february 2008inventory management 1 INVENTORY MANAGEMENT And Independent Demand Dr. Margaret Farrell  Arnold, Chapman & Clive (2008)  Heizer  Slack et al

february 2008 inventory management 2 Inventory Fundamentals (Arnold, Chapman & Clive (2008) introduction to materials management, Pearson Education) Inventories are materials & supplies that a business or institution carries either for sale or to provide inputs or supplies to the production process. All businesses and institutions require inventories Often they are a substantial part of total assets Financially, inventories are very nb to manufacturing companies – representing from 20% to 60% of total asset value on the balance sheet

february 2008 inventory management 3 Inventory Management Convert inventory value into cash  cash- flow Planning & controlling Inventory from raw material to end customer Inventory either results from production or supports it  they cannot be managed separately Inventory must be considered at each planning stage  long, medium and short term

february 2008 inventory management 4 Supplier Carrier Manuf. Site Carrier Distrib. centre Distrib. centre Customer

february 2008 inventory management 5 Types of Inventory There are many types and classifications of stock and inventory, for example: raw materials, WIP, finished goods, components and sub-assemblies, consumables or MRO items, tools and equipment, and resale items. Russell and Taylor include labour, and working capital.

february 2008 inventory management 6 Reasons for Holding Stock There are many reasons for holding stock (see below), however it should be remembered that the average cost of holding stock is 25% of its value. anticipated demand or certainty inventories variations (demand & production) also known as decoupling inventories Buffer - WIP - between production processes Buffer or uncertainty inventories or safety stock Bulk purchases future shortages seasonal fluctuations --supply and demand balancing production processes can flow smoothly as part of production or distribution deliberate investment policy cycle inventories (lots vs individual) Alternative Reasons obsolete stock little or no inventory control little or no stock records Poor Internal planning and Control Sub optimal decision making

february 2008 inventory management 7 Aims of Inventory management or Provisioning is to provide both internal and external customers with the required service levels in terms of quantity and order fill. requires ascertaining both present and future requirements for all types of inventory in order to avoid overstocking, whilst also avoiding bottlenecks in production. The final aim is to keep costs to a minimum by use of techniques such as variety reduction, economic lot sizes and analysis of costs incurred in obtaining and carrying inventories.

february 2008 inventory management 8 In summary the role of inventory management for individual items encompasses the principles, concepts and techniques for deciding; What to order / buy? How much to order / buy? When it is needed? When to order for purchase or production? and How and where to store it? Decisions made in answer to each of the above questions should be consistent with decisions at other levels (integrated) and should support Organisational objectives by; 1.defining & attaining desired levels of customer service 2.achieving investment objectives Balancing these conflicting objectives is the role of inventory management, of which purchasing is a key element.

february 2008 inventory management 9 How much When to What stock control to re-order? re-order? system to use? When demand andWhen demand and/or lead-time are knownlead-time are not with certaintyknown with certainty

february 2008 inventory management 10 Control of Service Inventories  Can be a critical component of profitability  Losses may come from shrinkage or pilferage  Applicable techniques include 1.Good personnel selection, training, and discipline 2.Tight control on incoming shipments 3.Effective control on all goods leaving facility

february 2008 inventory management 11 Holding, Ordering, and Setup Costs  Holding costs - the costs of holding or “carrying” inventory over time  Ordering costs - the costs of placing an order and receiving goods  Setup costs - cost to prepare a machine or process for manufacturing an order

february 2008 inventory management 12 Cost of Stock The cost of stock can be broken down into four key elements; Costs of Holding Stock (Ch) Interest on Capital Storage and Store mgt Handling Audits etc. Insurance and Security Deterioration & Obsolesce Pilferage and Vermin Procurement / Obtaining Stock (Co) clerical / administrative & purchasing transport local manufacturing costs (local order, P&C...) Stockout Costs Loss of Contribution Loss of future sales Loss of goodwill Costs of Production stoppages Labour frustration Cost of expediting Materials Costs of Stock Bulk Buying Longer production Runs Actual sales price Profit

february 2008 inventory management 13 Holding Costs Category Cost (and Range) as a Percent of Inventory Valu e Housing costs (including rent or depreciation, operating costs, taxes, insurance) 6% (3 - 10%) Material handling costs (equipment lease or depreciation, power, operating cost) 3% ( %) Labor cost3% (3 - 5%) Investment costs (borrowing costs, taxes, and insurance on inventory) 11% (6 - 24%) Pilferage, space, and obsolescence3% (2 - 5%) Overall carrying cost26% Table 12.1

february 2008 inventory management 14 Simple Methods of Stock Control Demand and Supply Demand or usage level  average, busy or slack for specified periods of time  i.e. average, min., or max. Suppliers delivery period or lead time  average, max or min. time Calculate the re-order level or the level of stock which will trigger a fresh purchase: Re-Order Level=maximum delivery period x maximum usage –Allowing for occasional checks –suitable for stock items of comparatively low value –real time information not required

february 2008 inventory management 15 Re- Order Quantity = optimum quantity which minimises the combined costs of ordering and holding stock (and purchase costs)  use mathematical models

february 2008 inventory management 16 Reorder level & reorder quantity example Component no. 697 has a usage level or demand of 30,000 units per annum. The max. weekly usage is 800 units and a minimum of 400 units p.w. The average lead time is 3weeks but it can vary in the range of 4weeks to a minimum of 2 weeks. What is the re-order level and reorder quantity?

february 2008 inventory management 17 SOLUTION avg. weekly usage = 600 avg. usage over avg. LT = 600 x 3 = 1,800 units max usage over max. LT = 800 x 4 = 3,200 units Probable re-order level set by management would be 3,000 units. Low value item => fix reorder quantity by deciding how many times you would like to place an order p.a. i.e. say 6 times, say every two months Reorder quantity = (30,000/6) = 5,000 units

february 2008 inventory management 18 More simple inventory systems Visual approaches to control, –Kanban or the two bin approach, –The use of records. The ABC classification system. Continuous Inventory systems –Or Fixed Order Quantity system: order a constant amount, once inventory has fallen to the ROL. The order placed, is for a fixed amount, known as the economic order quantity (EOQ). Periodic Inventory Systems place a variable quantity order, after a fixed period of time.

february 2008 inventory management 19 Inventory Costs Item Cost –Landed price Carrying Cost –Capital cost –Storage costs –Risk costs –See next slide Ordering Costs –Production control costs –Setup and teardown costs –Lost capacity cost –Purchase order cost –See next slide Stockout costs Capacity associated costs