session 21 - inventory control - students

7/28/2019 Session 21 - Inventory Control - Students

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Session 21

InventoryControl


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What do you think?How much inventory do businesses keep? Where

do they keep it?

DELL McDonalds Amazon TCS IKEA Wal-Mart ICI


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InventoryInventory: Stock of any item/ resource used in an

organization

Inventory System: Policies/ controls to monitorlevels of inventory

Types: RM, WIP, Parts & Supplies, FGPurpose of inventory analysis:

When to order How much to order Ensuring efficient levels of inventory (inventory cost

min.)


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Why do companies need

inventory?To maintain independence of operationsTo meet variation in product demand

To allow flexibility in production schedulingTo provide safeguard for variation in RM delivery

time

To take advantage of economies of scale


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Role of Cycle Inventory Lot/ Batch size The quantity that a SC stage either produces or purchases at a

time

Cycle inventory Average inventory in a supply chain due to either production or

purchases in lots sizes larger than those demanded by thecustomer

Kept to take advantage of economies of scale and reduce cost Q = lot or batch size of an order and D = demand per unit time

When demand is steady, Cycle Inventory = Lot Size 2 Avg Flow Time = Avg inventory Avg flow rate = Cycle Inventory

Demand


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Examples Jean MartStable demand D = 100 pairs of jeans per day

Store Manager purchases in lots of 1,000 Q = 1,000 pairs

Cycle Inventory = 1,000 2 = 500 Cycle inventory is proportional to the lot size Larger Lot Size = Higher Cycle Inventory = Longer lag b/

w production and sale

Average flow time = 1,000 2(100) = 5 days Jeans spend 5 more days in the SC

Lower cycle inventory = lower Working Capitalrequirements


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Economies of ScaleHow do you choose: Shopping at a convenience store near your home,

or at

Metro, Thokar Niaz Baig?Fixed costs are lower over smaller distance,

hence convenient for small quantities

For larger quantities, higher fixed cost are splitper unit

Example of buying 5 large bottles of coke versus 50large bottles

Shopping for multiple products


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Lot Sizing for a Single Product

(EOQ)How do you choose: Shopping at a convenience store near your home,

or at

Metro, Thokar Niaz Baig?Fixed costs are lower over smaller distance,

hence convenient for small quantities

For larger quantities, higher fixed cost are splitper unit

Example of buying 5 large bottles of coke versus 50large bottles

Shopping for multiple products


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Lot Sizing for a Single Product

(EOQ) Total Cost

Ordering Cost

Material Cost

Holding Cost

Example: Deskpro at Best Buy Demand, D = 1,000 units per month

or 12,000 per year

Fixed Order Cost per lot, S = $4,000 Unit Cost per computer, C = $500 Holding Cost, h = 20% of unit cost Economic Order Quantity, EOQ?

=, S = Fixed Cost incurred per order, C =Cost per unit, h = Holding cost per year as a fraction of unit cost

=Number of orders per year =/

=(/ )=/2

=(/2 ), =+(/ )+(/ )

, = 2/, =/ =/

2


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Aggregating Multiple Products -

Single order Transportation is a significant fixed cost per order Combine different products from the same supplier Single delivery coming from multiple suppliers Allows a reduction in lot size for individual products Example: 4 computer products - Deskpro, Litepro, Medpro,

Heavpro

Assume demand for each is 1,000 units per month Ordering separately, Q* = 980 units each, cycle inventory = 4(Q/

2) = 1960 units Aggregate orders of all four products:

Combined, Q* = 1,960 units &for each, Q* = 1,960 4 = 490 Total cycle inventory = 1,960 2 = 980 units & for each reduced to

490 2 = 245

Average flow time, inventory holding costs will be reduced


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Bulk DiscountsWeighing the value propositionDiscounts vs. stock holding cost

Price trendsDemand trends

session 21 - inventory control - students

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