Inventory Management_lecture 15.04.2015

8/20/2019 Inventory Management_lecture 15.04.2015

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Inventory Management


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Learning Objectives Describe the diferent types and uses o

inventory

Describe the objectives o inventorymanagement

Calculate inventory perormance measures

nderstand relevant costs associated !ithinventory

nderstand the role o cycle counting ininventory record accuracy


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"

Learning Objectives # con$t nderstand inventory$s role in service organi%ations Calculate order &uantities 'valuate the total relevant costs o diferent

inventory policies nderstand !hy companies don$t al!ays use the

optimal order &uantity nderstand ho! to justiy smaller order si%es

Calculate appropriate saety stoc( inventory policies Calculate order &uantities or single)period inventory


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*

+o! Companies se ,heir

Inventory1- .nticipation or seasonal inventory2- /luctuation Inventory or 0aety stoc( bufer

demand uctuations"- Lot)si%e or cycle stoc( ta(e advantage o

&uantity discounts or purchasing e3ciencies*- ,ransportation or 4ipeline inventory5- 0peculative or hedge inventory protects

against some uture event6 e-g- labor stri(e7- Maintenance6 repair6 and operating 8M9O:

inventories


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Objectives o Inventory

ManagementProvide desired customer service level Customer service is the ability to satisy

customer re&uirements 4ercentage o orders shipped on schedule 4ercentage o line items shipped on

schedule

4ercentage o ; volume shipped on schedule Idle time due to material and component

shortages


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Inventory Objectives con$tProvide for cost-ecient operations:

ee(s6 days6 or hours o supply


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?

Customer 0ervice Level

'@amples Percentage of Orders Shipped on Schedule

Aood measure i orders have similar value- Does not capture value- I one company represents 5B o your business but only 5 o your

orders6 5 on schedule could represent only 5B o value Percentage of Line Items Shipped on Schedule

9ecogni%es that not all orders are e&ual6 but does not capture

; value o orders- More e@pensive to measure- O( or Enished goods- . B service level might mean shipping 225 items out o the total

25B line items totaled rom 2B orders scheduled

Percentage Of Dollar Volume Shipped on Schedule 9ecogni%es the diferences in orders in terms o both line items and

; value


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F

Inventory Investment Measures !ample: ,he CoachMotor +ome Company has annual cost o goods sold o;1B6BBB6BBB- ,he average inventory value at any point intime is ;"F*6715- Calculate inventory turnover and

!ee(sGdays o supply-

Inventory "urnover:

#ee$s%Days of Supply:

turnsinventory26

$384,615

0$10,000,00

valueinventory average

soldgoodsof costannualTurnover ===

2weeks

0/52$10,000,00

$384,615

dollarsinusageweeklyaverage

dollarsinhandoninventoryaverageSupplyo !eeks ===

days100/260$10,000,00

$384,615Supplyof ays ==


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9elevant Inventory CostsItem &ost Includes price paid for the item plus

other direct costs associated 'iththe purchase

(olding&osts

Include the varia)le e!pensesincurred )y the plant related to thevolume of inventory held *+,-,./

&apital&osts

"he higher of the cost of capital or

the opportunity cost for thecompany


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1B

9elevant Inventory CostsOrdering&ost

/i@ed6 constant dollar amountincurred or each order placed

Shortage&osts

Loss o customer good!ill6 bac(order handling6 and lost sales

0is$ costs Obsolescence6 damage6deterioration6 thet6 insurance and

ta@es

Storagecosts

Included the variable e@penses orspace6 !or(ers6 and e&uipment

related to the volume o inventoryheld


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Determining Order

HuantitiesLot-for-lot Order e@actly !hat is needed

1i!ed-order2uantity 0peciEes the number o units to order!henever an order is placed

Min-ma!system

4laces a replenishment order !hen theon)hand inventory alls belo! thepredetermined minimum level-

Order n periods

Order &uantity is determined by totaldemand or the item or the ne@t n periods


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>iley 2B1B 12

'OH .ssumptions Demand is (no!n = constant

) no saety stoc( is re&uired Lead time is (no!n =

constant Jo &uantity discounts are

available Ordering 8or setup: costs are

constant .ll demand is satisEed 8no

shortages: ,he order &uantity arrives in a

single shipment


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>iley 2B1B 1"

,otal .nnual Inventory

Cost !ith 'OH Model"otal annual cost3 annual ordering cost 4

annual

holding costs

!2S" and !#

2"S

"T" = +

=


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>iley 2B1B 1*

Continuous 8H: 9evie! 0ystem '@ample . computercompany has annual demand o 1B6BBB- ,hey !ant todetermine 'OH or circuit boards !hich have an annualholding cost 8+: o ;7Gunit6 and an ordering cost 80: o ;?5-

,hey !ant to calculate ,C and the reorder point 89: i thepurchasing lead time is 5 days-

O5 *5/

0eorder Point *0/

"otal Inventory &ost *"&/

units500$6

$%5&10,000&2

!

2S"

===

units200days5&

days250

10,000Ti'e(ead)e'andaily* ===

$3000$1500$1500$62

500$%5

500

10,000T =+=

+

=


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>iley 2B1B 15

'conomic 4roduction

Huantity 8'4H:0ame assumptions as the 'OH e@cept inventory

arrives in increments = dra!s do!n as it arrives


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>iley 2B1B 17

Calculating '4H "otal cost:

Ma!imum inventory: dKavg- daily demand rate

pKdaily production rate

&alculating P5

+

= !

2

+S

"

T -./"

−=

p

d1"+-.

−

=

p

d1!

2S/0"


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>iley 2B1B 1?

P5 Pro)lem (P Ltd6 Produces premium plant food in ,78)ags6 Demand is +779777 l)s%'ee$6 "hey operate ,7'$s%year (P produces ,79777 l)s%'ee$6 Setup cost is;77 and the annual holding cost rate is ;6,,%)ag6

&alculate the P56 Determine the ma!imum inventorylevel6 &alculate the total cost of using the P5 policy6

+

= !

2

+S

"

T -."

−

=

p

d1!

2S/0"

−=p

d1"+,-.


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>iley 2B1B 1F

'4H 4roblem 0olution

−

=

p

d1!

2S/0" Bags EPQ 850,""

250000

000,100155#

200%000,100%50%2=

−

=

−=p

d1"+,-.

+

= !

2

+S

"

T -."

bags MAX I "10,46000,250

000,1001850,"" =

−=

( ) ( ) 6&0,25$55#2

"10,46200850,""

000,000,5 =

+

=TC


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>iley 2B1B 1

Huantity Discount Model

Same as the O5 model9 e!cept: nit price depends upon the &uantity

ordered

"he total cost e2uation )ecomes:

+ =!

2

"S

"

T$" '(+


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>iley 2B1B 2B

Huantity Discount4rocedure

Calculate the 'OH at the lo!est price Determine !hether the 'OH is

easible at that price >ill the vendor sell that &uantity at that

price

I yes6 stop # i no6 continue Chec( the easibility o 'OH at the

ne@t higher price


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>iley 2B1B 21

HD 4rocedure con$t

Continue until you identiy a easible 'OH Calculate the total costs 8including total

item cost: or the easible 'OH model Calculate the total costs o buying at the

minimum &uantity re&uired or each o thecheaper unit prices

&ompare the total cost of each option< choose the lo'est cost alternative =ny other issues to consider>


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>iley 2B1B 22

5uantity Discount !ample Collin$s 0port store isconsidering going to a diferent hat supplier- ,he presentsupplier charges ;1BGhat and re&uires minimum &uantitieso *B hats- ,he annual demand is 126BBB hats6 the

ordering cost is ;2B6 and the inventory carrying cost is2B o the hat cost6 a ne! supplier is ofering hats at ; inlots o *BBB- >ho should he buy rom O5 at lo'est price ;?6 Is it feasi)le>

Since the O5 of ,+@ is not feasi)le9 calculate thetotal cost *&/ for each price to ma$e the decision

A777 hats at ;? each saves ;+?9B7 annually6 Space>

ats516$180

20212,000/"$ ==

( ) ( ) ( )

( ) ( ) ( ) $101,66012,000$$18024000$20400012,000

$120,8012,000$10$22

40$20

40

12,000

$

$10

=++=

=++=


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>hy Companies Don$t Alwaysse Optimal Order Huantity

It is not unusual or companies to order lessor more than the 'OH or several reasons

,hey may not have a (no!n uniormdemand

0ome suppliers have minimum order&uantity that are beyond the demand-


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Nustiying 0maller OrderHuantities

NI, or Lean 0ystemsP !ould recommend reducing order &uantitiesto the lo!est practical levels


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Determining 0aety 0toc( and0ervice Levels

I demand or lead time isuncertain6 saety stoc( can beadded to improve order)cycleservice levels 0 3 dL 4SS #here SS 3FGdL9 and H is the

num)er of standard

deviations and GdL isstandard deviation of thedemand during lead time

Order-cycle service level ,he probability that demand

during lead time !ill note@ceed on)hand inventory

. 5 service level 8stoc(outris( o 5: has a QK1-7*5


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>iley 2B1B 27


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>iley 2B1B 2?

4eriodic 9evie! 0ystems

Orders are placed at speciEed6 E@ed)time intervals8e-g- every /riday:6 or a order si%e *5/ to bring on)hand inventory *O(/ up to the target inventory

*"I/9 similar to the min)ma@ system- =dvantages are:

Jo need or a system to continuously monitor item Items ordered rom the same supplier can be revie!ed on

the same day saving purchase order costs

Disadvantages: 9eplenishment &uantities 8H: vary Order &uantities may not &uality or &uantity discounts On the average6 inventory levels !ill be higher than H

systems)more stoc(room space needed


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>iley 2B1B 2F

4eriodic 9evie! 0ystemsCalculations or ,I

"argeted Inventory level:

,I K d894 R L: R 00

d K average period demand

94 K revie! period 8days6 !(s:

L K lead time 8days6 !(s:

00 K %S94RL 0eplenishment 5uantity *5/3"I-O(


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>iley 2B1B 2

P System: an auto parts store calculated the 'OH or Drive


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>iley 2B1B "B

0ingle 4eriod InventoryModel

"he SPI model is designed for products thatshare the follo'ing characteristics: 0old at their regular price only during a single)time period

Demand is highly variable but ollo!s a (no!n probabilitydistribution

0alvage value is less than its original cost so money is lost!hen these products are sold or their salvage value

O)Jective is to )alance the gross proKt of thesale of a unit 'ith the cost incurred 'hen aunit is sold after its primary selling period


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>iley 2B1B "1

SPI Model !ample ,)shirts are purchase in multiples o1B or a charity event or ;F each- >hen sold during theevent the selling price is ;2B- .ter the event their salvagevalue is just ;2- /rom past events the organi%ers (no! the

probability o selling diferent &uantities o t)shirts !ithin arange rom FB to 12B

Payo "a)lePro)6 Of Occurrence -7 6, 6B7 6+, 6+7&ustomer Demand 7 ?7 +77 ++7 +7

8 of Shirts Ordered ProKtFB ;7B ;7B ;7B ;7B ;7B ;7BB ;BB ;1BFB ;1BFB ;1BFB ;1BFB ;1B*B

uy +77 ;F*B ;1B2B ;12BB ;12BB ;12BB ;1BF" 11B ;?FB ; 7B ;11*B ;1"2B ;1"2B ;1B7F

12B ;?2B ; BB ;1BFB ;127B ;1**B ;1B27

Sample calculations:Payo *uy ++7/3 sell +77*;7-;/ N**++7-+77/ ! *;-;//3 ;++A7!pected ProKt *uy +77/3 *;A7 67/4*;+77 ! 6,/4*;+77 ! 6B7/ R

*;+77 ! 6+,/4*;+77 ! 6+7/ 3 ;+7B


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>iley 2B1B "2

Inventory management!ithin OM +o! it all Etstogether

Inventory management provides the materials and suppliesneeded to support actual manuacturing or serviceoperations- Inventory replenishment policies guide themaster production scheduler !hen determining !hich jobs

and !hat &uantity should be scheduled 80upplement D:- Inventory management policies also afect the layout o the

acility- . policy o small lot si%es and re&uent shipmentsreduces the space needed to store materials 8Ch ?:-

Longer throughput times reduce an organi%ation$s ability torespond &uic(ly to changing customer demands 8Ch *:-

Aood inventory management assures continuous supply andminimi%es inventory investment !hile achieving customerservice objectives-


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>iley 2B1B ""

Inventory Management.cross the Organi%ation

Inventory management policies afectunctional areas throughout

.ccounting is concerned o the costimplications o inventory

Mar(eting is concerned as stoc(ingdecision afect the level o customer

service Inormation 0ystems trac(s and controls

inventory records


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'@ercise 1

. toy manuacturer uses appro@imately "76BBBsilicon chips annually- ,he chips are used at a steadyrate during the 2*B days the plant operates- .nnualholding cost is 5B cents per chip6 and ordering cost8per order: is ;25Gorder- .ssume that each o theirorders comes in one batch- Determine a- -the best order &uantity b- demonstrate that your order &uantity is optimal by

sho!ing that annual ordering costs K annual holding costs

c- the average inventory level d- the number o orders per year e- the number o !or(ing days bet!een orders 8+int days

bet!een orders K T days in a year G T o orders per year->hy:


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'@ercise 2

4roblem 2- ,he Dine Corporation is both a producerand a user o brass couplings- ,he Erm operates2BB days a year and uses the couplings at a steadyrate o 5B per day- Couplings can be produced at arate o 15B per day- Inventory holding cost isestimated at ;5 per unit per year- Machine setup

costs are ;*B per production run- Determine a- the best production run si%e b- demonstrate that your production run si%e is optimal by

sho!ing that annual set up costs K annual holding costs8+int End the ormula o holding and setup cost or '4Hmodel in my lecture note-:

c- the ma@imum inventory level 8+int End the ormula in

the derivation o '4H: d- the number o production runs per year e- the cycle time and the production time !ithin each cycle

8+int cycle time is given by HGd and production time isgiven by HGp- >hy ,hin( beore using the ormula:


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'@ercise "

4roblem " . small manuacturing Erm used roughly "6*BB

pounds o chemical dye each year- Currently the Ermpurchases "BB pounds per order and pays ;" perpound- ,he supplier has just announced that orderso 16BBB pounds or more !ill be Elled at a price o;2-5 per pound- ,he manuacturing Erm incurs a costo ;1BB each time it submits an order and assigns anannual holding cost o 2B o the purchase price per

pound- a- determine the best order si%e that minimi%es the total cost b- i the supplier ofered the discount at 265BB pounds instead

o at 16BBB pounds6 !hat order si%e !ould minimi%e totalcost


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'@ercise *

4roblem * . product is ordered our times everyyear- Inventory carrying cost is ;2B per unit peryear6 and the cost o shortage or each unit is ;*B-

Aiven the ollo!ing demand probabilities duringthe reorder period

ead +i-e(e-and

0 40 80 120 160

.roaility 0#1 0#25 0#3 0#25 0#1


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4roblem * 8continued:

a: >hat is the average lead time demand

b: >hat !ould be the reorder point !ithoutsaety stoc( c: >hat !ould be the probabilities o the

ollo!ing shortage levels i the company usesthe reorder point !ithout saety stoc(


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4roblem * 8continued:

d: /ollo! the Litely e@ample in my lecture to Endout the best saety stoc( level to minimi%e the totalcost-

e: >hat is the reorder point to achieve the 5service level >hat is the associated saety stoc(8+int you need to ollo! the e@ample in my lecturenote under Case 1:

Shortage evel 0 40 80

.roaility


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Inventory turnover

>iley 2B1B *B


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>hat is the inventory turnover ratio

as compared to the industryaverage

Inv- turnover K

K K *-1B@-

0alesInventories

;?6B"7;16?17

2BB"' 2BB2 2BB1 Ind-

Inv- ,- *-1@ *-5@ *-F@ 7-1@


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Inventory turnover is belo! industry average-

/irm might have old inventory6 orits control might be poor-

Jo improvement is currently

orecasted-

Comments on Inventory

,urnover


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.dvantages o 9apid ,urnover

Increased sales volume

Less ris( o obsolescence and

mar(do!ns Money or mar(et opportunities

Decreased operating e@penses

Increased asset turnover

Disadvantages o 9apid


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Disadvantages o 9apid9ate o ,urnover

Lo!ered sales volume- Increased cost o goods sold- Increase logistics costs e@panded

buying and ordering time-


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Inventory Carrying Costs

Capital costs on inventoryinvestment-

Inventory service costs- 0torage space costs-

Inventory ris( costs-


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Capital Costs on InventoryInvestment-

Opportunity cost o capital rate o returni money !ere invested else!here-

+urdle rate minimum rate o return onne! investments-

))Can !e ma(e more money earninginterest in mar(etable securities

))Can !e ma(e more money retiring debt6thus eliminating interest charges

C it l C t I t


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Capital Costs on InventoryInvestment )) Cash Ualue o

Inventory Manuacturers

))Direct costs E@edGvariable determined

and only variable costs counted-)).bsorption 8ull costing: E@edoverhead is calculated in inventoryvalue-

>holesalers and retailers))9eplacement cost 8plus reight:-

))Mar(et price i product phased out-


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Inventory 0ervice Costs

,a@es

)).d valorem 8personal property:

ta@es-

))Uary !ith si%e o inventory-

Insurance

))0ome!hat E@ed-


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0torage 0pace Costs

4lant !arehouses- /i@ed costs8e@cept or variable throughput

costs:- 4ublic !arehouses-

9ented or leased !arehouses-

Company)o!ned !arehouses-


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Inventory 9is( Costs

Obsolescence costs-

Damage costs-

0hrin(age costs-

9elocations costs 8transshipped toanother !arehouse to avoidobsolescence:-


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,urnover .fects InventoryCarrying Costs

et salesQQQQQQQ 3;+97779777

=verage inventory at retail 3;+97779777

"urnover 3 +


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et salesQQQQQQQ 3;+97779777

=verage inventory at retail 3;+97779777

"urnover 3 +

Inventory carrying costs 3 B7.

Inventory carrying costs 3 ;B779777


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et salesQQQQQQQ 3 ;+97779777

=verage inventory at retail 3 ; ,779777

"urnover 3

Inventory carrying costs 3 B7.

Inventory carrying costs 3 ;+,79777

Savings 3 ;+,79777


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nventoryturns

*verageinventory

30 )arry)ost

'arry )ostsavings %ro-$ previous )ost

1 $1,000,000 $300,000 0

2 $500,000 $150,000 $150,000

3 $333,333 $100,000 $100,000

4 $250,000 $"5,000 $25,000


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nventoryturns

*verageinventory

30 )arry)ost


1 $1,000,000 $300,000 0

2 $500,000 $150,000 $150,000

3 $333,333 $100,000 $100,000

4 $250,000 $%5,000 $25,000


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nventoryturns

*verageinventory

30 )arry)ost


10 $100,000 $30,000 3,333

11 $ &0,&0& $2",2"3 $2,"2"

12 $83,333 $25,000 $22"3

13 $"6,&23 $23,0"" $1,&23

Inventory Management_lecture 15.04.2015

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