Week 12B – Inventory Management (Chapter 12)

Week 12B – Inventory Management(Chapter 12) Definition, objectives, historical evolution, EOQ, ABC, Inventory counting systems SJSU Bus 140 - David Bentley

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

Some Terminology • Item • Stock-keeping unit (SKU) • Part • Stockout • Shortage • Decoupling • Safety stock • Safety time SJSU Bus 140 - David Bentley

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

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

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

Carrying costs Obvious Capital Various 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

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

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, where d = demand per period and LT = lead time in periods SJSU Bus 140 - David Bentley

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 - David Bentley

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

Historical Evolution of I/C - 2 • How Much? • Cost of inventory & EOQ • Balance carrying (holding) and ordering costs • EOQ = square root of 2DS/IC, where • D = quantity demand or usage for a period of time • S = setup and/or ordering cost • I = inventory carrying rate (percentage in decimal form) • C = cost of 1 unit of the item • Text: “H” which is the product of I times C SJSU Bus 140 - David Bentley

Historical Evolution of I/C - 3 • EOQ variations • Multiple delivery (manufacturing: EMQ or EPQ) • See pp. 489-492 • Quantity discounts (price breaks) • See pp. 492-494 SJSU Bus 140 - David Bentley

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

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

High A Annual $ volume of items B C Low Few Many Number of Items ABC Classification System - 1 • 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 - David Bentley

ABC Classification System - 2 • A items • 70-80% of the annual dollar usage • 5-15% of the number of items • B items • 10-20% of the annual dollar usage • 30-35% of the number of items • C items • 5-10% of the annual dollar usage • 50-60% of the number of items SJSU Bus 140 - David Bentley

ABC Classification System - 2 SJSU Bus 140 - David Bentley

Inventory Counting Systems - 1 • Periodic • Full physical (“wall-to-wall”) • Two bin • Bulk and shelf • Stockroom minimum (SRM) SJSU Bus 140 - David Bentley

Inventory Counting Systems - 2 • Perpetual • Transaction recording and balance maintenance • Historical evolution • Cycle counting • Based on quantity usage • Based on $ usage using Pareto Principle (ABC) • Block counting SJSU Bus 140 - David Bentley

Week 12B – Inventory Management (Chapter 12)