1. Operations Management Inventory Management1

2. Types of Inventory Raw material Work-in-process
Maintenance/repair/operating supplies
Finished goods 10

3. The Functions of Inventory
Decouple suppliers from production and production from distribution. Decoupling means that inventory is used to break a direct dependency that one part of the supply chain may have on another. If disruption occurs in any part of the system, inventory is used to cushion that impact.
Allows one to take advantage of quantity discounts
To provide a hedge against inflation
To protect against shortages due to delivery variation (safety stock) 8

4. Inventory Classifications
© T/Maker Co.
Process stage
Number & Value
Demand Type
Other
Raw Material WIP Finished Goods
A Items B Items C Items
Maintenance Dependent Operating
Independent Dependent 11

5. ABC Analysis Divides on-hand inventory into 3 classes
A class, B class, C class
Basis is usually annual $ volume
$ volume = Annual demand x Unit cost
Policies based on ABC analysis
Develop class A suppliers more
Give tighter physical control of A items
Forecast A items more carefully 13

8. TYPICAL DECISION TABLE FOR ABC CLASSIFICATION
Is annual usage more than $50,000? A
Is annual usage between $10,000 and $50,000? B
Is annual usage less than $10,000? C
Is the unit cost more than $500? A
Is the unit cost between $100 and $500? B
Does the physical nature of the item cause special storage problems? B
Is the lead time longer than 6 months? A
Is the lead time between 3 and 6 months? B
Is shelf life less that 3 months? A
Is shelf life greater than 3 months but less than 6 months? B

9. Control of A - Items - Close Control on inventory
- Frequent Check of Schedule Revision
- Little or zero Safety stock
- High turnover goals (sales/inventory), 12 to 24 times a year
- Frequent check of inventory
- Proper authorization
- Long-term relationship with supplier

10. Control of B - Items - Moderate control on inventory
- Moderate safety stock
- Moderate turnover - six to fifteen times a year
- Moderate authorization procedure
- Limited authorization required

11. Control on C - items - No or lose control - Large safety stock
- Low turnover - One to five times a year
- No authorization require
- No supplier relationship
- Buy when needed

12. Independent versus Dependent Demand
Independent demand - demand for item is independent of demand for any other item
Dependent demand - demand for item is dependent upon the demand for some other item 18

13. EOQ Assumptions Known and constant demand Known and constant lead time
Instantaneous receipt of material
No quantity discounts
No stockouts (shortage) 25

14. Cost of Inventory Holding Ordering Total Q Cost Cost Cost
/2 (1) = /100 (2) =
/2 (1) = /200 (2) =
/2 (1) = /300 (2) =

15. EOQ Model How Much to Order?
Annual Cost
Total Cost Curve
Holding Cost Curve
Order (Setup) Cost Curve
Order Quantity
Optimal Order Quantity (Q*) 26

16. Deriving an EOQ Develop an expression for setup or ordering costs
Develop an expression for holding cost
Set setup cost equal to holding cost
Solve the resulting equation for the best order quantity 30

17. Production Order Quantity Model
Answers how much to order and when to order
Allows partial receipt of material
Other EOQ assumptions apply
Suited for production environment
Material produced, used immediately
Provides production lot size
Lower holding cost than EOQ model 32

18. Make Information Working days = 240 Days a year Holding Ordering
Product
Cost
Demand
Production A
10.00
100000
130000
1.00
305.00 B
15.00
110000
140000
1.20
305.10 C
16.00
90000
120000
1.30
304.50 D
19.00
75000
105000
0.90
310.00 E
21.00
80000
1.50
312.00 F
25.00
150000
2.00
308.50 G
28.00
95000
125000
0.75
309.00 H
14.00
160000
0.65
312.50 I
9.00
65000
1.24
310.50 J
13.00
55000
85000
1.10
308.00

19. MAKE
EOQ
Purchasing
Holding
Ordering
Total
Product Q
Cost A
16258 B
16156 C
12986 D
13447 E
11047 F
13605 G
18060 H
25820 I
10153 J
9342

20. Buy Information Price Ordering Cost Holding Cost Demand A 25.00 5.00
1.00
100000 B
30.00
5.10
1.20
110000 C
31.00
4.50
1.30
90000 D
34.00
10.00
0.90
75000 E
36.00
12.00
1.50
80000 F
40.00
8.50
2.00
120000 G
43.00
9.00
0.75
95000 H
29.00
12.50
0.65
130000 I
24.00
10.50
1.24
65000 J
28.00
8.00
1.10
55000

21. BUY
EOQ
Purchasing
Holding
Ordering
Total
Product Q
Cost A
1000
500.00 B
967
580.17 C
789
513.08 D
1291
580.95 E
1131
848.53 F
1010 G
1510
566.24 H
2236
726.72 I
1049
650.50 J
894
491.93

22. Make Buy Total Product Cost F 3005442.06 4802019.90 G 2663250.82 H E B C D A J I