Chapter 13 Inventory Management

Effective Inventory Management

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

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?

Independent demand items

Items that are ready to be sold or used

Single-period model

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

inventory

a stock or store of goods

as SS increases

stockout decreases

Shortage cost

-Generally, the unrealized profit per unit -C.shortage = Cs = Revenue per unit - Cost per unit

Inventory management has two main concerns:

1.Level of customer service- having the right goods available in the right quantity, right place, right time 2.Costs of ordering and carrying inventories- satisfactory levels of customer service while keeping inventory costs within reach

Assumptions

1.Only one item is involved 2.Annual demand requirements are known 3.Usage rate is constant 4.Usage occurs continually, but production occurs periodically 5.The production rate is constant 6.Lead time does not vary 7.There are no quantity discounts

Assumptions:

1.Only one product is involved 2.Annual demand requirements are known 3.Demand is even throughout the year 4.Lead time does not vary 5.Each order is received in a single delivery 6.There are no quantity discounts

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

Inventory Functions

1.To meet anticipated customer demand 2.To smooth production requirements 3.To decouple operations 4.To protect against stockout 5.To take advantage of order cycles 6.To hedge against price increases 7.To permit operations 8.To take advantage of quantity discounts

cycle counting

A physical count of items in inventory

Radio frequency identification (RFID) tags

A technology that uses radio waves to identify objects, such as goods, in supply chains

Universal product code (UPC)

Bar code printed on a label that has information about the item to which it is attached

Excess cost

Different between purchase cost and salvage value of items left over at the end of the period C.excess = Ce = Cost per unit - Salvage value per unit salvage and excess disposal

Fixed-order-interval (FOI) model

Orders are placed at fixed time intervals

Periodic system

Physical count of items in inventory made at periodic intervals "how many are there"

Quantity discount

Price reduction for larger orders offered to customers to induce them to buy in large quantities -purchasing cost

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)

Perpetual inventory system

System that keeps track of removals from inventory continuously, thus monitoring current levels of each item

How much SS

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

EOQ Models

The basic EOQ model is used to find a fixed order quantity that will minimize total annual inventory costs

Service level

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

Two-bin system

Two containers of inventory; reorder when the first is empty

Reorder point

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

abc classification system

a important b moderately c least important

Economic Production Quantity (EPQ)

batching: produce a lot, sell it, stop.. then repeat

ROP under certainty

when there is uncertainty, there will be safety stock