Chapter 13

Cycle counting

A physical count of items in inventory.

Inventory

A stock or store of goods

POS systems

A system that electronically records actual sales. Such demand information is very useful for enhancing forecasting and inventory management.

Two-bin system

Two containers of inventory; reorder when the first is empty.

Inventories are a vital part of business:

(1) necessary for operations and (2) contribute to customer satisfaction

C items

(least important) 50 to 60 percent of the number of items in inventory but only about 10 to 15 percent of the annual dollar value.

A items

(very important) 10 to 20 percent of the number of items in inventory and about 60 to 70 percent of the annual dollar value.

Determinants of the reorder point

1. The rate of demand 2. The lead time 3. The extent of demand and/or lead time variability 4. The degree of stockout risk acceptable to management

Effective inventory management requires

1. A system keep track of inventory 2. A reliable forecast of demand 3. Knowledge of lead time and lead time variability 4. Reasonable estimates of -holding costs -ordering costs -shortage costs 5. A classification system for inventory items

Management has two basic functions concerning inventory:

1. Establish a system for tracking items in inventory. 2. Make decisions about when to order and how much to order.

Customer service with reasonable inventory costs

1. Measures of performance. 2. Customer Satisfaction 3. Inventory turnover.

The amount of safety stock that is appropriate for a given situation depends upon:

1. The average demand rate and average lead time. 2. Demand and lead time variability. 3. The desired service level.

The overall objective of inventory management is to...

Achieve satisfactory levels of customer service while keeping inventory costs within reasonable bounds

ABC Classification approach

Classifying inventory according to some measure of importance, and allocating control efforts accordingly.

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 resulting when demand exceeds the supply of inventory; often unrealized profit per unit.

Two categories of problem:

Demand can be characterized by a continuous distribution. Demand can be characterized by a discrete distribution.

Excess cost

Different between purchase cost and salvage value of items left over at the end of the period.

EOQ models

Economic order quantity models identify the optimal order quantity by minimizing the sum of annual costs that vary with order size and frequency 1. The basic economic order quantity model. 2. The economic production quantity model. 3. The quantity discount model.

Shortage cost

Generally, the unrealized profit per unit.

Level of customer service

Having the right goods available in the right quantity in the right place at the right time.

Cycle counting management

How much accuracy is needed? A items: ± 0.2 percent B items: ± 1 percent C items: ± 5 percent When should cycle counting be performed? Who should do it?

Single-period model Goal

Identify the order quantity that will minimize the long-run excess and shortage costs.

Forecasts

Inventories are necessary to satisfy customer demands, so it is important to have a reliable estimates of the amount and timing of demand. POS systems.

Inventory management has two main concerns:

Level of customer service. Costs of ordering and carrying inventories.

Single-period model

Model for ordering of perishables and other items with limited useful lives.

Customer satisfaction

Number and quantity of backorders.

EPQ Assumptions

Only one item is involved. Annual demand requirements are known. Usage rate is constant. Usage occurs continually, but production occurs periodically. The production rate is constant. Lead time does not vary. There are no quantity discounts.

EOQ Assumptions

Only one product is involved. Annual demand requirements are 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.

Fixed-order-interval (FOI) model

Orders are placed at fixed time intervals.

Areas that may lead to improvement:

Record keeping - Records and data must be accurate and up-to-date. Variation reduction - Lead variation - Forecast errors Lean operations Supply chain management

Periodic system

Physical count of items in inventory made at periodic intervals.

Quantity discount

Price reduction for larger orders offered to customers to induce them to buy in large quantities.

Inventory costs

Purchase cost Holding (carrying) costs Ordering costs Setup costs Shortage costs

Types of Inventory

Raw materials and purchased parts. Work-in-process (WIP). Finished goods inventories or merchandise. Tools and supplies. Maintenance and repairs (MRO) inventory. Goods-in-transit to warehouses or customers (pipeline inventory).

To reduce the likelihood of a stockout, it becomes necessary to carry...

Safety stock.

Improving inventory processes can offer:

Significant cost reduction and customer satisfaction benefits

Safety stock

Stock that is held in excess of demand due to variable demand and/or lead time.

Reasons for using the FOI model

Supplier's policy may encourage its use. Grouping orders from the same supplier can produce savings in shipping costs. Some circumstances do not lend themselves to continuously monitoring inventory position.

Perpetual inventory system

System that keeps track of removals from inventory continuously, thus monitoring current levels of each item. An order is placed when inventory drops to a predetermined minimum level.

Purchase cost

The amount paid to buy the inventory.

Economic Production Quantity (EPQ)

The batch mode is widely used in production. In certain instances, the capacity to produce a part exceeds its usage (demand rate).

Setup costs

The costs involved in preparing equipment for a job. Analogous to ordering costs.

Service level

The probability that demand will not exceed supply during lead time. Service level = 100% - stockout risk.

As the amount of safety stock carried increases...

The risk of stockout decreases. This improves customer service level.

Lead time

Time interval between ordering and receiving the order.

Basic EOQ model

Used to find a fixed order quantity that will minimize total annual inventory costs.

Reorder point

When the quantity on hand of an item drops to this amount, the item is reordered.

Independent demand items

items that are ready to be sold or used.

B items

moderately important

Demand or lead time uncertainty creates

the possibility that demand will be greater than available supply.