CH 13

Functions of inventory (8)

1. To meet anticipated customer demand 2. To smooth production requirements (seasonal demand) 3. To decouple operations (buffers) 4. To protect against stockouts (delays and shortages) 5. To take advantage of order cycles (buy in bulk) 6. To hedge against price increases 7. To permit operations 8. To take advantage of quantity discounts

Inventory

A stock or store of goods - Independent Demand Items: Items that are ready to be sold or used

Inventory Counting Systems -Two-bin System

Two containers of inventory; reorder when the first is empty -An order is placed when inventory drops to a predetermined minimum level -perpetual

Point-of-sale Systems

(POS) A system that electronically records actual sales -Such demand information is very useful for enhancing forecasting and inventory management

Inventory Counting Technologies -Radio Frequency Identification Tags

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

Inventory Counting Technologies -Universal Product Code

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

Goal: Total Cost Minimization

- D/Q decreases as Q increases making annual ordering cost inversely related to order size - carrying costs increase or decrease in direct proportion to changes in the order quantity - reaches its minimum at the quantity where carrying and ordering costs are equal

Inventory Counting Systems -Periodic System vs perpetual

- Periodic: Physical count of items in inventory made at periodic intervals (weekly or monthly) -Perpetual: keeps track of removals from inventory continuously, thus monitoring current levels of each item

- Purchase Cost - Holding (Carrying) Costs -Ordering Costs

-PC: The amount paid to buy the inventory -HC: Cost to carry an item in inventory for a length of time, usually a year -OC: Costs of ordering and receiving inventory, usually fixed costs

Deriving EOQ (Economic Order Quantity)

-Using calculus, we take the derivative of the total cost function and set the derivative (slope) equal to zero and solve for Q -The total cost curve reaches its minimum where the carrying and ordering costs are equal

Effective Inventory Management (5)

1. A system to keep track of inventory 2. A reliable forecast of demand 3. Knowledge of lead times and lead time variability 4.Reasonable estimates of -Holding costs -Ordering costs -Shortage costs 5. A classification system for inventory items

Inventory Management -Management has two basic functions concerning inventory

1. Establish a system for tracking items in inventory 2. Make Decisions about -When to order - How much to order

Objectives of Inventory Control -Main Concerns (2)

1. Level of customer service: Having the right goods available in the right quantity in the right place at the right time 2. Costs of ordering and carrying inventories -the timing and size of orders

Inventories are a vital part of business

1. Necessary for operations 2. Contribute to customer satisfaction

Economic Production Quantity (EPQ) Model Assumptions (7)

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

Basic EOQ Model Assumptions (6)

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

Inventory Costs (5)

1. Purchase cost 2. Holding (carrying) costs 3. Ordering costs 4. Setup costs 5. Shortage costs

Overall Objective of Inventory Control

Achieve satisfactory levels of customer service while keeping inventory costs within reasonable bounds 1. Measures of performance 2. Customer Satisfaction -Number and quantity of backorders - Customer complaints 3. Inventory Turnover= Cost of goods sold (COGS)/ average inventory investment -higher ratio = better

Shortage Costs

Costs resulting when demand exceeds the supply of inventory -Often unrealized profit per unit, opportunity loss, and unsatisfied customers

EPQ - Total Cost and Quantity

Cycle time= Qp/u Run time= Qp/p

Economic Production Quantity (EPQ) Example A toy manufacturer uses 48,000 rubber wheels per year for its popular dump truck series. - The firm makes its own wheels, which it can produce at a rate of 800 per day. The toy trucks are assembled uniformly over the entire year. Carrying cost is $1 per wheel a year. Setup cost for a production run of wheels is $45. The firm operates 240 days per year. a) Optimal run size. b) Minimum total annual cost for carrying and setup. c) Cycle time for the optimal run size. d) Run time.

Cycle time= Qp/u= 2400/200= 12 Run Time= Qp/p= 2400/800= 3

Total Annual Cost

D and H must be in the same units (EX: months or years) Length of order cycle= Q/D

Demand Forecasts and Lead Time

Inventories are necessary to satisfy customer demands, so it is important to have reliable estimates of the amount and timing of demand -Lead Time: Time interval between ordering and receiving the order

Economic Order Quantity Models

Models that identify the optimal order quantity by minimizing the sum of annual costs that vary with order size and frequency -The Basic Economic Order Quantity Model (Basic EOQ) -The Economic Production Quantity Model (EPQ) -The Quantity Discount Model

Basic EOQ Model

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

Economic Production Quantity (EPQ) Model

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