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