1. 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. What is Inventory? Stock of materials Stored capacity Examples
© 1995 Corel Corp.
© T/Maker Co.
© T/Maker Co.
© 1995 Corel Corp.

5. Role of Inventory
Is to protect us (firms) from critical stock-out; this approach gives the level of dependability of supplies

6. Strategic role of Inventory
At a strategic level, the essential role of inventory is to support the five operations performance objectives of quality, speed, dependability, flexibility and costs.
Supporting quality objectives,
E.g. Scotch, whisky, fine wine, are stored in barrels for many years to acquire distinctive and mature flavours, also timbers.

7. Strategic role of Inventory Cont..
Supporting speed objectives,
E.g. Inventory of fuels – on power station,
Hospitals must always have inventory of blood, bandages etc for immediate response to accident and emergency patient.
Supporting dependability objectives,
Supporting flexibility objectives, and
Those supporting cost objectives.

8. The Functions of Inventory
To ”decouple” or separate various parts of the production process
To provide a stock of goods that will provide a “selection” for customers
To take advantage of quantity discounts
To hedge against inflation and upward price changes

9. Types of Inventory Raw material Work-in-progress
Maintenance/repair/operating supply
Finished goods

10. COST ASSOCIATED WITH INVENTORIES
From a manager point of view, two basic categories of costs are associated with inventories;
Inventory carrying costs, and
Inventory acquisition costs.

11. Holding (Carrying) Costs
Obsolescence
Insurance
Extra staffing
Interest
Pilferage
Damage
Warehousing
Etc.

12. Inventory carrying costs
Carrying materials in inventory is very expensive
Prior to the relative recent period of high interest rates, the annual cost of carrying a production inventory where approximately 25% of the value of the inventory,
But in recent years due to escalation and volatile costs of money the figure ranges from 25 – 35% of the value of the inventory,

13. Inventory carrying costs Cont…
Five major element make up these costs in the following manner,
Opportunity cost of invented funds...12 – 20%
Insurance costs…………………..……2 – 4%
Property costs………………………....1 – 3%
Storage costs………………………..…1 – 3%
Obsolescence and deterioration …….4 – 10%
Total carrying costs……………………..20 – 40%

14. Inventory carrying costs Cont…
Generally;
These group of carrying cost rises and fall nearly portionatery with the rise and fall of inventory level,
The inventory level is directly related to the quantity in which the ordered materials is delivered,
Thus, the large the order quantity, the higher the average inventory level during the period covered by the order,

15. Inventory carrying costs Cont…
Thus; if a firm has estimated its approximate inventory costs, as a % of inventory value; the annual inventory costs that would be generated by delivery quantities of various sizes can be calculated as follows;
Carrying cost per year = (Average inventory value) * (inventory carrying costs as a % of inventory value)
But, Average inventory value is given by;
(Average inventory in units) * (Material unit cost)
Therefore; Carrying cost per year = average inventory in units) * (Material unit cost) * (inventory carrying costs as a % of inventory level

16. Inventory carrying costs Cont…
Symbolically;
CC = Q/2 * C * I,
Whereby;
CC = Carrying cost per year for the materials in question,
Q = Order or delivery quantity for the material in units,
C = Delivery unit costs of the materials,
I = Inventory carrying cost for the material, expressed
as a % of inventory value

17. Ordering Costs
Forms
Order processing
Clerical support
Etc.

18. Setup Costs
Clean-up costs
Re-tooling costs
Adjustment costs
Etc.

19. Inventory acquisition costs
These are the costs of generating, processing and handling an order, along with its related paper work, ( or costs - associated with ordering and receiving an order)

20. Inventory acquisition costs Cont…
If a firm’s cost accounting department can estimate its approximate acquisition cost per order; the annual acquisition costs that would be generated by order quantities of various sizes can be calculated as follows:
Acquisition cost per year is given by;
(No. of order placed per year) * ( acquisition cost per order)

21. Inventory acquisition costs Cont…
Symbolically;
i.e. AC = (U/Q) * A,
Whereby
AC = Acquisition cost per year for the material in questions,
U = Expected annual usage of the material, in units,
Q = Order or delivery quantity for the material, in units,
A = Acquisition costs per order or per delivery of the materials

22. Inventory Models Fixed order-quantity models Probabilistic models
Economic order quantity
Production order quantity
Quantity discount
Probabilistic models
Fixed order-period models
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23. How Much?
When!
All inventory models essentially answer just two questions, how much and when. We will start this section by looking at the how much question.

24. Economic Order Quantity
The EOQ is one of the most easily understood approaches to answering the how much question.
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25. EOQ Assumptions Known and constant demand Known and constant lead time
Instantaneous receipt of material
No quantity discounts
Only order (setup) cost and holding cost
No stockouts

26. Inventory Usage Over Time
Inventory Level
Average Inventory (Q*/2)
Minimum inventory
Order quantity = Q (maximum inventory level)
Usage Rate

27. Economic Order Quantity
The next series of slides presents Figure13.3. The series builds in steps to the final Figure.
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28. Economic Order Quantity
On-hand inventory (units)
Time

29. Economic Order Quantity
On-hand inventory (units)
Time
This sequence of slides is intended to show the actual behavior of inventory over time.

30. Economic Order Quantity
On-hand inventory (units)
Time
Receive order Q

31. Economic Order Quantity
On-hand inventory (units)
Time
Receive order Q
1 cycle

32. Economic Order Quantity
On-hand inventory (units)
Time
Receive order Q
1 cycle
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33. Economic Order Quantity
On-hand inventory (units)
Time
Receive order
Inventory depletion (demand rate) Q
1 cycle

34. Economic Order Quantity
On-hand inventory (units)
Time
Receive order
Inventory depletion (demand rate) Q
1 cycle
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35. Economic Order Quantity
On-hand inventory (units)
Time
Average
cycle
inventory Q — 2
1 cycle
Receive order
Inventory depletion (demand rate)

36. Economic Order Quantity
The next series of slides presents Figure The series builds in steps to the final Figure.
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37. Economic Order Quantity
Annual cost (dollars)
Lot Size (Q)

38. Economic Order Quantity
Annual cost (dollars)
Lot Size (Q)
Holding cost (HC)
To improve legibility, this Figure is presented in three parts.

39. Economic Order Quantity
Annual cost (dollars)
Lot Size (Q)
Holding cost (HC)
Ordering cost (OC)

40. Economic Order Quantity
Annual cost (dollars)
Lot Size (Q)
Ordering cost (OC)
Holding cost (HC)
Total cost = HC + OC

41. Noninstantaneous Replenishment
Production quantity Q
On-hand inventory
Time

42. Noninstantaneous Replenishment
Production quantity Q
Demand during production interval
On-hand inventory
p – d
Time

43. Noinstantaneous Replenishment
Production quantity
Demand during production interval
On-hand inventory Q
Time
p – d

44. Noinstantaneous Replenishment
Production quantity
Demand during production interval
On-hand inventory Q
Time
p – d
Production and demand
Demand only
TBO

45. Noinstantaneous Replenishment
Production quantity
Demand during production interval
Production and demand
Demand only
TBO
On-hand inventory Q
Time
p – d

46. Special Inventory Models
Production quantity
Demand during production interval
Maximum inventory
Production and demand
Demand only
TBO
On-hand inventory Q
Time
Imax
p – d

47. Noinstantaneous Replenishment
Production and demand
Demand only
TBO
Production quantity
Demand during production interval
Maximum inventory
On-hand inventory Q
Time
Imax
p – d
Imax = (p – d) = Q( ) p

48. Noinstantaneous Replenishment
Production and demand
Demand only
TBO
Production quantity
Demand during production interval
Maximum inventory
On-hand inventory Q
Time
Imax
p – d
C = (H) (S) 2 D

49. Noinstantaneous Replenishment
Production and demand
Demand only
TBO
Production quantity
Demand during production interval
Maximum inventory
On-hand inventory Q
Time
Imax
p – d
C = ( ) (S) D
Q p – d p

50. Noinstantaneous Replenishment
Production and demand
Demand only
TBO
Production quantity
Demand during production interval
Maximum inventory
On-hand inventory Q
Time
Imax
p – d
ELS = p
2DS H

51. 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.

52. 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.

53. 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.

54. 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.

55. 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.