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Chapter 8

Chapter 8. Inventory Management. Introduction. Radio Frequency Identification (RFID) . Conventional bar codes are replaced with computer chips or smart tags. Use wireless technology to track inventory. Wal-Mart RFID. Early adopter of RFID is Wal-Mart.

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Chapter 8

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  1. Chapter 8 Inventory Management

  2. Introduction

  3. Radio Frequency Identification (RFID) • Conventional bar codes are replaced with computer chips or smart tags. • Use wireless technology to track inventory. Chapter 8 - Inventory Management

  4. Wal-Mart RFID • Early adopter of RFID is Wal-Mart. • By January 2005, 53 of its top 100 suppliers were sending RFID-tagged goods to its three distribution centers in the Dallas, Texas area. • Wal-Mart’s goal is to have all top 100 suppliers shipping RFID-tagged goods by the end of February 2005 in addition to 37 other suppliers. Chapter 8 - Inventory Management

  5. Wal-Mart RFID continued • The impetus for Wal-Mart’s investment in RFID was the lack of visibility it had into its backroom storage areas. • The major drawback to RFID is its cost. • In 2005, the cost of smart tags was $0.25 each if purchased in volume, and $0.75 if purchased in smaller quantities. • The stated goal in the industry is to get the price of smart tags down to $.05 Chapter 8 - Inventory Management

  6. Vendor-Managed Inventory (VMI) • With VMI, suppliers are given responsibility for managing the inventory carried by their retail or wholesale customers. • Rich Products, a $2 billion family-owned food company headquartered in Buffalo, NY, has a partnership with IBM to provide VMI services to the grocery industry for its frozen food items.  Chapter 8 - Inventory Management

  7. General Considerations

  8. Functions of Inventories • Transit Inventories • Buffer Inventories (safety stocks) • Anticipation Inventories • Decoupling Inventories • Cycle Inventories Chapter 8 - Inventory Management

  9. Forms of Inventories • Raw materials • Maintenance, repair, and operating supplies • Work-in-process (WIP) • Finished goods Chapter 8 - Inventory Management

  10. Inventory-Related Costs • Ordering or setup costs • Inventory carrying or holding costs • Stockout costs • Opportunity costs • Cost of goods Chapter 8 - Inventory Management

  11. Decisions in Inventory Management • When to order? • How much to order? Chapter 8 - Inventory Management

  12. Types of Inventory Management Systems • Reorder point systems • time between orders varies • constant order quantity • Periodic review systems • time between orders fixed • order quantity varies • Material requirements planning (MRP) • dependent demand items Chapter 8 - Inventory Management

  13. Fluctuations in Inventory Chapter 8 - Inventory Management

  14. Reorder Point Systems • Reorder point • Lead time • Two-bin system • Perpetual inventory system Chapter 8 - Inventory Management

  15. A Reorder Point System Chapter 8 - Inventory Management

  16. Periodic Review System • maximum inventory level • - on-hand inventory • - on-order quantity • + demand over lead time • reorder quantity Chapter 8 - Inventory Management

  17. Periodic Review System Without Considering On-Order Quantity Chapter 8 - Inventory Management

  18. Periodic Review System (Assumes None On Order at Time of Reorder) Chapter 8 - Inventory Management

  19. Priorities for Inventory Management: The ABC Concept • A items • 15-20% of items that account for 75-80% of annual inventory value • B items • 30-40% of items that account for 15% of annual inventory value • C items • 40-50% of items that account for 10-15% of annual inventory value Chapter 8 - Inventory Management

  20. ABC Inventory Categories Chapter 8 - Inventory Management

  21. The Economic Order Quantity (EOQ)

  22. Assumptions • Constant rate of demand • Shortages not allowed • Stock replenishment can be scheduled to arrive exactly when inventory drops to zero • Purchase price, ordering cost, and per unit holding cost are independent of quantity ordered • Items are ordered independently of each other Chapter 8 - Inventory Management

  23. Notation • Q = order quantity • U = annual usage • CO = order cost per order • CH = annual holding cost per unit Chapter 8 - Inventory Management

  24. Water Distributor’s Inventory Pattern Chapter 8 - Inventory Management

  25. Water Distributor’s Inventory Graph Chapter 8 - Inventory Management

  26. Annual Order Cost $ Q Chapter 8 - Inventory Management

  27. Annual Holding Cost $ Q Chapter 8 - Inventory Management

  28. Graph of Annual Inventory Costs Chapter 8 - Inventory Management

  29. Finding an Optimal Policy Chapter 8 - Inventory Management

  30. Alternative Way of Deriving EOQ Chapter 8 - Inventory Management

  31. Alternative Way of Deriving EOQ continued Chapter 8 - Inventory Management

  32. EOQ Example • Given: • 25,000 annual demand • $3 per unit per year holding cost • $100 ordering costs Chapter 8 - Inventory Management

  33. Cautions Regarding EOQ • GIGO • Exclude “sunk” costs • Very small EOQ values my not be valid Chapter 8 - Inventory Management

  34. Chapter 8 - Inventory Management

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