Chapter1-Introduction to Inventory

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BJTM3033: INVENTORY MANAGEMENT


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Kamaruddin Radzuan

Room:

4035, Block C, STML Building Tel:

04-9287138

Email:[email protected]


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Grades

Contributions to overall grade:

5% Attendance

10% Presentation 20% Quizzes (2)

10% Assignment(1)

15% Final Project (1) 40% Final Exam


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Copyright 2005 TheMcGraw-Hill Companies. All

rights reserved.

McGraw-Hill/Irwin 144

Definition of Inventory

Inventory

The stock of any item or resource used in an

organization, includes raw materials, finished

goods, and work-in-process.


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rights reserved.


Types of Inventory

Raw MaterialsVendor-supplied items that have not had

any labor added by the firm receiving theitems.

Finished GoodsCompleted products that are still in the

possession of the firm that manufacturedthem.

Work-in-Process (WIP)Items that have been partially processed

but are still incomplete.


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rights reserved.


Managerial Issues

Inventory is no longer viewed as an asset

Product life cycles are becoming shorter

increasing the likelihood of productobsolescence.

Inventory concealing other problems.

The high costs of inventory storage.


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Transparency Masters to

accompany Heizer/RenderPrinciples of Operations

Management, 5e, and

2004 by Prentice Hall, Inc., Upper SaddleRiver, N.J. 07458

12-7

The Functions of Inventory

To decouple or separate various parts of

the production process

To provide a stock of goods that will providea selection for customers

To take advantage of quantity discounts

To hedge against inflation and upward pricechanges


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rights reserved.


Reason for Maintaining Inventory

To protect against uncertainty:

Shortages of raw materials.

Work-in-process variations.

Changes in demand for finished products.

To support a strategic plan

As a cyclic demand buffer for a level-output strategy.

To take advantage of economies of scale

Large quantity purchases reduce the average total unitcosts related to fixed ordering, setup costs, andtransportation costs.


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accompany Heizer/Render

Principles of Operations

Management, 5e, and


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The Material Flow Cycle


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Management, 5e, and


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1 Run time: Job is at machine and being worked on2 Setup time: Job is at the work station, and the work station is

being "setup."

3 Queue time: Job is where it should be, but is not being processedbecause other work precedes it.

4 Move time: The time a job spends in transit

5 Wait time: When one process is finished, but the job is waitingto be moved to the next work area.

6 Other: "Just-in-case" inventory.

The Material Flow Cycle

Other Wait

Time

Move

Time

Queue

Time

Setup

Time

Run

TimeInput

Cycle Time

Output


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Management, 5e, and


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Divides on-hand inventory into 3 classes A class, B class, C class

Basis is usually annual $ volume $ volume = Annual demand x Unit cost

Policies based on ABC analysis Develop class A suppliers more Give tighter physical control of A items

Forecast A items more carefully

ABC Analysis

What is ABC Analysis ?Inventory aplication of what is known as the Pareto Principle.

Pareto principle states Critical few and trivial many

The objective is to separate the important from the unimportant


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Transparency Masters to accompany

Heizer/Render Principles of OperationsManagement, 5e, and Operations

Management, 7e

2004 by Prentice Hall, Inc., Upper Saddle River,N.J. 0745812-12

% of Inventory Items

Classifying Items as ABC

0

20

40

60

80

100

0 50 100

% Annual $ Usage

A

BC

Class % $ Vol % Items

A 80 15

B 15 30

C 5 55


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Management, 5e, and


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Inventory Classifications

Inventory

Processstage

DemandType

Number& Value

Other

Raw Material

WIPFinished

Goods

IndependentDependent

A Items

B ItemsC Items

MaintenanceOperating

1984-1994

T/Maker Co.


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Management, 5e, and


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Physically counting a sample of total

inventory on a regular basis

Used often with ABC classification A items counted most often (e.g., daily)

Cycle Counting


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Management, 5e, and


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Advantages of Cycle Counting

Eliminates shutdown and interruption ofproduction necessary for annual physicalinventories

Eliminates annual inventory adjustments Provides trained personnel to audit the

accuracy of inventory

Allows the cause of errors to be identified

and remedial action to be taken Maintains accurate inventory records


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Periodic vs. Continous Inv. System

A method of inventory valuation for

financial reporting purposes where a

physical count of the inventory is

performed at specific intervals.

This accounting method forinventory valuation only keeps track

of the inventory at the beginning of a

period, the purchases made and the

sales during the same period and is

recorded under the asset section of

the balance sheet.

A Method where information on

inventory quantity and availability is

updated on a continuous basis as a

function of doing business.

Generally this is accomplished byconnecting the inventory system with

order entry and in retail the point of

sale system.

In this case, book inventory would be

exactly the same as, or almost the

same, as the real inventory.

PERIODIC CONTINOUS


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Management, 5e, and


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Higher costs Item cost (if purchased)

Ordering (or setup) cost

Costs of forms, clerks wages etc. Holding (or carrying) cost

Building lease, insurance, taxes etc.

Difficult to control

Hides production problems

Disadvantages of Inventory


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Part No Unit Usage Unit Cost $ Annual $ Usage

1 1100 2 22002 600 40 24000

3 100 4 400

4 1300 1 1300

5 100 60 60006 10 25 250

7 100 2 200

8 1500 2 3000

9 200 2 400

10 500 1 500

Total 5510 38250


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Part No Annual $ Cumulative Cumulative % $ Class

Usage $ Usage Usage


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Part No Annual $ Cumulative Cumulative % $ Class

Usage $ Usage Usage

2 24,000 24,000 62.75 A

5 6,000 30,000 78.43 A

8 3,000 33,000 86.27 B

1 2,200 35,200 92.03 B

4 1,300 36,500 95.42 B10 500 37,000 96.73 C

9 400 37,400 97.78 C

3 400 37,800 98.82 C

6 250 38,050 99.48 C

7 200 38,250 100.00 C

Chapter1-Introduction to Inventory

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