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ISQA 429

ISQA 429. Inventory. Why Do We Have Inventories?. Cover Up For Customers’ Unreliable Forecasts Our Unreliable Forecasts, Bad Planning Inaccurate Shop Floor Scheduling Poor Inventory Control Poor Internal Quality Unreliable Supplier Deliveries, Quality Unreliable Transportation

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ISQA 429

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  1. ISQA 429 Inventory

  2. Why Do We Have Inventories? • Cover Up For • Customers’ Unreliable Forecasts • Our Unreliable Forecasts, Bad Planning • Inaccurate Shop Floor Scheduling • Poor Inventory Control • Poor Internal Quality • Unreliable Supplier Deliveries, Quality • Unreliable Transportation • Excessive Supplier Lead Times • Excessive Set-Up Times • Poor Maintenance

  3. Reasons to Keep Inventories • Seasonal Demand Exceeds Capacity • Hedges • Supply • Price In general, we should maintain inventories: • if they provide a competitive or strategic advantage, OR • if inventories will provide necessary goods unavailable any other way.

  4. Inventory Types • Raw Materials and Components • Work-in-Process • Finished Goods • Maintenance, Repair and Operating Supplies • Squirrel Stock • Excess, Surplus, Scrap

  5. Inventory Carrying Costs

  6. Inventory Carrying Costs • Cost of Capital • Lost Opportunity Cost • Borrowing Costs • Inventory Labor • Wages • Fringe Benefits • Capital Investments • Building • Material Handling Equipment • Storage Racks

  7. Inventory Carrying Costs • Variable Costs • Heat and Light • Taxes and Insurance • Shrinkage and Obsolescence • Tracking Costs • Computer Time & Data Entry

  8. Inventory Management Tools • ABC Analysis • Inventory Turnover Ratio

  9. Classifications of Inventories • Emergency Inventories • Active Inventories • Expensed Inventories

  10. Economic Order Quantity

  11. Safety Stock Calculations • Safety Stock is a Function of Variability in Demand DURING LEAD TIME • Stockouts Often Are Caused By INTERACTION Between Lead Times Longer Than Normal and Demand Greater Than Normal

  12. Safety Stock Calculations • Many Methods of Calculation • Average Use During Lead Time = Safety Stock • Maximum Use During Lead Time - Average Use During Lead Time = Safety Stock • Mean Absolute Deviation • Dangers of “Letting The Computer Do It”

  13. Mean Absolute Deviation Step 1: Calculate Average Lead Time Usage Step 2: Compare Each Period’s Usage to Average Step 3: Calculate Average Difference Step 4: Select Inventory Response Rate Step 5: Calculate Safety Stock (Average Difference x Multiplier from Step 4)

  14. Usage Variability and Service Levels MAD Std Dev Svc Lvl 1.0 .8 58% 1.5 1.2 77% 2.0 1.6 89% 2.5 2.0 95% 3.0 2.4 98% 3.5 3.2 99.5% 1 MAD = .8 Std Dev 1 Std Dev = 1.25 MAD

  15. Minimum and Maximum • Min = Reorder Point (ROP) • Min = Average Use During Lead Time + Safety Stock • Max = EOQ + Safety Stock

  16. Consignment Inventories • Definition • Inventory Carrying Cost Sharing • Advantages • Investment • Availability • Potential Problems • Ownership • Flexibility • Minimum Turns

  17. Inventory Management • Objectives • Assure Critical Item Availability • Minimize Investment • Measures • ABC Analysis • Level of Investment • Number of Turns • Inventory Response Rate • Overall and By Class • Days/Weeks of Supply

  18. Inventory Management • An Alternative View of ABC • Criticality • Lead Time • Cycle Counting • Risk Pooling • Trading Premium Transportation for Inventory • Hold Slow Movers at Only One or Two Central Locations

  19. Total Cost of Ownership • INV Cost = (Avg Inv + SS) x unit price x ICC • ADMIN Cost = # Orders x PO Cost • TC = INV Cost + ADMIN Cost • As Inventory Sits, Its Value Declines, Its Costs Increase

  20. What Is Impact Of Increasing Turns By 1?

  21. Inventory Technologies • Bar Coding • ASRS • RF Technologies • Voice Pick • RFID Systems • Computer Controlled Warehouse Activities • Pick-to-Light Systems • Automated Reordering

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