13-1MRP and ERP William J. Stevenson Operations Management 8 th edition.
11-1Inventory Management CHAPTER 11 Inventory Management McGraw-Hill/Irwin Operations Management,...
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11-1 Inventory Management CHAPTER 11 Inventory Management McGraw-Hill/Irwin Operations Management, Eighth Edition, by William J. Stevenson Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
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Transcript of 11-1Inventory Management CHAPTER 11 Inventory Management McGraw-Hill/Irwin Operations Management,...
11-1 Inventory Management
CHAPTER11
Inventory Management
McGraw-Hill/IrwinOperations Management, Eighth Edition, by William J. StevensonCopyright © 2005 by The McGraw-Hill Companies, Inc. All rights
reserved.
11-2 Inventory Management
Types of InventoriesTypes of Inventories
Raw materials & purchased parts Partially completed goods called
work in progress Finished-goods inventories
(manufacturing firms) or merchandise (retail stores)
11-3 Inventory Management
Types of Inventories (Cont’d)Types of Inventories (Cont’d)
Replacement parts, tools, & supplies
Goods-in-transit to warehouses or customers
11-4 Inventory Management
Functions of InventoryFunctions of Inventory
To meet anticipated demand—anticipation stock
To smooth production requirements—seasonal inventory
To decouple operations—buffer inventory
To protect against stock-outs—safety stock (stock-out inventory)
11-5 Inventory Management
Functions of Inventory (Cont’d)Functions of Inventory (Cont’d)
To take advantage of order cycles—cycle stock
To permit operations—pipeline inventory
To help hedge against price increases
To take advantage of quantity discounts
11-6 Inventory Management
Objective of Inventory ControlObjective of Inventory Control
Two key decisions When to order—timing
How much to order—size
Performance measures Inventory turnover
Days of inventory on hand
11-7 Inventory Management
Inventory SystemsInventory Systems
Periodic SystemPhysical count of items made at periodic intervals
Perpetual Inventory System System that keeps track of removals from inventory continuously, thus monitoringcurrent levels of each item
11-8 Inventory Management
Inventory Systems (Cont’d)Inventory Systems (Cont’d)
Two-Bin System - Two containers of inventory; reorder when the first is empty
Universal Bar Code - Bar code printed on a label that hasinformation about the item to which it is attached
0
214800 232087768
11-9 Inventory Management
Holding (carrying) costs: cost to carry an item in inventory for a length of time, usually a year
Ordering costs: costs of ordering and receiving inventory
Shortage costs: costs when demand exceeds supply
Key Inventory TermsKey Inventory Terms
11-10 Inventory Management
ABC Classification SystemABC Classification System
The purpose
The process
The procedure
Figure 11.1
Annual $ value of items
AA
BB
CC
High
Low
Few ManyNumber of Items
11-11 Inventory Management
Inventory ModelsInventory Models
The basic EOQ The primary cost trade-off The lot size (Q) Reorder point (ROP) Safety stock
11-12 Inventory Management
Ch 12 - 10© 2000 by Prentice-Hall IncRussell/Taylor Oper Mgt 3/e
Assumptions Of Basic EOQ ModelAssumptions Of Basic EOQ Model
Demand is known with certainty Demand is relatively constant over time No shortages are allowed Lead time for the receipt of orders is
constant The order quantity is received all at once
11-13 Inventory Management
EOQ: Cost Trade-offEOQ: Cost Trade-off
Order Freq. Lot size Avg. Inv
Daily 10 5
Weekly 50 25
Monthly 200 100
Ordering Cost Carrying cost
11-14 Inventory Management
The Inventory CycleThe Inventory CycleFigure 11.2
Profile of Inventory Level Over Time
Quantityon hand
Q
Receive order
Placeorder
Receive order
Placeorder
Receive order
Lead time
Reorderpoint
Usage rate
Time
11-15 Inventory Management
Total CostTotal Cost
Annualcarryingcost
Annualorderingcost
Total cost = +
Q2H D
QSTC = +
11-16 Inventory Management
Cost Minimization GoalCost Minimization Goal
Order Quantity (Q)
The Total-Cost Curve is U-Shaped
Ordering Costs
QO
An
nu
al C
os
t
(optimal order quantity)
TCQ
HD
QS
2
Figure 11.4C
11-17 Inventory Management
Deriving the EOQDeriving the EOQ
Using calculus, we take the derivative of the total cost function and set the derivative (slope) equal to zero and solve for Q.
Q = 2DS
H =
2(Annual Demand)(Order or Setup Cost)
Annual Holding CostOPT
11-18 Inventory Management
Minimum Total CostMinimum Total Cost
The total cost curve reaches its minimum where the carrying and ordering costs are equal.
Q = 2DS
H =
2(Annual Demand)(Order or Setup Cost)
Annual Holding CostOPT
11-19 Inventory Management
When to Reorder with EOQ OrderingWhen to Reorder with EOQ Ordering
Reorder Point - When the quantity on hand of an item drops to this amount, the item is reordered
Safety Stock - Stock that is held in excess of expected demand due to variable demand rate and/or lead time.
Service Level - Probability that demand will not exceed supply during lead time.
11-20 Inventory Management
Determinants of the Reorder PointDeterminants of the Reorder Point
The rate of demand The lead time Demand and/or lead time variability Stockout risk (safety stock)
11-21 Inventory Management
Safety StockSafety Stock
LT Time
Expected demandduring lead time
Maximum probable demandduring lead time
ROP
Qu
an
tity
Safety stock
Figure 11.12
Safety stock reduces risk ofstockout during lead time
11-22 Inventory Management
Reorder PointReorder Point
ROP
Risk ofa stockout
Service level
Probability ofno stockout
Expecteddemand Safety
stock0 z
Quantity
z-scale
Figure 11.13
The ROP based on a normalDistribution of lead time demand
