Chapter 8 Inventory Management

Introduction

Chapter 8 - Inventory Management3 Radio Frequency Identification (RFID) Conventional bar codes are replaced with computer chips or smart tags. Use wireless technology to track inventory.

Chapter 8 - Inventory Management4 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 Management5 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 Management6 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.

General Considerations

Chapter 8 - Inventory Management8 Functions of Inventories Transit Inventories Buffer Inventories (safety stocks) Anticipation Inventories Decoupling Inventories Cycle Inventories

Chapter 8 - Inventory Management9 Forms of Inventories Raw materials Maintenance, repair, and operating supplies Work-in-process (WIP) Finished goods

Chapter 8 - Inventory Management10 Inventory-Related Costs Ordering or setup costs Inventory carrying or holding costs Stockout costs Opportunity costs Cost of goods

Chapter 8 - Inventory Management11 Decisions in Inventory Management When to order? How much to order?

Chapter 8 - Inventory Management12 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 Management13 Fluctuations in Inventory

Chapter 8 - Inventory Management14 Reorder Point Systems Reorder point Lead time Two-bin system Perpetual inventory system

Chapter 8 - Inventory Management15 A Reorder Point System

Chapter 8 - Inventory Management16 Periodic Review System maximum inventory level - on-hand inventory - on-order quantity + demand over lead time reorder quantity

Chapter 8 - Inventory Management17 Periodic Review System Without Considering On-Order Quantity

Chapter 8 - Inventory Management18 Periodic Review System (Assumes None On Order at Time of Reorder)

Chapter 8 - Inventory Management19 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 for15% of annual inventory value C items  40-50% of items that account for 10-15% of annual inventory value

Chapter 8 - Inventory Management20 ABC Inventory Categories

The Economic Order Quantity (EOQ)

Chapter 8 - Inventory Management22 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 Management23 Notation Q = order quantity U = annual usage CO = order cost per order CH = annual holding cost per unit

Chapter 8 - Inventory Management24 Water Distributor’s Inventory Pattern

Chapter 8 - Inventory Management25 Water Distributor’s Inventory Graph

Chapter 8 - Inventory Management26 Annual Order Cost $ Q

Chapter 8 - Inventory Management27 Annual Holding Cost $ Q

Chapter 8 - Inventory Management28 Graph of Annual Inventory Costs

Chapter 8 - Inventory Management29 Finding an Optimal Policy

Chapter 8 - Inventory Management30 Alternative Way of Deriving EOQ

Chapter 8 - Inventory Management31 Alternative Way of Deriving EOQ continued

Chapter 8 - Inventory Management32 EOQ Example Given:  25,000 annual demand  $3 per unit per year holding cost  $100 ordering costs

Chapter 8 - Inventory Management33 Cautions Regarding EOQ GIGO Exclude “sunk” costs Very small EOQ values my not be valid

Chapter 8 - Inventory Management 34