Ops Mgt. Chapter 13: (Inventory Management)

a store or stock of goods which can be finished products or components.
Inventory Strategic Importance
necessary for business operations and contributes to customer satisfaction.
Reasons for Holding Inventory
– Permits Operations
– Decouples Operations
– Meet Customer Demand
– Reduce Risk of Stock Outs
– Take Advantage of Order Cycles
– Take Advantage of Quantity Discounts
– Hedge Against Price Increase
– Smooth Production Requirements
Permits Operations
by providing time for manufacturing and distribution activities.
Decouples Operations
by providing buffer between work centers and in supply chain.
Take Advantage of Order Cycles
by using economic lot sizes to reduce operating costs.
Take Advantage of Quantity Discounts
by creating a larger volume orders for suppliers.
Meet Customer Demand
by holding anticipation stock or cycle stock of products.
Reduce Risk of Stock outs
by holding of safety stock of components or products.
Hedge Against Price Increase
by purchasing extra stock in anticipation of price changes.
Smooth Production Requirement’s
by allowing steady rate of output using seasonal inventories.
Types of Inventory
1. Components (raw materials sand parts)
2. Work-In-Process
3. Finished Goods (merchandise)
4. Goods-In-Transit (Pipeline Inventory)
5. Maintenance, Repairs, and Operations (MRO)
6. Tools and Supplies
Holding Carrying Costs
cost to carry an item in inventory for a length of time, usually a year.
Ordering Costs
costs of ordering and receiving items for inventory from an outside vendor.
Inventory Related Costs
– Holding Carrying Costs
– Ordering Costs
– Setup Costs
– Purchase Cost
– Shortage Costs
Setup Costs
cost of preparing machinery and equipment to produce items for inventory.
Purchase Costs
amount paid on a per unit basis to a suppler to buy items for inventory .
Shortage Costs
costs incurred when demand exceeds supply (unrealized sales or profits).
Inventory Management Objective
To achieve a desired level of customer service while keeping inventory costs reasonable.
Days of Inventory on Hand
inventory in units divided by daily demand or usage in units.
Inventory Turnover Ratio
ratio of annual cost of goods sold to average inventory investment.
Inventory Management – Key Elements of an Effective System:
– Inventory tracking system
– Reliable forecast of demand
– Knowledge of lead time and variability
– Reasonable estimates of inventory-related costs
– Classification system for items in inventory
Periodic System
physical count of items in inventory is made at periodic intervals.
Perpetual Inventory System
additions to and withdrawals from inventory continuously tracked to determine current levels of stock for each item.
Universal Product Codes (UPC)
labels that can provide information using scanable bar coding.
Radio Frequency Identification (RFID)
tags that emit signals using electron magnetic fields that:
1) Eliminates need for line of sight scanning.
2) Provide real-time information on item status
3) Can provide more information than UPC labels.
Inventory Tracking Systems Types
Periodic Systems and Perpetual Inventory System
Inventory Tracking Technology:
– Universal Product Codes (UPC)
– Radio Frequency Identification (RFID)
– Point of Sales Systems (POS)
Point of Sales Systems (POS)
useful for both inventory tracking and demand forecasting.
ABC Approach
most common type of classification systems.
ABC Approach
Classifies inventory items according to some relative importance and allocates control effort accordingly.
Cycle Counting
physical counting of items in inventory
Inventory classification systems can answer key cycle counting questions:
1. How much accuracy is needed?
2. When should count be performed?
3. Who should do the count?
Inventory Management Key Functions:
– Establish/maintain inventory tracking system.
– Determine timing/size of replenishment orders.
Inventory Replenishment: (When to order)
ROP models
Determinants of Reorder Point:
– Rate of demand or usage of the item
– Lead time for delivery or production
– Variability of Demand and/or lead time
– Acceptable stock risk or service level
Reorder Point Models (ROP Models)
mathematical models that determine on hand quantity of an item at which point more should be ordered.
ROP Model – Conditions of Uncertainty
hold inventory in excess of demand (safety stock) to account for variability of demand or lead time.
Alternative to ROP Models
FOI Model
Fixed-Order-Interval (FOI) Model
orders of varying quantity placed at fixed time intervals.
FOI Model Commonly Used:
– When supplier encourages/requires it use
– To consolidate orders and save shipping costs
– When inventory tracking is difficult
Basic Economic Order Quality (EOQ) Model:
determines optimal fixed order quantity that minimizes total annual inventory holding ordering costs.
Single Period Model
determines optimal fixed order quantity that minimizes total annual excess inventory and shortage costs.
Single Period Model
is applicable primarily to products with limited shelf life such as perishables.
Basic EOQ Model – (Limitations) Model has the following assumptions:
– Only one product/item is involved.
– Annual usage rate or demand is known.
– Demand is constant during the year.
– Replenishment lead time cannot vary.
– Each order is received in a single delivery.
– There are no quantity discounts
(Any or all of these assumptions can be modified by using other EOQ Models)
Quantity Discount Model
determines optimal fixed order quantity that minimizes total annual holding costs, ordering costs, and purchasing costs.
Alternatives to Basic EOQ Model
Quantity Discount Model
Economic Production Models (EPQ)
determines an optimal fixed order quantity that will minimize total annual inventory holding costs and production set up costs.
Two Bin System
simplified method of tracking and reordering inventory using two storage containers or bins per item.
– each container contains same quantity of item which is equal to its demand or usage during replenishment for an empty container.
– The item is reordered when a bin is empty.
Supplier Management
work with suppliers to reduce size and frequency of stock outs.
Record Keeping
continually search for ways to improve accuracy and reliability.
Variance Reduction
reduce variability of both lead times and demand forecasts.
Reduce Inventory Levels
use lean techniques to decrease average inventory on hand
Inventory Management- Keys to Success:
– Record Keeping
– Variance Reduction
– Supplier Management
– Reduce Inventory Levels