© 1997 Prentice-Hall, Inc Principles of Operations Management Inventory for Independent Demand Chapter 9

© 1997 Prentice-Hall, Inc Learning Objectives n Explain what inventory is n Describe how inventory is classified n Explain ABC analysis n Explain cycle counting

© 1997 Prentice-Hall, Inc Thinking Challenge Netscape allows people to navigate the Internet graphically. To sell Netscape, the company put it on the Internet: no disks, no packaging, no inventory, no distributors. What other products could be sold on the Internet to obtain these benefits? AloneGroupClass © 1995 Corel Corp.

© 1997 Prentice-Hall, Inc What Is Inventory? n Stock of materials n Stored capacity n Examples © 1995 Corel Corp. © T/Maker Co. © 1995 Corel Corp.

© 1997 Prentice-Hall, Inc Purposes of Inventory n Meet anticipated demand n Decouple production & distribution l Permits constant production quantities n Take advantage of quantity discounts n Provide hedge against inflation n Protect against shortages n Permit smooth operations through WIP (i.e., decouple operations)

© 1997 Prentice-Hall, Inc Disadvantages of Inventory n Higher costs l Item cost (if purchased) l Ordering (or setup) cost s Costs of forms, clerks’ wages etc. l Holding (or carrying) cost s Building lease, insurance, taxes etc. n Difficult to control n Hides production problems

© 1997 Prentice-Hall, Inc Inventory Holding Costs Housing (building) cost6% Material handling costs3% Labor cost3% Inventory investment costs11% Pilferage, scrap, & obsolescence3% Total holding cost26% % of Category Inventory Value

© 1997 Prentice-Hall, Inc Inventory Classifications © T/Maker Co.

© 1997 Prentice-Hall, Inc ABC Analysis n Divides on-hand inventory into 3 classes l A class, B class, C class n Basis is usually annual $ volume l $ volume = Annual demand x Unit cost n Policies based on ABC analysis l Develop class A suppliers more l Give tighter physical control of A items l Forecast A items more carefully

© 1997 Prentice-Hall, Inc Classifying Items as ABC % of Inventory Items % Annual $ Usage A B C

© 1997 Prentice-Hall, Inc ABC Classification Example You’re a buyer for Auto Palace. Classify the following items as A, B, or C. Note: Example is for illustration only; too few items.

© 1997 Prentice-Hall, Inc ABC Classification Solution Stock #Vol.Cost$ Vol.%ABC ,000 $ , , , Total

© 1997 Prentice-Hall, Inc ABC Classification Thinking Challenge You’re an inventory control supervisor for USX. Classify the following items as A, B, or C. AloneGroupClass

© 1997 Prentice-Hall, Inc ABC Classification Solution*

© 1997 Prentice-Hall, Inc Cycle Counting n Physically counting a sample of total inventory on a regular basis n Used often with ABC classification l A items counted most often (e.g., daily) n Advantages l Eliminates annual shut-down for physical inventory count l Improves inventory accuracy l Allows causes of errors to be identified

© 1997 Prentice-Hall, Inc Basic Inventory Planning Questions n How much to order? n When to order? Purchase Order DescriptionQty. Microwave1000

© 1997 Prentice-Hall, Inc Inventory Models n Fixed order quantity models l Economic order quantity l Production order quantity l Quantity discount n Probabilistic models n Fixed order period models Help answer the inventory planning questions! © T/Maker Co.

© 1997 Prentice-Hall, Inc ConclusionConclusion n Explained what inventory is n Described how inventory is classified n Explained ABC analysis n Explained cycle counting