chap.4 _ inventory management edited.ppt

8/16/2019 chap.4 _ Inventory Management edited.ppt

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Inventory control Inventory control

Chapter 4Chapter 4


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Lecture OutlineLecture Outline

Elements of Inventory Management

Inventory Control SystemsEconomic Order Quantity Models

Quantity Discounts

Reorder Point

Order Quantity for a Periodic InventorySystem


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What Is Inventory?What Is Inventory?

Stock of items kept to meet future

demandPurpose of inventory management

how many units to order

when to order


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Types of InventoryTypes of Inventory

Raw materials

Purchased parts and supplies

Work-in-process (partially completed)products (WIP)

Items being transportedSpare parts, Tools, and equipment


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Two Forms of DemandTwo Forms of Demand

IndependentIndependent Demand for items used by externalDemand for items used by external

customerscustomers

Cars, appliances, computers, andhouses are examples of independentdemand inventory

DependentDependent

Demand for items used to produceDemand for items used to producefinal productsfinal products

Tires stored at a plant are an exampleof a dependent demand item


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Inventory and Quality

Management

Customers usually perceive quality

service as availability of goods they wantwhen they want them

Inventory must be sufficient to provide

high-quality customer service in TQM


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Inventory ostsInventory osts

Carrying costCarrying cost cost of holding an item in inventorycost of holding an item in inventory

Ordering costOrdering cost cost of replenishing inventorycost of replenishing inventory

Shortage costShortage cost temporary or permanent loss of salestemporary or permanent loss of sales

when demand cannot be metwhen demand cannot be met


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Inventory ontrol !ystemsInventory ontrol !ystems

Continuous system (fixedContinuous system (fixed

order!uantity"order!uantity" constant amount orderedconstant amount ordered

when inventory declines towhen inventory declines topredetermined levelpredetermined level

#eriodic system (fixedtime#eriodic system (fixedtimeperiod"period"

order placed for variableorder placed for variableamount after fixed passage ofamount after fixed passage oftimetime


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"conomic Order Quantity

#"OQ$ Models

EOQ

optimal order quantity that willminimize total inventory costs

Basic EOQ model

Production quantity model


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%ssumptions of &asic%ssumptions of &asic

"OQ Model"OQ Model

Demand is $nown with certainty andDemand is $nown with certainty and

is constant over timeis constant over time %o shortages are allowed%o shortages are allowed &ead time (time from ordering to&ead time (time from ordering to

receipt" for the receipt of orders isreceipt" for the receipt of orders isconstantconstant Order !uantity is received all at onceOrder !uantity is received all at once


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Inventory Order ycleInventory Order ycle

DemandDemandraterate

TimeTimeLeadLeadtimetime

LeadLeadtimetime

OrderOrderplacedplaced

OrderOrderplacedplaced

OrderOrderreceiptreceipt

OrderOrderreceiptreceipt

I n v e n t o r y

L e v e l

I n v e n t o r y

L e v e l

Reorder point,Reorder point, R R

Order quantity,Order quantity, Q Q

00


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"OQ ost Model"OQ ost Model

A A cost of placing order cost of placing order DD annual demand annual demand

C C annual perunit carrying cost annual perunit carrying cost QQ order !uantity order !uantity

'nnual ordering cost 'nnual ordering cost

AD AD

QQ

'nnual carrying cost 'nnual carrying cost CQCQ

))

Total cost *Total cost *

AD AD

QQ

CQCQ

))


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"OQ ost Model"OQ ost Model

TC = + AD

Q

CQ

2

= - + AD

Q 2C

2

TC

Q

0 = - + AD

Q 2

C

2

Q opt =2 AD

C

Deriving Q opt roving equality o!co"t" at optimal point

= ADQ CQ 2

Q 2 =2 AD

C

Q opt =2 AD

C


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"OQ ost Model #cont'$"OQ ost Model #cont'$

Order +uantity,Order +uantity, QQ

'nnual 'nnualcost ("cost (" Total CostTotal Cost

Carrying Cost Carrying Cost

CQCQ

))

Slope -Slope -

.inimum.inimumtotal costtotal cost

Optimal order Optimal order QQoptopt

Ordering Cost Ordering Cost AD AD

QQ


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"OQ "(ample"OQ "(ample

C C -/01 per yard -/01 per yard A A 21- 21- DD 2-,--- yards 2-,--- yards

QQoptopt ))C C

ooDD

C C cc

QQoptopt )(21-"(2-,---")(21-"(2-,---"

(-/01"(-/01"

QQoptopt ),--- yards ),--- yards

TC TC minmin * * AD AD

QQ

CQCQ

))

TC TC minmin * *(21-"(2-,---"(21-"(2-,---"

),---),---

(-/01"(),---"(-/01"(),---"

))

TC TC minmin 01- * 01- 2,1-- 01- * 01- 2,1--

Orders per year Orders per year DD33QQoptopt

2-,---3),---2-,---3),---

1 orders3year 1 orders3year

Order cycle time Order cycle time 422 days3(422 days3(DD33QQoptopt""

4223142231

5)/) store days5)/) store days


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)eorder *oint)eorder *oint

Level of inventory at which a new orderLevel of inventory at which a new order

is placedis placed

R R dLdL

wherewhere

d d demand rate per period demand rate per periodLL lead time lead time


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)eorder *oint+ "(ample)eorder *oint+ "(ample

Demand 2-,--- yards3year Demand 2-,--- yards3year

Store open 422 days3year Store open 422 days3year Daily demand 2-,--- 3 422 4)/216Daily demand 2-,--- 3 422 4)/216

yards3dayyards3day

&ead time & 2- days&ead time & 2- days

7 d& (4)/216"(2-" 4)2/16 yards7 d& (4)/216"(2-" 4)2/16 yards


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Production Quantity

Model

An inventory system in which an order isreceived gradually, as inventory is

simultaneously being depleted

Non-instantaneous receipt model assumption thatQis received all at once is relaxed

p -daily rate at which an order is received overtime, production rate

d -daily rate at which inventory is demanded


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*roduction Quantity Model*roduction Quantity Model

#cont'$#cont'$

QQ(2(2d/pd/p""

InventoryInventorylevellevel

(2(2d/pd/p""QQ

2 2

TimeTime--

Order Order receipt periodreceipt period

8egin8egin

order order receiptreceipt

9nd9nd

order order receiptreceipt

.aximum.aximum

inventoryinventorylevellevel

'verage 'verageinventoryinventorylevellevel


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*roduction Quantity Model*roduction Quantity Model

#cont'$#cont'$ p p = production rate= production rate d d = demand rate= demand rate

#a$imum inventory level =#a$imum inventory level = Q Q -- d d

== Q Q % -% -

Q Q

p p

d d

p p

&verage inventory level =&verage inventory level = % -% -

Q Q

22d d

p p

TC TC = + % -= + % -d d

p p

AD AD

Q Q

CQ CQ

22

Q Q optopt ==22 AD AD

C C

% -% -

d d

p p


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*roduction Quantity Model+*roduction Quantity Model+

"(ample"(ampleC C -/01 per yard -/01 per yard A A 21- 21- DD 2-,--- yards 2-,--- yards

d d 2-,---3422 4)/) yards per day 2-,---3422 4)/) yards per day p p 21- yards per day 21- yards per day

Q Q optopt = = = 2,2'()* yard"= = = 2,2'()* yard"22 AD AD

C C % -% - d d

p p

2%'0%0,0002%'0%0,000

0)' % -0)' % -.2)2.2)2

%'0%'0

TC TC = + % - = /%,.2= + % - = /%,.2d d p p

AD AD

Q Q CQ CQ

22

roduction run = = = %')0' day" per order roduction run = = = %')0' day" per order QQ

p p

),)15/:),)15/:

21-21-


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Production Quantity Model:Production Quantity Model:

Example (cont.)Example (cont.)

1umer o! production run" = = = 3)3. run"4year DQ

%0,0002,2'()*

#a$imum inventory level = 5 % - = 2,2'()* % -

= %,2 yard"

d

p.2)2%'0


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,' Quantity Discounts Model,' Quantity Discounts Model

#rice per unit decreases as order#rice per unit decreases as order

!uantity increases!uantity increases

TC TC * * * * PDPD AD AD

QQ

CQCQ

))

wherewhere

P P per unit price of the item per unit price of the itemDD annual demand annual demand


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Cont;Cont;

The goal < is to reduce price (#" for an item when it is purchased inThe goal < is to reduce price (#" for an item when it is purchased inlarger !uantitieslarger !uantities

Di"count 1umer Di"count 5uantity Di"count 6 Di"count rice

2 - to === no discount 1/--

) 2,--- to 2,=== 6 6/:-

4 ),--- and over 1 6/01

Total Cost Setup cost(order cost" * >olding cost * #roduct costTotal Cost Setup cost(order cost" * >olding cost * #roduct cost

TC DS3+ * +>3) * #DTC DS3+ * +>3) * #D

+ < +uantity ordered+ < +uantity ordered

D < 'nnual demand in unitsD < 'nnual demand in units

S < Ordering or setup cost per order per setupS < Ordering or setup cost per order per setup

# < #rice per unit# < #rice per unit

> < >olding cost per unit per year > < >olding cost per unit per year


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The Steps to determine Optimum +uantity order olding cost (I" as percentage of unit price (#">olding cost (I" as percentage of unit price (#"

)/)/ If order !uantity is too low, ad@ust the order !ty upward to the lowestIf order !uantity is too low, ad@ust the order !ty upward to the lowest!ty that will !ualify for the discount!ty that will !ualify for the discount

4/4/ Compute Total cost for eachCompute Total cost for each

6/6/ Select +? with the lowest total costSelect +? with the lowest total cost

9xample < The store stoc$s toy race cars/ 7ecently, the store has9xample < The store stoc$s toy race cars/ 7ecently, the store hasbeen given a !uantity discount schedule for these cars/ The normalbeen given a !uantity discount schedule for these cars/ The normalcost for the race car is 1/--/ Aor orders between 2,--- and 2,===cost for the race car is 1/--/ Aor orders between 2,--- and 2,===units, the unit cost drops to 6/:-B for orders ),--- or more units, theunits, the unit cost drops to 6/:-B for orders ),--- or more units, theunit cost is only6/01/ Aurthermore, ordering cost is 6=/-- per order,unit cost is only6/01/ Aurthermore, ordering cost is 6=/-- per order,annual demand is 1,--- race cars and inventory carrying charge as aannual demand is 1,--- race cars and inventory carrying charge as a

percent of cost is )-/ hat order !uantity will minimiEe the totalpercent of cost is )-/ hat order !uantity will minimiEe the totalinventory costFinventory costF

2/2/ +2? )DS3I# )(1,---"(6="3()-"(1/--" 0-- cars order +2? )DS3I# )(1,---"(6="3()-"(1/--" 0-- cars order

+)? )DS3I# )(1,---"(6="3()-"(6/:-" 026 cars order +)? )DS3I# )(1,---"(6="3()-"(6/:-" 026 cars order

+4? )DS3I# )(1,---"(6="3()-"(6/01" 02: cars order +4? )DS3I# )(1,---"(6="3()-"(6/01" 02: cars order


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)/)/

+2? 0--+2? 0--

+)? 2,--- ad@usted+)? 2,--- ad@usted

+4? ),--- ad@usted+4? ),--- ad@usted

4/ Calculate Total Cost each discount4/ Calculate Total Cost each discount

TC DS3+ * +>3) * #DTC DS3+ * +>3) * #D

'nnual #roduct Cost #D 'nnual #roduct Cost #D 'nnual ordering cost DS3+ 'nnual ordering cost DS3+

'nnual >olding cost +>3) +I#3) 'nnual >olding cost +>3) +I#3)

6/ Select Order +uantity at the lowest cost 2,--- units6/ Select Order +uantity at the lowest cost 2,--- units

Di"count1um2er 7nit rice +, Order 5uantity &nnual roductCo"t &nnualOrdering Co"t &nnual8olding Co"t TotalCo"t

2 1/-- 0-- )1,---/-- 41- 41- )1,0--

) 6/:- 2,--- )6,---/-- )61 6:- )6,0)1

4 6/01 ),--- )4,01-/-- 2)),1 =1- )6,:)4


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Quantity Discount+ "(ampleQuantity Discount+ "(ample

+G'%TITH+G'%TITH #7IC9#7IC9

2 6=2 6= 2,6--2,6--

1- :=1- := 2,2--2,2--

=-*=-* =--=--

A A ),1--),1--

C C 2=- per computer2=- per computer

DD )--)--

QQoptopt 0)/1 #Cs 0)/1 #Cs))C C

ooDD

C C cc

)()1--"()--")()1--"()--"

2=-2=-

TC TC * * * * PDPD )44,0:6 )44,0:6

AD AD

QQoptopt

CQCQoptopt

))

AorAor QQ 0)/1 0)/1

TC TC * * * * PDPD 2=6,2-1 2=6,2-1 AD AD

QQ

CQCQ

))

AorAor QQ =- =-


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!afety !toc-s!afety !toc-s

Safety stoc$Safety stoc$ buffer added to on hand inventory during leadbuffer added to on hand inventory during lead

timetime Stoc$outStoc$out

an inventory shortagean inventory shortage

Service levelService level probability that the inventory available duringprobability that the inventory available during

lead time will meet demandlead time will meet demand


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)eorder *oint with)eorder *oint with

a !afety !toc- a !afety !toc-

Reorder Reorder

point,point, R R

Q Q

LTLT

TimeTime

LTLT

I n v e n t o r y

l e v e l

I n v e n t o r y

l e v e l

00

9a!ety 9toc:


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)eorder *oint With)eorder *oint With

.aria/le Demand

.aria/le Demand

R R == dLdL ++ z z d d L L

wherewhere

d d average daily demandaverage daily demand

LL lead timelead time

σσd d the standard deviation of daily demandthe standard deviation of daily demand

z z number of standard deviationsnumber of standard deviations

corresponding to the service levelcorresponding to the service level

probabilityprobability (service factor"(service factor"

z z σσd d L L safety stoc$safety stoc$


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)eorder *oint for)eorder *oint for

a !ervice Levela !ervice Levelroaility o!roaility o!

meeting demand duringmeeting demand during

lead time = "ervice levellead time = "ervice level

roaility o!roaility o!

a "toc:outa "toc:out

RR

9a!ety "toc:9a!ety "toc:

d d LL

DemandDemand

z z d d L L


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Service factor values for CS&Service factor values for CS&


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)eorder *oint for)eorder *oint for

.aria/le Demand.aria/le DemandThe carpet store wants a reorder point with a =1The carpet store wants a reorder point with a =1

service level and a 1 stoc$out probabilityservice level and a 1 stoc$out probability

d d 4- 4- mm per dayper day LL 2- days 2- days

σσd d 1 1 mm per dayper day

Aor a =1 service level,Aor a =1 service level, z z 2/5 2/566

R R dLdL ** z z σσd d L L

4-(2-" * (2/5 4-(2-" * (2/566"(1"( 2-""(1"( 2-"

4) 4)1/=1/= mm

Safety stoc$Safety stoc$ z z σσd d L L

(2/5 (2/566"(1"( 2-""(1"( 2-"

) )11//== mm


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%& lassification%& lassification

The items on hand are classified intoThe items on hand are classified intoA, B,A, B, andandCC typestypes

on the basis of theon the basis of thevalue in terms of capital or annualvalue in terms of capital or annual

dollar usage (i.e., dollar value per unit multiplied bydollar usage (i.e., dollar value per unit multiplied byannual usage rateannual usage rate), and then allocates control efforts), and then allocates control efforts

accordingly.accordingly.

Thus, the items withThus, the items withhigh valuehigh valueandandlow volumelow volumeare keptare kept

inin A-type A-type, items with, items withlow valuelow valueandandhigh volumehigh volumeare keptare kept

inin C-typeC-type, and the items, and the items withwith moderate valuemoderate value andand

moderate volumesmoderate volumesbelong to the B-type.belong to the B-type.

A ---- very important, B ---- moderately important, A ---- very important, B ---- moderately important,

and C-- least importantand C-- least important


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Class AClass A

5 – 15 % of units5 – 15 % of units

70 – 80 % of value70 – 80 % of value

Class BClass B

30 % of units30 % of units

15 % of value15 % of value

Class CClass C 50 – 60 % of units50 – 60 % of units

5 – 10 % of value5 – 10 % of value

The actual number of categories varies fromThe actual number of categories varies fromorganiEation to organiEation, depending on the extentorganiEation to organiEation, depending on the extent

to which a firm wants to differentiate the control efforts/to which a firm wants to differentiate the control efforts/


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%& lassification+ "(ample%& lassification+ "(ample

%% / (0/ (0 00

22 .'0.'0 3030

.. .0.0 %.0%.033 *0*0 (0(0

'' .0.0 %00%00

(( 2020 %*0%*0

%0%0

%0%0

** .20.20 '0'0

'%0'%0 (0(0

%0%0 2020 %20%20

&RT&RT 71IT CO9T71IT CO9T &117&L 79&;


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%& lassification+%& lassification+

"(ample #cont'$"(ample #cont'$


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%& lassification+%& lassification+

"(ample #cont'$"(ample #cont'$


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*urchasing*urchasing

Purchasing is an important function ofPurchasing is an important function of

materials management.materials management.

In any industry purchase means buyingIn any industry purchase means buying

of equipments, materials, tools, parts etc.of equipments, materials, tools, parts etc.

required for industry.required for industry.


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O/0ectives of *urchasingO/0ectives of *urchasing

The basic objective of the purchasingThe basic objective of the purchasing

function is to ensure continuity of supplyfunction is to ensure continuity of supply

of raw materials, sub-contracted itemsof raw materials, sub-contracted items

and spare parts and to reduce theand spare parts and to reduce theultimate cost of the finished goods.ultimate cost of the finished goods.


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*arameters of *urchasing*arameters of *urchasing

The success of any manufacturing activity isThe success of any manufacturing activity is

largely dependent on the procurement of rawlargely dependent on the procurement of raw

materials of right quality, in the right quantities,materials of right quality, in the right quantities,

from right source, at the right time and at rightfrom right source, at the right time and at right

price popularly known asprice popularly known asten ‘R’s’ten ‘R’s’of the art ofof the art of

efficient purchasing.efficient purchasing.


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*urchase parameters*urchase parameters

RIGHT PRICERIGHT PRICE

RIGHT QUALITYRIGHT QUALITY

RIGHT TIMERIGHT TIME RIGHT SOURCERIGHT SOURCE

RIGHT QUANTITYRIGHT QUANTITY

RIGHT ATTITUDERIGHT ATTITUDE

7I>T CO%T7'CT7I>T CO%T7'CT

7I>T .'T97I'&7I>T .'T97I'&

7I>T T7'%S#O7T'TIO%7I>T T7'%S#O7T'TIO%

7I>T #&'C9 OA7I>T #&'C9 OA

D9&IJ97HD9&IJ97H


43/44

*urchasing *rocedure*urchasing *rocedure

RECOGNITION OF THE NEEDRECOGNITION OF THE NEED

THE SELECTION OF THE SUPPLIERTHE SELECTION OF THE SUPPLIER

PLACING THEORDERPLACING THEORDER FOLLOW-UP OF THEORDERFOLLOW-UP OF THEORDER

RECEIVING AND INSPECTION OF THE MATERIALSRECEIVING AND INSPECTION OF THE MATERIALS

PAYMENT OF THEINVOICEPAYMENT OF THEINVOICE

MAINTENANCE OF THE RECORDSMAINTENANCE OF THE RECORDS

MAINTENANCE OF VENDORRELATIONSMAINTENANCE OF VENDORRELATIONS


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"(ercise"(ercise

The XYZ Ltd. carries a wide assortment of items for itsThe XYZ Ltd. carries a wide assortment of items for its

customers.customers.

One of its popular items has annual demand of 8000 units.One of its popular items has annual demand of 8000 units.

Ordering cost per order is found to be Rs. 12.5. The carrying costOrdering cost per order is found to be Rs. 12.5. The carrying cost

of average inventory is 20% per year and the cost per unit is Rs.of average inventory is 20% per year and the cost per unit is Rs.

1.00. Determine the optimal economic quantity and make your1.00. Determine the optimal economic quantity and make yourrecommendations.recommendations.

chap.4 _ inventory management edited.ppt

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