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Transcript of chpt13 Inventory handout - csuohio.educis.csuohio.edu/~ichen/ch13.pdf · • Physical count of...
13-1 Inventory Management
CHAPTER13
Inventory Management
Homework problems # 3,4,8, 14,15,17, 24,26,36,37 on pp. 589-595.
13-2 Inventory Management
Inventory• Inventory• Astockorstoreofgoods
• Independentdemanditems• Itemsthatarereadytobesoldorused
13-3 Inventory Management
Independent vs. Dependent DemandIndependentDemand
lWhenitem’sdemandisinfluencedbymarketconditionsandisnotrelatedto(i.e.,is“independent”of)productiondecisionforanyotheritem.
l Wholesaleandretailmerchandise(finishedgoods),serviceindustryinventory,end-itemandreplacement-partinventories,spare-parts,MRO(maintenance,repair,andoperating)supplies.
l Demandmustbeforecasted.
DependentDemandlWhenitem’sdemandderivesfrom(i.e.,“depend”on)theproductiondecisionsforitsparents.
lAllintermediateandpurchaseditemsinmanufacturing.lDemandmustbederived.
13-4 Inventory Management
Independent Demand
A
B(4) C(2)
D(2) E(1) D(3) F(2)
Dependent Demand
Inventory: a stock or store of goods
13-5 Inventory Management
Types of Inventories
• Rawmaterialsandpurchasedparts• Work-in-process• Finishedgoodsinventoriesormerchandise• Maintenanceandrepairs(MRO)inventory,toolsandsupplies
• Goods-in-transittowarehousesorcustomers(pipelineinventory)e.g.,DeLL
13-6 Inventory Management
Functions of Inventory• Inventoriesserveanumberoffunctionssuchas:
1. Tomeetanticipatedcustomerdemand2. Tosmoothproductionrequirements3. Todecoupleoperations4. Toprotectagainststockouts5. Totakeadvantageofordercycles6. Tohedgeagainstpriceincreases7. Topermitoperations8. Totakeadvantageofquantitydiscounts
13-7 Inventory Management
Inventory Management• Managementhastwobasicfunctionsconcerninginventory:1. Establishasystemfortracking itemsininventory2. Makedecisionsabout
• Howmuchtoorder?• Whentoorder?
13-8 Inventory Management
• Asystemtokeeptrackofinventory• Areliableforecastofdemand• Knowledgeofleadtimes• Reasonableestimatesof
• Holdingcosts• Orderingcosts• Shortagecosts
• Aclassificationsystem
Effective Inventory Management
13-9 Inventory Management
InventoryTracking/Reviewing/CountingSystems
• PeriodicSystem• Physicalcountofitemsininventorymadeatperiodicintervals
• Perpetual(continuous)InventorySystem• Systemthatkeepstrackofremovalsfrominventorycontinuously,thusmonitoringcurrentlevelsofeachitem• Two-binsystem
• Twocontainersofinventory;reorderwhenthefirstisempty
13-10 Inventory Management
Demand Forecast and Lead Time• Forecasts
• Inventoriesarenecessarytosatisfycustomerdemands,soitisimportanttohaveareliableestimatesoftheamount andtiming ofdemand
• Leadtime• Timeintervalbetweenorderingandreceivingtheorder
• Point-of-sale(POS)systems• Asystemthatelectronicallyrecordsactualsales• Suchdemandinformationisveryusefulforenhancingforecastingandinventorymanagement
13-11 Inventory Management
ABC Classification System
Annual$valueofitems
AB
C
High
LowFew Many
VolumeofItems
• A-B-Capproach• Classifyinginventoryaccordingtosomemeasureofimportance,andallocatingcontroleffortsaccordingly
• Aitems(veryimportant)
• 10to20percentofthenumberofitemsininventoryandabout60to70percentoftheannualdollarvalue
• Bitems(moderatelyimportant)
• Citems(leastimportant)• 50to60percentofthenumberofitemsininventorybutonlyabout10to15percentoftheannualdollarvalue
13-12 Inventory Management
Cycle Counting• Cyclecounting
• Aphysicalcountofitemsininventory• Cyclecountingmanagement
• Howmuchaccuracyisneeded?• Aitems:± 0.2percent• Bitems:± 1percent• Citems:± 5percent
• Whenshouldcyclecountingbeperformed?• Whoshoulddoit?
13-13 Inventory Management
• Economicorderquantitymodel
• Economicproductionmodel
•Quantitydiscountmodel
How Much to Order: EOQ Models
Skip
13-14 Inventory Management
Basic EOQ Model• ThebasicEOQmodelisusedtofindafixedorderquantitythatwillminimizetotalannualinventorycosts
• Assumptions• Onlyoneproductisinvolved(atatime)• Annualdemandrequirementsareknown• Demandiseventhroughouttheyear• Leadtimedoesnotvary• Eachorderisreceivedinasingledelivery(nopartialdelivery)• Therearenoquantitydiscounts
13-15 Inventory Management
Key Inventory Terms• Leadtime:timeintervalbetweenorderingandreceivingtheorder
• Holding(carrying)costs:costtocarryanitemininventoryforalengthoftime,usuallyayear
• Orderingcosts:costsoforderingandreceivinginventory
• Shortagecosts:costswhendemandexceedssupply
13-16 Inventory Management
Profile of Inventory Level Over Time
Quantityon hand
Q
Receive order
Placeorder
Receiveorder
Placeorder
Receiveorder
Lead time
Reorderpoint
Usagerate
Time
The Inventory Cycle
WhenorderquantityisQ ,howmuchisaverageinventory?
13-17 Inventory Management
Large vs. Small orders13-18 Inventory Management
Total CostAnnualcarryingcost
Annualorderingcost
Total cost = +
Q2 H
DQ STC = +
13-19 Inventory Management
Cost Minimization Goal
OrderQuantity(Q)
TheTotal-CostCurveisU-Shaped
OrderingCosts
QO
Ann
ual C
ost
(optimal order quantity)
Howtofindtheoptimalorderquantity?
HQ2
SQD
13-20 Inventory Management
Deriving the EOQ
Usingcalculus,wetakethederivativeofthetotalcostfunctionandsetthederivative(slope)equaltozeroandsolveforQ.
Cost Holding AnnualCost) Setupor der Demand)(Or 2(Annual =
H2DS = QOPT
13-21 Inventory Management
Minimum Total Cost
Thetotalcostcurvereachesitsminimumwherethecarryingandorderingcostsareequal.
13-22 Inventory Management
EOQ Sensitivity• Whathappenstooptimalorderquantity(andcycleinventory)ifthedemandrateincrease?
• Whathappenstolotsizesifsetup/orderingcostsdecrease?
• Whathappensifinterestratesdrop?• HowcriticalareerrorsinestimatingD,H,andS?
• Conclusion:EOQisrobust,insensitivetoparameterestimationerrors!
13-23 Inventory Management
EOQ Sensitivity13-24 Inventory Management
• Productiondoneinbatchesorlots• Capacitytoproduceapartexceedsthepart’susageordemandrate
• AssumptionsofEPQaresimilartoEOQexceptordersarereceivedincrementallyduringproduction
Economic Production Quantity (EPQ)
13-25 Inventory Management
EOQ with Quantity Discounts• Objectives:
• Considertradeoffsbetweendiscountbenefitsandincreasesinholdingcosts
• Theintroductionofquantitydiscountswillcausetheoptimumorderquantitytobeunchangedorgreater.
• TypesofDiscounts:• All-units:• Increment:
13-26 Inventory Management
Total Costs with Quantity Discounts
Annualcarryingcost
PurchasingcostTC = +
Q2 H
DQSTC = +
+Annualorderingcost
PD+
13-27 Inventory Management
Total Costs with constant PD
constant
13-28 Inventory Management
Total Costs with Variable PD
13-29 Inventory Management
EOQ with Quantity Discounts• Two-StepProcedure
• Step1.Beginningwith lowestprice,calculatetheEOQforeachpriceleveluntilafeasibleEOQisfound.Itisfeasibleifitliesintherangecorrespondingtoitsprice.
• Step2.IfthefirstfeasibleEOQfoundisforthelowestpricelevel,thisquantityisbest.Otherwise,calculatethetotalcostforthefirstfeasibleEOQandforthepricebreakquantityateach lowerpricelevel.Thequantitywiththelowesttotalcostisoptimal.
13-30 Inventory Management
Quantity Discounts ExampleExample.Assumethatthefollowingquantitydiscountscheduleisprovidedbyasupplier:
Ordersize Discount Unitcost0~49 0% $30.0050~99 5% $28.50100ormore 10% $27.00
Ifannualdemandis120units,orderingcostis$20perorder,andannualunitinventoryholdingcostis25%,whatorderquantitywouldminimizetotalinventorycosts?
13-31 Inventory Management
When to Reorder with EOQ Ordering• ReorderPoint- Whenthequantityonhandofanitemdropstothisamount,theitemisreordered
• SafetyStock- Stockthatisheldinexcessofexpecteddemandduetovariabledemandrateand/orleadtime.
• ServiceLevel- Probabilitythatdemandwillnotexceedsupplyduringleadtime.
13-32 Inventory Management
Determinants of the Reorder Point• Therateofdemand• Theleadtime• Demandand/orleadtimevariability• Stockoutrisk(safetystock)
Example:
13-33 Inventory Management
Safety StockFigure13.12
13-34 Inventory Management
Reorder PointFigure13.13 TheROPisbasedonaNormal
distributionofleadtimedemand
13-35 Inventory Management
Reorder Point Figure13.1413-36 Inventory Management
uVariable demand and constant lead time
uConstant demand and variable lead time
uVariable demand and variable lead time
Reorder Point Models
ROP= 𝑑• 𝐿𝑇 + Z• 𝐿𝑇 • 𝜎𝑑& +𝑑&• 𝜎𝐿𝑇&
�
ROP = 𝑑• 𝐿𝑇 + Z • d • 𝜎LT
ROP = 𝑑• LT + Z • 𝜎d • 𝐿𝑇�
13-37 Inventory Management
Reorder Point ExampleTheinjectionmoldingdepartmentofacompanyuses40pondsofapowderaday.Inventoryisreorderedwhentheamountonhandis240pounds.Leadtimeaveragesfivedays.Itisnormallydistributedandhasastandarddeviationoftwodays.
a).Whatistheprobabilityofastockoutduringleadtime?
b).Whatreorderpointwouldprovidea5%stockout?
13-38 Inventory Management
Fixed-order-interval (FOI) model
• Ordersareplacedatfixedtimeintervals• ReasonsforusingtheFOImodel:
• Supplier’spolicymayencourageitsuse• Mayrequireonlyperiodicchecksofinventorylevele.g.,grocerystores,smallshops
• Groupingordersfromthesamesuppliercanproducesavingsinshippingcosts
• Somecircumstancesdonotlendthemselvestocontinuouslymonitoringinventoryposition
13-39 Inventory Management
• Tightcontrolofinventoryitems• Itemsfromsamesuppliercanbecombinedandmayyieldsavingsin:• Ordering• Packing• Shippingcosts
• Maybepracticalwheninventoriescannotbecloselymonitored
• Note:
Fixed-Interval Benefits13-40 Inventory Management
Fixed-order-interval Model (Figure 13-15)
13-41 Inventory Management
Fixed-order-interval Model• ComparePandQsystemsintermsoforderquantity,reorderpoint,orderinterval(timebetweenorder)
• Whenbothdemandandleadtimeareconstant,PandQsystemsfunctionidentically.
orderquantity reorderpoint orderinterval
Q system
P system
13-42 Inventory Management
• Tightcontrolofinventoryitems• Itemsfromsamesuppliermayyieldsavingsin:
• Ordering• Packing• Shippingcosts
• Maybepracticalwheninventoriescannotbecloselymonitored
Fixed-Interval Benefits
13-43 Inventory Management
• Requiresalargersafetystock• Increasescarryingcost• Costsofperiodicreviews?
Fixed-Interval Disadvantages13-44 Inventory Management
Fixed-order-interval order quantityAmount to order (target Inventory) =
Where
OI = order (review) interval
A = inventory on hand at reorder time
13-45 Inventory Management
FOI Example13-46 Inventory Management
• Singleperiodmodel:modelfororderingofperishablesandotheritemswithlimitedusefullives
• Shortagecost:generallytheunrealizedprofitsperunitCs =
• Excesscost:differencebetweenpurchasecostandsalvagevalueofitemsleftoverattheendofaperiod
Ce=
Single Period Model
13-47 Inventory Management
Stocking Levels
Service level
SoBalance Point
Quantity
Ce Cs
So =OptimumStocking Quantity
unitper cost excess unitper cost shortage
where
level Service
==
+=
e
s
es
s
CC
CCC
So
Optimal stocking point =
13-48 Inventory Management
Single Period Model Example• GreatFarmer’sMarketbuysorganicmixedsaladfor$2.00perpoundandsellsitfor$4.20perpound.Attheendofeachweek,anyremainingmixedsaladissoldtoaproducerofcannedsoupfor$0.6perpound.Weeklydemandcanbeapproximatelybyanormaldistributionwithameanof100poundsandastandarddeviationof10pounds.Whatistheoptimalstockinglevel?
13-49 Inventory Management
Areasunderthestandardnormalcurve,from-∞to+z-∞ 0
13-50 Inventory Management
• Toomuchinventory• Tendstohideproblems• Easiertolivewithproblemsthantoeliminatethem
• Costlytomaintain• Wisestrategy
• Reducelotsizes• Reducesafetystock
Operations Strategy