pom - j. galván 1 production and operations management ch.13: inventory management
TRANSCRIPT
POM - J. GalvánPOM - J. Galván 11
PRODUCTION AND PRODUCTION AND OPERATIONS OPERATIONS
MANAGEMENTMANAGEMENT
Ch.13: Inventory ManagementCh.13: Inventory Management
POM - J. GalvánPOM - J. Galván 22
Learning ObjectivesLearning Objectives
Explain what inventory isExplain what inventory is Explain how inventory is classifiedExplain how inventory is classified Explain ABC Analysis and Cycle Explain ABC Analysis and Cycle
CountingCounting Compare inventory modelsCompare inventory models Use inventory models to find how Use inventory models to find how
much and when to ordermuch and when to order
POM - J. GalvánPOM - J. Galván 33© 1998 by Prentice Hall, Inc.A Simon & Schuster Company
Upper Saddle River, N.J. 07458
Stock of materialsStock of materials Stored capacityStored capacity ExamplesExamples
© 1995 Corel Corp.
© 1995 Corel Corp.
What is Inventory?What is Inventory?
POM - J. GalvánPOM - J. Galván 44
The Functions of InventoryThe Functions of Inventory Provide a stock of goods to meet anticipated Provide a stock of goods to meet anticipated
customer demand and provide a “selection” of customer demand and provide a “selection” of goodsgoods
Decouple suppliers from production and production Decouple suppliers from production and production from distributionfrom distribution
Allow one to take advantage of quantity discountsAllow one to take advantage of quantity discounts To provide a hedge against inflationTo provide a hedge against inflation To protect against shortages due to delivery To protect against shortages due to delivery
variationvariation To permit operations to continue smoothly with the To permit operations to continue smoothly with the
use of “work-in-process”use of “work-in-process”
POM - J. GalvánPOM - J. Galván 55
Higher costsHigher costs• Item cost (if purchased)Item cost (if purchased)• Ordering (or setup) costOrdering (or setup) cost
Costs of forms, clerks’ wages etc.Costs of forms, clerks’ wages etc.• Holding (or carrying) costHolding (or carrying) cost
Building lease, insurance, taxes etc.Building lease, insurance, taxes etc.
Difficult to controlDifficult to control Hides production problemsHides production problems
Disadvantages of InventoryDisadvantages of Inventory
POM - J. GalvánPOM - J. Galván 66
Types of InventoryTypes of Inventory
Raw materialRaw material Work-in-processWork-in-process Maintenance/repair/operating Maintenance/repair/operating
suppliessupplies Finished goodsFinished goods
POM - J. GalvánPOM - J. Galván 77
Inventory
Process stage
Demand Type
Number & Value Other
Raw Material WIP
Finished Goods
Independent Dependent
A Items B Items C Items
Maintenance Dependent Operating
Inventory ClassificationsInventory Classifications
POM - J. GalvánPOM - J. Galván 88
1 Run timeRun time: : Job is at machine and being worked onJob is at machine and being worked on2 Setup timeSetup time: Job is at the work station, and the work station is : Job is at the work station, and the work station is
being "setup."being "setup."3 Queue timeQueue time: Job is where it should be, but is not being : Job is where it should be, but is not being
processed because other work precedes it.processed because other work precedes it.4 Move timeMove time: The time a job spends in transit: The time a job spends in transit5 Wait timeWait time: When one process is finished, but the job is waiting : When one process is finished, but the job is waiting
to be moved to the next work area.to be moved to the next work area.6 OtherOther: : "Just-in-case" inventory."Just-in-case" inventory.
The Material Flow CycleThe Material Flow Cycle
OtherWaitTime
MoveTime
QueueTime
SetupTime
RunTimeInput
Cycle Time
Output
POM - J. GalvánPOM - J. Galván 99
Divides on-hand inventory into 3 classesDivides on-hand inventory into 3 classes• A class, B class, C classA class, B class, C class
Basis is usually annual $ volumeBasis is usually annual $ volume• $ volume = Annual demand x Unit cost$ volume = Annual demand x Unit cost
Policies based on ABC analysisPolicies based on ABC analysis• Develop class A suppliers moreDevelop class A suppliers more• Give tighter physical control of A itemsGive tighter physical control of A items• Forecast A items more carefullyForecast A items more carefully
ABC AnalysisABC Analysis
POM - J. GalvánPOM - J. Galván 1010
0
20
40
60
80
100
0 50 100 150% of Inventory Items% of Inventory Items
% Annual $ Usage% Annual $ Usage
AA
BB CC
Class % $ Vol % ItemsA 80 15B 15 30C 5 55
Classifying Items as ABCClassifying Items as ABC
ABC AnalysisABC Analysis
10 20 30 40 50 60 70 80 90100
Percentage of items
Perc
en
tag
e o
f d
ollar
valu
e
100 —
90 —
80 —
70 —
60 —
50 —
40 —
30 —
20 —
10 —
0 —
Class CClass B
Class A
POM - J. GalvánPOM - J. Galván 1212
Physically counting a sample of Physically counting a sample of total inventory on a regular basistotal inventory on a regular basis
Used often with ABC classificationUsed often with ABC classification• A items counted most often (e.g., daily)A items counted most often (e.g., daily)
Cycle CountingCycle Counting
POM - J. GalvánPOM - J. Galván 1313
Advantages of Cycle CountingAdvantages of Cycle Counting Eliminates shutdown and interruption of Eliminates shutdown and interruption of
production necessary for annual production necessary for annual physical inventoriesphysical inventories
Eliminates annual inventory adjustmentsEliminates annual inventory adjustments Provides trained personnel to audit the Provides trained personnel to audit the
accuracy of inventoryaccuracy of inventory Allows the cause of errors to be Allows the cause of errors to be
identified and remedial action to be identified and remedial action to be takentaken
Maintains accurate inventory recordsMaintains accurate inventory records
POM - J. GalvánPOM - J. Galván 1414
Techniques for Controlling Techniques for Controlling Service Inventory Include:Service Inventory Include:
Good personnel selection, training, Good personnel selection, training, and disciplineand discipline
Tight control of incoming shipmentsTight control of incoming shipments Effective control of all goods leaving Effective control of all goods leaving
the facilitythe facility
POM - J. GalvánPOM - J. Galván 1515
Independent versus Independent versus Dependent DemandDependent Demand
Independent demand - demand for Independent demand - demand for item is independent of demand for item is independent of demand for any other itemany other item
Dependent demand - demand for Dependent demand - demand for item is dependent upon the demand item is dependent upon the demand for some other itemfor some other item
POM - J. GalvánPOM - J. Galván 1616
Holding, Ordering, and Setup CostsHolding, Ordering, and Setup Costs
Holding costs - associated with Holding costs - associated with holding or “carrying” inventory over holding or “carrying” inventory over timetime
Ordering costs - associated with costs Ordering costs - associated with costs of placing order and receiving goodsof placing order and receiving goods
Setup costs - cost to prepare a Setup costs - cost to prepare a machine or process for machine or process for manufacturing an ordermanufacturing an order
POM - J. GalvánPOM - J. Galván 1717
Holding CostsHolding Costs
ObsolescenceObsolescence InsuranceInsurance Extra staffingExtra staffing InterestInterest PilferagePilferage DamageDamage WarehousingWarehousing Etc.Etc.
POM - J. GalvánPOM - J. Galván 1818
Determining Inventory Holding Determining Inventory Holding CostsCosts
CategoryCategory
Housing costsHousing costs
Material handling Material handling costscosts
Labor cost from extra Labor cost from extra handlinghandling
Investment costsInvestment costs
Pilferage, scrap, and Pilferage, scrap, and obsolescenceobsolescence
Cost as aCost as a % of Inventory % of Inventory
ValueValue6%6%
(3 - 10%)(3 - 10%)
3%3%(1 - 3.5%)(1 - 3.5%)
3%3%(3 -(3 - 5%)5%)
11%11%(6 - 24%)(6 - 24%)
3%3%(2 - 5%)(2 - 5%)
POM - J. GalvánPOM - J. Galván 1919
Ordering CostsOrdering Costs
SuppliesSupplies FormsForms Order processingOrder processing Clerical supportClerical support Etc.Etc.
POM - J. GalvánPOM - J. Galván 2020
Setup CostsSetup Costs
Clean-up costsClean-up costs Re-tooling costsRe-tooling costs Adjustment costsAdjustment costs Etc.Etc.
POM - J. GalvánPOM - J. Galván 2121
Fixed order quantity Fixed order quantity modelsmodels• Economic order quantityEconomic order quantity• Production order quantityProduction order quantity• Quantity discountQuantity discount
Probabilistic modelsProbabilistic models Fixed order period modelsFixed order period models
Help answer the inventory planning questions!
Help answer the inventory planning questions!
© 1984-1994 T/Maker Co.
Inventory ModelsInventory Models
POM - J. GalvánPOM - J. Galván 2222
Known and constant demandKnown and constant demand Known and constant lead timeKnown and constant lead time Instantaneous receipt of materialInstantaneous receipt of material No quantity discountsNo quantity discounts Only order (setup) cost and holding Only order (setup) cost and holding
costcost No stockoutsNo stockouts
EOQ AssumptionsEOQ Assumptions
POM - J. GalvánPOM - J. Galván 2323
Order QuantityOrder Quantity
Annual CostAnnual Cost
Holding Cost Curve
Holding Cost Curve
Total Cost Curve
Total Cost Curve
Order (Setup) Cost CurveOrder (Setup) Cost Curve
Optimal Optimal Order Quantity (Q*)Order Quantity (Q*)
EOQ ModelEOQ ModelHow Much to Order?How Much to Order?
POM - J. GalvánPOM - J. Galván 2424
More units must be stored if more orderedMore units must be stored if more ordered
Purchase OrderDescription Qty.Microwave 1
Order quantityOrder quantity
Purchase OrderDescription Qty.Microwave 1000
Order quantityOrder quantity
Why Holding Costs IncreaseWhy Holding Costs Increase
POM - J. GalvánPOM - J. Galván 2525
Cost is spread over more unitsCost is spread over more units
Example: You need 1000 microwave ovens Example: You need 1000 microwave ovens
Purchase OrderDescription Qty.Microwave 1
Purchase OrderDescription Qty.Microwave 1
Purchase OrderDescription Qty.Microwave 1
Purchase OrderDescription Qty.Microwave 1
1 Order (Postage $ 0.32)1 Order (Postage $ 0.32) 1000 Orders (Postage $320)1000 Orders (Postage $320)
Order quantityOrder quantity
Purchase OrderDescription Qty.Microwave 1000
Why Order Costs DecreaseWhy Order Costs Decrease
POM - J. GalvánPOM - J. Galván 2626
EOQ ModelEOQ ModelWhen To OrderWhen To Order
Reorder Reorder Point Point (ROP)(ROP)
TimeTime
Inventory LevelInventory Level
AverageAverageInventory Inventory
(Q*/2)(Q*/2)
Lead TimeLead Time
Optimal Optimal Order Order QuantityQuantity(Q*)(Q*)
POM - J. GalvánPOM - J. Galván 2727
Deriving an EOQDeriving an EOQ
Develop an expression for setup or Develop an expression for setup or ordering costsordering costs
Develop an expression for holding Develop an expression for holding costcost
Set setup cost equal to holding costSet setup cost equal to holding cost Solve the resulting equation for the Solve the resulting equation for the
best order quantitybest order quantity
POM - J. GalvánPOM - J. Galván 2828
Optimal Order Quantity
Expected Number of Orders
Expected Time Between Orders Working Days / Year
Working Days / Year
= =× ×
= =
= =
=
= ×
Q*D SH
ND
Q*
TN
dD
ROP d L
2
DD = Demand per year = Demand per year
SS = Setup (order) cost per order = Setup (order) cost per order
HH = Holding (carrying) cost = Holding (carrying) cost
dd = Demand per day = Demand per day
LL = Lead time in days = Lead time in days
EOQ Model EquationsEOQ Model Equations
POM - J. GalvánPOM - J. Galván 2929
Answers how much to order and Answers how much to order and when to orderwhen to order
Allows partial receipt of materialAllows partial receipt of material• Other EOQ assumptions applyOther EOQ assumptions apply
Suited for production environmentSuited for production environment• Material produced, used immediatelyMaterial produced, used immediately• Provides production lot sizeProvides production lot size
Lower holding cost than EOQ modelLower holding cost than EOQ model
Production Order Quantity Production Order Quantity ModelModel
POM - J. GalvánPOM - J. Galván 3030
Reasons for Variability in ProductionReasons for Variability in Production Most variability is caused by tolerating waste or Most variability is caused by tolerating waste or
by poor management. Specific causes include:by poor management. Specific causes include: employees, machines, and suppliers produce employees, machines, and suppliers produce
units that do not conform to standards, are units that do not conform to standards, are late or are not the proper quantitylate or are not the proper quantity
engineering drawings or specifications are engineering drawings or specifications are inaccurateinaccurate
production personnel try to produce beforeproduction personnel try to produce beforedrawings or specifications are completedrawings or specifications are complete
customer demands are unknowncustomer demands are unknown
POM - J. GalvánPOM - J. Galván 3131
POQ Model Inventory LevelsPOQ Model Inventory Levels
Inventory LevelInventory Level
TimeTimeSupply Supply BeginsBegins
Supply Supply EndsEnds
Production portion of cycleProduction portion of cycle
Demand portion of cycle with no Demand portion of cycle with no supplysupply
POM - J. GalvánPOM - J. Galván 3333
D = Demand per year
S = Setup cost
H = Holding cost
d = Demand per day
p = Production per day
POQ Model EquationsPOQ Model Equations
Optimal Order Quantity
Max. Inventory Level
Setup Cost
Holding Cost
= =-
= *
= *
=
QH*
dp
Q
DQ
S
p *1
(
0.5 * H * Q - dp
1
)- d
p1
( )
2*D*S
( )
POM - J. GalvánPOM - J. Galván 3434
Answers how much to order & Answers how much to order & when to orderwhen to order
Allows quantity discountsAllows quantity discounts• Reduced price when item is purchased Reduced price when item is purchased
in larger quantitiesin larger quantities• Other EOQ assumptions applyOther EOQ assumptions apply
Trade-off is between lower price & Trade-off is between lower price & increased holding costincreased holding cost
Quantity Discount ModelQuantity Discount Model
POM - J. GalvánPOM - J. Galván 3535
Lowest cost not in Lowest cost not in discount rangediscount range
Quantity Discount ModelQuantity Discount ModelHow Much to Order?How Much to Order?
Order Order QuantityQuantity
Total CostTotal Cost TC for TC for Discount 1Discount 1
Discount Discount Quantity 1Quantity 1
TC for TC for Discount 2Discount 2
TC for TC for Discount 3Discount 3
DiscountDiscount Quantity 2Quantity 2
Quantity OrderedQuantity Ordered
Price 1Price 1 Price 2Price 2 PricePrice 3 3
POM - J. GalvánPOM - J. Galván 3636
Answer how much & when to order Answer how much & when to order Allow demand to varyAllow demand to vary
• Follows normal distributionFollows normal distribution• Other EOQ assumptions applyOther EOQ assumptions apply
Consider service level & safety stockConsider service level & safety stock• Service level = Service level = 1 - Probability of stockout1 - Probability of stockout• Higher service level means more safety Higher service level means more safety
stockstock More safety stock means higher ROPMore safety stock means higher ROP
Probabilistic ModelsProbabilistic Models
POM - J. GalvánPOM - J. Galván 3737
Probabilistic ModelsProbabilistic ModelsWhen to Order?When to Order?
Reorder Reorder Point Point (ROP)(ROP)
XX
Safety Stock (SS)Safety Stock (SS)
TimeTime
Inventory LevelInventory Level
OptimalOptimal Order Order
QuantityQuantity
Lead TimeLead Time
SSSS
ROPROP
Service Service LevelLevel P(Stockout)P(Stockout)
Place Place orderorder
Receive Receive orderorder
FreqFreq
POM - J. GalvánPOM - J. Galván 3838
Reorder Reorder Point Point
(ROP)(ROP)
X
Safety Stock (SS)Safety Stock (SS)
TimeTime
Inventory LevelInventory Level
OptimalOptimalOrderOrderQuantityQuantity
SSSS
ROPROP
Service Service LevelLevel P(Stockout)P(Stockout)
FreqFreq
Lead TimeLead Time
Place Place orderorder
Receive Receive orderorder
Probabilistic ModelsProbabilistic ModelsWhen to OrderWhen to Order
POM - J. GalvánPOM - J. Galván 3939
Answers how much to orderAnswers how much to order Orders placed at fixed intervalsOrders placed at fixed intervals
• Inventory brought up to target amountInventory brought up to target amount• Amount ordered variesAmount ordered varies
No continuous inventory countNo continuous inventory count• Possibility of stockout between intervalsPossibility of stockout between intervals
Useful when vendors visit routinelyUseful when vendors visit routinely• Example: P&G representative calls every 2 Example: P&G representative calls every 2
weeksweeks
Fixed Period ModelFixed Period Model
POM - J. GalvánPOM - J. Galván 4040
TimeTime
Inventory LevelInventory Level Target maximumTarget maximum
PeriodPeriod PeriodPeriodPeriodPeriod
Fixed Period ModelFixed Period ModelWhen to Order?When to Order?