oml - inventory ms

8/13/2019 OML - Inventory MS

1/36

OM Inventory Management 1

Operations

Management

Inventory Management


2/36


AMAZON.com

Jeff Bezos, in 1995, started AMAZON.com

as a virtual retailer no inventory, no

warehouses, no overhead; just a bunch of

computers.

Growth forced AMAZON.com to excel in

inventory management!

AMAZON is now a worldwide leader in

warehouse management and automation.


3/36


Order Fulfillment at AMAZON

1. You order items;, computer assigns yourorder to distribution center [closest facility

that has the product(s)]

2. Lights indicate products ordered to workerswho retrieve product and reset light.

3. Items placed in crate with items from other

orders, and crate is placed on conveyor.Bar code on item is scanned 15 times

virtually eliminating error.


4/36OM Inventory Management 4

Order Fulfillment at AMAZON

4. Crates arrive at central point where items

are boxed and labeled with new bar code.

5. Gift wrapping done by hand (30 packages

per hour)

6. Box is packed, taped, weighed and labeled

before leaving warehouse in a truck.

7. Order appears on your doorstep within a

week



The Functions of Inventory

To decouple or separate various parts of

the production process

To have a stock of goods that will provide aselection for customers

To take advantage of quantity discounts

To hedge against inflation and upward price

changes



Higher costs

Item cost (if purchased)

Ordering (or setup) cost

Costs of forms, clerks wages etc.

Holding (or carrying) cost

Building lease, insurance, taxes etc.

Difficult to control

Hides production problems

Disadvantages of Inventory



Types of Inventory

Raw material

Work-in-process (WIP)

Maintenance/repair/operating

supplies (MRO)

Finished goods



Inventory Management

Two ingredients of inventory mgmt

systems

Classification of inventory items

Basis for establishing inventory policies

Maintenance of accurate inventory

records



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

A (70%-80% of total annual $ volume); B (15-25%), C (5%)

Other criteria could include Delivery problems

Quality problems

High unit cost


10/36


Classifying Items as ABC

% of Inventory Items

020

40

60

80

100

0 50 100

% Annual $ Usage

A

B

C

Class % $ Vol % Items

A 80 15B 15 30

C 5 55


11/36


ABC Analysis

Policies then established for each class

after analysis

Policies based on ABC analysis could

include

Focus more on development of class Asuppliers

Have tighter physical control of A items

Forecast A items more carefully


12/36


Record Accuracy

Good Inventory policies are meaningless

if mgmt does not know what inventory is

on hand

Incoming and outgoing record-keeping

must be good

Stock-room security must be good

Cycle count ingcan result in accurate

record keeping


13/36


Cycle Counting

Continuous audit for verifying accuracy ofinventory records

Physically counting inventory on a regular

basis Used often withABCclassification

Aitems counted most often (e.g., daily)

Cause of inaccuracies traced andappropriate remedial action taken

Does not require the facilities to be shutdown for this periodic audit


14/36


Advantages of Cycle Counting

Eliminates shutdown and interruption ofproduction necessary for annual physical

inventories

Eliminates annual inventory adjustments Provides trained personnel to audit the

accuracy of inventory

Allows the cause of errors to be identifiedand remedial action to be taken

Maintains accurate inventory records


15/36


Independent versusDependent Demand

Independent demand- demand for item isindependent of demand for any other item

Demand for cars is independent of demand for

white boards

Dependent demand- demand for item isdependent upon the demand for some

other item Demand for car wipers is dependent on

demand for cars


16/36


Inventory Costs

Holding costs- associated with holding or

carrying inventory over time

Ordering costs- associated with costs of

placing order and receiving goods

Setup costs- cost to prepare a machineor process for manufacturing an order


17/36


Inventory Models

When to order and how much to order

Fixed order-quantity models

Economic order quantity Production order quantity

Quantity discount

Probabilistic models

Fixed order-period models


18/36


EOQ Assumptions

Known, constant and independent

demand

Known and constant lead time Instantaneous and complete receipt of

material

No quantity discounts

Only order (setup) cost and holding cost

considered

No stock outs


19/36


Inventory Usage Over Time

Time

In

ventoryLeve

l

AverageInventory

(Q*/2)

0

Minimuminventory

Order quantity = Q(maximuminventory level)

Usage Rate

EOQ M d l


20/36


EOQ ModelHow Much to Order?

Order quantity

Annual Cost

Order (Setup) Cost Curve

OptimalOrder Quantity (Q*)

Minimumtotal cost


21/36


Deriving an EOQ

1. Develop an expression for setup or

ordering costs

2. Develop an expression for holding cost

3. Set setup cost equal to holding cost

4. Solve the resulting equation for the bestorder quantity


22/36

Objective is to minimize total costs

Annualcost

Order quantity

Curve for totalcost of holding

and setup

Holding cost

curve

Setup (or order)cost curve

Minimumtotal cost

Optimal orderquantity (Q*)

Minimizing cost



23/36


24/36

Q = Number of pieces per orderQ* = Optimal number of pieces per order (EOQ)D = Annual demand in units for the inventory itemS = Setup or ordering cost for each orderH = Holding or carrying cost per unit per year

Annual holding cost = (Average inventory level)x (Holding cost per unit per year)

Order quantity2

= (Holding cost per unit per year)

= (H)Q2

Annual setup cost = SDQ

Annual holding cost = H

Q

2

The EOQ model



25/36

Q = Number of pieces per orderQ* = Optimal number of pieces per order (EOQ)D = Annual demand in units for the inventory itemS = Setup or ordering cost for each orderH = Holding or carrying cost per unit per year

Optimal order quantity is found when annual setup costequals annual holding cost

Annual setup cost = SDQ

Annual holding cost = H

Q

2

Solving for Q*

2DS = Q2

HQ2= 2DS/H

Q* = 2DS/H

The EOQ model


Production Order Quantity


26/36


Production Order QuantityModel

Answers how much to order and when to

order

Allows partial receipt of materialnoinstantaneous receipt of materials

Other EOQ assumptions apply

Suited for production environment Material produced, used immediately

Provides production lot size

Lower holding cost than EOQ model


27/36

Inventoryleve

l

Time

Demand part of cyclewith no production

Part of inventory cycle duringwhich production (and usage) istaking place

t

Maximuminventory

Production order quantity model



28/36


29/36

Q = Number of pieces per order p = Daily production rateH = Holding cost per unit per year d = Daily demand/usage ratet = Length of the production run in days

= Maximuminventory levelTotal produced during the

production runTotal used during the

production run

= ptdt

However, Q = total produced = pt ; thus t = Q/p

Maximuminventory level = p d = Q 1

Qp

Qp

dp

Holding cost = (H) = 1 Hdp

Q2

Maximum inventory level

2

POQ model



30/36

Q = Number of pieces per order p = Daily production rateH = Holding cost per unit per year d = Daily demand/usage rateD = Annual demand

Q2=2DS

H[1 - (d/p)]

Q* =2DS

H[1 - (d/p)]p

Setup cost = (D/Q)SHolding cost = HQ[1 - (d/p)]1

2

(D/Q)S = HQ[1 - (d/p)]12

POQ model


Q tit Di t M d l


31/36

Quantity Discount Model

Answers how much to order & when to

order

Allows quantity discounts Reduced price when item is purchased in

larger quantities

Other EOQ assumptions apply

Trade-off is between lower price &

increased holding costOM Inventory Management 31

Q tit Di t M d l


32/36

Reduced prices are often available whenlarger quantities are purchased

Trade-off is between reduced product costand increased holding cost

Total cost = Setup cost + Holding cost + Product cost

TC = S + H + PDDQ

Q2

Quantity Discount Model


Q tit di t d l


33/36

DiscountNumber Discou nt Quant i ty Discou nt (%)

DiscountPric e (P)

1 0to 999 no d iscount $5.00

2 1,000to 1,999 4 $4.80

3 2,000and over 5 $4.75

A typical quantity discount schedule

Quantity discount model


Q tit di t d l


34/36

1. For each discount, calculate Q*

2. If Q* for a discount doesnt qualify, choosethe smallest possible order size to get thediscount

3. Compute the total cost for each Q* oradjusted value from Step 2

4. Select the Q* that gives the lowest totalcost

Steps in analyzing a quantity discount

Quantity discount model


Fi d P i d M d l


35/36

Answers how much to order

Orders placed at fixed intervals

Inventory brought up to target amount

Amount ordered varies

No continuous inventory count

Possibility of stockout between intervals

Useful when vendors visit routinely

Example: P&G representative calls every 2

weeks

Fixed Period Model


Inventory Level in a Fixed


36/36


yPeriod System

Various amounts (Qi) are ordered at regular time intervals(p) based on the quantity necessary to bring inventory up

to target maximum

p p p

Q1 Q2

Q3

Q4Target maximum

Time

On-HandInventory

oml - inventory ms

Documents