1. © 1997 Prentice-Hall, Inc. 9 - 1 Principles of Operations Management Inventory for Independent Demand Chapter 9

2. © 1997 Prentice-Hall, Inc. 9 - 2 Learning Objectives n Explain what inventory is n Describe how inventory is classified n Explain ABC analysis n Explain cycle counting

3. © 1997 Prentice-Hall, Inc. 9 - 3 Thinking Challenge Netscape allows people to navigate the Internet graphically. To sell Netscape, the company put it on the Internet: no disks, no packaging, no inventory, no distributors. What other products could be sold on the Internet to obtain these benefits? AloneGroupClass © 1995 Corel Corp.

4. © 1997 Prentice-Hall, Inc. 9 - 4 What Is Inventory? n Stock of materials n Stored capacity n Examples © 1995 Corel Corp. © 1984-1994 T/Maker Co. © 1995 Corel Corp.

5. © 1997 Prentice-Hall, Inc. 9 - 5 Purposes of Inventory n Meet anticipated demand n Decouple production & distribution l Permits constant production quantities n Take advantage of quantity discounts n Provide hedge against inflation n Protect against shortages n Permit smooth operations through WIP (i.e., decouple operations)

6. © 1997 Prentice-Hall, Inc. 9 - 6 Disadvantages of Inventory n Higher costs l Item cost (if purchased) l Ordering (or setup) cost s Costs of forms, clerks’ wages etc. l Holding (or carrying) cost s Building lease, insurance, taxes etc. n Difficult to control n Hides production problems

7. © 1997 Prentice-Hall, Inc. 9 - 7 Inventory Holding Costs Housing (building) cost6% Material handling costs3% Labor cost3% Inventory investment costs11% Pilferage, scrap, & obsolescence3% Total holding cost26% % of Category Inventory Value

8. © 1997 Prentice-Hall, Inc. 9 - 8 Inventory Classifications © 1984-1994 T/Maker Co.

9. © 1997 Prentice-Hall, Inc. 9 - 9 ABC Analysis n Divides on-hand inventory into 3 classes l A class, B class, C class n Basis is usually annual $ volume l $ volume = Annual demand x Unit cost n Policies based on ABC analysis l Develop class A suppliers more l Give tighter physical control of A items l Forecast A items more carefully

10. © 1997 Prentice-Hall, Inc. 9 - 10 Classifying Items as ABC % of Inventory Items % Annual $ Usage A B C

11. © 1997 Prentice-Hall, Inc. 9 - 11 ABC Classification Example You’re a buyer for Auto Palace. Classify the following items as A, B, or C. Note: Example is for illustration only; too few items.

12. © 1997 Prentice-Hall, Inc. 9 - 12 ABC Classification Solution Stock #Vol.Cost$ Vol.%ABC 206 26,000 $ 36 105 200 600 019 2,000 55 144 20,000 4 4 207 7,000 10 Total

13. © 1997 Prentice-Hall, Inc. 9 - 13 ABC Classification Thinking Challenge You’re an inventory control supervisor for USX. Classify the following items as A, B, or C. AloneGroupClass

14. © 1997 Prentice-Hall, Inc. 9 - 14 ABC Classification Solution*

15. © 1997 Prentice-Hall, Inc. 9 - 15 Cycle Counting n Physically counting a sample of total inventory on a regular basis n Used often with ABC classification l A items counted most often (e.g., daily) n Advantages l Eliminates annual shut-down for physical inventory count l Improves inventory accuracy l Allows causes of errors to be identified

16. © 1997 Prentice-Hall, Inc. 9 - 16 Basic Inventory Planning Questions n How much to order? n When to order? Purchase Order DescriptionQty. Microwave1000

17. © 1997 Prentice-Hall, Inc. 9 - 17 Inventory Models n Fixed order quantity models l Economic order quantity l Production order quantity l Quantity discount n Probabilistic models n Fixed order period models Help answer the inventory planning questions! © 1984-1994 T/Maker Co.

18. © 1997 Prentice-Hall, Inc. 9 - 18 ConclusionConclusion n Explained what inventory is n Described how inventory is classified n Explained ABC analysis n Explained cycle counting