inventory management - control_lecture 3
TRANSCRIPT
Logistics management
INVENTORY MANAGEMENT - CONTROL
Joanna Oleśków-Szłapka
What Is Inventory?
□Stock of items kept to meet future demand
□Purpose of inventory management□how many units
to order?□when to order?
Types of Inventory
Inputs• Raw Materials• Purchased parts• Maintenance and
Repair Materials
Outputs• Finished Goods• Scrap and Waste
Process
In Process• Partially Completed
Products and Subassemblies
(in warehouses, or “in transit”)
(often on the factory floor)
Water Tank Analogy for Inventory
Supply RateInventory Level
Demand Rate
Inventory Level
Buffers Demand Rate from Supply Rate
Two Forms of Demand
DependentDependent Demand for items used to produce Demand for items used to produce
final products final products Tires stored at a Goodyear plant are
an example of a dependent demand item
IndependentIndependent Demand for items used by external Demand for items used by external
customerscustomers Cars, appliances, computers, and
houses are examples of independent demand inventory
Inventory Hides Problems
Poor Quality
UnreliableSupplier
MachineBreakdownInefficient
Layout
BadDesign
LengthySetups
Inventory and Supply Chain Management - problems
□Bullwhip effect□demand information is distorted as it moves
away from the end-use customer□higher safety stock inventories to are stored to
compensate□Seasonal or cyclical demand□Inventory provides independence from
vendors□Take advantage of price discounts□Inventory provides independence between
stages and avoids work stop-pages
Inventory Costs
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 sales temporary or permanent loss of sales
when demand cannot be metwhen demand cannot be met
Typical Inventory Carrying CostsTypical Inventory Carrying Costs
Housing cost:□ Building rent or depreciation□ Building operating cost□ Taxes on building□ Insurance
Material handling costs:□ Equipment, lease, or depreciation□ Power□ Equipment operating cost
Manpower cost from extra handling and supervision
Investment costs:□ Borrowing costs□ Taxes on inventory□ Insurance on inventory
Pilferage, scrap, and obsolescence
Overall carrying cost
6% (3% - 10%)
3% (1% - 4%)
3% (3% - 5%)
10% (6% - 24%)
5% (2% - 10%) (15% - 50%)
Costs as % of Inventory Value
INVENTORY CONTROL
□ Inventory control is concerned with minimizing the total cost of inventory.
□ The three main factors in inventory control decision making process are:
The cost of holding the stock (e.g., based on the interest rate).
The cost of placing an order (e.g., for row material stocks) or the set-up cost of
production. The cost of shortage, i.e., what is lost if
the stock is insufficient to meet all demand. □ The third element is the most difficult to
measure and is often handled by establishing a "service level" policy, e. g, certain percentage of demand will be met from stock without delay.
Inventory Control Systems
Continuous system (fixed-Continuous system (fixed-order-quantity)order-quantity)
constant amount ordered constant amount ordered when inventory declines to when inventory declines to predetermined levelpredetermined level
Periodic system (fixed-time-Periodic system (fixed-time-period)period)
order placed for variable order placed for variable amount after fixed passage of amount after fixed passage of timetime
Zero Inventory?
□Reducing amounts of raw materials and purchased parts and subassemblies by having suppliers deliver them directly.
□Reducing the amount of works-in process by using just-in-time production.
□Reducing the amount of finished goods by shipping to markets as soon as possible.
How to Measure Inventory
□The Dilemma: closely monitor and control inventories to keep them as low as possible while providing acceptable customer service.
□Average Aggregate Inventory Value:how much of the company’s
total assets are invested in inventory?□Ford:6.825 billion□Sears: 4.039 billion
Inventory Measures
□Weeks of Supply□Ford: 3.51 weeks□Sears: 9.2 weeks
□Inventory Turnover (Turns)□Ford: 14.8 turns□Sears: 5.7 turns□GM: 8 turns□Toyota: 35 turns
ABC CLASSIFICATION
ABC Classification
□The ABC Classification The ABC classification system is to grouping items according to annual sales volume, in an attempt to identify the small number of items that will account for most of the sales volume and that are the most important ones to control for effective inventory management.
ABC Classification
□Class A□5 – 15 % of units□70 – 80 % of
value
□Class B□30 % of units□15 % of value
□Class C□50 – 60 % of units□ 5 – 10 % of value
ABC Classification: Example
11 $ 60$ 60 909022 350350 404033 3030 13013044 8080 606055 3030 10010066 2020 18018077 1010 17017088 320320 505099 510510 6060
1010 2020 120120
PARTPART UNIT COSTUNIT COST ANNUAL USAGEANNUAL USAGE
ABC Classification: Example (cont.)
Example 10.1Example 10.1
11 $ 60$ 60 909022 350350 404033 3030 13013044 8080 606055 3030 10010066 2020 18018077 1010 17017088 320320 505099 510510 6060
1010 2020 120120
PARTPART UNIT COSTUNIT COST ANNUAL USAGEANNUAL USAGETOTAL % OF TOTAL % OF TOTALPART VALUE VALUE QUANTITY % CUMMULATIVE
9 $30,600 35.9 6.0 6.08 16,000 18.7 5.0 11.02 14,000 16.4 4.0 15.01 5,400 6.3 9.0 24.04 4,800 5.6 6.0 30.03 3,900 4.6 10.0 40.06 3,600 4.2 18.0 58.05 3,000 3.5 13.0 71.0
10 2,400 2.8 12.0 83.07 1,700 2.0 17.0 100.0
$85,400
AA
BB
CC
% OF TOTAL % OF TOTALCLASS ITEMS VALUE QUANTITY
A 9, 8, 2 71.0 15.0B 1, 4, 3 16.5 25.0C 6, 5, 10, 7 12.5 60.0
ABC Analysis □ Recognizes fact some inventory items are more
important than others. □ Purpose of analysis is to divide all of company's
inventory items into three groups: A, B, and C. □ Depending on group, decide how inventory
levels should be controlled.
Silicon Chips, Inc. Example
□Maker of super-fast DRAM chips, has organized its 10 inventory items on an annual dollar-volume basis.
□Parts are identified by item number, part number, annual demands, and unit costs.
□How should company classify items into groups A, B, and C?
Silicon Chips, Inc. Example□How should company classify items into groups A,
B, and C?
Inventory Management Approaches
□A-items– Track carefully (e.g. continuous
review)– Sophisticated forecasting to assure
correct levels
□C-items– Track less frequently (e.g. periodic
review)– Accept risks of too much or too little
(depending on the item)
Economic Order Quantity Model
Economic Order Quantity (EOQ) Models
□EOQ□optimal order quantity that will
minimize total inventory costs
□Basic EOQ model□Production quantity model
Assumptions of Basic EOQ Model
Demand is known with certainty and Demand is known with certainty and is constant over timeis constant over time
No shortages are allowedNo shortages are allowed Lead time for the receipt of orders is Lead time for the receipt of orders is
constantconstant Order quantity is received all at onceOrder quantity is received all at once
EOQ Lot Size Choice
□There is a trade-off between lot size and inventory level.□Frequent orders (small lot size): higher
ordering cost and lower holding cost.□Fewer orders (large lot size): lower
ordering cost and higher holding cost.
EOQ Inventory Order CycleEOQ Inventory Order Cycle
Demand rate
0 TimeLead time
Lead time
Order Placed
Order Placed
Order Received
Order Received
Inve
nto
ry
Lev
el
Reorder point, R
Order qty, Q
As Q increases, average inventory level increases, but number of orders placed decreases
ave = Q/2
Total Cost of Inventory – EOQ Model
Answer to Inventory Answer to Inventory Management Questions for EOQ Management Questions for EOQ
ModelModelKeeping track of inventory
□Implied that we track continuouslyHow much to order?
□Solve for when the derivative of total cost with respect to Q = 0: -SD/Q^2 + iC/2 = 0
□Q = sqrt ( 2SD/iC)When to order?
□Order when inventory falls to the “Reorder Point-level” R so we will just sell the last item as the new order comes in:
□R = DL
The EOQ ModelThe EOQ Model
QQ = Number of pieces per order= Number of pieces per order Q*Q* = Optimal number of pieces per order (EOQ)= Optimal number of pieces per order (EOQ)
DD = Annual demand in units for the Inventory item= Annual demand in units for the Inventory itemSS = Setup or ordering cost for each order= Setup or ordering cost for each orderHH = Holding or carrying cost per unit per year= Holding or carrying cost per unit per year
An EOQ ExampleAn EOQ Example
Determine optimal number of needles to orderDetermine optimal number of needles to orderD D = 1,000= 1,000 units unitsS S = $10= $10 per order per orderH H = $.50= $.50 per unit per year per unit per year
Q* =Q* =22DSDS
HH
Q* =Q* =2(1,000)(10)2(1,000)(10)
0.500.50= 40,000 = 200= 40,000 = 200 units units
An EOQ ExampleAn EOQ Example
Determine optimal number of needles to orderDetermine optimal number of needles to orderD D = 1,000= 1,000 units units Q* Q* = 200= 200 units unitsS S = $10= $10 per order per orderH H = $.50= $.50 per unit per year per unit per year
= N = == N = =Expected Expected number of number of
ordersorders
DemandDemandOrder quantityOrder quantity
An EOQ ExampleAn EOQ Example
Determine optimal number of needles to orderDetermine optimal number of needles to orderD D = 1,000= 1,000 units units Q*Q* = 200= 200 units unitsS S = $10= $10 per order per order NN = 5= 5 orders per year orders per yearH H = $.50= $.50 per unit per year per unit per year
= T == T =Expected Expected
time between time between ordersorders
Number of working Number of working days per yeardays per year
NN
An EOQ ExampleAn EOQ Example
Determine optimal number of needles to orderDetermine optimal number of needles to orderD D = 1,000= 1,000 units units Q*Q* = 200= 200 units unitsS S = $10= $10 per order per order NN = 5= 5 orders per year orders per yearH H = $.50= $.50 per unit per year per unit per year TT = 50= 50 days days
Total annual cost = Setup cost + Holding costTotal annual cost = Setup cost + Holding cost
TC = S + HTC = S + HDDQQ**
QQ**22
Reorder Point
EOQ answers the “how much” questionEOQ answers the “how much” question
The reorder point (ROP) tells when to The reorder point (ROP) tells when to orderorder
ROP ROP ==Lead time for a Lead time for a
new order in daysnew order in daysDemand Demand per dayper day
== d x L d x L
d = d = DDNumber of working days in a yearNumber of working days in a year
Reorder Point: Example
Demand = 10,000 Demand = 10,000 kgkg/year/year
Store open 311 days/yearStore open 311 days/year
Daily demand = 10,000 / 311 = 32.154 Daily demand = 10,000 / 311 = 32.154 kgkg/day/day
Lead time = L = 10 daysLead time = L = 10 days
R = dL = (32.154)(10) = 321.54 R = dL = (32.154)(10) = 321.54 kg = 322 kgkg = 322 kg
Safety Stocks
Safety stockSafety stock buffer added to on hand inventory during lead buffer added to on hand inventory during lead
timetime
Stockout Stockout an inventory shortagean inventory shortage
Service level Service level probability that the inventory available during probability that the inventory available during
lead time will meet demandlead time will meet demand
Variable Demand with a Reorder Point
ReorderReorderpoint, point, RR
LTLT
TimeTimeLTLT
Inve
nto
ry le
vel
Inve
nto
ry le
vel
00
Reorder Point with a Safety Stock
ReorderReorderpoint, point, RR
LTLT
TimeTimeLTLT
Inve
nto
ry le
vel
Inve
nto
ry le
vel
00
Safety Stock
Reorder Point With Variable Demand
RR = = dLdL + + zzdd L L
wherewhere
dd == average daily demandaverage daily demandLL == lead timelead time
dd == the standard deviation of daily demand the standard deviation of daily demand
zz == number of standard deviationsnumber of standard deviationscorresponding to the service levelcorresponding to the service levelprobabilityprobability (service factor) (service factor)
zzdd L L == safety stocksafety stock
Reorder Point for a Service Level
Probability of Probability of meeting demand during meeting demand during lead time = service levellead time = service level
Probability of Probability of a stockouta stockout
RR
Safety stock
ddLLDemandDemand
zd L
Safety factor values for CSL
Reorder Point for Variable Demand
The carpet store wants a reorder point with a 95% The carpet store wants a reorder point with a 95% service level and a 5% stockout probabilityservice level and a 5% stockout probability
dd = 30 = 30 mm per day per dayLL = 10 days= 10 days
dd = 5 = 5 mm per day per day
For a 95% service level, For a 95% service level, zz = 1.6 = 1.644
RR = = dLdL + + zz dd L L
= 30(10) + (1.6= 30(10) + (1.644)(5)( 10))(5)( 10)
= 32= 325.95.9 mm
Safety stockSafety stock = = zz dd L L
= (1.6= (1.644)(5)( 10))(5)( 10)
= 2= 255..99 mm