Introductory Operations Management: Chapter 12 Inventory Management -Part A
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Transcript of Introductory Operations Management: Chapter 12 Inventory Management -Part A
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CHAPTER 12 PART A – INVENTORY MANAGEMENTSuman Niranjan
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INVENTORY
Independent Demand
A
B(4) C(2)
D(2) E(1) D(3) F(2)
Dependent Demand
Independent demand is uncertain. Dependent demand is certain.
Inventory: a stock or store of goods
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INVENTORY MODELS
Independent demand – finished goods, items that are ready to be sold E.g. a computer
Dependent demand – components of finished products E.g. parts that make up the computer
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KEY INVENTORY TERMS
Lead time: time interval between ordering and receiving the order
Holding (carrying) costs: cost to carry an item in inventory for a length of time, usually a year
Ordering costs: costs of ordering and receiving inventory
Shortage costs: costs when demand exceeds supply
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TYPES OF INVENTORIES
Raw materials & purchased partsPartially completed goods called
work in progressFinished-goods inventories
(manufacturing firms) or merchandise (retail stores)
Replacement PartsPipeline Inventory
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FUNCTIONS OF INVENTORY
To meet anticipated demand
To smooth production requirements
To decouple operations
To protect against stock-outs
To take advantage of order cycles
To help hedge against price increases
To permit operations
To take advantage of quantity discounts6
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LITTLE’S LAW
Little’s Law: The average amount of inventory in a system is
equal to the product of the average demand rate and the average time a unit spends in the system
Example If a unit is in system for an average of 10 days
and the demand for each day is 5 units, the average inventory: 5 units/day * 10 days = 50 units
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OBJECTIVE OF INVENTORY CONTROL To achieve satisfactory levels of customer service
while keeping inventory costs within reasonable bounds Level of customer service
Costs of ordering and carrying inventory
Two fundamental decisions of inventory control When to order; how much to order
Days of inventory on-hand Higher – excess inventory; Lower – risk of running out
Inventory turnover is the ratio ofaverage cost of goods sold toaverage inventory investment.
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EFFECTIVE INVENTORY MANAGEMENT A system to keep track of inventory on-hand
and order A reliable forecast of demand and forecast
error Knowledge of lead times and lead time
variability Reasonable estimates of
Holding costs Ordering costs Shortage costs
A classification system of inventory items 9
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INVENTORY COUNTING SYSTEMS
Periodic SystemPhysical count of items made at periodic intervals
Perpetual Inventory System System that keeps track of removals from inventory continuously, thus monitoringcurrent levels of each item
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INVENTORY COUNTING SYSTEMS (CONT’D) Two-Bin System - Two containers of
inventory; reorder when the first is empty Universal Bar Code - Bar code
printed on a label that hasinformation about the item to which it is attached
RFID tags
0
214800 23208776811
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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
Annual $ value of items
A
B
C
High
Low
Low HighPercentage of Items
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INVENTORY COUNTING
Increase Customer service
Improve Operations
Cycle Counting Purpose is to reduce the discrepancy amounts
indicated by the records and actual inventory
A physical count of items in inventory
Cycle counting management How much accuracy is needed?
When should cycle counting be performed?
Who should do it? 13
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ECONOMIC ORDER QUANTITY MODELS Basic Economic order quantity (EOQ) model
The order size that minimizes total annual cost
Economic production model
Quantity discount model
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ASSUMPTIONS OF EOQ MODEL
Only one product is involved
Annual demand requirements known
Demand is even throughout the year
Lead time does not vary
Each order is received in a single delivery
There are no quantity discounts
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THE INVENTORY CYCLE
Profile of Inventory Level Over Time
Quantityon hand
Q
Receive order
Placeorder
Receive order
Placeorder
Receive order
Lead time
Reorderpoint
Usage rate
Time
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TOTAL COST
Annualcarryingcost
Annualorderingcost
Total cost = +
TC = Q2
H DQ
S+
TC: Total CostQ: Order Quantity in UnitsH: Holding Cost Per UnitD: Demand, Usually in Units Per YearS: Ordering Cost
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COST MINIMIZATION GOAL
Order Quantity (Q)
The Total-Cost Curve is U-Shaped
Ordering Costs
QO
An
nu
al
Cost
(optimal order quantity)
TCQH
D
QS
2
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DERIVING THE EOQ
Using calculus, we take the derivative of the total cost function and set the derivative (slope) equal to zero and solve for Q.
O
2DS 2(Annual Demand)(Order or Setup Cost)Q = =
H Annual Holding Cost
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MINIMUM TOTAL COST
The total cost curve reaches its minimum where the carrying and ordering costs are equal.
Q2
H DQ
S=
20
Number of orders per year =
length of the order cycle =
D
Q
Q
D
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EXAMPLE 2
A local distributor for a national tire company expects to sell approximately 9,600 steel-belted radial tires of a certain size and tread design next year. Annual carrying cost is $16 per tire, and ordering cost is $75. The distributor operates 288 days a year.a) What is the EOQ?b) How many times per year does the store
reorder?c) What is the length of an order cycle?d) What is the total annual cost if the EOQ
quantity is ordered?21
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ECONOMIC PRODUCTION QUANTITY (EPQ) Production done in batches or lots
Capacity to produce a part exceeds the part’s usage or demand rate
Assumptions of EPQ are similar to EOQ except orders are received incrementally during production
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ECONOMIC PRODUCTION QUANTITY ASSUMPTIONS Only one item is involved Annual demand is known Usage rate is constant Usage occurs continually Production rate is constant Lead time does not vary No quantity discounts
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EOQ WITH INCREMENTAL INVENTORY REPLENISHMENT
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ECONOMIC RUN SIZE
02
p= Production or DeleveryRate
u= Usagerate
DS pQ
H p u
maxmin
0
max
carryingcost +setupcost2
Where Maximum Inventory
I DTC H S
Q
I
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0 0
0
Cycle Time = Run Time =
Themaximum and average inventory are
2max
max average
Q Q
u p
Q II p u I
p
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EXAMPLE 4
A toy manufacturer uses 48,000 rubber wheels per year for its popular dump truck series. The firm makes its own wheels, which it can produce at a rate of 800 per day. The toy trucks are assembled uniformly over the entire year. Carrying cost is $1 per wheel a year. Setup cost for a production run of wheels is $45. The firm operates 240 days per year. Determine the Optimal run size. Minimum total annual cost for carrying and
setup. Cycle time for the optimal run size. Run time.
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