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MGTSC 352

Learn about inventory management, including why it is important, inventory policies, and how to find optimal inventory levels. Explore concepts such as acquisition costs, ordering costs, carrying costs, and shortage costs.

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MGTSC 352

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  1. MGTSC 352 Lecture 19: Distribution Planning One last look at shortest paths Inventory Management What is it, why keep it, inventory policies

  2. Inventory Management (pg. 132) Inventory = goods that have not yet been sold • raw material • work-in-process • finished goods • supplies

  3. More Recent Data Active learning: (1 min. / pairs) What does the inventory / monthly shipments ratio mean?

  4. Why Keep Inventory? • Seasonality (anticipated variation) • Provide flexibility (unanticipated variation) a.k.a.: • Economies of scale • Price speculation (not an ops reason) • Something to work on • NDR,JP

  5. Inventory Policy Answers two general questions • When to order? (ROP = reorder point) • How much to order? (Q = reorder quantity)

  6. Acquisition cost ($/unit purchased) Ordering costs($/order) clerical expenses delivery, inspection setup (prod.) Carrying costs = Holding costs($/unit/time unit) cost of capital insurance shrinkage, spoilage, obsolescence material handling (fork lifts, space) Shortage costs($/unit short) lost goodwill, discounts, penalties lost sales shut down of assembly line (prod.) Relevant Costs

  7. A&E Noise (VCRs) (pg. 134) • Cost: $150 • Price: $175 • Ordering cost:$30/order • Holding cost:0.25150/365 = $0.1/unit-day • Inventory policy • Order 80 when inventory position ≤ 60 • Inventory position = inv. on hand + inv. in transit • Lead time:5 days

  8. Inventory POSITION includes inventory in transit. Example 1 - the Distribution Game Example 2 - Today is 21 Aug. 1997, and there are 50 units in stock. The last two orders were placed on 9 Aug. and 18 Aug. Should Jane order today? I = 50 + 80 = 130 > 60, do not order today(Aug 18 order in transit) Order 80 when inventory pos. ≤ 60Lead time: 5 days

  9. Maximum inventory Avg. inventory ROP Demand during leadtime Q Leadtime Minimum inventory Inventory Time

  10. Finding Good Inventory Policies • Approach 1: Simulation • We will use historical sales (instead of generating random future sales) • We will assume demand = sales(an approximation) • Experiment with different values of Q and ROP • Approach 2: EOQ + LTD • An approximate model • Simpler to use • More abstract to Excel

  11. Acquisition Costs (pg. 142) • Total units sold per year  (10.12 VCRs/day)(365 days/year) = 3695 VCRs/year • Total acquisition costs per year  ($150/VCR)(3695 VCRs/year) = $554,350/year • Total acquisition costs per year if order size were changed to 90  $554,350 / year Acquisition costs are not affected by inventory policy, as long as demand is satisfied and there are no volume discounts

  12. Order Costs • Cost per order = $20 + ($20 / hour)(0.5 hours) = $30 / order • Number of orders per year  (3695 VCRs / year)/(80 VCRs / order) = 46.2 orders / year • Total order cost per year  (46.2 orders / year)($30 / order) = $1385.63 / year

  13. Inventory Simulated inventory profile Time

  14. Approximation 1: constant demand Inventory Time

  15. Maximum inventory Avg. inventory ROP Q Leadtime Minimum inventory Inventory LTD = Demand during leadtime Time

  16. Holding Costs (pg. 143) • Minimum inventory  ROP – LTD = 60 VCRs – (5 days)(10.12 VCRs/day) = 9.4 units • Maximum inventory  Min. inv. + Q = 9.4 + 80 = 89.4 VCRs • Average inventory  (min + max)/2 = (9.4 + 89.4)/2 = 49.4 VCRs • Total VCR-years of inventory per year  (49.4 VCRs)(1 year) = 49.4 VCR-years • Total holding cost per year  (49.4 VCR-years)($37.5 / VCR / year) = $1852.50 / year

  17. Avg. inventory Inventory What is a “VCR-year” of inventory? 5 VCRs Total inventory for the year: 5 VCR-years 1 VCR-year of inventory 4 VCRs 1 VCR-year of inventory 3 VCRs 1 VCR-year of inventory 2 VCRs 1 VCR-year of inventory 1 VCR 1 VCR-year of inventory 1 year Time

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