Chapter 11 – Inventory Management

1. Chapter 11 – Inventory Management Definition, objectives, historical evolution, EOQ, service levels, models SJSU Bus 140 - David Bentley

2. What Is Inventory? • Material owned for use in product or as operating supply • Has value (usually) • Need for product or to support production • Other? SJSU Bus 140 - David Bentley

3. Inventory Types - 1 • Raw Material (RM) – purchased • “true” raw material • Component parts • Work-in-process (WIP) – manufactured in-house • Assemblies • Sub-assemblies • Fabricated parts SJSU Bus 140 - David Bentley

4. Inventory Types - 2 • Finished Goods (FGI) • Completed products • Raw Materials in Process (RIP) • Found in lean operations (JIT) environments • Combines RM and WIP • Operating supplies • Goods in transit SJSU Bus 140 - David Bentley

5. Major Objectives • Never have a stockout • Customer dissatisfaction • Production disruption • Never carry excess inventory • Inventory is an asset but it is not free • In other words – walk a tightrope! SJSU Bus 140 - David Bentley

6. Carrying costs Obvious Capital Holding* Semi-obvious Obsolescence Inventory management Hidden Idle stock Scrap and rework * Next slide Ordering costs People Purchasing staff Receiving Inspection Order transmission Purchasing supplies Occupancy Purchasing Receiving Inventory Related Costs SJSU Bus 140 - David Bentley

7. Holding costs – Stock Related • Personnel • Equipment • Occupancy (rent and utilities) • Interest • Insurance • Taxes • Security • Shrinkage and damage SJSU Bus 140 - David Bentley

8. Historical Evolution of I/C - 1 • Record keeping • Answer 2 questions • When to order • How much to order • When? • Sawtooth diagram & ROP (see next slide) • ROP = d X LT SJSU Bus 140 - David Bentley

9. Profile of Inventory Level Over Time Q Usage rate Quantity on hand Reorder point Time Place order Place order Receive order Receive order Receive order Lead time Sawtooth diagram & ROP SJSU Bus 140 - Source: Stevenson

10. ROP Limitations • Assumes demand is known and linear • Relies on instantaneous replenishment when inventory reaches zero • Assumes lead time is known and constant • Has no relationship to future usage • Treats each item independently • Encourages safety stock SJSU Bus 140 - David Bentley

11. Historical Evolution of I/C - 2 • How Much? • Cost of inventory & EOQ • Balance carrying (holding) and ordering costs • EOQ = square root of 2DS/IC • Variations • Multiple delivery (manufacturing: EMQ or EPQ) • Quantity discounts SJSU Bus 140 - David Bentley

12. EOQ Limitations • Assumes ordering costs are accurately known • Assumes carrying costs are accurately known • Results in always carrying a certain amount of inventory • Focuses on mechanics, not basics • No emphasis on changing costs SJSU Bus 140 - David Bentley

13. Additional ordering models • Fixed-order interval • Frequency is set • Quantity varies with each order • Single-period model • One-time order • Perishables, refurbishing contracts • Alternative: ABC approach (Pareto!) • Based on dollar usage over a fixed period • Order “A” often, “C” rarely, “B” in between SJSU Bus 140 - David Bentley

14. High A Annual $ volume of items B C Low Few Many Number of Items ABC Classification System • Classifying inventory according to some measure of importance and allocating control efforts accordingly. • A-very important • B- mod. important • C- least important SJSU Bus 140 - Source: Stevenson

15. Inventory Counting Systems • Periodic • Full physical (“wall-to-wall”) • Two bin • Bulk and shelf • Stockroom minimum (SRM) • Perpetual • Transaction recording and balance maintenance • Historical evolution • Cycle counting (using ABC) SJSU Bus 140 - David Bentley

16. Inventory Metrics • Inventory Turnover • T = CGS AI • Expected Annual Shortages • E(N) = E(n) x D Q • Service Level • SLANNUAL = 1 - (E(N)/D) SJSU Bus 140 - David Bentley