Operations Management Inventory Management 1

Types of Inventory Raw material Work-in-process Maintenance/repair/operating supplies Finished goods 10

The Functions of Inventory Decouple suppliers from production and production from distribution. Decoupling means that inventory is used to break a direct dependency that one part of the supply chain may have on another. If disruption occurs in any part of the system, inventory is used to cushion that impact. Allows one to take advantage of quantity discounts To provide a hedge against inflation To protect against shortages due to delivery variation (safety stock) 8

Inventory Classifications © 1984-1994 T/Maker Co. Process stage Number & Value Demand Type Other Raw Material WIP Finished Goods A Items B Items C Items Maintenance Dependent Operating Independent Dependent 11

ABC Analysis Divides on-hand inventory into 3 classes A class, B class, C class Basis is usually annual $ volume $ volume = Annual demand x Unit cost Policies based on ABC analysis Develop class A suppliers more Give tighter physical control of A items Forecast A items more carefully 13

TYPICAL DECISION TABLE FOR ABC CLASSIFICATION Is annual usage more than $50,000? A Is annual usage between $10,000 and $50,000? B Is annual usage less than $10,000? C Is the unit cost more than $500? A Is the unit cost between $100 and $500? B Does the physical nature of the item cause special storage problems? B Is the lead time longer than 6 months? A Is the lead time between 3 and 6 months? B Is shelf life less that 3 months? A Is shelf life greater than 3 months but less than 6 months? B

Control of A - Items - Close Control on inventory - Frequent Check of Schedule Revision - Little or zero Safety stock - High turnover goals (sales/inventory), 12 to 24 times a year - Frequent check of inventory - Proper authorization - Long-term relationship with supplier

Control of B - Items - Moderate control on inventory - Moderate safety stock - Moderate turnover - six to fifteen times a year - Moderate authorization procedure - Limited authorization required

Control on C - items - No or lose control - Large safety stock - Low turnover - One to five times a year - No authorization require - No supplier relationship - Buy when needed

Independent versus Dependent Demand Independent demand - demand for item is independent of demand for any other item Dependent demand - demand for item is dependent upon the demand for some other item 18

EOQ Assumptions Known and constant demand Known and constant lead time Instantaneous receipt of material No quantity discounts No stockouts (shortage) 25

Cost of Inventory Holding Ordering Total Q Cost Cost Cost ----------------------------------------------------------------- 100 100/2 (1) = 50 1000/100 (2) =20 70 200 200/2 (1) =100 1000/200 (2) =10 110 300 300/2 (1) =150 1000/300 (2) = 6.67 156.67

EOQ Model How Much to Order? Annual Cost Total Cost Curve Holding Cost Curve Order (Setup) Cost Curve Order Quantity Optimal Order Quantity (Q*) 26

Deriving an EOQ Develop an expression for setup or ordering costs Develop an expression for holding cost Set setup cost equal to holding cost Solve the resulting equation for the best order quantity 30

Production Order Quantity Model Answers how much to order and when to order Allows partial receipt of material Other EOQ assumptions apply Suited for production environment Material produced, used immediately Provides production lot size Lower holding cost than EOQ model 32

Make Information Working days = 240 Days a year Holding Ordering Product Cost Demand Production A 10.00 100000 130000 1.00 305.00 B 15.00 110000 140000 1.20 305.10 C 16.00 90000 120000 1.30 304.50 D 19.00 75000 105000 0.90 310.00 E 21.00 80000 1.50 312.00 F 25.00 150000 2.00 308.50 G 28.00 95000 125000 0.75 309.00 H 14.00 160000 0.65 312.50 I 9.00 65000 1.24 310.50 J 13.00 55000 85000 1.10 308.00

MAKE EOQ Purchasing Holding Ordering Total Product Q Cost A 16258 1000000.00 1875.96 1003751.92 B 16156 1650000.00 2077.25 1654154.51 C 12986 1440000.00 2110.29 1444220.57 D 13447 1425000.00 1728.96 1428457.91 E 11047 1680000.00 2259.53 1684519.05 F 13605 3000000.00 2721.03 3005442.06 G 18060 2660000.00 1625.41 2663250.82 H 25820 1820000.00 1573.40 1823146.80 I 10153 585000.00 1987.84 588975.69 J 9342 715000.00 1813.38 718626.76

Buy Information Price Ordering Cost Holding Cost Demand A 25.00 5.00 1.00 100000 B 30.00 5.10 1.20 110000 C 31.00 4.50 1.30 90000 D 34.00 10.00 0.90 75000 E 36.00 12.00 1.50 80000 F 40.00 8.50 2.00 120000 G 43.00 9.00 0.75 95000 H 29.00 12.50 0.65 130000 I 24.00 10.50 1.24 65000 J 28.00 8.00 1.10 55000

BUY EOQ Purchasing Holding Ordering Total Product Q Cost A 1000 2500000.00 500.00 2501000.00 B 967 3300000.00 580.17 3301160.34 C 789 2790000.00 513.08 2791026.16 D 1291 2550000.00 580.95 2551161.90 E 1131 2880000.00 848.53 2881697.06 F 1010 4800000.00 1009.95 4802019.90 G 1510 4085000.00 566.24 4086132.48 H 2236 3770000.00 726.72 3771453.44 I 1049 1560000.00 650.50 1561301.00 J 894 1540000.00 491.93 1540983.87

Make Buy Total Product Cost F 3005442.06 4802019.90 G 2663250.82 4086132.48 H 1823146.80 3771453.44 E 1684519.05 2881697.06 B 1654154.51 3301160.34 C 1444220.57 2791026.16 D 1428457.91 2551161.90 A 1003751.92 2501000.00 J 718626.76 1540983.87 I 588985.69 1561301.00