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BA339 – Chapter 12

BA339 – Chapter 12. Inventory Management Functions of Inventory Types of Inventory & Classifications Material Flow Cycle & Terms ABC Analysis Cycle Counting Inventory Costs Inventory Models. BA339 – Chapter 13. Function of Inventory (stored materials, stored capacity)

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BA339 – Chapter 12

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  1. BA339 – Chapter 12 • Inventory Management • Functions of Inventory • Types of Inventory & Classifications • Material Flow Cycle & Terms • ABC Analysis • Cycle Counting • Inventory Costs • Inventory Models

  2. BA339 – Chapter 13 • Function of Inventory (stored materials, stored capacity) • To “de-couple”or separate various part of the production process > minimize risk, cost • To provide a stock of goods that will provide a selection for customers > helps sales, creates demand, forecast demand • Take advantage of quantity discounts . Improve cost performance • Hedge against inflation > make short-term costs more predictable/lower • Smooth out production (minimize disruptions) • Manage seasonal demand for materials/services

  3. BA339 – Chapter 13 • Types of Inventory • Raw materials • Purchased materials & parts; not processed • Can be used to de-couple suppliers from production > preferable to eliminate variation in quality, quantity or delivery so separation is not needed. • Work-in-process (WIP) • Components/raw materials that have undergone change but are not complete • Often exist because of the time it takes and the processed used to make an item (cycle time) • Reducing cycle time reduces inventory

  4. BA339 – Chapter 13 • Types of Inventory • MRO inventories • Maintenance, repair, operating supplies needed to keep machinery and processes productive • Compare manufacturing vs. service environments • Finished goods inventory • Completed product • Inventoried because of uncertain customer demand, logistics cycle time, etc.

  5. BA339 – Chapter 13 • Inventory Classifications • Process stage • Raw material • WIP • Finished goods • Number & value • A, B, & C items • Demand type • Independent • Dependent • Other • MRO • Operation/production

  6. BA339 – Chapter 13 • Material Flow Cycle & Terms • Run time – job is at machine and being worked on • Setup time – job is at workstation and work station is being prepared to process job • Queue time – job is where it should be but not being processed because other work precedes it (often the longest part of cycle time) • Move time – time the job spends in transit between work stations • Wait time – job has completed one process but is waiting to be moved to next work area/process • Other – Just in case inventory > used to compensate for poor quality, poor process control

  7. BA339 – Chapter 13 • ABC Analysis • Inventory application of the Pareto principle (critical few vs. trivial many) • Used to establish inventory policies the focus resources on the few critical items and not the trivial many • To determine the annual dollar volume for ABC analysis: • Measure the annual demand of each inventory item time the cost per unit

  8. BA339 – Chapter 13 • ABC Analysis • Divides on-hand inventory into 3 classes: • A class – often only 15% of the number of inventory items but represents 70-80% of the total dollar usage • B class – medium dollar value; often represent 30% of the number of inventory items but 15-25% of the total dollar usage • C class – low dollar value; often represent 55-60% of number of inventory items but only 5% of total dollar value • Basis is annual $ volume • $$ volume = annual demand x unit cost • Policies focus on class A > Supplier development, control of items and forecasting

  9. BA339 – Chapter 13 • ABC Analysis • Graph – 12-17; also see figure 12.2 in text • Problem: • See example 1 on page 476 in text • Practice problem

  10. BA339 – Chapter 13 • Cycle Counting • Method of inventory control that precludes use of 100% physical inventory • Sample counts on a regular basis • Often used with ABC classifications – A class items counted most frequently • Eliminates shutdown & interruption of production (and sales) necessary for annual physical inventory • Eliminates annual inventory adjustments • Provides trained personnel to audit accuracy

  11. BA339 – Chapter 13 • Cycle Counting • Allows for causes of error/discrepancies to be identified sooner and remedial action to be taken • Maintains accurate inventory records (cost) • A class items – once/month • B class items – once/quarter • C class items – once/6 months

  12. BA339 – Chapter 13 • Cycle Counting • Example: Calculate the # of items counted per day • A items – 500; 20 working days/month • B items – 1750; 60 working days/quarter • C items – 2750; 120 working days/6mos. • Practice problem #2 – 1000/4000/8000

  13. BA339 – Chapter 13 • Inventory Costs • Holding/carrying costs – those associated with carrying inventory over time • Housing costs - buildings, rent, depreciation, operating costs, taxes, insurance; 3-10%% • Material handling costs – equipment, leases, depreciation, fuel, operating costs; 1-3.5% • Labor costs – from extra handling; 3-5% • Investment costs – COM/borrowing, taxes, and insurance on inventory; 6-24% • Pilferage, scrap, obsolescence; 2-5% • Often 25-35% of inventory values; less than 15% is suspect;

  14. BA339 – Chapter 13 • Inventory Costs • Ordering costs – costs associated with placing orders and receiving goods; aka, transaction costs; supplies, forms, order support, clerical support • Setup costs – cost to prepare or setup a machine to process material; clean-up, re-tooling, adjustment • Setup time – time required to prepare a machine to process material

  15. BA339 – Chapter 13 • Inventory Models • Dependent Demand – Chapter 14, MRP • Inventory demand that is based on demand for other items • Example: Toaster oven components & toaster ovens; outdoor gas grills and barbecue utensils • Independent Demand – Chapter 12, 3 models • Economic order quantity (EOQ) • Production order quantity (POQ) • Quantity discount

  16. BA339 – Chapter 13 • EOQ • Assumptions: Known & constant demand and lead time; instantaneous receipt of materials; no quantity discounts; only order setup costs and holding costs; no stockouts • Used to minimize total costs; setup/holding costs are significant, all other costs are constant • See graph on12-29; page 484 in text

  17. BA339 – Chapter 13 • EOQ – Calculation • Variables • Q = number of pieces/order; order quantiy • Q* = optimum number of pieces per order (EOQ) • D = annual demand in units for the inventory item • S = setup or ordering costs for each order • H = holding or carrying cost per unit per year • Demand/day = d • L = lead time in days

  18. BA339 – Chapter 13 • EOQ – Calculations • Steps • 1. Calculate the annual set up cost • (Annual demand/number units per order) x setup/order costs per order • (D/Q) x S • 2. Calculate the annual holding cost • (Avg. inventory level) x (Holding cost per unit per year) • (Q/2) x H

  19. BA339 – Chapter 13 • EOQ Calculations • Steps (cont.) • 3. Optimal order quantity is found when annual setup costs = annual holding costs • (D/Q) x S = (Q/2) x H • 4. Solve for Q* - cross multiply terms and isolate Q on the left side of the equation • 2DS = Q squared x H • Q squared = (2DS/H) • Q* = Square root of (2DS/H)

  20. BA339 – Chapter 13 • POQ Model • Determines how much to order and when to order • Allow partial receipt of material > all other EOQ assumptions apply • Suited for production environment • Materials produced, used immediately • Provides production lot size • Lower holding cost than EOW model • POQ graph in Figure 12.6, page 489 in text • Production variability caused by employees, machines, nonconforming materials, late delivery, inaccurate drawings/specs., production starts before drawing complete, unknown demand

  21. BA339 – Chapter 13 • Quantity Discount Model • Determines how much to order and when to order • Allow quantity discounts • Price reductions based on increasing quantity • Other EOQ assumptions apply • Trade-off is between lower price and increased holding/carrying costs

  22. BA339 – Chapter 13 • Probabilistic Models • Determine how much and when to order • Allows demand to vary • Follows normal distribution • Other EOQ assumptions apply • Considers service level and safety stock • Service level = 1 – probability of stockout • Higher service level means more safety stock • More safety stock means higher reorder point

  23. BA339 – Chapter 13 • Fixed Period Model • Determine how much to order • Orders placed at fixed intervals • Inventory brought up to target amount • Amount ordered varies • No continuous inventory count • Possibility of stockout between intervals depending on demand • Useful when vendors visit routinely

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