7.0 Inventory Management

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InventoryManagementCHAPTER 11


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Inventory Inventory is the stock of any item orresource used in an organization and caninclude: ra materials! ork"in"#rocess!

$nished #roducts! and s#are #arts%

&ne of the most e'#ensive assets of manycom#anies re#resenting as much as ()* oftotal invested ca#ital%

erations managers must +alanceinventory investment and customer service%


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Functions of InventoryTo decou#le or se#arate various #arts ofthe #roduction #rocess

To decou#le the $rm from ,uctuations indemand and #rovide a stock of goods thatill #rovide a selection for customers

To take advantage of -uantity discounts

To hedge against in,ation


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Inventory Management

How inventory items can be classifed?

How accurate inventory records can be maintained?


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ABC AnalysisA Items

B Items C Items

Percen

tofannualdo

llarusage

80

70

60 50

40

30

20

10

0 | | | | | | | | | |

10 20 30 40 50 60 70 80 0 100

Percent of !n"entor# !tems


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ABC Analysis Example.ilicon chi#s! Inc%! maker of su#erfast/RA0 chi#s! ants to categorize its 1)maor inventory items using A2C analysis%Categorize the items in A! 2! and Cclasses%

Item No.Per UnitCost (!

"eman#(Units!

13(43 15%14 6))17)4 )%53 13))1)386 9) 1)))1)(43 )%6 3()

1)76 8%( 1))1)864 53%86 7()1)()) 13%( 1)))15)4( )%6 3)))

11(36 1(5 ())

1346) 14 1(()


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ABC Analysis ExampleHauls Plastics is a large manufacturer ofinection molded #lastics in orth Carolina% Aninvestigation of the com#any;s manufacturing

facility in Charlotte yields the information#resented in the ta+le +elo% Ho ould the#lant classify these items according to an A2Cclassi$cation system4855 13 3%)(

A>375

913) 3%( >E831) 8 1%8

/E3767 4( 1%( ?>871) 4 3

E/3795 6) 1%4( ?E9111 6 7


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'ecor# Accuracy

Cycle CountingRecord accuracy reers to how wellthe inventory records agree withphysical count.

Cycle Counting is a physical

inventory-taking technique in whichinventory is counted on a requentbasis rather than once or twice ayear.


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Inventory Mo#elsEconomic &rder ?uantity model

Production &rder ?uantity model

?uantity /iscount 0odel

Pro+a+ilistic 0odels


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)ol#ing* +r#ering* an#

,etup CostsHolding costs " the costs of holdingor carryingB inventory over time

rdering costs " the costs of#lacing an order and receiving goods

!etup costs " cost to #re#are a

machine or #rocess for manufacturingan order


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Basic E+- Mo#elAssum#tions:1% /emand is knon! constant! and

inde#endent3% ead time is knon and constant

7% Recei#t of inventory is instantaneous

and com#lete5% ?uantity discounts are not #ossi+le

(% &nly varia+le costs are setu# and

holding


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Inventory Usage +ver

ime$rder

%uant!t# & '(ma)!mum!n"entor#

le"el*

+sage rate A"erage!n"entor#on ,and

'2

-!n!mum!n"entor#

In"entor#le"el

.!me0

/eorderPo!nt & /$P


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Minimi/ing Costs+01ective is to minimi/e totalcosts

Annua

lcost

$rder %uant!t#

Cur"e for totalcost of ,old!ng

and setu

old!ng costcur"e

etu (or order*cost cur"e

-!n!mumtotal cost

$t!mal order

%uant!t# ('*

Purc,asecost cur"e


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'eor#er Point Curve'

/$P(un!ts*I

n"entor#le"el(un!ts*

.!me (da#s*ead t!me &

loe & un!tsda# & d


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2e E+- Mo#el

timal order -uantity!

Total cost D .etu# cost Holding cost Product cost

Reorder Point!


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E+- Mo#el Example.har# Inc% markets #ainless hy#odermic needlesto the hos#itals% The annual demand of theneedles is 1!))) unitsF the set u# or ordering cost

is G1) #er orderF and the holding cost #er unit #eryear is G)%()% The com#any has a 3()"dayorking year% It takes ( days to #rocess an order%Price of one needle is G3(%

a =ind the economic order -uantity%+ =ind the total num+er of orders #er year%c =ind the e'#ected time +eteen the orders%d /etermine the total costs%e >hat is the reorder #ointhat is the economic #roduction -uantity for thiscom#any

7.0 Inventory Management

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