1. Chapter 8 Quantity and Inventory ©McGraw-Hill Education. All rights reserved.

2. Key Questions Addressed in Chapter 8 How much to acquire? When to acquire? How to inventory effectively?

3. Factors Complicating Quantity Decisions Forecasts – Purchase decisions made a long time before actual requirements are known – Rely on forecasts of future demand, lead times, prices, and other costs – Forecasts are rarely, if ever, perfect Costs – Costs associated with placing orders, holding inventory, running out of materials, and having a service unavailable when needed

4. Factors Complicating Quantity Decisions Availability – Desired quantities may be unavailable without paying a higher price or delivery charge Price-Volume Relationship – Reduced prices for larger quantities versus carrying costs Shortages – May cause serious disruptions

5. Forecasting Techniques: Quantitative: – Use past data to predict the future Causal models Time series forecasting Qualitative: – Gather opinions and use with judgment to forecast Market forecasts: estimates of sales staff Top down forecast The Delphi technique: a formal approach

6. Types of Demand Dependent or derived demand: – item is part of a larger component or product, and its use is dependent on the production schedule for the larger component – example: demand for bottles and caps for a drink Independent demand: – usage is determined directly by customer orders, independent of production scheduling decisions – example: demand for an energy drink

7. Why Inventory? To provide and maintain good customer service. To smooth the flow of goods through the production process To provide protection against the uncertainties of supply and demand To obtain a reasonable utilization of people and equipment

8. Cost of Inventories Basic elements are: – capital costs – inventory service costs – storage space costs – inventory risk costs

9. ABC Classification of Purchases ©McGraw-Hill Education. All rights reserved. 9 Class Percentage of Total Items Purchased Percentage of Total Purchase Dollars A1070-80 B10-2010-15 C70-8010-20

10. Determining Quantity of Services Forecasting aggregate demand for services often more unreliable than for goods – Multiple contacts: users, specifiers, order placers, and supplier relationship managers – Multiple contracts at varying prices and terms with the same supplier Organizationwide consumption management is impossible under these conditions Difficult for suppliers to determine capacity requirements and project utilization rates