inventory management chapter 7 prepared by mark a. jacobs, phd ©2012 cengage learning. all rights...

INVENTORY INVENTORY MANAGEMENTMANAGEMENT

Chapter 7Chapter 7

Prepared by Mark A. Jacobs, PhD

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2

LEARNING OBJECTIVESLEARNING OBJECTIVES

You should be able to: Distinguish dependent from independent demand

inventories Describe the four basic types of inventories & their

functions Understand the costs of inventory & inventory

turnovers Understand ABC classification, ABC inventory matrix &

cycle counting


LEARNING OBJECTIVES LEARNING OBJECTIVES ((ContinuedContinued))

Know RFID & how it can be used in inventory management

Understand the EOQ model & its underlying assumptions

Understand the Quantity Discounts & the EMQ Models & their relationships with the basic EOQ model

Understand & able to distinguish among the various statistical ROP models

Describe the continuous review & periodic review systems


CHAPTER OUTLINECHAPTER OUTLINE

• Introduction • Dependent and Independent Demand• Concepts and Tools of Inventory Management• Inventory Models

Introduction

Inventory can be one of the most expensive assets of an organization

Inventory may account for more than 10% of total revenue or 20% of total assets

Management must reduce inventory levels yet avoid stockouts and other problems

This chapter will discuss: Dependent & independent demand Tools for managing inventory Basic types of inventories Various inventory management approaches

Matching Supply & Demand

Suppliers must accurately forecast demand so they can produce & deliver the right quantities at the right time at the right cost

Suppliers must find ways to better match supply & demand to achieve optimal levels of cost, quality, & customer service to enable them to compete with other supply chains

Problems that affect product & delivery will have ramifications throughout the chain

Dependent & Independent Demand

Inventory management models – Generally classified as dependent demand and independent demand models

Dependent Demand – Describes the internal demand for parts based on

the demand of the final product in which the parts are used. Subassemblies, components, & raw materials are examples of dependent demand items.

Independent Demand – The demand for final products & has a demand

pattern affected by trends, seasonal patterns, & general market conditions.

Concepts and Tools of Inventory Management Functions and Basic Types of Inventory

The primary functions of inventory are to – Buffer from uncertainty in the marketplace & Decouple dependencies in the supply chain (e.g., safety

stock)

Four broad categories of inventories Raw materials- unprocessed purchase inputs. Work-in-process (WIP)- partially processed materials not

yet ready for sales. Finished goods- products ready for shipment. Maintenance, repair & operating (MRO)- materials used in

production (e.g., cleaners & brooms).

Concepts and Tools of Inventory Management (Continued)

Inventory Costs Direct costs- directly traceable to unit produced (e.g.,

labor) Indirect costs- cannot be traced directly to the unit

produced (e.g., overhead) Fixed costs- independent of the output quantity (e.g,

buildings, equipment, & plant security) Variable costs- vary with output level (e.g., materials) Order costs- direct variable costs for making an order. In

mfg, setup costs are related to machine setups Holding or carrying costs- incurred for holding inventory

in storage


Inventory Investment Firms should diligently measure inventory investment to

ensure that it does not adversely affect competitiveness. Measures include: Absolute value of inventory (found on balance sheet) Inventory turnover or turnover ratio- how many times

inventory “turns” in an accounting period. More is better because its faster!

Cost of Revenue

Average InventoryInventory Turnover Ratio =


ABC Inventory Control System

Determines which inventories should be counted & managed more closely than others

Groups inventory as A, B, & C Items A items are given the highest priority with larger safety stocks.

A items, which account for approximately 20% of the total items, are about 80% of the total inventory cost

B & C items account for the other 80% of total items & only 20% of costs. The B items require closer management since they are relatively more expensive (per unit), require more effort to purchase/make, & may be more prone to obsolescence

C items have the lowest value and hence lowest priority


Radio Frequency Identification (RFID)

Successor to the barcode for tracking individual unit of goods. RFID does not require direct line of sight to read a tag and information on the tag is updatable.

RFID Tags (Transponders) Readers Information Infrastructure (Local/ERP Servers)

Hand Held ReadersShelf Readers

Fixed Portal Readers

RFID MiddlewareLocal / ERP Server

Database

Item

PalletCrate

Box

RFID Tags (Transponders) Readers Information Infrastructure (Local/ERP Servers)




Database

Item

PalletCrate

Box

RFID Tags (Transponders) Readers Information Infrastructure (Local/ERP Servers)RFID Tags (Transponders) Readers Information Infrastructure (Local/ERP Servers)




Database

Item

PalletCrate

Box



RFID MiddlewareLocal / ERP ServerRFID Middleware

Local / ERP Server

DatabaseDatabase

ItemItem

PalletCratePalletCrate

BoxBox

(Fig. 7.4)


RFID

Automates the supply chain: Materials Management – goods automatically counted and

logged as they enter the supply warehouse

Manufacturing – assembly instructions encoded on RFID tag provide information to computer controlled assembly devices

Distribution Center – shipment leaving DC automatically updates ERP to trigger a replenishment order and notify customer for delivery tracking

Retail Store – no check out lines as scanners link RFID tagged goods in shopping cart with buyers credit card

Inventory Models

The Economic Order Quantity (EOQ) Model – A quantitative decision model based on the trade-off between annual inventory holding costs & annual order costs

The EOQ model seeks to determine an optimal order quantity, where the sum of the annual order cost & the annual inventory holding cost is minimized.

• Order Cost is the direct variable cost associated with placing an order.

• Holding Cost or carrying cost is the cost incurred for holding inventory in storage.

Inventory Models (Continued)

Assumptions of the EOQ Model Demand must be known & constant. Delivery time is known & constant. Replenishment is instantaneous. Price is constant. Holding cost is known & constant. Ordering cost is known & constant. Stock-outs are not allowed.


EOQ Model

(Fig. 7.5)


Inventory on hand & relationships to – EOQ, average inventory, lead time, reorder point, & order cycle

(Fig. 7.6)

Illustration


The Statistical Reorder Point (ROP)

The lowest inventory level at which a new order must be placed to avoid a stockout.

Demand and delivery lead time are never certain and require safety stock.

The models used under uncertainty are –

Statistical ROP with Probabilistic Demand and Constant Lead Time

The Statistical ROP with Constant Demand and Probabilistic Lead Time

The Statistical ROP when Demand and Lead Time are both Probabilistic


The Continuous Review System versus The Periodic Review System

Order quantity & ROP models assume that the physical inventory is precisely known at every point in time

Reality shows that stock records and actual quantity are different & requires continuous review of inventory to determine when to reorder

A Continuous Review System is costly to conduct but requires less safety stock than the

The Periodic Review System, which reviews physical inventory at specific points in time and requires higher level of safety stock

inventory management chapter 7 prepared by mark a. jacobs, phd ©2012 cengage learning. all rights...

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