Chapter 7: Inventory Management (SCM 301)

Assumptions of the EOQ model (fixed parameters)

1. Demand must be known and constant. 2. Order lead time is known and constant. 3. Replenishment is instantaneous. 4. Price is constant. 5. Holding cost is known and constant 6. Ordering cost is known and constant. 7. Stock-outs are not allowed.

Fixed Order Quantity Models

1. Economic Order Quantity Model 2. Quantity Discount Model 3. Economic Manufacturing Quantity Model These models use fixed parameters to derive the optimum order quantity to minimize total inventory costs.

Functions and basic types of inventory

Buffer - from uncertainty in the market place. Decouple - dependencies in the supply chain (safety stock).

Indirect costs

Cannot be traced directly to the unit produced (overhead).

Dependent Demand

Describes the internal demand for parts based on the demand of the final product in which the parts are used. Sub-assemblies, components, and raw materials are examples of dependent demand items.

ABC Inventory Control System

Determines which inventories should be counted and manged more closely than others.

Item cost

Direct costs traceable to each unit for material and labor.

Order costs

Direct variable costs for making an order. In mfg, setup costs are related to machine setups.

Direct Costs

Directly traceable to unit produced (material costs and labor).

How much do I order?

EOQ and price break model.

Due to the step-wise shape of the total inventory cost curve, the optimal order quantity lies on either one of the....

Feasible EOQs or the price break point.

Inventory investment

Firms should diligently measure inventory investment to ensure that it does not adversely affect competitiveness (ITR).

Continuous Review (Q) System

Fixed-order quantity model, allows for random demand, and stock position is monitored continuously.

Periodic Review (P) System

Fixed-time period model, assume demand is random, and order up to the "target" level at a specified time.

Inventory Management Models

Generally classified as dependent demand and independent demand models.

Service costs

Insurance costs and taxes.

RFID software

Manages the collection, synchronization, and communication of the data with systems, and stores the information in a database.

Retail store

No check out lines as scanners link RFID tagged goods in shopping cart with buyers credit card.

Risk costs

Obsolescence and inventory shrinkage.

Objective of EOQ is to find...

Order quantity (Q) that minimizes the total cost (TC) of managing inventory.

When should orders be placed?

Periodic review and continuous review.

Cycle counting

Physical inventory-taking technique where inventory is counted on a frequent basis rather than once or twice a year.

Excessive inventory is a sign of...

Poor inventory management.

Radio Frequency Identification (RFID)

Successor to the bar code for tracking individual unit of goods. RFID does not require direct line of sight to read a tag and information on the tag in updatable.

Total Annual Inventory Cost Formula (TAIC)

TAIC = annual purchase cost + annual holding cost + annual order cost TAIC = APC + AHC + AOC = (R x C) + (Q/2 x (K x C)) + (R/Q x S)

Independent Demand

The demand for final products and has a demand pattern affected by trends, seasonal patterns, and general market conditions.

Statistical Reorder Point (ROP)

The lowest inventory level at which a new order must be placed to avoid a stock-out. Demand and delivery lead time are never certain and require safety stock.

Demand and Lead Time Uncertainty

Uncertainty is a normal condition. the reorder point becomes the average demand during lead time plus the safety stock.

Storage space costs

Variable storage and handling costs.

Variable costs

Vary with output level (materials).

Economic Order Quantity (EOQ) Model

A quantitative decision model based on the trade-off between annual inventory holding costs and annual order costs.

B items

Account for the other 40% of total items and 15% of total inventory costs.

The EOQ model seeks to determine...

An optimal order quantity, where the sum of the annual order cost and the annual inventory holding cost is minimized.

What inventory level should be maintained?

Reorder point and safety stock.

Distribution Center

Shipment leaving DC automatically updates ERP to trigger a replenishment order and notify customer for delivery tracking.

Holding cost

The cost incurred from holding inventory in storage. Sometimes called CARRYING COST.

Stock out costs

The cost of not having inventory on hand when demand occurs.

The models used under uncertainty are...

1. Statistical ROP with probabilistic demand and constant lead time. 2. Statistical ROP with constant demand and probabilistic lead time. 3. Statistical ROP when demand and lead time are both probabilistic.

Manufacturing

Assembly instructions encoded on RFID tag proved information to computer controlled assembly devices.

Tag

Computer chip and an antenna for wireless communication.

Communication network

Connects the readers to transmit inventory information to the enterprise information system.

A items

Given the HIGHEST priority with larger safety stocks. A items account for approximately 20% of the total items and about 80% of the total inventory costs.

Materials management

Goods automatically counted and logged as they enter the supply warehouse.

Reader

Handheld or fixed-position RFID device that reads the tags.

Things EOQ doesn't do well

Handle multiple locations well and when demand isn't constant.

C items

Have the LOWEST value and hence lowest priority. They account for the remaining 40% of total items and % of total inventory costs.

Inventory accuracy

How well the inventory records agree with physical count.

Holding or carrying costs

Incurred for holding inventory in storage.

EOQ is used for __________ __________ items

Independent demand.

Fixed costs

Independent of the output quantity (buildings, equipment, and plant security).

Capital or finance costs

Interest charges and opportunity costs.

Most expensive asset of an organization

Inventory

Four broad categories of inventories

Raw materials, work-in-process (WIP), finished goods, and maintenance, repair and operating (MRO).

Management must...

Reduce inventory levels yet avoid stock outs and other problems.

Big Data Decision-Making

Refers to collections of data sets that are too large and complex to be processed by traditional database management tools or data processing software applications. Helps to process the data in real time to take advantage of the information captured by RFID.

Quantity Discount Model or Price-Break Model

Relaxes the constant price assumption by allowing purchase quantity discounts.

Components of RFID

Tag, reader, communication network, and RFID software.

Order cost

the direct variable cost associated with placing an order. Sometimes called SETUP COST.

Inventory may account for ___% of total revenue or total assets

10%

How much effort to put into managing inventory?

ABC inventory analysis and inventory turnover analysis.

Fixed Parameters

Like known demand (and its constant), order lead time, entire order can be delivered at one time, Price is constant.