Operations10

473.31

Fall 2015

Bruce Duggan

Providence University College

Summary• Two main classes of demand:

o independent demand o dependent demand

• Independent demand is the focus of this chaptero based on statistics

• In the fixed-order-quantity and fixed-time-period models, the influence of service level was shown on safety stock and reorder point determinations.

• inventory reduction requires a knowledge of the operating system• A major goal of most firms today is to reduce inventory

Learning Objectives Review1. What is the strategic role of inventory and where do you position it in

the supply chain?

2. What are the different reasons for keeping inventory?

3. What are the different costs of creating and holding inventory?

4. Discuss how the type of inventory system logic that is appropriate for an item depends on the type of demand for that item.

5. Calculate the appropriate order size when a one-time purchase must be made.

Learning Objectives Review6. What is the economic order quantity and how do you calculate it?7. Discuss fixed-order-quantity and fixed-review-period models, including ways to

determine safety stock when there is variability in demand.8. What is Pareto (ABC) analysis of inventory?9. What is inventory counting and what is its relationship to inventory accuracy?

DefinitionsInventory

• “the stock of any item or resource used in an organization”• it can include:

o raw materialso finished productso component partso Supplieso work-in-process

An inventory system is the set of policies and controls that monitor levels of inventory and determines what levels should be maintained, when stock should be replenished, and how large orders should be

DefinitionsAn Inventory System

• “the set of policies and controls that monitor levels of inventory and determineo what levels should be maintainedo when stock should be replenished, and o how large orders should be”

Supply Chain Inventories

Copyright © 2013 McGraw-Hill Ryerson Limited

LO1

10-4

Inventory SystemsSingle-period Inventory model

• used when making a one time purchasing decision

Fixed-order-quantity model (Q-model) • a model where the amount requisitioned is fixed and the actual ordering is

triggered by inventory dropping to a specified level of inventory• also called Economic Order Quantity (EOQ)

Fixed-time-period model (P-model) • a model that specifies inventory is ordered at the end of a predetermined

time period

Purposes of Inventory1. To maintain independence of operations2. To meet variation in product demand3. To allow flexibility in production scheduling4. To provide a safeguard for variation in raw material delivery time5. To take advantage of economic purchase order size

Inventory Costs1. Holding (or carrying) costs

• include the costs for • storage facilities

• handling

• insurance

• pilferage

• breakage

• obsolescence

• depreciation

• taxes, and

• the opportunity cost of capital

2. Setup (or production change) costs • include the costs for arranging

specific equipment setups

Inventory Costs3. Ordering (or order preparation)

costs • the managerial and clerical

costs to prepare the purchasing order such as:• cost of someone placing an order

• counting items, and

• calculating order sizes

4. Shortage costs • the cost of

• lost profits

• lost customers, and

• lateness penalties

Independent vs Dependent DemandIndependent demand

• the demands for various items that are unrelated to each other.

Dependent demand • the need for any one item is a

direct result of the need for some other item, usually an item of which it is a part.

Single-Period Inventory ModelThis model states that we should continue to increase the size of the inventory so long as the probability of selling the last unit added is equal to or greater than the ratio of: Cu/Co+Cu

Single Period Model ExampleOur college basketball team is playing in a tournament game this weekend. Based on our past experience we sell on average 2,400 shirts with a standard deviation of 350. We make $10 on every shirt we sell at the game, but lose $5 on every shirt not sold. How many shirts should we make for the game?

Solution:• Cu = $10 and Co = $5

• P ≤ $10 / ($10 + $5) = .667

Z.667 = .432 (use NORMSINV(.667) or Appendix E)• therefore we need 2,400 + .432(350) = 2,551 shirts

Multiperiod Inventory Systems

Multiperiod Inventory Systems

Fixed-Order-Quantity Models Assumptions

• Demand for the product is constant and uniform throughout the period. • Lead time is constant.• Price per unit of product is constant.• Inventory holding cost is based on average inventory.• Ordering or set-up cost are constant.• All demands for the product will be satisfied. (No backorders are allowed.)

Fixed-Order-Quantity Models

Copyright © 2013 McGraw-Hill Ryerson Limited 10-16

LO6

Basic Fixed-Order Quantity (EOQ) Model Formula

Copyright © 2013 McGraw-Hill Ryerson Limited

Fixed-Order-Quantity Models

10-18

EOQ Example Problem Data

EOQ Example Solution

Lot Size vs. Set-up Cost

Fixed-Order-Quantity Model with Safety Stock

Fixed-Order-Quantity Model with Safety Stock

Fixed-Order-Quantity Model with Safety Stock

Fixed-Order-Quantity Model with Safety Stock Example

Fixed-Time-Period ModelFixed-time-period model (P-model)

• inventory is ordered at the end of a predetermined time period.

Inventory is counted only at particular times, such as every week or every month.

Fixed-Time-Period Model with Safety Stock

Fixed-Time-Period Model with Safety Stock

Fixed-Time-Period Model with Safety Stock ExampleEXAMPLE 10.5: QUANTITY TO ORDER

Daily demand for a product is 10 units with a standard deviation of 3 units. The review period is 30 days, and lead time is 14 days. Management has set a policy of satisfying 98 percent of demand from items in stock. At the beginning of this review period, there are 150 units in inventory.How many units should be ordered?

Fixed-Time-Period Model with Safety Stock Example

Inventory Control and Supply Chain ManagementInventory turn

• a key measure that relates inventory control to company performance• Inventory turn = Cost of goods sold / Average inventory value

Inventory Control and Supply Chain Management

Inventory Control and Supply Chain Management - Example

Inventory Control and Supply Chain Management - Example

ABC Classification SystemItems kept in inventory are not of equal importance in terms of:

• dollars invested• profit potential• sales or usage volume• stock-out penalties

So, identify inventory items based on percentage of total dollar value, where “A” items are roughly top 15 %, “B” items as next 35 %, and the lower 65% are the “C” items

ABC Classification System Example

ABC Classification System Example

ABC Classification System Example

Inventory Accuracy and Cycle CountingInventory accuracy

• how well the inventory records agree with physical count.

Cycle Counting • is a physical inventory-taking technique in which inventory is counted on a

frequent basis rather than once or twice a year

10-39

End of Chapter 10

Copyright © 2013 McGraw-Hill Ryerson Limited 10-43