inventory ppt
TRANSCRIPT
Inventory Inventory
Operations Management 2 Lally School of Management and Technology
Inventory - I Items from last class What is inventory Inventory Video Inventory Cost Structure Basic Ideas for Managing Independent
Demand InventoryEconomic Order Quantity Exercise
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Inventory DefinitionInventory Definition
A stock of items held to meet future demand
Question: Goods vs Services?
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Types of Inventory
Inputs• Raw Materials• Purchased parts• Maintenance and
Repair Materials
Outputs• Finished Goods• Scrap and Waste
Process
In Process• Partially Completed
Products and Subassemblies
(in warehouses, or “in transit”)
(often on the factory floor)
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Types of Inventory
Work inprocess
Work inprocess
Work inprocess
Finishedgoods
RawMaterials
Vendors Customer
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Water Tank Analogy for Inventory
Supply RateInventory Level
Demand Rate
Inventory Level
Buffers Demand Rate from Supply Rate
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Independent and Dependent Demand Independent and Dependent Demand InventoryInventory
Independent demand– items demanded by external customers
(Kitchen Tables) Dependent demand
– items used to produce final products (table top, legs, hardware, paint, etc.)
– Demand determined once we know the type and number of final products
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Independent and Dependent Demand Independent and Dependent Demand Inventory ManagementInventory Management
Independent demand– Uncertain / forecasted– Continuous Review / Periodic Review
Dependent demand– “Requirements” / planned– Materials Requirements Planning / Just in
Time
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Reasons To Hold InventoryReasons To Hold Inventory
Meet variations in customer demand:Meet unexpected demandSmooth seasonal or cyclical demand
Pricing related:Temporary price discountsHedge against price increasesTake advantage of quantity discounts
Process & supply surprisesInternal – upsets in parts of or our own processesExternal – delays in incoming goods
Transit
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Reasons To Reasons To NOTNOT Hold Inventory Hold Inventory Carrying cost
Financially calculable Takes up valuable factory space
Especially for in-process inventory Inventory covers up “problems” …
That are best exposed and solved
Driver for increasing inventory turns (finished goods) and lean production/Just in time for work in process
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Inventory Hides Problems
Poor Quality
UnreliableSupplier
MachineBreakdownInefficient
Layout
BadDesign
LengthySetups
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To Expose Problems:Reduce Inventory Levels
Poor Quality
UnreliableSupplier
MachineBreakdownInefficient
Layout
BadDesign
LengthySetups
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Remove Sources of Problems and Repeat the Process
Poor Quality
UnreliableSupplier
MachineBreakdownInefficient
Layout
BadDesign
LengthySetups
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VideoVideo
Inventory concepts that occur in the textbook supply chain
Watch for:Difference between independent and
dependent demand inventory
“How much and when” to order
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Inventory Cost Structures Ordering (or setup) cost Carrying (or holding) cost:
Cost of capitalCost of storageCost of obsolescence, deterioration, and loss
Stock out cost Item costs, shipping costs and other cost
subject to volume discounts
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Typical Inventory Carrying CostsTypical Inventory Carrying Costs
Housing cost:Building rent or depreciationBuilding operating costTaxes on buildingInsurance
Material handling costs:Equipment, lease, or depreciationPowerEquipment operating cost
Manpower cost from extra handling and supervision
Investment costs:Borrowing costsTaxes on inventoryInsurance on inventory
Pilferage, scrap, and obsolescence
Overall carrying cost
6% (3% - 10%)
3% (1% - 4%)
3% (3% - 5%)
10% (6% - 24%)
5% (2% - 10%) (15% - 50%)
Costs as % of Inventory Value
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Inventory Management SystemsInventory Management Systems
Functions of Inventory Management– Track inventory – How much to order– When to order
Prioritization Inventory Management Approach
– EOQ– Continuous / Periodic
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ABC Prioritization
Based on “Pareto” concept (80/20 rule) and total usage in dollars of each item.
Classification of items as A, B, or C often based on $ volume.
Purpose: set priorities for management attention.
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ABC Prioritization ‘A’ items: 20% of SKUs, 80% of dollars ‘B’ items: 30 % of SKUs, 15% of dollars ‘C’ items: 50 % of SKUs, 5% of dollars Three classes is arbitrary; could be any
number. Percents are approximate. Danger: dollar use may not reflect
importance of any given SKU!
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ABC Analysis Example
1010 2020 3030 4040 5050 6060 7070 8080 9090 100100
Percentage of itemsPercentage of items
Per
cen
tag
e o
f d
oll
ar v
alu
eP
erce
nta
ge
of
do
llar
val
ue
100 100 —
90 90 —
80 80 —
70 70 —
60 60 —
50 50 —
40 40 —
30 30 —
20 20 —
10 10 —
0 0 —
+Class C
Class A
+Class B
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Annual Usage of Items by Dollar Value
ItemAnnual Usage in
Units Unit Cost Dollar Usage
Percentage of Total Dollar
Usage1 5,000 1.50$ 7,500$ 2.9%2 1,500 8.00 12,000 4.7%3 10,000 10.50 105,000 41.2%4 6,000 2.00 12,000 4.7%5 7,500 0.50 3,750 1.5%6 6,000 13.60 81,600 32.0%7 5,000 0.75 3,750 1.5%8 4,500 1.25 5,625 2.2%9 7,000 2.50 17,500 6.9%10 3,000 2.00 6,000 2.4%
Total 254,725$ 100.0%
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ABC Chart For Previous Slide
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
3 6 9 2 4 1 10 8 5 7
Item No.
Pe
rce
nt
Usa
ge
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
Cu
mu
lati
ve %
Usa
ge
Percentage of Total Dollar Usage Cumulative Percentage
A B C
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Inventory Management Approaches A-items
– Track carefully (e.g. continuous review)– Sophisticated forecasting to assure
correct levels C-items
– Track less frequently (e.g. periodic review)
– Accept risks of too much or too little (depending on the item)
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Economic Order Quantity (EOQ)Model
Demand rate D is constant, recurring, and known Amount in inventory is known at all times Ordering (setup) cost S per order is fixed Lead time L is constant and known. Unit cost C is constant (no quantity discounts) Annual carrying cost is i time the average $ value of
the inventory No stockouts allowed. Material is ordered or produced in a lot or batch and
the lot is received all at once
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EOQ Lot Size Choice
There is a trade-off between lot size and inventory level.Frequent orders (small lot size): higher
ordering cost and lower holding cost.
Fewer orders (large lot size): lower ordering cost and higher holding cost.
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EOQ Inventory Order CycleEOQ Inventory Order Cycle
Demand rate
0 TimeLead time
Lead time
Order Placed
Order Placed
Order Received
Order Received
Inve
nto
ry
Lev
el
Reorder point, R
Order qty, Q
As Q increases, average inventory level increases, but number of orders placed decreases
ave = Q/2
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Total Cost of Inventory – EOQ Model
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Answer to Inventory Management Answer to Inventory Management Questions for EOQ ModelQuestions for EOQ Model
Keeping track of inventoryImplied that we track continuously
How much to order?Solve for when the derivative of total cost with respect
to Q = 0: -SD/Q^2 + iC/2 = 0Q = sqrt ( 2SD/iC)
When to order?Order when inventory falls to the “Reorder Point-level” R
so we will just sell the last item as the new order comes in:
R = DL
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Re-order Point ExampleRe-order Point Example
Demand = 10,000 yds/year
Lead time = L = 10 days
When inventory falls to R, we order so as not to run out before the new order comes in.
R = ?
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Re-order Point ExampleRe-order Point Example
Demand = 10,000 yds/year
Daily demand = 10,000 / 365 = 27.4 yds/day
Lead time = L = 10 days
R = D*L = (27.4)(10) = 274 yds
(usually can neglect issues of working days vs weekends, etc.)
Don’t forget to convert to consistent time units!
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EOQ SummaryEOQ Summary
How much to order?Q = sqrt(2DS/iC)
When to order?R = DL
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EOQ ExerciseEOQ Exercise Now you do it See Excel Spreadsheet:
Excel_Inv_Examples.xls, EOQ tab Compute the values of R and Q and
compare to the simulation Next see what happens when you have
volume discounts (EOQ w Discount Tab)
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EOQ ExampleEOQ ExampleUnit Cost C $0.45 /unitHolding cost factor i 25% /yearOrdering cost S $15.00 /orderDemand rate D 10000 units/yearLead time L 0.0192 year
Solutions:Re-order point R units (rounded)Q = sqrt(2SD/(iC)) units (rounded)