Inventory presentation
Transcript of Inventory presentation
Inventory ManagementOperations Management II
Juan Ignacio Camino MoyaÁlvaro Fernández-Novel Rodríguez
Objective: strike a balance between inventory investment and customer service.
Functions:
1. To separate various parts of the production process.
2. To decouple the firm from fluctuations in demand and provide a stock of goods that will provide a selection for customers.
3. To take advantage of quantity discounts.
4. To hedge against inflation.
The Importance of Inventory
Types of inventory
Raw materials
Work in process
Maintenance/repair/operating materials (MRO)
Finished goods
MANAGING INVENTORY
Inventories Classification
Inventory Records Maintenance
Pareto
Principle
•Many trivial goods
•Few crucial ones
Measurement
•Annual demand of each product
•Cost per unit
Classes
•Class A: 15% of total inventory, but 70% of dollar usage.
•Class B: 30% of total inventory, but 25% of dollar usage
•Class C: 55% of total inventory, but 5% of dollar usage
ABC Analysis
IMPORTANT: Know what you have and what you need.
Precise decisions about ordering, scheduling and shipping
Correct incoming and outgoing record keeping, stock- room security…
Record Accuracy
A Items: Frequent
C Items: Least
B Items: Medium
Cycle Counting, instead of annual
Service sector needs inventory control•Inventory in transit is lost value•Inventory damaged or stolen prior to sale is a
lost
Retail business•Shrinkage: Retail inventory unaccounted
between receipt and sale•Pilferage: Inventory theft.
Applicable measures•Good personnel selection, training and
discipline•Control of incoming shipments•Effective control of all goods leaving the
facility
Control of Service Inventories
INVENTORY MODELS
INTRODUCTION: Types of costs
INVENTORY MODELS FOR INDEPENDENT
DEMANDBasic Economy Order Quantity Model
Production Order Quantity ModelQuantity Discount Model
The Basic Economic Order Quantity Model
Demand for an item is known, constant and independent from other items
Lead time is known and consistent
Receipt of inventory instantaneous and complete
Quantity discounts not possible
The only variable costs are the ones previously explained
Shortages can be completely avoided
Assumptions
EOQ Model: Minimizing Cost
Significant costs are holding and ordering costs.
EOQ Model: Minimizing Cost
Reorder Points
EOQ MODEL
Assumptions
1. Demand for an item is known, constant and independent.
2. Lead time is known and consistent.3. Receipt of inventory is instantaneous and
complete. The inventory from an order arrives in one batch at one time.
4. No quantity discounts5. Holding, ordering and set up costs are variable.6. Shortages can be avoided if orders are placed at
the right time
Production order quantity model
Objective:
How much to order (Q*p) and when to order (ROP) so that we minimize costs
Production order quantity model
Production order quantity model
1. Demand for an item is known, constant and independent.
2. Lead time is known and consistent.3. Receipt of inventory is instantaneous and
complete. The inventory from an order arrives in one batch at one time.
4. No quantity discounts5. Holding, ordering and set up costs are
variable.6. Shortages can be avoided if orders are
placed at the right time
Quantity Discount Model
A quantity discount is a reduced price per unit of item when we purchase it in larger quantities.
Quantity discount models
Discount number
Discount quantity
Discount (%)
Discount price
1 0 to 999 0 $5.00
2 1000 to 1999 4 $4.80
3 2000 and over
5 $4.75
Objective: How much to order to minimize costs?
Quantity discount model
Ordering quantities with the highest
discount?
NO!!!
Tradeoff between reduced product costs and increased holding costs
Step 1: calculate Q* for each discount
Step 2: Adjust Q* to the lowest quantity that will
qualify for the discount
Step 3: Apply the total cost equation for each order quantity and pick the one with the lowest cost.
Quantity discount model
D = Annual demandS = Set up cost per orderI = holding cost as % of unit priceP = price per unit
Quantity discount model
Discount Category
Unit CostOrder
Quantity
Annual cost
Holding Ordering Purchase Total
123
$5.004.854.75
70010002500
$350485
1188
$35024598
$25,00024,50023,750
$25,70024,98025,036
1. Demand for an item is known, constant and independent.
2. Lead time is known and consistent.3. Receipt of inventory is instantaneous and
complete. The inventory from an order arrives in one batch at one time.
4. No quantity discounts5. Holding, ordering and set up costs are
variable.6. Shortages can be avoided if orders are
placed at the right time
Probabilistic Models and safety stock
Key issue : maintaining an adequate service level in the face of uncertain demand.
Service level: 1-probability of stockout
Stockout is reduced with safety stock.
Therefore:
Probabilistic models and safety stock
Objective: find such safety stock level that satisfies the given service level and minimizes total costs
Probabilistic models and safety stock.
One order is placed for each product
Remaining products have little or no value after sales period
Exact demand is never known, so we consider a probability distribution
Consider probability of stock out and have left overs
Single Period Model
Single Period Model: Optimal stocking
Cs: Cost of shortage Sales Price/Unit – Cost/Unit
Co: Cost of overageCost/Unit – Residual Value/Unit
Same order amount each
time
• Inventory decreases to reorder point
• New order is placed
Perpetual monitoring
system
• Every movement of inventory must be recorded
Fixed period system
• Inventory is ordered at the end of a giving period
• Always same amount per interval
Fixed Period Systems
ANY QUESTION?Thank you for your attention