1. Chapter 12
Inventory management

2. Operations management
Inventory management
Direct
Design
Develop
Deliver
Operations management
Inventory management
The market requires… a quantity of products and services at a particular time
The operation supplies the delivery of a quantity of products and services when required
Figure This chapter covers inventory management

3. Key operations questions
In Chapter 12 – Inventory planning and control – Slack et al. identify the following key questions…
What is inventory?
Why should there be any inventory?
How much should be ordered?
When should an order be placed?
How can inventory be controlled?

4. Inventory management
Inventory is created to compensate for the differences in timing between supply and demand
Time
Inventory accumulating
Inventory reducing
Inventory
Time
In-flow (supply from previous process)
Out-flow (rate of demand from output process)
Figure Inventory is created to compensate for the differences in timing between supply and demand

5. Some ways in which physical inventory may be reduced
Reason for holding inventory
Example
How inventory could be reduced
As an insurance against uncertainty
Safety stocks for when demand or supply is not perfectly predictable
Improve demand forecasting
Tighten supply, e.g. through service level penalties
To counteract a lack of flexibility
Cycle stock to maintain supply when other products are being made
Increase flexibility of processes, e.g. by reducing changeover times (see Chapter 11)
Using parallel processes producing output simultaneously (see Chapter 7)
To take advantage of relatively short-term opportunities
Suppliers offer ‘time limited’ special low cost offers
Persuade suppliers to adopt ‘everyday low prices’ (see Chapter 13)
Table Some ways in which physical inventory may be reduced

6. Some ways in which physical inventory may be reduced (Continued)
Reason for holding inventory
Example
How inventory could be reduced
To anticipate future demands
Build up stocks in low demand periods for use in high demand periods
Increase volume flexibility by moving towards a ‘chase demand’ plan (see Chapter 11)
To reduce overall costs
Purchasing a batch of products in order to save delivery and administration costs
Reduce administration costs through purchasing process efficiency gains
Investigate alternative delivery channel that reduce transport costs.
To fill the processing ‘pipeline’
Items being delivered to customer
Reduce process time between customer request and dispatch of items
Reduce throughput time in the downstream supply chain (see Chapter 13)
Table Some ways in which physical inventory may be reduced (Continued)

7. Inventory has a significant effect on return on assets
Profit
Total assets
Revenues  Costs
Working capital + Fixed assets =
Ability to supply from stock
Obsolescence, damage, loss
Cost of funding inventory
Storage costs
Ordering costs
Amount you owe suppliers
Amount customers owe you
Figure Inventory management has a significant effect on return on assets

8. Demand (D) = 1,000 items per year
Two alternative inventory plans with different order quantities (Q)
Demand (D) = 1,000 items per year
400
Plan A
Q = 400
Inventory level
Average inventory for plan A = 200
Plan B
Q = 100
Average inventory for plan B = 50
100
0.1 yr
0.4 yr
Time
Figure Two alternative inventory plans with different order quantities (Q)

9. Economic order quantity (EOQ)
Traditional view of inventory-related costs
400
Total costs
Order costs
350
300
250
Costs
200
Holding costs
Economic order quantity (EOQ)
150
100 50 50
100
150
200
250
300
350
400
Order quantity
Figure Graphical representation of the economic order quantity
400

10. The re-order point Inventory level Time
Demand (D) = 100 items per week
400
Order quantity (Q) = 400
Re-order level
300
Re-order point
Inventory level
200
100 1 2 3 4 5 6 7 8
Time
Order lead time
Figure Re-order level (ROL) and re-order point (ROP) are derived from the order lead time and demand rate

11. Distribution of lead-time usage
Safety stock(s) helps to avoid stock-outs when demand and/or order lead times are uncertain d1 t2
Re-order level (ROL) d2
Distribution of lead-time usage Q
Inventory level t1 ? S
Time
Figure Safety stock (s) helps to avoid stock-outs when demand and/or order lead time are uncertain

12. The probability distributions for order lead time and demand rate combine to give the lead-time usage distribution
0.4
0.3
0.2
0.1 1 2 3 4 5
Probability
Order lead time
0.4
0.3
0.2
0.1
110
120
130
140
Probability
Demand rate
0.4
0.3
0.2
0.1
Probability
100–199
Lead-time usage
120–299
300–399
400–499
500–599
600–699
700–799
Figure The probability distributions for order lead time and demand rate combine to give the lead-time usage distribution

13. A paper merchant must get its inventory planning and control right
Figure The role of the paper merchant

14. Pareto curve for stocked items
100
Class A items
Class B items
Class C items 90 80 70 60
Percentage of value of items 50 40 30 20 10 10 20 30 40 50 60 70 80 90
100
Percentage of types of items
Figure Pareto curve for items in a warehouse

15. 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

16. Original holding costs
Criticism of the EOQ approach
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
Revised total costs
Original order costs
Original total costs
Revised holding costs
Revised order costs
Costs
Revised EOQ
Original holding costs
Original EOQ
Order quantity
Figure 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

17. The ‘Two-bin’ and ‘Three-bin’ systems of reordering
Two-bin system
Three-bin system
Bin 1
Bin 2
Bin 1
Bin 2
Bin 3
Items being used
Reorder level + safety inventory
Items being used
Reorder level inventory
Safety inventory
Figure The two-bin and three-bin systems of re-ordering

18. supplies4medics.com Questions
Prepare a spreadsheet-based ABC analysis of usage value. Classify as follows:
A-Items: top 20% of usage value
B-Items: next 30% of usage value
C-Items: remaining 50% of usage value
Calculate the inventory weeks for each item, for each classification, and for all the items in total. Does this suggest that the OM’s estimate of inventory weeks is correct?
If so, what is your estimate of the overall inventory at the end of the base year, and how much might that have increased during the year?
Based on the sample, analyze the underlying causes of the availability problem described in the text.
Calculate the EOQs for the A-items.
What recommendations would you give to the company?

19. supplies4medics.com (Continued)
Sample
number
Catalogue reference number*
Sales unit description **
Sales unit cost
(Euro)
Last 12 months’ Sales
(units)
Inventory as at last year end
Re-order Quantity 1
11036
Disposable Aprons (10pk)
2.40
100 10 2
11456
Ear-loop Masks (Box)
3.60
6,000
120
1,000 3
11563
Drill Type 164
1.10
220
420
250 4
12054
Incontinence Pads Large
3.50
35,400
8,500
10,000 5
12372
150ml Syringe
11.30
430 6
12774
Rectal Speculum 3 Prong
17.40 65 20 7
12979
Pocket Organiser Blue
7.00
160
500 8
13063
Oxygen Trauma Kit
187.00 40 9
13236
Zinc Oxide Tape
1.50
1,260 50
13454
Dual Head Stethoscope
6.25 16 25 11
13597
Disp. Latex Catheter
0.60
3,560 12
13999
Roll-up Wheelchair Ramp
152.50 44 13
14068
WashClene Tube
1.40
22,500
10,500
8,000 14
14242
Cervical Collar
12.00
140 24 15
14310
Head Wedge
89.00
14405
Three-Wheel Scooter
755.00 17
14456
Neonatal Trach. Tube
80.40
268 18
14675
Mouldable Strip Paste
10.20
1,250
172 19
14854
Sequential Comp. Pump
430.00
24943
Toilet Safety Frame
25.60
560
* Reference numbers are allocated sequentially as new items are added to catalogue. ** All quantities are in sales units (e.g. item, box, case, pack).
Table Representative sample of 20 catalogue Items

20. Sample #
Unit
Cost
Annual Sales UV
Cum
Class-ification
% of UV
Inventory
Inventory Value
Inventory Turns
Stock weeks 19
430.00
430
184,900 A
41.33 40
17,200
4.8 4
3.50
35,400
123,900
308,800
69.02
8,500
29,750
12.5 13
1.40
22,500
31,500
340,300
76.06
10,500
14,700
24.3 2
3.60
6,000
21,600
361,900
80.89
1,200
4,320
10.4
Sub Total
65,970
5.49
9.5 17
80.40
268
21,547
383,447 B
85.70 6
482
1.2 20
25.60
560
14,336
397,783
88.91 18
461
1.7
10.20
1,250
12,750
410,533
91.76
172
1,754
7.2 16
755.00 14
10,570
421,103
94.12 5
3,775
18.6
59,203
6,473
9.15
5.7 8
187.00
7,480
428,583 C
95.79
374
2.6
11.30
4,859
433,442
96.88
120
1,356
14.5 15
89.00 44
3,916
437,358
97.75
178
2.4 11
0.60
3,560
2,136
439,494
98.23 12 7
0.2 9
1.50
1,260
1,890
441,384
98.65
0.0
152.50
1,830
443,214
99.06
6,710
190.7
12.00
140
1,680
444,984
99.46 24
288
8.9
17.40 65
1,131
446,025
99.69
348
16.0
7.00
840
446,865
99.88
160
1,120
69.3 3
1.10
220
242
447,107
99.93
420
462
99.3 1
2.40
100
240
447,347
99.99 10
6.25 63
447,410
100.00
83.2
26,307
10,943
21.6
Total
83,386
5.37
9.7