Inventory Management

1. CHAPTER Inventory Management

2. Objectives 1.Describe the traditional inventory management model. 2. Discuss JIT inventory management. 3. Explain the theory of constraints, and tell how it can be used to manage inventory. After studying this chapter, you should be able to:

3. Inventory Costs 1. Ordering costs are the costs of placing and receiving an order. 2. Setup costsare the costs of preparing equipment and facilities so they can be used to produce a particular product or component. 3. Carrying costs are the costs of carrying inventory.

4. Traditional Reasons for Carrying Inventory • 1. To balance ordering or setup costs and carrying costs. • 2. To satisfy customer demand. • 3. To avoid shutting down manufacturing facilities because of machine failure, defective parts, unavailable parts, or late delivery of parts. • 4. To buffer against unreliable production processes. • 5. To take advantage of discounts. • 6. To hedge against future price increases.

5. The Appropriate Inventory Policy Two Basic Questions Must be Addressed • How much should be ordered or produced? • When should the order be placed or the setup be performed?

6. The Traditional Inventory Model Total Costs = Ordering costs + Carrying costs TC = PD/Q + CQ/2 Where TC = The total ordering (or setup) and carrying costs P = The cost of placing and receiving an order (or the cost of setting up a production run) Q = The number of units ordered each time an order is placed D = The known annual demand C = The cost of carrying one unit of stock for one year

7. Economic order quantity (EOQ) =  2PD/C The Traditional Inventory Model D = 10,000 units Q = 1,000 units P = $25 per order C = $2 per unit

8. EOQ =  ($2 x $25 x 10,000)/2 EOQ =  250,000 The Traditional Inventory Model EOQ = 500 units

9. Reorder Point Demand is Certain • Reorder point = Rate of usage x Lead time • Example: The producer uses 50 parts per day and that the lead time is 4 days. • Reorder point = 4 x 50 = 200units • Thus, an order should be placed when inventory drops to 200 units.

10. Reorder Point Demand is Certain Inventory (units) (EOQ) 500 400 300 200 100 (ROP) 2 4 6 8 10 12 14 16 18 20 Days

11. Reorder Point Safety Stock If the refrigerator part was used at a rate of 60 parts a day instead of 50, the firm would use 200 parts after three and one-third days. The safety stock is determined as follows: Maximum usage 60 Average usage 50 Difference 10 Lead time x4 Safety stock 40

12. Reorder Point Safety Stock ROP = (Average rate of usage x Lead time) + Safety stock ROP = (50 x 4) + 40 ROP = 240 units

13. A Manufacturing Example The manager of Benson Company is trying to determine the size of the production runs for the blade fabrication. The controller supplies the following information: Average demand for blades 320 per day Maximum demand for blades 340 per day Annual demand for blades 80,000 Unit carrying cost $5 Setup cost $12,500 Lead time 20 days

14.  2PD C EOQ =  2 x 80,000 x 2,500 = 5  400,000,000 = A Manufacturing Example = 20,000 blades

15. A Manufacturing Example Maximum usage 340 Average usage 320 Difference 20 Lead time x20 Total safety stock 400 Reorder point = (Average usage x Lead time) + Safety stock = (320 x 20) + 400 = 6,800 units

16. Traditional Inventory Systems • Push-through system • Significant inventories • Large supplier base • Short-term supplier contracts • Departmental structure • Specialized labor • Centralized services • Low employee involvement • Supervisory management style • Acceptable quality level • Driver tracing dominates

17.   Product A A A Abrasive Grinders Welding Equipment Lathes Product B B B Department. 1 Department 2 Department 3 Traditional Manufacturing Layout Each process passes through departments that specialize in one process. Finished Product A Finished Product B

18. JIT Inventory Systems • Pull-through system • Insignificant inventories • Small supplier base • Long-term supplier contracts • Cellular structure • Multiskilled labor • Decentralized services • High employee involvement • Facilitating management style • Total quality control • Direct tracing dominates

19. JIT Inventory Systems JIT has two strategic objectives: • To increase profits • To improve a firm’s competitive positions

20. Grinder  Grinder  Welding Welding Lathe Lathe Product A Product B Finished Product Finished Product JIT Manufacturing Layout Cell A Cell B

21. JIT And Inventory Management Setup and Carrying Costs: The JIT Approach • JIT reduces the costs of acquiring inventory to insignificant levels by: • 1. Drastically reducing setup time • 2. Using long-term contracts for outside purchases • Carrying costs are reduced to insignificant levels by reducing inventories to insignificant levels

22. JIT And Inventory Management Due Date Performance: The JIT Solution • Lead times are reduced so that the company can meet requested delivery dates and to respond quickly to customer demand. • Lead times are reduced by: • reducing setup times • improving quality • using cellular manufacturing

23. Avoidance of Shutdown: The JIT Approach JIT And Inventory Management Total preventive maintenance to reduce machine failures Total quality control to reduce defective parts Cultivation of supplier relationships to ensure availability of quality raw materials and subassemblies The use of the Kanban system is also essential

24. What is the Kanban System? A withdrawal Kanban A production Kanban A vendor Kanban A Card System is used to monitor work-in-process

25. Withdrawal Kanban Item No.___________________ _____________ Item Name_________________ _____________ Computer Type_____________ _____________ Box Capacity_______________ _____________ Box Type__________________ _____________ 15670T07 Processing Process Circuit Board CB Assembly TR6547 PC Subsequent Process 8 C Final Assembly

26. Production Kanban Item No.___________________ _____________ Item Name_________________ _____________ Computer Type_____________ Box Capacity_______________ Box Type__________________ 15670T07 Process Circuit Board CB Assembly TR6547 PC 8 C

27. Vendor Kanban Item No.___________________ Item Name_________________ _____________ Box Capacity_______________ Box Type__________________ Time to Deliver Name of Supplier 15670T08 Name of Receiving Co. Computer Casing Electro PC Receiving Gate 8 75 C 8:30 A.M., 12:30 P.M., 2:30 P.M. Garry Supply

28. Kanban Process (7) Withdrawal Store (1) Lot with P-Kanban CD Assembly (5) Attach W-Kanban (1) Remove W-Kanban Attach to Post (6) Signal Remove (4) P-Kanban Attach to Post CB Stores (2), (3) Production Ordering Post Withdrawal Post Final Assembly

29. JIT’s Limitations • Time is required to build sound relationships with suppliers. • Sharp reductions in inventory buffers may cause a regimented workflow and high levels of stress among production workers. • The absence of inventory to buffer production interruptions. • Current sales are placed at risk to achieve assurance of future sales.

30. JIT And Inventory ManagementDiscounts and Price Increases: JIT Purchasing Versus Holding Inventories Careful vendor selection Long-term contracts with vendors Prices are stipulated (usually producing a significant savings) Quality is stipulated The number of orders placed are reduced

31. Throughput Inventory Operating expenses Theory of Constraints Three Measures of Organizational Performance

32. Five Steps to Improve Performance Theory of Constraints • 1. Identify the organization’s constraint(s). • 2. Exploit the binding constraint(s). • 3. Subordinate everything else to the decisions made in Step 2. • 4. Elevate the binding constraint(s). • 5. Repeat the process.

33. Initial Process Rope Process A Final Process Process B Finished Goods Time Buffer Drummer Process Drum-Buffer-Rope System Materials Process C

34. Drum-Buffer-Rope System Material for 12 Parts per Day (Part X: 6 and Part Y: 6) Confer Company Grinding Process Rope Time 12 Units Part X Buffer 12 Units Part Y DRUMMER Drilling Process Finished Goods 6 Units Part X per Day 6 Units Part Y per Day Polishing Process

35. Chapter Nineteen The End