inventory-1213683812410770-9-120430061608-phpapp02

8/14/2019 inventory-1213683812410770-9-120430061608-phpapp02

1/35

Parts and materials

Available capacity

Human resources

1995 Corel Corp.

1984-1994 T/Maker Co. 1984-1994 T/Maker Co.

1995

Corel Corp.

What is Inventory?


2/35

The Functions of Inventory

To decouple or separate various partsof the production process

To provide a stock of goods that willprovide a selection for customers

To take advantage of quantity discounts

To hedge against inflation and upwardprice changes


3/35

Inventory

Process

stageDemand

TypeNumber

& ValueOther

Raw Material

WIP & Finished

Goods

Independent

Dependent

A Items

B Items

C Items

Maintenance

Dependent

Operating

Inventory Classifications


4/35

Sources of WasteJIT fightsseven typesof waste

Waste of motion --excessive or unnecessary human activity

Waste of waiting --jobs waiting to be processed

Waste of inventory --building up unnecessary inventory

stocks Waste of conveyance --jobs being unnecessary moved

Waste of processing --excessive or unnecessary operations

Waste ofoverproduction --producing more than demanded

Waste of correction(defective products) --waste due toscrap, rework, repair, etc.


5/35

Higher costs Ordering (or setup) cost

Costs of processing, clerks wages etc.

Holding (or carrying) cost Building lease, insurance, opportunity, taxes

etc.

Difficult to controlHides production problems

Disadvantages of Inventory


6/35

Holding Costs Breakdown(Approximate Ranges)

Category

Housing costs

Material handling costs

Labor and administrationcost

Investment costs

Pilferage, scrap, andobsolescence

Cost as a% of Inventory Value

6%(3 - 10%

3%(1 - 3.5%0

3%(3 -5%)

11%(6 - 24%)

3%(2 - 5%)


7/35

Order Quantity

Cost

Ordering & Setup Costs Curve

Optimal

Order Quantity (Q*)

EOQ Model:Minimize the overall Costs


8/35

Inventory Holding Costs

Obsolescence

Insurance

Extra staffingInterest

Pilferage

DamageWarehousing

Etc.


9/35

Ordering Costs & Setup Costs

Order processing

Clerical support

Clean-up costsRe-tooling costs

Relocation or adjustment costs


10/35

Underline Decisions Supportedby EOQ Models

Objective: Minimizing the total inventory costs

How much to order (Economic Order Quantity)

When to order? (Reorder Point)

How often should we place orders (OrderingPeriod)

Others

How to Take advantage of quantity discount

What if the lead time and demand are not constant?

Heuristics: Fixed Period Systems


11/35

Basic EOQ Model (ConstantDemand and Lead Time)

Reorder

Point

(ROP)

Time

Inventory Level

Average

Inventory

(Q*/2)

Lead Time

Optimal

Order

Quantity(Q*)


12/35

Derive the EOQ: Finding Q*that Minimizes the Total Costs

HQ

S

Q

DTC

2

Total inventory cost = Order (Setup) cost + Holding cost

To minimize TC, we set the derivative of TC with respect

to Q* equal to 0

02

)()(

2

H

Q

DS

dQ

TCd

Thus,

H

DSQ

2*


13/35

Optimal Order Quantity

Expected Number of Orders

Expected Time Between Orders Working Days / Year

= =

= =

= =

Q*D S

H

N

D

Q*

TN

2

D= Demand per yearS= Setup (order) cost per order

H= Holding (carrying) cost

EOQ Model Equations: Howmuch to Order


14/35

Reorder Point: When toOrder?

When there is lead time between orderand delivery, we need to identify thereorder point to avoid out of stock.

This provides answer for the secondinventory When to order?

ROP = (Demand per day)(Lead time fora new order in days) = dL

Working Days / Year=d

D


15/35

EOQ ExampleElectronic Assembler, Inc. has to order 2920 TX5 circuit boards per year. The ordering

cost is $80 per order; and the holding cost per unit per year is $50. The purchaseprice is $28. The items can be delivered in 5 days. The company would like toreduce its inventory costs by determining the optimal number of circuit boards toobtain per order. The conditions of ordering and inventory handling satisfy theassumptions of the EOQ model.

Annual demand D = 2,920 units

Daily demand d = 2,920/365=8 unitsHolding cost H = $50 per unit per year

Ordering cost S = $80 per order

Purchase price P = $28 per unit

Lead time LT = 5 days

Answer the following questions with detailed calculations and explanation:

1. Optimal quantity per order (EOQ):2. Annual total relevant costs (optimal):

3. Annual total costs (optimal):

4. Number of orders per year:

5. Inventory cycle time (Nd=365 working days per year):

6. Reorder Point (ROP):


16/35

Allows partial receipt of material

Other EOQ assumptions apply

Suited for production environment

Material produced, used immediately

Provides production lot size

Lower holding cost than EOQ model

Production Order QuantityModel


17/35

POQ Model

Reorder

Point

(ROP)

Time

Inventory Level

Average

Inventory

Lead Time

Optimal

Order

Quantity(Q*)


18/35

POQ Model Inventory Levels

Time

Inventory Level

Production

Portion of Cycle

Max. Inventory

Q(1- d/p)Q*

Supply

Begins

Supply

Ends

Inventory level with no demand

Demand portion of cycle

with no supply


19/35

D= Demand per year

S= Setup costH= Holding cost

d= Demand per day

p = Production per day

POQ Model Equations

Optimal Order Quantity

Setup Cost

Holding Cost

= =

-

= *

= *

=

Q

H*d

p

Q

D

Q

S

p*

1

(

0.5 * H * Q -d

p1

)- dp

1

( )

2*D*S

( )Maximum inventory level


20/35

Answers how much to order &when to order

Allows quantity discounts Reduced price when item is purchased in

larger quantities


Trade-off is between lower price &increased holding cost

Quantity Discount Model


21/35

Quantity Discount ModelHow Much to Order?

Lowest cost not in

discount range

OrderQuantity

TotalCost

Quantity which would

be ordered

Quantity toearn

Discount 2

Discount 2

Price

Quantity toearn

Discount 1

Discount 1

PriceInitial Price


22/35

Allow demand and lead time to vary

Follows normal distribution


Consider service level & safety stock

Service level = 1 - Probability of stockout

Higher service level means more safetystockMore safety stock means higher ROP

Probabilistic Models


23/35

Probabilistic ModelsWhen to Order?

Reorder

Point

(ROP)

Optimal

Order

QuantityX

Safety Stock (SS)

Time

Inventory Level

Lead Time

SSROP

ServiceLevel P(Stockout)

Place

orderReceive

order

Frequency


24/35

020

40

6080

100

0 50 100% of Inventory Items

% Annual $ Usage

A

B

C

Class % $ Vol % ItemsA 80 15B 15 30

C 5 55

ABC Classification: Pareto Principle(Critical few and trivial many)


25/35

Orders placed at fixed intervals

Inventory brought up to target amount

Amount ordered variesNo continuous inventory count

Possibility of stockout between intervals

Useful when vendors visit routinely Example: P&G representative visits every

2 weeks

Heuristics: Fixed Period Model


26/35

Time

Inventory Level Target maximum

Period PeriodPeriod

Heuristics: Fixed Period Model

l i i il


27/35

Traditional: inventory exists in caseproblems arise

JIT objective: Eliminate redundant

inventoryJIT requires Small lot sizes Low setup time Containers for fixed number of parts

JIT inventory: Minimum inventory tokeep system running (lean but agile)

Implementing JIT via AgileInventory Management


28/35

Scrap

Work in process inventory level

(hides problems)

Unreliable

Vendors

Capacity

Imbalances

Lowering InventoryReduces Waste


29/35

Scrap

Reducing inventory reveals

problems so they can be solved.

Unreliable

Vendors

Capacity

Imbalances

WIP

Lowering InventoryReduces Waste


30/35

To Lower Inventory,Reduce Lot Sizes

Time

Inventory Level

Lot Size 200

Lot Size 80

Average inventory

= 100

Average

inventory = 40

Average inventory = (Lot size)/2


31/35

Which IncreasesInventory Costs

Lot Size

Cost

Setup Cost

OptimalLot Size

Smaller

Lot Size


32/35

Unless Setup Costs areReduced

Lot Size

Cost

Setup Cost

Original

optimal

lot size

New optimal

lot size


33/35

Steps to Reduce Setup Time(Honda Assembly Line)

Initial Setup Time

Separate setup into preparation, and actual setup,

doing as much as possible while the

machine/process is running (save 30 minutes)

Move material closer and improvematerial handling (save 20 minutes)

Standardize and

improve tooling

(save 15 minutes)

90 min

60 min

45 min

25 min

15 min

Use one-touch system to

eliminate adjustments (save 10

minutes)

Training operators and

standardizing work

procedures (save 2 minutes)

Step 1

Step 2

Step 3

Step 5 13 minStep 4

d


34/35

Reducing Lot Sizes Increasesthe Number of Lots

Small lots increase flexibility to meet customer

demands

Strategies for eliminating waste

and for eliminating waiting


35/35

A A B B B C

JIT Small Lots

Time

A A B B B C

Freeze Part of the Schedule

Flexibility between Nissan plant and Dealers

Five day before delivery: 100% flexibility

Four day before: Freeze number of each model

Three day before: Freeze change color

Two day: Freeze major options

One day before: Freeze minor options

inventory-1213683812410770-9-120430061608-phpapp02

Documents

Transcript of inventory-1213683812410770-9-120430061608-phpapp02