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MGT 651 Week Five

MGT 651 Week Five. Inventory Management. Types of Inventory. Raw Materials Work in Process Semifinished Assemblies Finished Goods Maintenance, Repair, and Operating Supplies. Inventory Objectives. Customer Service Delivery in a Timely Manner Buffering Against Uncertainty

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MGT 651 Week Five

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  1. MGT 651 Week Five Inventory Management MGT 651 - V DR. SAVAS OZATALAY

  2. Types of Inventory • Raw Materials • Work in Process • Semifinished Assemblies • Finished Goods • Maintenance, Repair, and Operating Supplies MGT 651 - V DR. SAVAS OZATALAY

  3. Inventory Objectives • Customer Service • Delivery in a Timely Manner • Buffering Against Uncertainty • Providing Variety • Efficiency • In Purchasing • In Production • Investment MGT 651 - V DR. SAVAS OZATALAY

  4. Aggregate Inventory Considerations • Inventory as an Asset • Costs of Goods Sold • Return on Investment • Inventory Turnover • Inventory as Strategy MGT 651 - V DR. SAVAS OZATALAY

  5. Return on Investment Net Annual Profit Return on Total Assets = ---------------------- Total Assets 5,000 -------- = 3.125% 160,000 Net Annual Profit Return on Inventory Investment = -------------------- Average Inventory 5,000 ----------- = 10% 50,000 MGT 651 - V DR. SAVAS OZATALAY

  6. Inventory Turnover Formula Cost of Goods Sold Inventory Turnover = -------------------------- Average Inventory 70,000 = ------------- = 1.4 50,000 MGT 651 - V DR. SAVAS OZATALAY

  7. Strategies for Seasonal Demand Chase Strategy Volume Demand Time Balanced Strategy Volume Production Time MGT 651 - V DR. SAVAS OZATALAY

  8. Reasons for Obsolete Inventory • Engineering changes • Spoilage • Technical obsolescence • Defects • Lack of market demand MGT 651 - V DR. SAVAS OZATALAY

  9. Functions of Inventory • Safety Stock • Cycle Stock • Transportation (Pipeline) Stock • Anticipation Stock • Hedging Stock • Decoupling Stock MGT 651 - V DR. SAVAS OZATALAY

  10. Inventory Tracking Methods • Perpetual Inventory Systems • Periodic Inventory Systems • Visual Review Systems • Four-Wall Inventory Systems MGT 651 - V DR. SAVAS OZATALAY

  11. Alternative Costing Methods • First In , First Out (FIFO) • Last in , First Out (LIFO) • Average Cost • Standard Cost • Replacement Cost • Actual Cost • Value-Added Costing MGT 651 - V DR. SAVAS OZATALAY

  12. Activity-Based Costing Terminology • Activity • Activity Analysis • Activity-Based Management • Avoidable Cost • Driver • Cost Driver • Resource Driver • Traceability of Costs MGT 651 - V DR. SAVAS OZATALAY

  13. Principles of Item Identification • Uniqueness • One number for all uses • Assignment of responsibility • No reuse • Conciseness • Uniformity in length and composition • No confusing characters • Expansion • Use of check digits when possible MGT 651 - V DR. SAVAS OZATALAY

  14. Part Numbers • Advantages of Meaningful Part Numbers • Communicates information to people • Easier to understand, work with, and recall • Facilitates detection of miscoded numbers • May use hyphens to separate segments • Advantages of Nonmeaningful Part Nos • Codes tend to be shorter • Codes can be all numeric • Facilitates the use of check digits • Better accommodation of growth MGT 651 - V DR. SAVAS OZATALAY

  15. Example of Bin Locations • Space on a shelf • Vat or other liquid container • Space on the floor • Outdoor space in a storage lot • Designated segment of a rack MGT 651 - V DR. SAVAS OZATALAY

  16. Location Methods • Prearranged Locations • Familiarity with locations speeds retrieval • Locate most frequently used materials at the front • Orderly and easy to understand • Problems with overflow materials • May result in poor utilization • Random Location • More, but smaller, locations improve utilization • Lot, or batch, identify more easily maintained • Picking can be on a FIFO basis • Locations can be assigned to facilitate picking • Changes to variety of items can be easily accommodated • Zoned Locations • Compromise method-random within groups • Zones assigned based on physical characteristics • Automated Storage and Retrieval Systems • Usually based on a random location scheme • May vary greatly in size and capacity MGT 651 - V DR. SAVAS OZATALAY

  17. Stockkeeping Principles • Security • Transaction recording • Authorization control • Automation when cost effective MGT 651 - V DR. SAVAS OZATALAY

  18. Consequences of Inaccurate Records • Lost sales • Shortages • Excesses • Missed schedules • Low productivity • Late delivery • Excessive expediting • Excess freight costs • High inventory levels • High levels of obsolescence MGT 651 - V DR. SAVAS OZATALAY

  19. CYCLE COUNTING Efficient use of few experienced people continuously throughout the year RESULTS Timely detection and correction of causes of errors Fewer mistakes in item identification Minimal loss of production time Systematic improvement of record accuracy PERIODIC INVENTORY Inefficient use of many inexperienced people in a short, hectic period once a year RESULTS No correction of causes of errors Many mistakes in item identification Plant and warehouse shutdown for inventory No improvement of record accuracy Cycle Counting vs. Periodic Inventory MGT 651 - V DR. SAVAS OZATALAY

  20. Example Target Level of Accuracy ALLOWABLE ALLOWABLE INVENTORY TOLERANCE TOLERANCE CLASS QUANTITY VALUE A (+,-) 0.2 % $ 100 B (+,-) 1.0 % $ 100 C (+,-) 5.0 % $ 100 * Tolerance specified by user * If variance is less than both quantity and value tolerance, then accept count MGT 651 - V DR. SAVAS OZATALAY

  21. Sources of Problems • Poor design of forms • Untrained personnel • Carelessness • Poor control of documents • Faulty computer programs • Items not identified properly • Inadequate storage space • Open (unsecured) storage areas MGT 651 - V DR. SAVAS OZATALAY

  22. Alternatives for When to Count • ABC classification • A items monthly • B items quarterly • C items annually • When reorder is indicated • When replenishment lot is received • When record indicates a zero balance • When record balance becomes negative • Every so many transactions MGT 651 - V DR. SAVAS OZATALAY

  23. Data Elements for Inventory Control • Item identification • Item description • Stock location data • On-hand balances in each stock location • On-order information by due date • Reorder and safety stock information • Financial information • Usage data • Classification information • Sourcing data • Lead-time data MGT 651 - V DR. SAVAS OZATALAY

  24. Data Collection Methods • Computer terminals • Bar code systems • Magnetic stripe systems • Optical recognition devices • Automatic counting devices MGT 651 - V DR. SAVAS OZATALAY

  25. Data Communication Customer Supplier Plant Distribution Center Distribution Center Plant Supplier Customer MGT 651 - V DR. SAVAS OZATALAY

  26. Determination of Order Quantity • The order quantity considerations • Total inventory costs • Reorder point • The Economic Order Quantity (EOQ) • Quantity Discounts MGT 651 - V DR. SAVAS OZATALAY

  27. Inventory Carrying Cost Components • Storage facility costs • Counting, transporting, and handling • Risk of obsolescence due to engineering changes or spoilage • Insurance and taxes • Risk of loss due to pilferage • Opportunity cost MGT 651 - V DR. SAVAS OZATALAY

  28. Purchase Order Costs • Supplier selection, follow-up, and other contacts • Accounts payable and collection • Receiving, inspecting, and handling • Preparation and handling of an authorization document MGT 651 - V DR. SAVAS OZATALAY

  29. Production Order Costs • Setup of equipment or assembly line changeover • Preparation of production order paperwork • Tracking and reporting work orders in the plant • Scrap that results from start-up after a new setup MGT 651 - V DR. SAVAS OZATALAY

  30. Limitations of the EOQ • Annual usage is assumed to be level and continuous • Underlying costs are assumed to be accurate • Replenishment is assumed to be instantaneous • Costs are more often expressed as total, or average, rather than marginal • Single-item replenishment is assumed MGT 651 - V DR. SAVAS OZATALAY

  31. Significant Relationships • The more demanded per year, the larger the order quantity • The higher the order, or setup cost, the larger the order quantity • The more expensive the item, the smaller the order quantity • The higher the carrying cost, the smaller the order quantity MGT 651 - V DR. SAVAS OZATALAY

  32. INVENTORY RECORD ACCURACY &CYCLE COUNTING MGT 651 - V DR. SAVAS OZATALAY

  33. IRA is required • To make valid planning possible • To provide satisfactory customer service • To determine proper replenishment time for individual items • To assure material availability • To analyze inventory levels and dispose of excess correctly MGT 651 - V DR. SAVAS OZATALAY

  34. Inaccurate Inventory Records Can Result In • Lost sales • Shortages • Excesses • Missed Schedules • Low productivity • Late delivery • Excess expediting • Excess cost MGT 651 - V DR. SAVAS OZATALAY

  35. Inaccurate Inventory Records Lead To Overordering Which causes High inventories and High obsolescence MGT 651 - V DR. SAVAS OZATALAY

  36. Requirements For Accurate Inventory Records • Adequate, disciplined record keeping • Qualified people • Effective audits of accuracy • Timely error and cause correction MGT 651 - V DR. SAVAS OZATALAY

  37. The Ability To Audit Inventory Records Stems From • The Physical inventory • Periodic or • Cyclic MGT 651 - V DR. SAVAS OZATALAY

  38. Physical Inventory • Count items • Compare with records • Reconcile differences • Adjust records MGT 651 - V DR. SAVAS OZATALAY

  39. Cycle Counting • Sample count records frequently • Test their accuracy • Identify causes of errors • Eliminate causes of errors • Provide measure of record accuracy MGT 651 - V DR. SAVAS OZATALAY

  40. Cycle Counting Objectives • Identification of causes of errors • Correction of conditions causing errors • Provide quantitative measure of accuracy • Maintenance of a high level of inventory record accuracy • Provide accurate statement of assets MGT 651 - V DR. SAVAS OZATALAY

  41. Cycle Counting Efficient use of a few experienced people continuously throughout the year Timely detection and correction of causes of error Fewer mistakes in item identification Minimum loss of production time Systematic improvement of record accuracy Continuous Record of accuracy levels Periodic Inventory Inefficient use of many inexperienced people in a short, hectic period once a year No correction of causes of error Many mistakes in item identification Plant & warehouse shut-down for inventory No improvement of record accuracy No measure of accuracy Cycle Counting vs Periodic Inventory Results MGT 651 - V DR. SAVAS OZATALAY

  42. Additional Advantages of Cycle Counting • Efforts can be concentrated in problem areas • Constant surveillance maintains system integrity • No requirements for advance staging of items • Valid MRP output • Less obsolete inventory • Less excess inventory • Reduced year-end inventory write-offs • Correct statement of assets throughout year MGT 651 - V DR. SAVAS OZATALAY

  43. Disadvantages of Periodic Physical Inventory • People unfamiliar with inventory items • As many errors are introduced as are corrected • Inefficient manpower utilization • Plant and warehouse must be shut down • Too late to find out what happened • Unable to correct causes of errors MGT 651 - V DR. SAVAS OZATALAY

  44. Government Procurement Regulations • Standard requires 95% accuracy of part number inventory records MGT 651 - V DR. SAVAS OZATALAY

  45. Record Accuracy “How good” is “Good enough”? Improvement toward 100% is the key Level of accuracy can never be too high Measure in terms of significant errors MGT 651 - V DR. SAVAS OZATALAY

  46. Typical Levels of Accuracy Allowable Allowable Inventory Tolerance Tolerance Class Quantity Value A +/- 0.2% $ 100 B +/- 1.0% $ 100 C +/- 5.0% $ 100 Tolerances are specified by user. If variance is less than quantity or value tolerance, accept count. MGT 651 - V DR. SAVAS OZATALAY

  47. Initial Phase of Cycle Counting • Select small representative sample • Count on a short cycle • Correct causes of errors • When test sample is 100% error free, start full scale program MGT 651 - V DR. SAVAS OZATALAY

  48. Identification of Problem Areas • Storage space adequate? • Items stored orderly? • Access to storage area controlled? • Locations planned properly? • Locator system effective? • “Good” and “Bad” inventory segregated? • Transactions reported efficiently? • Inventory classifications compatible with accounting system? MGT 651 - V DR. SAVAS OZATALAY

  49. Typical Workload Determination Inventory Number Annual Count Total Class Of Items Frequency Count C 4,000 1 4,000 B 1,500 2 3,000 A 250 6 1,500 Total: 8,500 Number of work days per year: 250 Items to be counted per day: 34 MGT 651 - V DR. SAVAS OZATALAY

  50. Typical ABC Cycle Count Frequency Once a Month? Once a Quarter? Once a year? “A” Items “B” Items “C” Items High Frequency Intermediate Low frequency Of Order, Such Frequency Of Order, Such As Monthly Of Order, Such As Annually As Quarterly High Cost Medium Cost Low Cost Of Error Of Error Of error MGT 651 - V DR. SAVAS OZATALAY

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