chapter 12
TRANSCRIPT
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Chapter 12
Inventory planning and control
Source: Corbis
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Inventory planning and control
Operations strategy
Design Improvement
Planning and control
Operations management
Inventory planning and control
The operation supplies ... the delivery of a quantity of products and services when
required
The market requires … a quantity of products
and services at a particular time
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Inventory is created to compensate for the differences in timing between supply and demand
Input process
Inventory
Output process
Rate of supply from input process
Rate of demand from output processInventory
Source: Alamy/Van Hilversum
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
e.g. Automotive parts distributor
e.g. Local retail store
Single-stage inventory system
Suppliers Suppliers
Stock Sales operation
Central depot
Distribution Local distribution
point
Sales operation
Two-stageinventory system
Single-stage and two-stage inventory systems
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
e.g. Television manufacturer
Suppliers
Input stock
Stage 1
A multi-stage inventory system
WIP Stage 2
WIP Stage 3
Finished goods stock
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
A multi-echelon inventory system
Yarn producers
Cloth manufacturers
Garment manufacturers
Regional warehouses
Retail stores
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
A paper merchant must get its inventory planning and control right
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Inventory profiles chart the variation in inventory level
Time
per period DQInstantaneous deliveries at a rate of
QD
Inve
nto
ry le
vel
Steady and predictable demand (D) Slope = demand rate (D)
=Average inventory
Q2
Orderquantity
= Q
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Two alternative inventory plans with different order quantities (Q)
Time
Inve
nto
ry le
vel Plan A
Q = 400
Demand (D) = 1000 items per year
Average inventory for plan A = 200
Average inventory for plan B = 50
0.1 yr 0.4 yr
100
400
Plan BQ = 100
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
400
350
300
250
200
150
100
50
40035030025020015010050Order quantity
Co
sts
Economic order quantity (EOQ)
Total costs
Holding costs
Order costs
Traditional view of inventory-related costs
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Cycle inventory in a bakeryIn
vent
ory
leve
l
Deliver A
Produce A
Deliver B
Produce B
Deliver C
Produce C
Deliver A
Produce A Produce B
Deliver B
Produce C
Deliver C
Time
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Time
Inve
nto
ry le
vel
Inventory profile for gradual replacement of inventory
Order quantity
Q
QP
M
Slope = P – DSlope = D
Sou
rce:
Ala
my/
Arc
hivB
erlin
Fot
oage
ntur
Gm
bH
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Inve
nto
ry le
vel
Time
Shortages
Inventory planning allowing for shortages
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
The re-order point
400
300
200
100Inve
nto
ry le
vel
00 1 2 3 4 5 6 7 8
Re-order level
Re-order point
Time
Demand (D) = 100 items per week
Order lead time
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Safety stock(s) helps to avoid stock-outs when demand and/or order lead times are uncertain
Inve
nto
ry le
vel
S
Q
Timet1 t2
d1
d2
Re-order level (ROL)
Distribution of lead-time
usage
?
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
The probability distributions for order lead time and demand rate combine to give the lead-time usage distribution
0.4
0.3
0.2
0.1
0110 120 130 140
Pro
babi
lity
Demand rate
0.4
0.3
0.2
0.1
01 2 3 4 5
Pro
babi
lity
Order lead time
0.4
0.3
0.2
0.1
0
Pro
babi
lity
100-199Lead-time usage
200-299 300-399 400-499 500-599 600-699 700-799
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
A periodic review approach to order timingwith probabilistic demand and lead time
Inve
nto
ry le
vel
Qm
T0 T1 T2 T3 Timet1 t2 t3
tf tf tf
Q1 Q2 Q3
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
100
90
80
70
60
50
40
30
20
10
100908070605040302010
Class C items
Class B items
Class A items
Pareto curve for stocked items
Percentage of types of items
Pe
rce
nta
ge
of v
alu
e o
f ite
ms
Source: Howard Smith Paper Group
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Inventory classifications and measures
Class A items – the 20% or so of high-value items which account for around 80% of the total stock value
Class B items – the next 30% or so of medium-value items which account for around 10% of the total stock value
Class C items – the remaining 50% or so of low-value items which account for around the last 10% of the total stock value
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
If the true costs of stock holding are taken into account,and if the cost of ordering (or changeover) is reduced,the economic order quantity (EOQ) is much smaller
Original holding costs
Original total costs
Revised holding costs
Order quantity
Co
st s
Original EOQ
Revised EOQ
Revised order costs
Revised total costs
Original order costs
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Two-bin system Three-bin system
The ‘two-bin’ and ‘three-bin’ re-ordering systems
Bin 2Bin 1 Bin 1 Bin 2 Bin 3
Items being used
Re-order level + safety inventory
Items being used
Re-order level inventory
Safety inventory
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Key Terms TestInventory (also known as stock)The stored accumulation of transformed resources in a process;
usually applies to material resources but may also be used for inventories of information; inventories of customers (or customers of customers) are usually called queues.
Buffer inventoryAn inventory that compensates for unexpected fluctuations in
supply and demand; can also be called a safety inventory.
Cycle inventoryInventory that occurs when one stage in a process cannot supply
all the items it produces simultaneously and so has to build up inventory of one item while it processes the others.
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Key Terms Test
De-coupling inventoryThe inventory that is used to allow work centres or
processes to operate relatively independently.
Anticipation inventoryInventory that is accumulated to cope with expected
future demand or interruptions in supply.
Pipeline inventoryThe inventory that exists because material cannot be
transported instantaneously.
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Key Terms Test
Work-in-process (WIP)The number of units within a process waiting to be processed
further (also called work-in-progress).
Economic order quantity (EOQ)The quantity of items to order that supposedly minimizes the total
cost of inventory management, derived from various formulae.
Economic batch quantity (EBQ)The amount of items to be produced by a machine or process that
supposedly minimizes the costs associated with production and inventory holding.
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Key Terms Test
Re-order pointThe point in time at which more items are ordered, usually
calculated to ensure that inventory does not run out before the next batch of inventory arrives.
Re-order levelThe level of inventory at which more items are ordered, usually
calculated to ensure that inventory does not run out before the next batch of inventory arrives.
Lead-time usageThe amount of inventory that will be used between ordering
replenishment and the inventory arriving, usually described by a probability distribution to account for uncertainty in demand and lead time.
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Key Terms Test
Continuous reviewAn approach to managing inventory that makes inventory-related
decisions when inventory reaches a particular level, as opposed to periodic review.
Periodic reviewAn approach to making inventory decisions that defines points in
time for examining inventory levels and then makes decisions accordingly, as opposed to continuous review.
Usage valueA term used in inventory control to indicate the quantity of items
used or sold multiplied by their value or price.
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Key Terms TestPareto lawA general law found to operate in many situations that indicates
that 20% of something causes 80% of something else, often used in inventory management (20% of products produce 80% of sales value) and improvement activities (20% of types of problems produce 80% of disruption).
ABC inventory controlAn approach to inventory control that classes inventory by its
usage value and varies the approach to managing it accordingly.
Perpetual inventory principleA principle used in inventory control that inventory records should
be automatically updated every time items are received or taken out of stock.