1. Module: Independent Inventory Operations Management as a Competitive Weapon

2. OM Course Framework 1. Cost - Design & Selection 2. Quality - TQM - SQC 3. Dependability - Project Management - JIT 4. Flexibility - Inventory - Supply Chain - Location - Forecasting - Aggregate Planning

3. 3 Module: Independent Inventory Learning Objectives At the end of this module, each student will be able to: 1.Discuss basic functions of inventory 2.Describe two basic inventory systems 3.Calculate inventory parameter values

4. 4 Module: Independent Inventory 1. Functions of Inventory 1.Anticipate customer demand 2.Decouple 3.Quantity discounts 4.Inflation 5.WIP 6.Delivery variation

5. 5 Module: Independent Inventory Types of Inventory 1.Cycle inventory

6. 6 Module: Independent Inventory Cycle Inventory On-hand inventory (units) Time Q 1 cycle Receive order Inventory depletion (demand rate) Average cycle inventory Q2Q2

7. 7 Module: Independent Inventory Types of Inventory 1.Cycle inventory 2.Safety Stock inventory 3.Anticipation inventory 4.Pipeline inventory

8. 8 Module: Independent Inventory 1.Fixed-order quantity models 2.Fixed-time period models 2. Inventory Systems

9. 9 Module: Independent Inventory Basic System Comparison q Variable amount Q Fixed amount T Time between orders R Reorder level High-priced Critical “A” items Low priced Less important “C” items

10. 10 Module: Independent Inventory Comparative Advantages Fixed-amount systems (Q systems) 1. Individualized review frequency 2. Quantity discounts 3. Lower safety stocks Fixed-period systems (P systems) 1. Convenient administration 2. Multiple items on single purchase order 3. Inventory known only at review period

11. 11 Module: Independent Inventory Individual Cost Elements DDemand (annual) CUnit cost SSetup cost (manufactured item) Ordering cost (purchased item) HHolding cost (annual) iHolding rate (H = iC) QOptimal low-cost amount to order

12. 12 Module: Independent Inventory Inventory Cost Equations Total Annual Cost = DC + (Q/2)H + (D/Q)S Annual Purchase Cost:(DC) Annual Holding Cost:(Q/2)(H) Annual Ordering Cost:(D/Q)(S)

13. 13 Module: Independent Inventory Economic Order Quantity Ordering Costs: (D/Q)S Holding Costs: (Q/2)(H) Order Quantity (Q) COSTCOST Item Cost: (DC) Total Cost Q* TC*

14. 14 Module: Independent Inventory Fixed-Order Inventory Equations Total Annual Cost = DC + (Q/2)(H) + (D/Q)(S) Optimal Order Quantity = = Q D S H 2 D = Demand per year C = Unit cost S = Setup (order) cost per order H = Annual holding cost L = Lead time d = Average daily demand R = dL

15. 15 Module: Independent Inventory Fixed-Order Model Example D = 21,900C = $5L = 6 days S = $10H = $0.50d = 60 units Total Annual Cost = DC + (Q/2)(H) + (D/Q)(S) = (21,900)(5) + (936/2)(.5) + (21,900/936)(10) = $109, 968

16. 16 Module: Independent Inventory Fixed-Period Inventory Equations Total Annual Cost = DC + (Q/2)(H) + (D/Q)(S) = Q D S H 2 q = quantity to be ordered T = time between orders I = current inventory amount D = Demand per year C = Unit cost S = Setup (order) cost per order H = Annual holding cost L = Lead time d = Average daily demand T = Q / D q = d(L + T) - I

17. 17 Module: Independent Inventory Fixed-Period Model Example D = 21,900C = $5L = 6 days S = $10H = $0.50d = 60 units