1 thing 12: inventory Management have you ever been in a rush to obtain through the grocery checkout come be stuck in heat behind a human buying numerous varieties the the same item - 20 can be ~ of pet food, v each can being a various flavour? The cashier scans every item, and you float why not scan one and enter a amount of 20. Indigenous inventory 18 monitoring perspective, it is an essential that the cashier scan every individual can. Why? The details is offered to update the inventory document of the keep to determine exactly how much and when a replenishment order must be place. Learning objectives command an ABC analysis Explain and also use bike counting Explain and also use the EOQ model for live independence inventory demand Compute a reorder allude and safety and security stock apply the manufacturing order quantity version Explain and use the quantity discount version Understand business levels and also probabilistic perform models The Newsvendor model 18 list management and also control are done at the level that the separation, personal, instance item or stock-keeping unit (SKU). An SKU is a certain item at a certain geographic location. 244 / 539 Inventory management The target of inventory monitoring is to: administer the wanted level the customer services 19 enable cost-efficient operations minimization the perform investment prestige of inventory one of the many expensive assets of countless companies representing as much as 50% of total invested capital Operations managers must balance inventory investment and customer organization 19 Customer company is a agency s capability to satisfy the requirements of its customers. The is, even if it is or not the product is easily accessible for the customer once the customer desire it. 245 / 539

2 functions of Inventory monitoring To decouple or separate various parts of the production process Anticipation inventory: items developed in anticipation that future demand. Come decouple the firm from fluctuations in demand and provide a stock of items that will provide a an option for customers Fluctuation inventory: Protect against unexpected need variations. To take advantage of quantity discounts: economic climates of range Lot-size inventory: outcomes from the actual amount purchased. Allows for reduced unit costs. To hedge versus inflation speculative inventory: Extra inventory gathered or purchased to protect versus some future event. 246 / 539 species of Inventory raw material: refers to items purchased however not processed Work-in-process: describes items undertaken some adjust but not completed Maintenance/repair/operating (MRO): refers to items important to store machinery and also processes abundant Finished goods: refers to completed product awaiting shipment 247 / 539

3 Inventory monitoring System 2 ingredients that inventory monitoring system: just how inventory items have the right to be share (ABC analysis). A technique for determining level that control and also frequency of testimonial of inventory. Exactly how accurate list records deserve to be maintained (Record accuracy) 248 / 539 ABC analysis ABC analysis is a an approach of dividing on-hand inventory right into three great based on yearly dollar volume. Alphabet is used to recognize level the control and frequency of testimonial of list items. Class A - high annual dollar volume (70% -80%) course B - medium annual dollar volume (15% - 25%) course C - low annual dollar volume ( 5%) ABC analysis is one inventory applications of what is recognized as Pareto Principle. The Pareto principle says that there are a vital few and trivial many. The Pareto principle argues that around 20% of the list items will account for around 80% that the list value. The idea is to develop policies that emphasis on the few vital parts and also not the plenty of trivial ones. It is no realistic come monitor cheap items through the exact same intensity as an extremely expensive items. 249 / 539

4 ABC evaluation Procedure because that an alphabet inventory Analysis: 1. Calculation the yearly dollar intake for each item. 2. Perform the items in descending order based on yearly dollar usage. 3. Calculate the cumulative yearly dollar volume percentage. 4. Share the items right into groups. 250 / 539 ABC evaluation 251 / 539

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5 ABC evaluation 252 / 539 figure It Out: ABC analysis Perform an ABC evaluation on the following collection of products. Item annual Demand Unit expense A $9 B $90 C $6 D $150 E $2,000 F $120 G $90 H $ / 539


6 Solution: ABC analysis The table listed below details the contribution of every of the eight products. Item annual Unit disagreement % Dollar cumulative Demand cost volume volume $ vol % G $90 $90,000 30% 30% E $2,000 $70,000 23% 53% D $150 $60,000 20% 72% F $120 $30,000 10% 82% C $6 $27,000 9% 91% A $9 $10,800 4% 95% B $90 $9,000 3% 98% H $75 $7,500 2% 100% Total= $304,300 items G473 is clearly an Aitem, and also items A211, B390, and H921 space all Citems. Various other classifications are somewhat subjective, however one an option is to label E707 and also D100 as Aitems, and also F660 and also C003 together Bitems. 254 / 539 Solution: ABC analysis 255 / 539

7 ABC analysis Policies that might be based on ABC evaluation include the following: 1. An ext emphasis ~ above supplier advance for A items. 2. Tighter physical inventory manage for A items; A items belong to more secure areas; inventory records for A items have to be verified much more frequently. 3. More care in forecasting A items. 256 / 539 Inventory document Accuracy For efficient inventory use, the inventory record must accurately reflect the quantity of materials available. Accurate records are crucial in production and also inventory systems. Permits organization to emphasis on what is needed. Important to make precise decisions around ordering, scheduling, and shipping. Incoming and also outgoing record keeping must be accurate. Stockrooms must be secure. Inaccurate inventory document can result in: shed sales (e.g., finished an excellent not easily accessible at time the sale), disrupted to work (not enough of a component or raw product to complete a job), poor customer business (late deliveries to customers), reduced productivity (additional setups to complete a job), negative material to plan (the inventory records are crucial in determining MRP quantities), and expediting (trying to attain necessary item in less than normal lead time). 257 / 539

8 cycle Counting bicycle counting is a continual physical count of the item in perform on a cyclic schedule. Items are counted and records to update on a regular basis frequently used through ABC analysis to identify cycle bike counting : 1. Eliminates shutdowns and also interruptions 2. Eliminates annual inventory adjustment 3. Permits trained personnel audit list accuracy 4. Allows causes of errors to it is in identified and corrected 5. Enables to maintain accurate inventory documents 258 / 539 figure It Out: bicycle Counting Imagine a company with 5,000 items in inventory, 500 A items, 1,750 B items, 2,750 C items. The firm s plan is to counting A items every month (20 functioning days), B items every 4 minutes 1 (60 days), and C items every 6 months (120 days). How many items room counted every day? Solution: Seventy-seven items room counted every day. The everyday audit of 77 article is much more efficient 보다 conducting a substantial inventory count when a year. 259 / 539

9 Inventory prices Holding costs the variable costs of hold or transporting inventory over time. It also includes obsolescence and cost concerned storage, such together insurance, extra staffing, and also interest payments. Ordering costs the prices of place an order and also receiving goods; cost of supplies, form, bespeak processing, purchasing, clerical support, etc. Setup costs price to prepare a an equipment or process for manufacturing an order. 260 / 539 Inventory design for Independent need The independent inventory model assumes that demand for an item is elevation of the demand for other items. The independent need inventory models are used to attend to two important inventory connected questions: once to order and how much to order. The adhering to are math models that identify order amount (i.e., just how much to order) and also minimize list cost: simple economic order quantity (EOQ) production order amount (POQ) amount discount model (QDM) The target of most inventory model is to minimize complete costs: setup( or ordering) costs and also holding (or carrying) cost. 261 / 539


10 The straightforward Economic Order amount (EOQ) version The EOQ model is just one of the most frequently used inventory manage techniques. The EOQ version is based upon the following assumptions: demand for an object is known, constant, and independent of decision for various other items. Command time 20 is known and also constant. Receipt of list is instantaneous and also complete. Quantity discounts are not possible. The only prices are the expenses of setting up and also cost of hold inventory end time. Stockouts 21 can be totally avoided if the order are placed at the best time. 20 lead time is the time between ordering and also receiving the order. That is, the moment it will certainly take for the stimulate to it is in delivered. 21 A stockout is the i can not qualify to satisfy the demand for one item. 262 / 539 Inventory intake over Time 263 / 539

11 The target of EOQ is come Minimize total Cost full cost = Setup cost + Holding price 264 / 539 The EOQ Model: holding or Setup price Let 265 / 539

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12 The EOQ Model: Holding cost Let 266 / 539 The EOQ design For a provided order quantity, yearly holding costs = Q H 2 annual setup costs = D S Q The total annual inventory cost: (26) (27) TC(Q) = D Q S + Q 2 H (28) 267 / 539

13 The EOQ version Optimal order quantity is uncovered when annual setup cost equals yearly holding price Solving because that Q: at the EOQ,Q, Q = D Q S = Q 2 H (29) 2DS H = EOQ (30) TC(Q )= 2 D S H. (31) at the EOQ, the cost per unit have the right to be computed as: ATC (Q )= TC(Q ) D = 2 S H. (32) D 268 / 539 figure It Out: AnEOQModel A product has demand of 4000 systems per year. Ordering cost is $20 and also holding cost is $4 per unit every year. The EOQ design is appropriate. Question 1: What is the cost-minimizing level of inventory? A) 400 B) 800 C) 200 D) Zero; this is a class C item. E) cannot be determined because unit price is not known. Concern 2: What is the full inventory cost? A) $400 B) $800 C) $200 D) Zero; this is a course C item. E) can not be determined since unit price is not known. 269 / 539

14 Solution: one EOQ model We know: D=4000 per year; S=$20 ; H=$4 per unit per year. Desire to know: EOQ = Q and total inventory cost 2DS EOQ = Q = H = 4 The total cost of inventory = 200units TC = D Q S + Q 2 H = = $400 + $400 = $800 2 What wake up to annual inventory costs when a non-eoq order amount is used, speak 100 unit or 300 units? TC = D Q S + Q 2 H = = $800 + $200 = $ TC = D Q S + Q 2 H = = $200 + $800 = $ The difference in between the EOQ policy and any various other policy is a penalty expense incurred through the company for not utilizing the EOQ policy. 270 / 539 number It Out: The intended Total number of Orders A product has need of 4000 units per year. Ordering price is $20 and also holding expense is $4 per unit per year. The EOQ design is appropriate. What is the meant total number of orders every year? A) 20 B) 200 C) 50 D) 40 E) 365 Solution: The expected total number of orders: N = need Order quantity = D Q N = D Q = =20 orders per year 271 / 539

15 number It Out: The supposed time between orders A product has demand of 4000 devices per year. Ordering price is $20 and also holding price is $4 every unit every year. The EOQ model is appropriate. What is the intended time between orders? i think 250 functioning days. A) 4 B) 12.5 C) 25 D) 40 E) 50 Solution: The meant time between orders T = The variety of working days every year N = 250 N T = 250 N = =12.5 days 272 / 539 figure It Out: Total yearly Inventory Cost: Revisited A product has demand of 4000 devices per year. Ordering cost is $20 and holding expense is $4 every unit per year. The EOQ version is appropriate. What is the total annual inventory cost and per unit perform cost? A) $4000, $1.00 B) $600, $0.15 C) $200, $0.05 D) $800, $0.20 E) $500, $0.125 Solution: The expected time in between orders Total annual Cost= yearly Setup cost + annual Holding price TC = SC + HC = D Q S + Q 2 H TC(200) = D Q S + Q 2 H = =$800 ATC (200) = $800/4000 = $ / 539

16 The EOQ Model: Robust note that the EOQ model is durable works even if every parameters and assumptions room not met the complete cost curve is relatively flat intheareaoftheeoq for our previously example, imagine the the monitoring overestimated the annual demand by 25%. Ordering expense is $20 and holding expense is $4 per unit every year. The EOQ model is appropriate. What is the total yearly inventory cost? D = 4000 x (1-0.25) = 3000, climate 2DS Q = H = = devices per year 4 and TC = D Q S + Q 2 H = = $ The total cost decreases by 13.40% only. 274 / 539 Sensitivity evaluation of the EOQ examining the sensitivity that the EOQ model to small changes, errors, or uncertainties, in expense can yield an useful insights into the administration of inventories. Sensitivity analysis is a technique for systematically transforming crucial parameters to recognize the effects of those changes. The following table reflects the effect on EOQ of changes in the parameters of the formula. Parameters EOQ Parameters readjust EOQ change Demand (D) Order/setup prices (S) Holding expenses (H) 2DS 2DS H H 2DS H let s continue using ours previous example where EOQ = 200, and examine the results on EOQ of copy D, S, and also H personal Parameters EOQ Parameters adjust EOQ readjust Demand, D Setup cost, S holding cost, H 2DS 2DS H D: Q : H S: Q : DS H H: 4 8 Q : / 539

17 Reorder point (ROP): when to Order? A reorder allude (ROP) is the perform level (point) in ~ which action is bring away (an bespeak placed) to replenish the stocked item. EOQ answer the just how much concern The reorder point (ROP) tells as soon as to order once we have no demand uncertainty, we collection the reorder suggest (ROP)toequaltoaverage demand during command time, thatis ROP = d L where d= daily demand in units, d=d (number of working days every year); l = lead time for a brand-new order in days; and also D = yearly demand. 276 / 539 figure It Out: Reorder allude (ROP) Imagine that the command time for the product in our previous example with yearly demand (D) of 4000 devices is 4 days. Assuming 250 working days, what would certainly be an ideal re-order point? Solution: d = D/250 = 4000/250 = 16 ROP = d together =16 4=64 systems The reorder point is 64 units. Since we know demand and lead time because that certainty, the replenishment order arrives simply as the on-hand inventory is depleted. The need during lead time is 64 units. 277 / 539

18 Reorder allude Curve 278 / 539 number It Out: Reorder point A person takes 2 special tablet computers per day, which are yielded to his house seven job after an order is referred to as in. At what point should the human being reorder? Usages, d = 2 tablet computers per day lead time, l = 7 job ROP= usage Lead time = d together = 2 tablet computers per day 7 work = 14 tablets Thus, the person should reorder when 14 tablets space left. In this example, the need during command time is 14 tablets. 279 / 539