Inventory Management. Overview To hold or not to hold To hold or not to hold Types of inventory...
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Transcript of Inventory Management. Overview To hold or not to hold To hold or not to hold Types of inventory...
Inventory Inventory ManagementManagement
OverviewOverview
To hold or not to holdTo hold or not to hold
Types of inventoryTypes of inventory
Pareto principalPareto principal
ABC analysisABC analysis
Cycle countingCycle counting
To hold or not to hold – that is the To hold or not to hold – that is the question.question.
To hold:To hold:
Customer serviceCustomer service
Ordering or setup Ordering or setup
costscosts
Labor and Labor and
equipment equipment
utilizationutilization
Transportation costTransportation cost
Not to hold:Not to hold: Inventory Inventory
holding costholding cost Interest or Interest or
opportunity costopportunity cost Storage and Storage and
handling costhandling cost Taxes, insurance, Taxes, insurance,
shrinkageshrinkage
Hide production Hide production problemsproblems
Types of inventoryTypes of inventory
Raw materialRaw material
WIP inventory – Work In ProcessWIP inventory – Work In Process
MRO inventory – Maintenance, MRO inventory – Maintenance,
Repair, Operating suppliesRepair, Operating supplies
Finished goods inventoryFinished goods inventory
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Pareto PrinciplePareto Principle
80/20 rule80/20 rule
Based on the work of an economist & avid Based on the work of an economist & avid
horticulturalist, V. Pareto in late 19horticulturalist, V. Pareto in late 19thth century century
Italy.Italy. 80% of the land was owned by 20% of the people.80% of the land was owned by 20% of the people.
80% of the peas were produced by 20% of the pods80% of the peas were produced by 20% of the pods
Applied to business by quality guru Dr. JuranApplied to business by quality guru Dr. Juran
Pareto principle applied:Pareto principle applied: Applied to MeetingsApplied to Meetings: 80% of decisions : 80% of decisions
come from 20% of meeting time.come from 20% of meeting time. Applied to product defectsApplied to product defects: 20% of the : 20% of the
quality problems cause 80% of the defects. quality problems cause 80% of the defects. Applied to SalespeopleApplied to Salespeople: Roughly 20% of a : Roughly 20% of a
sales force will develop 80% of the annual sales force will develop 80% of the annual resultsresults
Applied to Business UnitsApplied to Business Units: Roughly 20% of : Roughly 20% of a company's business units will produce a company's business units will produce 80% of the annual revenue. 80% of the annual revenue.
Applied to time-managementApplied to time-management……
Moral of the Pareto Moral of the Pareto principleprinciple
Find the significant 20% Find the significant 20%
Manage that 20%Manage that 20%
Pareto principal + Inventory = Pareto principal + Inventory = ABC AnalysisABC Analysis
““critical few and the trivial many”critical few and the trivial many” Create a Pareto chart for the inventory Create a Pareto chart for the inventory
dollars per year of each item – dollar-dollars per year of each item – dollar-volumevolume
Generally the top 80% of dollars are from Generally the top 80% of dollars are from approximately 20% of the items.approximately 20% of the items.
Categorize all items into Categorize all items into Class A items – top ~20% items by dollar-Class A items – top ~20% items by dollar-
volumevolume Class B itemsClass B items Class C itemsClass C items
ABC AnalysisABC Analysis
10 20 30 40 50 60 70 80 90 100
Percentage of items
Per
cen
tag
e o
f d
oll
ar v
alu
e
100 —
90 —
80 —
70 —
60 —
50 —
40 —
30 —
20 —
10 —
0 —
ABC AnalysisABC Analysis
10 20 30 40 50 60 70 80 90 100
Percentage of items
Per
cen
tag
e o
f d
oll
ar v
alu
e
100 —
90 —
80 —
70 —
60 —
50 —
40 —
30 —
20 —
10 —
0 —
ABC AnalysisABC Analysis
10 20 30 40 50 60 70 80 90 100
Percentage of items
Per
cen
tag
e o
f d
oll
ar v
alu
e
100 —
90 —
80 —
70 —
60 —
50 —
40 —
30 —
20 —
10 —
0 —
ABC AnalysisABC Analysis
10 20 30 40 50 60 70 80 90 100
Percentage of items
Per
cen
tag
e o
f d
oll
ar v
alu
e
100 —
90 —
80 —
70 —
60 —
50 —
40 —
30 —
20 —
10 —
0 —
ABC AnalysisABC Analysis
10 20 30 40 50 60 70 80 90 100
Percentage of items
Per
cen
tag
e o
f d
oll
ar v
alu
e
100 —
90 —
80 —
70 —
60 —
50 —
40 —
30 —
20 —
10 —
0 —
Class C
Class A
Class B
ABC AnalysisABC Analysis
Policies based on ABC analysisPolicies based on ABC analysis Develop Class A suppliers moreDevelop Class A suppliers more
Implement tighter physical control Implement tighter physical control
of Class A itemsof Class A items
Forecast Class A items more Forecast Class A items more
carefullycarefully
Model inventory for Class A itemsModel inventory for Class A items
Cycle countingCycle counting
Physically counting a sample of total Physically counting a sample of total
inventory on a regular basisinventory on a regular basis
Used often with Used often with ABCABC classification classification Class AClass A items counted most often (e.g., daily) items counted most often (e.g., daily)
Class BClass B items counted less frequently (e.g. items counted less frequently (e.g.
weekly)weekly)
Class CClass C items counted least often (e.g. items counted least often (e.g.
monthly)monthly)
Advantages of Cycle Advantages of Cycle CountingCounting
Eliminates shutdown and interruption Eliminates shutdown and interruption of production necessary for annual of production necessary for annual physical inventoriesphysical inventories
Eliminates annual inventory Eliminates annual inventory adjustmentsadjustments
Provides trained personnel to audit Provides trained personnel to audit the accuracy of inventorythe accuracy of inventory
Allows the cause of errors to be Allows the cause of errors to be identified and remedial action to be identified and remedial action to be takentaken
Maintains accurate inventory recordsMaintains accurate inventory records
Inventory CostsInventory Costs
Holding costsHolding costs - associated with holding or - associated with holding or
“carrying” inventory over time“carrying” inventory over time
Ordering costsOrdering costs - associated with costs of - associated with costs of
placing order and receiving goods; placing order and receiving goods; retail & retail &
distributiondistribution
Setup costsSetup costs - cost to prepare a machine or - cost to prepare a machine or
process for manufacturing an order; process for manufacturing an order; productionproduction
Holding CostsHolding Costs
StorageStorage ObsolescenceObsolescence InsuranceInsurance Extra staffingExtra staffing InterestInterest PilferagePilferage DamageDamage WarehousingWarehousing Etc.Etc.
Ordering CostsOrdering Costs
SuppliesSupplies
FormsForms
Order processingOrder processing
Clerical supportClerical support
Transportation/shippingTransportation/shipping
Etc.Etc.
Setup CostsSetup Costs
Machine setup costsMachine setup costs
Clean-up costsClean-up costs
Re-tooling costsRe-tooling costs
Adjustment costsAdjustment costs
Etc.Etc.
