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Chapter 11 – Inventory Management

Chapter 11 – Inventory Management. Definition, objectives, historical evolution, EOQ, service levels, models. What Is Inventory?. Material owned for use in product or as operating supply Has value (usually) Need for product or to support production Other?. Inventory Types - 1.

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Chapter 11 – Inventory Management

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  1. Chapter 11 – Inventory Management Definition, objectives, historical evolution, EOQ, service levels, models SJSU Bus 140 - David Bentley

  2. What Is Inventory? • Material owned for use in product or as operating supply • Has value (usually) • Need for product or to support production • Other? SJSU Bus 140 - David Bentley

  3. Inventory Types - 1 • Raw Material (RM) – purchased • “true” raw material • Component parts • Work-in-process (WIP) – manufactured in-house • Assemblies • Sub-assemblies • Fabricated parts SJSU Bus 140 - David Bentley

  4. Inventory Types - 2 • Finished Goods (FGI) • Completed products • Raw Materials in Process (RIP) • Found in lean operations (JIT) environments • Combines RM and WIP • Operating supplies • Goods in transit SJSU Bus 140 - David Bentley

  5. Major Objectives • Never have a stockout • Customer dissatisfaction • Production disruption • Never carry excess inventory • Inventory is an asset but it is not free • In other words – walk a tightrope! SJSU Bus 140 - David Bentley

  6. Carrying costs Obvious Capital Holding* Semi-obvious Obsolescence Inventory management Hidden Idle stock Scrap and rework * Next slide Ordering costs People Purchasing staff Receiving Inspection Order transmission Purchasing supplies Occupancy Purchasing Receiving Inventory Related Costs SJSU Bus 140 - David Bentley

  7. Holding costs – Stock Related • Personnel • Equipment • Occupancy (rent and utilities) • Interest • Insurance • Taxes • Security • Shrinkage and damage SJSU Bus 140 - David Bentley

  8. Historical Evolution of I/C - 1 • Record keeping • Answer 2 questions • When to order • How much to order • When? • Sawtooth diagram & ROP (see next slide) • ROP = d X LT SJSU Bus 140 - David Bentley

  9. Profile of Inventory Level Over Time Q Usage rate Quantity on hand Reorder point Time Place order Place order Receive order Receive order Receive order Lead time Sawtooth diagram & ROP SJSU Bus 140 - Source: Stevenson

  10. ROP Limitations • Assumes demand is known and linear • Relies on instantaneous replenishment when inventory reaches zero • Assumes lead time is known and constant • Has no relationship to future usage • Treats each item independently • Encourages safety stock SJSU Bus 140 - David Bentley

  11. Historical Evolution of I/C - 2 • How Much? • Cost of inventory & EOQ • Balance carrying (holding) and ordering costs • EOQ = square root of 2DS/IC • Variations • Multiple delivery (manufacturing: EMQ or EPQ) • Quantity discounts SJSU Bus 140 - David Bentley

  12. EOQ Limitations • Assumes ordering costs are accurately known • Assumes carrying costs are accurately known • Results in always carrying a certain amount of inventory • Focuses on mechanics, not basics • No emphasis on changing costs SJSU Bus 140 - David Bentley

  13. Additional ordering models • Fixed-order interval • Frequency is set • Quantity varies with each order • Single-period model • One-time order • Perishables, refurbishing contracts • Alternative: ABC approach (Pareto!) • Based on dollar usage over a fixed period • Order “A” often, “C” rarely, “B” in between SJSU Bus 140 - David Bentley

  14. High A Annual $ volume of items B C Low Few Many Number of Items ABC Classification System • Classifying inventory according to some measure of importance and allocating control efforts accordingly. • A-very important • B- mod. important • C- least important SJSU Bus 140 - Source: Stevenson

  15. Inventory Counting Systems • Periodic • Full physical (“wall-to-wall”) • Two bin • Bulk and shelf • Stockroom minimum (SRM) • Perpetual • Transaction recording and balance maintenance • Historical evolution • Cycle counting (using ABC) SJSU Bus 140 - David Bentley

  16. Inventory Metrics • Inventory Turnover • T = CGS AI • Expected Annual Shortages • E(N) = E(n) x D Q • Service Level • SLANNUAL = 1 - (E(N)/D) SJSU Bus 140 - David Bentley

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