess

Problems:

2 – ABC Inventory Classification3 – Basic EOQ4 – Basic EOQ11– EOQ with Non-instantaneous Delivery13 – EOQ with Discount28 – EOQ, ROP, Shortages33 – EOQ for multiple products

(b) Determine the EOQ for each item.