Slack, Chambers and Johnston, Operations Management, 6 th Edition, © Nigel Slack, Stuart Chambers, and Robert Johnston Chapter 12 Inventory planning and control Photodisc. Kim Steele

Slack, Chambers and Johnston, Operations Management, 6 th Edition, © Nigel Slack, Stuart Chambers, and Robert Johnston Design Planning and control Operations strategy Improvement Inventory planning and control The operation supplies… the delivery of a quantity of products and services when required The market requires… a quantity of products and services at a particular time

Slack, Chambers and Johnston, Operations Management, 6 th Edition, © Nigel Slack, Stuart Chambers, and Robert Johnston Key operations questions In Chapter 12 – Inventory planning and control – Slack et al. identify the following key questions: What is inventory? Why is inventory necessary? What are the disadvantages of holding inventory? How much inventory should an operation hold? When should an operation replenish its inventory? How can inventory be controlled?

Slack, Chambers and Johnston, Operations Management, 6 th Edition, © Nigel Slack, Stuart Chambers, and Robert Johnston Inventory is created to compensate for the differences in timing between supply and demand Input process Inventory Output process Rate of supply from input process Rate of demand from output process Inventory

Slack, Chambers and Johnston, Operations Management, 6 th Edition, © Nigel Slack, Stuart Chambers, and Robert Johnston e.g. Automotive parts distributor e.g. Local retail store Single-stage inventory system Suppliers Stock Sales operation Central depot Distribution Local distribution point Sales operation Two-stage inventory system Single-stage and two-stage inventory systems

Slack, Chambers and Johnston, Operations Management, 6 th Edition, © Nigel Slack, Stuart Chambers, and Robert Johnston e.g. Television manufacturer Suppliers Input stock Stage 1 A multi-stage inventory system WIP Stage 2 WIP Stage 3 Finished goods stock

Slack, Chambers and Johnston, Operations Management, 6 th Edition, © Nigel Slack, Stuart Chambers, and Robert Johnston A multi-echelon inventory system Yarn producers Cloth manufacturers Garment manufacturers Regional warehouses Retail stores

Slack, Chambers and Johnston, Operations Management, 6 th Edition, © Nigel Slack, Stuart Chambers, and Robert Johnston A paper merchant must get its inventory planning and control right

Slack, Chambers and Johnston, Operations Management, 6 th Edition, © Nigel Slack, Stuart Chambers, and Robert Johnston Inventory profiles chart the variation in inventory level Time per period DQDQ Instantaneous deliveries at a rate of QDQD Inventory level Steady and predictable demand (D) Slope = demand rate (D) = Average inventory Q2Q2 Order quantity = Q

Slack, Chambers and Johnston, Operations Management, 6 th Edition, © Nigel Slack, Stuart Chambers, and Robert Johnston Two alternative inventory plans with different order quantities (Q) Time Inventory level Plan A Q = 400 Demand (D) = 1000 items per year Average inventory for plan A = 200 Average inventory for plan B = yr 0.4 yr Plan B Q = 100

Slack, Chambers and Johnston, Operations Management, 6 th Edition, © Nigel Slack, Stuart Chambers, and Robert Johnston Order quantity Costs Economic order quantity (EOQ) Total costs Holding costs Order costs Traditional view of inventory-related costs

Slack, Chambers and Johnston, Operations Management, 6 th Edition, © Nigel Slack, Stuart Chambers, and Robert Johnston Cycle inventory in a bakery Inventory level Deliver A Produce A Deliver B Produce B Deliver C Produce C Deliver A Produce A Produce B Deliver B Produce C Deliver C Time

Slack, Chambers and Johnston, Operations Management, 6 th Edition, © Nigel Slack, Stuart Chambers, and Robert Johnston TimeInventory level Inventory profile for gradual replacement of inventory Order quantity Q QPQP M Slope = P – D Slope = D

Slack, Chambers and Johnston, Operations Management, 6 th Edition, © Nigel Slack, Stuart Chambers, and Robert Johnston Inventory level Time Shortages Inventory planning allowing for shortages

Slack, Chambers and Johnston, Operations Management, 6 th Edition, © Nigel Slack, Stuart Chambers, and Robert Johnston The re-order point Inventory level Re-order level Re-order point Time Demand (D) = 100 items per week Order lead time

Slack, Chambers and Johnston, Operations Management, 6 th Edition, © Nigel Slack, Stuart Chambers, and Robert Johnston Safety stock(s) helps to avoid stock-outs when demand and/or order lead times are uncertain Inventory level S Q Time t1t1 t2t2 d1d1 d2d2 Re-order level (ROL) Distribution of lead-time usage ?

Slack, Chambers and Johnston, Operations Management, 6 th Edition, © Nigel Slack, Stuart Chambers, and Robert Johnston The probability distributions for order lead time and demand rate combine to give the lead-time usage distribution Probability Demand rate Probability Order lead time Probability 100–199 Lead-time usage 120– – – – – –799

Slack, Chambers and Johnston, Operations Management, 6 th Edition, © Nigel Slack, Stuart Chambers, and Robert Johnston A periodic review approach to order timing with probabilistic demand and lead time Inventory level QmQm ToTo T1T1 T2T2 T3T3 Time t1t1 t2t2 t3t3 tftf tftf tftf Q1Q1 Q2Q2 Q3Q3

Slack, Chambers and Johnston, Operations Management, 6 th Edition, © Nigel Slack, Stuart Chambers, and Robert Johnston Class C items Class B items Class A items Pareto curve for stocked items Percentage of types of items Percentage of value of items

Slack, Chambers and Johnston, Operations Management, 6 th Edition, © Nigel Slack, Stuart Chambers, and Robert Johnston 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.

Slack, Chambers and Johnston, Operations Management, 6 th Edition, © Nigel Slack, Stuart Chambers, and Robert Johnston 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 Original holding costs Original total costs Revised holding costs Order quantity Costs Original EOQ Revised EOQ Revised order costs Revised total costs Original order costs

Slack, Chambers and Johnston, Operations Management, 6 th Edition, © Nigel Slack, Stuart Chambers, and Robert Johnston Two bin system Three bin system The ‘Two bin’ and ‘Three bin’ systems of re-ordering system 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