1. Inventory planning and control
Chapter 12
Inventory planning and control
Source: Corbis

2. Inventory planning and control Inventory planning and control
Operations strategy
The market requires … a quantity of products and services at a particular time
Operations management
Design
Improvement
The operation supplies ... the delivery of a quantity of products and services when required
Planning and control

3. Inventory is created to compensate for the differences in timing between supply and demand
Rate of supply from input process
Source: Alamy/Van Hilversum
Rate of demand from output process
Inventory
Input process
Inventory
Output process

4. Single-stage and two-stage inventory systems
Single-stage inventory system
Two-stage inventory system
Suppliers
Suppliers
Stock
Central depot
e.g. Local retail store
e.g. Automotive parts distributor
Sales operation
Distribution
Local distribution point
Sales operation

5. A multi-stage inventory system
Input stock
e.g. Television manufacturer
Stage 1
WIP
Stage 2
WIP
Stage 3
Finished goods stock
Suppliers

6. A multi-echelon inventory system
Yarn producers
Retail stores
Cloth manufacturers
Garment manufacturers
Regional warehouses

7. A paper merchant must get its inventory planning and control right

8. Inventory profiles chart the variation in inventory level
Order quantity = Q
Steady and predictable demand (D)
Slope = demand rate (D) =
Average inventory Q 2
Inventory level Q D
Instantaneous deliveries at a rate of
Time D Q
per period

9. Two alternative inventory plans with different order quantities (Q)
Demand (D) = 1000 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

10. Traditional view of inventory-related costs
400
Total costs
Order costs
350
300
250
200
Costs
Holding costs
Economic order quantity (EOQ)
150
100 50 50
100
150
200
250
300
350
400
Order quantity
400

11. Cycle inventory in a bakery
Deliver A
Produce A
Deliver B
Produce B
Deliver C
Produce C
Deliver A
Produce A
Produce B
Deliver B
Produce C
Deliver C
Inventory level
Time

12. Inventory profile for gradual replacement of inventory
Source: Alamy/ArchivBerlin Fotoagentur GmbH
Order quantity Q
Slope = P – D
Slope = D Q P M
Inventory level
Time

13. Inventory planning allowing for shortages
Inventory level
Shortages
Time

14. The re-order point Inventory level Time
Demand (D) = 100 items per week
400
Re-order level
300
Re-order point
Inventory level
200
100 1 2 3 4 5 6 7 8
Time
Order lead time

15. 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

16. 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
Lead-time usage

17. A periodic review approach to order timing with probabilistic demand and lead timeQm Q1 Q2 Q3
Inventory level T0 T1 T2 T3
Time t1 t2 t3 tf tf tf

18. Pareto curve for stocked items
Source: Howard Smith Paper Group
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

19. 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

20. Original holding costs
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

21. The ‘two-bin’ and ‘three-bin’ re-ordering systems
Two-bin system
Three-bin system
Bin 1
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

22. Key Terms Test Inventory (also known as stock)
The stored accumulation of transformed resources in a process; usually applies to material resources but may also be used for inventories of information; inventories of customers (or customers of customers) are usually called queues.
Buffer inventory
An inventory that compensates for unexpected fluctuations in supply and demand; can also be called a safety inventory.
Cycle inventory
Inventory that occurs when one stage in a process cannot supply all the items it produces simultaneously and so has to build up inventory of one item while it processes the others.

23. Key Terms Test De-coupling inventory
The inventory that is used to allow work centres or processes to operate relatively independently.
Anticipation inventory
Inventory that is accumulated to cope with expected future demand or interruptions in supply.
Pipeline inventory
The inventory that exists because material cannot be transported instantaneously.

24. Key Terms Test Work-in-process (WIP)
The number of units within a process waiting to be processed further (also called work-in-progress).
Economic order quantity (EOQ)
The quantity of items to order that supposedly minimizes the total cost of inventory management, derived from various formulae.
Economic batch quantity (EBQ)
The amount of items to be produced by a machine or process that supposedly minimizes the costs associated with production and inventory holding.

25. Key Terms Test Re-order point
The point in time at which more items are ordered, usually calculated to ensure that inventory does not run out before the next batch of inventory arrives.
Re-order level
The level of inventory at which more items are ordered, usually calculated to ensure that inventory does not run out before the next batch of inventory arrives.
Lead-time usage
The amount of inventory that will be used between ordering replenishment and the inventory arriving, usually described by a probability distribution to account for uncertainty in demand and lead time.

26. Key Terms Test Continuous review
An approach to managing inventory that makes inventory-related decisions when inventory reaches a particular level, as opposed to periodic review.
Periodic review
An approach to making inventory decisions that defines points in time for examining inventory levels and then makes decisions accordingly, as opposed to continuous review.
Usage value
A term used in inventory control to indicate the quantity of items used or sold multiplied by their value or price.

27. Key Terms Test Pareto law
A general law found to operate in many situations that indicates that 20% of something causes 80% of something else, often used in inventory management (20% of products produce 80% of sales value) and improvement activities (20% of types of problems produce 80% of disruption).
ABC inventory control
An approach to inventory control that classes inventory by its usage value and varies the approach to managing it accordingly.
Perpetual inventory principle
A principle used in inventory control that inventory records should be automatically updated every time items are received or taken out of stock.