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Slack, Chambers and Johnston, Operations Management, 6th Edition,© Nigel Slack, Stuart Chambers, and Robert Johnston 201012.1
12.1
Chapter 12
Inventory planning and control
Photodisc. Kim Steele
Slack, Chambers and Johnston, Operations Management, 6th Edition,© Nigel Slack, Stuart Chambers, and Robert Johnston 201012.2
12.2
Design
Planning and control
Operations strategy
Improvement
Inventory planning and control
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, 6th Edition,© Nigel Slack, Stuart Chambers, and Robert Johnston 201012.3
12.3 Key operations questions
In Chapter 12 – Inventory planning and control – Slack
et al. identify the following key questions:
•What is inventory?
•Why is inventory necessary?
•What are the disadvantages of holding inventory?
•How much inventory should an operation hold?
•When should an operation replenish its inventory?
•How can inventory be controlled?
Slack, Chambers and Johnston, Operations Management, 6th Edition,© Nigel Slack, Stuart Chambers, and Robert Johnston 201012.4
12.4 Inventory is created to compensate for the differences intiming between supply and demand
Input process
Inventory
Output process
Rate of supply from input process
Rate of demand from output processInventory
Slack, Chambers and Johnston, Operations Management, 6th Edition,© Nigel Slack, Stuart Chambers, and Robert Johnston 201012.5
12.5
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-stage inventory system
Single-stage and two-stage inventory systems
Slack, Chambers and Johnston, Operations Management, 6th Edition,© Nigel Slack, Stuart Chambers, and Robert Johnston 201012.6
12.6
e.g. Television manufacturerSuppliers
Input stock
Stage 1
A multi-stage inventory system
WIP Stage 2
WIP Stage 3
Finished goods stock
Slack, Chambers and Johnston, Operations Management, 6th Edition,© Nigel Slack, Stuart Chambers, and Robert Johnston 201012.7
12.7 A multi-echelon inventory system
Yarn producers
Cloth manufacturers
Garment manufacturers
Regional warehouses
Retail stores
Slack, Chambers and Johnston, Operations Management, 6th Edition,© Nigel Slack, Stuart Chambers, and Robert Johnston 201012.8
12.8 A paper merchant must get its inventory planning andcontrol right
Slack, Chambers and Johnston, Operations Management, 6th Edition,© Nigel Slack, Stuart Chambers, and Robert Johnston 201012.9
12.9 Inventory profiles chart the variation in inventory level
Time
per period DQInstantaneous deliveries at a rate of
QD
Inve
ntor
y le
vel
Steady and predictable demand (D) Slope = demand rate (D)
=Average inventory
Q2
Order quantity = Q
Slack, Chambers and Johnston, Operations Management, 6th Edition,© Nigel Slack, Stuart Chambers, and Robert Johnston 201012.10
12.10 Two alternative inventory plans with differentorder quantities (Q)
Time
Inve
ntor
y 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, 6th Edition,© Nigel Slack, Stuart Chambers, and Robert Johnston 201012.11
12.11
400
350
300
250
200
150
100
50
40035030025020015010050Order quantity
Cos
ts
Economic order quantity (EOQ)
Total costs
Holding costs
Order costs
Traditional view of inventory-related costs
Slack, Chambers and Johnston, Operations Management, 6th Edition,© Nigel Slack, Stuart Chambers, and Robert Johnston 201012.12
12.12 Cycle inventory in a bakeryIn
vent
ory
leve
l
Deliver A
Produce ADeliver
B
Produce BDeliver
C
Produce CDeliver
A
Produce A Produce BDeliver
B
Produce CDeliver
C
Time
Slack, Chambers and Johnston, Operations Management, 6th Edition,© Nigel Slack, Stuart Chambers, and Robert Johnston 201012.13
12.13
Time
Inve
ntor
y le
vel
Inventory profile for gradual replacement of inventory
Order quantity
Q
QP
M
Slope = P – DSlope = D
Slack, Chambers and Johnston, Operations Management, 6th Edition,© Nigel Slack, Stuart Chambers, and Robert Johnston 201012.14
12.14
Inve
ntor
y le
vel
Time
Shortages
Inventory planning allowing for shortages
Slack, Chambers and Johnston, Operations Management, 6th Edition,© Nigel Slack, Stuart Chambers, and Robert Johnston 201012.15
12.15 The re-order point
400
300
200
100Inve
ntor
y 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, 6th Edition,© Nigel Slack, Stuart Chambers, and Robert Johnston 201012.16
12.16 Safety stock(s) helps to avoid stock-outs when demand and/or order lead times are uncertain
Inve
ntor
y le
vel
S
Q
Timet1 t2
d1
d2
Re-order level (ROL)
Distribution of lead-time
usage
?
Slack, Chambers and Johnston, Operations Management, 6th Edition,© Nigel Slack, Stuart Chambers, and Robert Johnston 201012.17
12.17 The probability distributions for order lead time and demandrate combine to give the lead-time usage distribution
0.4
0.3
0.2
0.10
110 120 130 140
Pro
babi
lity
Demand rate
0.4
0.3
0.2
0.10
1 2 3 4 5
Pro
babi
lity
Order lead time
0.4
0.3
0.2
0.10
Pro
babi
lity
100–199Lead-time usage
120–299 300–399 400–499 500–599 600–699 700–799
Slack, Chambers and Johnston, Operations Management, 6th Edition,© Nigel Slack, Stuart Chambers, and Robert Johnston 201012.18
12.18 A periodic review approach to order timing with probabilistic demand and lead time
Inve
ntor
y le
vel
Qm
To T1 T2 T3 Timet1 t2 t3
tf tf tf
Q1 Q2 Q3
Slack, Chambers and Johnston, Operations Management, 6th Edition,© Nigel Slack, Stuart Chambers, and Robert Johnston 201012.19
12.19
100
90
80
70
6050
40
30
20
10
100908070605040302010
Class C items
Class B items
Class A items
Pareto curve for stocked items
Percentage of types of items
Per
cent
age
of v
alue
of i
tem
s
Slack, Chambers and Johnston, Operations Management, 6th Edition,© Nigel Slack, Stuart Chambers, and Robert Johnston 201012.20
12.20 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, 6th Edition,© Nigel Slack, Stuart Chambers, and Robert Johnston 201012.21
12.21 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
Cos
ts
Original EOQ
Revised EOQ
Revised order costs
Revised total costs
Original order costs
Slack, Chambers and Johnston, Operations Management, 6th Edition,© Nigel Slack, Stuart Chambers, and Robert Johnston 201012.22
12.22
Two bin system Three bin system
The ‘Two bin’ and ‘Three bin’ systems of re-ordering system
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