Chapter 12: Inventory Management

Minimizing costs

-By minimizing the sum of setup and holding costs, total costs are minimized. -Optimal order size will minimize total cost -A reduction in either cost reduces the total cost. -Optimal order quantity occurs when holding cost and setup coat are equal.

Reorder points

-EOQ answers the how much question -The reorder point (ROP) tells "when" to order -Leading time (L) is the time b/w placing and receiving an order.

Fixed-Period (P) Systems

-Fixed-quantity models require continuous monitoring using perpetual inventory systems. -In fixed-period systems orders placed at the end of a fixed period. -order brings inventory up to target level --only relevant costs are ordering and holding --lead times are known and constant --items are independent of one another -Inventory only counted at each review period -May be scheduled at convenient times -Appropriate in routine situations -May result in stock-outs between periods. -May require increased safety stock.

Two basic questions in inventory control

-How much should I order/produce? -When should I order/produce?

The Materials Flow Cycle

-Input -Wait for inspection -Wait to be moved -Move Time -Wait in queue for operator -Setup time -Run time -Output

Importance of inventory

-Less inventory lowers cost but increases chances of running out -More inventory raises costs but always keeps customers happy.

Single-Period Model

-Only one order is placed for a product -Units have little or no value at the end of the sales period.

Types of Inventory

-Raw Material purchased but nor processed -Work-in-Process (WIP) undergone some changes but not completed -Finished Goods completed product awaiting shipment -Maintenance/repair/operating (MRO) necessary to keep machinery and processes productive.

Robust model

-The EOQ model is robust -It works even if all parameters and assumptions aren't met. -The total cost curve is relatively flat in the area of the EOQ.

Three V Model of Inventory Managment

-Volume -Velocity -Value

ABC Analysis

-other criteria than annual dollar volume may be used. --high shortage or holding cost; anticipated engineering changes; delivery problems; quality problems. -Policies employed may include: 1. More emphasis on supplier development 2. Tighter physical inventory control for A items. 3. More care in forecasting A items.

Probabilistic models and safety stock

-used when demand is not constant or certain -use safety stock to achieve a desired service level and avoid stock-outs.

Basic EOQ Model

1. Demand is known, constant, and independent 2. Lead time is known and constant 3. Receipt of inventory is instantaneous and complete. 4. Quantity discounts are not possible 5. Only variable costs are setup (or ordering) and holding. 6. Stock-outs can be completely avoided

Functions of inventory

1. To provide a selection of goods for anticipated demand and to separate the firm from fluctuations in demand. 2. To decouple or separate various parts of the production process. 3. To take advantage of quantity discounts 4. To hedge against inflation.

Other Probabilistic Models

When data on demand during lead time is not available, there are other models available 1. When demand is variable and lead time is constant 2. When lead time is variable and demand is constant 3. When both demand and lead time are variable

Inventory Management

the objective of inventory management is to strike a balance between inventory investment and customer service.