INVENTORY MANAGEMENT:Principles, Concepts and Techniques

Materials Management I Logistics SeriesEugene L. Magad, Series Editor

Previously vublished by Chavman & Hall

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INVENTORY MANAGEMENT: Principles, Concepts and Techniques

by

John W. Toomey

l1li...

" Springer Science+Business Media, LLC

Library of Congress Cataloging-in-Publication

Toomey, John W., 1932-Inventory management: principles, concepts and techniques / by John W. Toomey.

p. cm. -- (Materials management/logistics series) Includes bibliographical references and index. ISBN 978-1-4613-6961-5 ISBN 978-1-4615-4363-3 (eBook) DOI 10.1007/978-1-4615-4363-3

1. Inventory control. 1. Title. ll. Series.

TS160.T662000 658.7'87--dc21

00-025875

Copyright © 2000 by Springer Science+Business Media New York Originally published by Kluwer Academic Publishers, New York in 1998 Softcover reprint ofthe hardcover Ist edition 1998

Ali rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, mechanical, photo­copying, recording, or otherwise, without the prior written permission of the publisher, Springer Science+Business Media, LLC.

Printed an acid-free paper.

CONTENTS

PREFACE / ix

1. OVERVIEW / 1Inventory Management Defined /Inventory Functions / 3Inventory Goals / 4Functional Classifications / 5Independent and Dependent Demand / 7Inventory Systems / 8Case Study / 9

2. COST CONCEPTS / 13Cost Accounting / 13Variance Analysis / 14Activity-Based Costing / 15LIFO and FIFO / 17Inventory Valuation / 19Inventory-Profit Relationship / 21Accounting-Based Decisions / 22Case Study / 23

3. FORECASTING / 29Forecast Reasoning / 29Principles of Forecasting / 29Demand Patterns / 30Forecasting Methods / 31System Design / 32Forecasting Techniques / 33Error Measurement / 38Tracking Signal / 40Demand Filter / 41Case Study / 41

VI

4. INVENTORY RELIABILITY / 45Service Levels / 45Cause and Effect / 46Safety Stock and Safety Lead Time / 47Safety Stock Calculation / 48Cost OfSafety Stock / 51Cycle Counting / 52Case Study / 55

5. ORDER QUANTITIES / 61Lot Size Considerations / 61The Economic Lot Size / 64Fixed Order Quantities / 66Fixed Period Quantities / 67Lot-For-Lot Quantities / 67Economic Order Quantity Variations / 68Noninstantaneous Receipt Lot Sizes / 70Case Study / 72

6. REPLENISHING INDEPENDENT DEMAND / 77Independent Demand Defined / 77The Reorder Point / 78Time-Phased Order Points / 79Periodic Review Systems / 80Visual Review Systems / 82Replenishment Variations / 83Joint Replenishment Systems / 86Case Study / 87

7. REPLENISIDNG DEPENDENT DEMAND / 91Dependent Demand Characteristics / 91The Bill ofMaterial / 93Material Requirements Planning (MRP) Logic / 95Input To MRP / 97MRP Output / 99Regeneration and Net Change MRP / 101Manufacturing Resource Planning (MRP II) / 101Case Study / 102

8. MASTER PRODUCTION SCHEDULING / 107Master Scheduling / 107MPS Calculations / 108Utilizing Planning Bills / 110Managing the MPS / 113Capacity Planning / 114Case Study / 117

9. DISTRIBUTION MANAGEMENT / 123Distribution Networks / 123Costs ofDistribution / 125Site Location Planning / 126Modes ofTransportation / 127Distribution Center Control / 128Freight Control / 130Case Study / 131

10. DISTRIBUTION RESOURCE PLANNING / 135Reorder Point Pull Systems / 135Centralized DRP System / 136DRP Use ofMRP Logic / 138Integrating DRP with MRP / 141Managing the DRP System / 142Case Study / 145

11. PURCHASING MANAGEMENT / 151The Role Of Purchasing / 151Purchasing Quantities / 153Extension of the Manufacturing Function / 155Supplier Relationships / 156Performance Measurements / 159Case Study / 160

12. MANUFACTURING MANAGEMENT / 165Job Shop Manufacturing / 165Process Manufacturing / 167Repetitive Manufacturing / 171System Requirements / 174Case Study / 176

vii

viii

13. SUPPLY CHAIN MANAGEMENT / 181The Supply Chain / 181Supply Chain Goals / 183Required Capacities / 186Supply Chain Control Systems / 187Performance Measurements / 189Case Study / 190

14. INVENTORY MANAGEMENT ORGANIZATION / 195Basic Functions / 195Materials Management Organization / 199Centralized and Decentralized Management / 202Case Study / 204

GLOSSARY / 209

INDEX / 223

PREFACE

While teaching the APICS Certification Review Course for InventoryManagement, I am reminded of the changes in the field since I took the examover twenty years ago. At that time emphasis was placed on lot sizing, safetystocks, forecasting methods, and ordering techniques. Material requirementsplanning was in its early days and the dependent demand time-phased logicwas covered to a greater degree in the MRP module. The present day reviewcourse, published in 1994, devotes about one-third of its contents todistribution, manufacturing environments, and Just-in-Time; factors notconsidered an important part of inventory management in the 1970's. Thesechanges reflect today's business goals calling for efficient lean operationsacross the entire supply chain from raw material to the final customer.The goal of this book will be to explain the dynamics of inventory

management's principles, concepts, and techniques as they relate t) the entiresupply chain (customer demand, distribution, and product transformationprocesses). The interrelationships of all functions will be defined. The bookconcentrates on understanding the many ramifications of inventorymanagement. In today's competitive business environment, inventorymanagement has proven to be most critical.This book is directed to inventory management practitioners to assist them

in better understanding the body of knowledge required to operate in today'scompetitive environment. It is also directed to those in related fields of thebusiness world. Almost all functions such as sales, engineering, andaccounting have an impact and are impacted by inventory management. Thebook will assist in the training of four year and community college studentsas well as APICS CPIM (Certified in Production and Inventory Management)candidates. As such it will not only be a textbook but also a desk referencefor those employees responsible for controlling inventories, and thereby assistin reducing cost, improving customer service, and maximizing capacity.The book is organized to first overview the basics of inventory

management (Chapter I). Cost concepts which both drive and measureinventory management decisions are explained in Chapter 2. The basics ofindependent demand control are covered with Forecasting (Chapter 3),Inventory Reliability (Chapter 4), Order Quantities (Chapter 5), andReplenishing Independent Demand (Chapter 6). Systems controllingdependent demand are explained in Replenishing Dependent Demand(Chapter 7) and Master Production Scheduling (Chapter 8). DistributionManagement and Distribution Resource Planning are detailed in Chapters 9and 10. The activity or execution functions of inventory management

x

(Purchasing and Manufacturing) are spelled out in Chapters 11 and 12.Supply Chain Management is outlined in Chapter 13. Chapter 14 defines themany interrelationships of all the related functions.Each chapter concludes with a case study and suggested solution. The case

studies tell the story of a growing company, Smith Industries, and the relatedinventory management problems it had to address. The problems addressedrelate to the subject matter of the chapter.I would like to acknowledge the encouragement received from Eugene

Magad of Harper College and Gary Folven and Carolyn Ford of KluwerAcademic Publishers. After two books I have learned that it can be a longroad to completion. I want to also give special thanks to those who were of somuch assistance in their technical reviews of the subject matter. They areBrian Carroll of Engineering Systems Associates, Roger Dykstra ofManufacturing Management Associates, Robert (Pat) O'Donnell of Hearth &Home, and Tom Setlik of Tempel Steel Company. The reviewers have beeninvaluable in their suggestions and corrections.Finally, I would like to give special thanks to Joan Toomey, proof reader

extraordinaire.

John W. Toomey