Module 9 - Inventory Management: ABC Analysis

The simple stock-control model

1) Steady and predictable demand rate (D) 2) Receive order instantaneously 3) Holding cost and Variable costs for delivery remain the same 4) No discounts are available for large orders

EOQ Assumptions

1. Demand rate is constant and known with certainty. 2. No constraints are placed on the size of each lot. 3. The only two relevant costs are the inventory holding cost and the fixed cost per lot for ordering or setup. 4. Decisions for one item can be made independently of decisions for other items. 5. The lead time is constant and known with certainty.

1. What's EOQ? 2. Which are the costs playing a role of EOQ? 3. How is EOQ calculated?

1. Economic Order Quantity is the quantity to be purchased which minimizes total costs 2. Ordering (S) and Holding (H) costs (in inventory) 3. see picture

Procedure when applying ABC Analysis

1. The period consumption of all goods is established in quantity units used. 2. Then, these quantity units are multiplied with their prices (unit value) in order to determine the value consumption of the individual goods type (annual dollar usage) 3. Then every goods type is classified in accordance with this value consumption. 4. Finally, the accumulated consumption values and percentages of the type- and value- related consumption are calculated and the goods classified by the value based consumption in A, B and C categories.

Classifications of the ABC Items

A items = 20% of the items, which account for 80% of the total stock value • High-quality + strong selling materials B Items = the next 30% of items, which account for around 15% of the total stock value • Average materials with average sales C Items: = remaining 50% of items, which account for the last 5% of total stock value • Low-quality/weak selling materials must be treated with the principle of work simplification and cost reduction

Inventory Management Systems

Dependent Demand: Hybrid MRP - JIT Systems Independent Demand: For Retailers - ABC Category items --> EOQ basic For Manufactures - EOQ

Reorder Point

EOQ answers the "how much" question The reorder point (ROP) tells "when" to order

Inventory buffering fluctations

Inventory is created to compensate for the differences in timing between supply rates and demand rates

Inventory and supply chains

Inventory: A stock of items held to meet future demand --> a buffer

EOQ: the lot size Q, that minimizes the total annual cost

The total cost curve reaches its minimum where the holding and ordering costs are equal.

Deriving EOQ

We use derivatives in order to find the minimum point of the total cost curve (where the slope = 0)

ROP - Example Demand = 8,000 units 250 working days a year Lead time for orders = 3 working days

d = D/ number of working days in a year = 8,000/250 = 32 units ROP = d x L = 32 units * 3 days = 96 units

Inventory Management

planning & controlling of inventories in order to meet the competitive priorities of the organization

Stock strategies in storage

t = ordering/controlling cycle q = order quantity s = order point S = target stock (highest stock level, e.g. which the warehouse is to reach after restocking)

Stock Keeping Unit (SKU)

· A "stock-keeping unit" (SKU) is a single item or asset stored at a particular location · Each item is identified by a unique (SKU)

Categorizing inventory by stock-value - ABC Analysis

· Based on "Pareto" concept (80/20 rule) & total usage in $ of each item (SKU) · Purpose is to set priorities on effort used to manage different items, i.e. to allocate scarce management resources like employees 'time

Compare large infrequent orders with small frequent ones to meet the same demand

Ordering and holding costs help to find the solution

Inventory Reduction Tactics for Cycle Inventory

Reduce the lot size (Q) Reduce order & setup costs + allow Q to be reduced Increase repeatability to eliminate the need for changeovers