Inventory planning and control Chapter 12 Inventory planning and control Source: Corbis

Inventory planning and control Inventory planning and control Operations strategy The market requires … a quantity of products and services at a particular time Operations management Design Improvement The operation supplies ... the delivery of a quantity of products and services when required Planning and control

Inventory is created to compensate for the differences in timing between supply and demand Rate of supply from input process Source: Alamy/Van Hilversum Rate of demand from output process Inventory Input process Inventory Output process

Single-stage and two-stage inventory systems Single-stage inventory system Two-stage inventory system Suppliers Suppliers Stock Central depot e.g. Local retail store e.g. Automotive parts distributor Sales operation Distribution Local distribution point Sales operation

A multi-stage inventory system Input stock e.g. Television manufacturer Stage 1 WIP Stage 2 WIP Stage 3 Finished goods stock Suppliers

A multi-echelon inventory system Yarn producers Retail stores Cloth manufacturers Garment manufacturers Regional warehouses

A paper merchant must get its inventory planning and control right

Inventory profiles chart the variation in inventory level Order quantity = Q Steady and predictable demand (D) Slope = demand rate (D) = Average inventory Q 2 Inventory level Q D Instantaneous deliveries at a rate of Time D Q per period

Two alternative inventory plans with different order quantities (Q) Demand (D) = 1000 items per year 400 Plan A Q = 400 Inventory level Average inventory for plan A = 200 Plan B Q = 100 Average inventory for plan B = 50 100 0.1 yr 0.4 yr Time

Traditional view of inventory-related costs 400 Total costs Order costs 350 300 250 200 Costs Holding costs Economic order quantity (EOQ) 150 100 50 50 100 150 200 250 300 350 400 Order quantity 400

Cycle inventory in a bakery Deliver A Produce A Deliver B Produce B Deliver C Produce C Deliver A Produce A Produce B Deliver B Produce C Deliver C Inventory level Time

Inventory profile for gradual replacement of inventory Source: Alamy/ArchivBerlin Fotoagentur GmbH Order quantity Q Slope = P – D Slope = D Q P M Inventory level Time

Inventory planning allowing for shortages Inventory level Shortages Time

The re-order point Inventory level Time Demand (D) = 100 items per week 400 Re-order level 300 Re-order point Inventory level 200 100 1 2 3 4 5 6 7 8 Time Order lead time

Distribution of lead-time usage Safety stock(s) helps to avoid stock-outs when demand and/or order lead times are uncertain d1 t2 Re-order level (ROL) d2 Distribution of lead-time usage Q Inventory level t1 ? S Time

The probability distributions for order lead time and demand rate combine to give the lead-time usage distribution 0.4 0.3 0.2 0.1 1 2 3 4 5 Probability Order lead time 0.4 0.3 0.2 0.1 110 120 130 140 Probability Demand rate 0.4 0.3 0.2 0.1 Probability 100-199 Lead-time usage 200-299 300-399 400-499 500-599 600-699 700-799

A periodic review approach to order timing with probabilistic demand and lead time Qm Q1 Q2 Q3 Inventory level T0 T1 T2 T3 Time t1 t2 t3 tf tf tf

Pareto curve for stocked items Source: Howard Smith Paper Group Pareto curve for stocked items 100 Class A items Class B items Class C items 90 80 70 60 Percentage of value of items 50 40 30 20 10 10 20 30 40 50 60 70 80 90 100 Percentage of types of items

Inventory classifications and measures Class A items – the 20% or so of high-value items which account for around 80% of the total stock value Class B items – the next 30% or so of medium-value items which account for around 10% of the total stock value Class C items – the remaining 50% or so of low-value items which account for around the last 10% of the total stock value

Original holding costs If the true costs of stock holding are taken into account, and if the cost of ordering (or changeover) is reduced, the economic order quantity (EOQ) is much smaller Revised total costs Original order costs Original total costs Revised holding costs Revised order costs Costs Revised EOQ Original holding costs Original EOQ Order quantity

The ‘two-bin’ and ‘three-bin’ re-ordering systems Two-bin system Three-bin system Bin 1 Bin 2 Bin 1 Bin 2 Bin 3 Items being used Re-order level + safety inventory Items being used Re-order level inventory Safety inventory

Key Terms Test Inventory (also known as stock) The stored accumulation of transformed resources in a process; usually applies to material resources but may also be used for inventories of information; inventories of customers (or customers of customers) are usually called queues. Buffer inventory An inventory that compensates for unexpected fluctuations in supply and demand; can also be called a safety inventory. Cycle inventory Inventory that occurs when one stage in a process cannot supply all the items it produces simultaneously and so has to build up inventory of one item while it processes the others.

Key Terms Test De-coupling inventory The inventory that is used to allow work centres or processes to operate relatively independently. Anticipation inventory Inventory that is accumulated to cope with expected future demand or interruptions in supply. Pipeline inventory The inventory that exists because material cannot be transported instantaneously.

Key Terms Test Work-in-process (WIP) The number of units within a process waiting to be processed further (also called work-in-progress). Economic order quantity (EOQ) The quantity of items to order that supposedly minimizes the total cost of inventory management, derived from various formulae. Economic batch quantity (EBQ) The amount of items to be produced by a machine or process that supposedly minimizes the costs associated with production and inventory holding.

Key Terms Test Re-order point The point in time at which more items are ordered, usually calculated to ensure that inventory does not run out before the next batch of inventory arrives. Re-order level The level of inventory at which more items are ordered, usually calculated to ensure that inventory does not run out before the next batch of inventory arrives. Lead-time usage The amount of inventory that will be used between ordering replenishment and the inventory arriving, usually described by a probability distribution to account for uncertainty in demand and lead time.

Key Terms Test Continuous review An approach to managing inventory that makes inventory-related decisions when inventory reaches a particular level, as opposed to periodic review. Periodic review An approach to making inventory decisions that defines points in time for examining inventory levels and then makes decisions accordingly, as opposed to continuous review. Usage value A term used in inventory control to indicate the quantity of items used or sold multiplied by their value or price.

Key Terms Test Pareto law A general law found to operate in many situations that indicates that 20% of something causes 80% of something else, often used in inventory management (20% of products produce 80% of sales value) and improvement activities (20% of types of problems produce 80% of disruption). ABC inventory control An approach to inventory control that classes inventory by its usage value and varies the approach to managing it accordingly. Perpetual inventory principle A principle used in inventory control that inventory records should be automatically updated every time items are received or taken out of stock.