Production Planning & Control

INTRO: INVENTORY MANAGEMENT

(Chapter 9 & 10)

*Quiz #1 - 11 March_2019 (s.d MRP) Session 5a

HW #4 (10 problems): No. 9.3, 9.5, 9.6, 9.7, 9.8, 9.12,

9.14, 9.15, 9.17, 9.18 (Arnold pp. 212 - 215) - No Dateline
Read Chapter 9 & 10 – Exercises: All..
Session-5a:
(about Lot Sizing & EOQ Model) Rabu, 4 March, 2020
Time: 08.00-10.00; K.204
PPC/Session-5a/yad/4 March_2020
Outline:

1. What is Inventory?
2. Key Factors in Inventory Management
Decision
3. ABC Inventory Control
4. Financial Inventory Performances
 I. WHAT IS INVENTORY
• Persediaan (Inventories):
“…. Materials dan supplies yang disimpan perusahaan
untuk dijual atau input atau supplies bagi proses
produksi.”

• Inventory management:
“….bertanggung jawab dalam perencanaan dan
pengendalian inventory dari tahap bahan baku sampai
ke customer.”
• Karena inventory dihasilkan dari produksi atau
penunjangnya, maka inventory tidak bisa dikelola
secara terpisah-pisah, sehingga harus dikoordinasikan.
Contoh Inventory

Tissue
• Stock material
• Capacity reserved

Examples:
Komputer
Mur dan baut Ban mobil
 II. FAKTOR KUNCI DALAM KEPUTUSAN
INVENTORY MANAGEMENT

5 Faktor kunci inventory management:

1. Inventory management objectives
2. Flow of materials
3. Supply and demand patterns
4. Inventory functions
5. Inventory costs.
2.1. Sasaran Inventory Management
1). Customer Service Maksimum
Customer service adalah ”ketersediaan item ketika dibutuhkan”. Contoh:
• % order dikirim sesuai jadwal.
• % line items dikirim sesuai jadwal
• Order-days kekurangan stok.

2). Efisiensi Operasi

• Inventories memungkinkan operasi dua proses yang berbeda ‘rates of
production’
• Inventories memungkinkan ‘levelling production’ dan mengakumulasi
‘anticipation inventory’ untuk penjualan pada ‘peak period’. Maka,
inventories menurunkan costs of overtime, hiring and firing, training,
subcontracting, and capacity required.
• Inventories memungkinan pembelian dalam kuantitas besar untuk
mendapatkan biaya order dan diskon.

3). Investasi inventory minimum.

Biaya inventory : Item cost, carrying costs, ordering costs, stockout
costs, dan capacity associated costs.
2.2. Flow of Materials
Inventory classification and its related flow
of materials:
1. Raw materials – not yet entered into the
production process
2. Work-in-process (WIP)
3. Finished goods
4. Distribution inventories
5. Maintenance, repair, operational
supplies (MRO’s) – items that do not
become part of the product

Note: Inventory can be based on flow of materials, quantity and

value, demand types, and maintenance repair and operations.
Inventory and the flow of materials
Example 1 - Inventory based on flow of materials

Computer
.

Inventory

Flow of
Materials

• Raw Mat'l
• WIP
• Fin. Goods
Example 2 – Inventory based on quantity and value

Automotive
A
Inventory

Flow of Quantity
Materials & Value
B
C
Raw Mat'l A Items
WIP B Items
Fin. Goods C Items
Example 3 – Inventory based on demand types

Inventory

Independent
Flow of Quantity Demand
Materials & Value Types

Raw Mat'l Item A

Independent
WIP Item B
Dependent
Fin. Goods Item C
Dependent
 Example 4 - MROs

Inventory

Flow of Quantity Demand

Others
Materials & Value Types

Raw Mat'l Item A

Independent
WIP Item B MRO’s
Dependent
Fin. Goods Item C
2.3. Supply and Demand Patterns
1. Little needs of inventory, if “supply” = “demand” exactly.
For this situation exist:
• Demand stable, predictable, and constant for long
time periods.
• Production rate = demand rate
2. This can be achieved if manufacturing can produced
goods on a line-flow basis .
3. But balanced in supply and demand is difficult to achieve:
• Products usually made in lot or batch
• Workstations are separately organized by function
(Machine tool in one area, welding in a another, and
assembly in the other area
• Jobs move from one workstation to another
workstation, and so on.
 2.4. Inventory Functions*
1. Anticipation inventory
Inventory terbentuk untuk mengantisipasi ‘future demand’. Contohnya:
‘Peak season’, promosi, shutdown libur, pemogokan, dll
2. Fluktuasi inventory (safety stock atau reserve stock )
Meng-cover naik turun atau fluktuasi acak pada supply dan demand atau lead
time. Ini disebut ‘buffer stock’ atau ‘reserve stock’.
3. Lot size inventory (cycle stock)
Kuantitas diproduksi atau dibeli yang lebih besar dari dibutuhkan, yang akan
membentuk ’lot size inventory’
4. Inventory transportasi (transportation inventory)
Inventory ini ada karena dibutuhkan waktu untuk memindahkan barang dari
satu tempat ke tempat lain, disebut ‘pipeline or movement inventories’.
5. Hedge inventory
Pembelian ‘hedge inventory’ ketika harga murah di pasar komoditas dunia
untuk mengantisipasi ekspektasi harga yang meningkat di masa depan. .
Contoh produk komoditas terdiri dari mineral dan komoditas, grains dan
binatang.
6. MRO’s inventory
Item inventory ini digunakan untuk menunjang suplai O&M…
*Note: Tujuan ‘inventories’ adalah untuk ‘decouple’ supply and demand (buffers).
Contoh ‘transportation inventory’:
Delivery of goods from supplier is in transit for 10 days.
If the annual demand is 5,200 units, what is the average
annual inventory in transit?

Solution:
Given t = 10 days, and annual demand A = 5,200 units
I = tA/365
= (10 x 5,200)/365
= 142.5 units.
2.5. Total Cost of Inventory

Inventory cost components:

1. Item cost: Price of item, incl. transportation cost,
custom and duties, and insurance (landed costs)
2. Carrying cost: Capital costs, storage costs, risk costs
(obsolescence, damage, pilferage, deterioration)
3. Ordering cost: Production control costs, setup and
teardown costs, lost capacity cost, purchase order
cost.
4. Stockout cost: Backorder costs, losts sales, and
possibly lost customers.
5. Capacity-associated costs: Costs for changing
output levels, may be needed costs for overtime,
hiring, training, extra shifts, and layoffs.
Total Costs and Order Quantity

Cost versus lot size

Example 1: Carrying Costs

The company carries average annual costs of $ 2,000,000. If

the cost of capital is 10%, storage costs are 7%, and risk costs
are 6%.

Problem: What does it cost per year to carry this inventory?

Solution:
Given cost of capital 10%, storage costs 7%, and risk costs 6%
Total percentage cost of carrying inventory = 10%+7%+6%
= 23%
Annual cost of carrying inventory = 0.23x$2,000,000
= $ 460,000
Example 2: Ordering Costs

Given the following annual costs:

• Production control salaries = $60,000
• Supplies and operating expenses for production control
department = $15,000
• Cost of setting up work centers for an order = $120
• Orders placed each year = 2,000.

Problem: Calculate the average cost of placing one order..!

Solution:
Average cost = (fixed costs/number of orders) + variable cost
= ($60,000 + $15,000)/2,000 + $120
= $157.50.
Example 3: Capacity-Related Costs:
A company makes and sells a seasonal product. Based on a
sales forecast of 2,000, 3,000, 6,000, and 5,000 per quarter,
calculate a level production plan, quarterly ending inventory,
and average quarterly inventory.

Problem:
If inventory carrying costs are $3 per unit per quarter, what is
the annual cost of carrying inventory? (opening and ending
inventories are zero).
Solution:
Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total
Forecast demand 2,000 3,000 6,000 5,000 16,000
Production 4,000 4,000 4,000 4,000 16,000
Ending inventory 0 2,000 3,000 1,000 0
Average inventory 1,000 2,500 2,000 500
Inventory cost ($) 3,000 7,500 6,000 1,500 18,000
 III. ABC INVENTORY CONTROL

• Determine the relative importance of inventory

– Annual monetary usage
– Critical/difficult items to obtain

• Degree of control based on ABC value

– A items about 20% of items, 80% of value
– B items about 30% of items, 15% of value
– C items about 50% of items, 5% of value
Example : ABC Inventory Analysis
Given the following inventory data
Solution:
Classifying on cumulative $ usage:
ABC curve- percentage of value versus
percentage of items
Control Using ABC

• Keep large amount of “C” items on hand

– Value of items usually not worth the
extra control to keep inventory
accurate
• Control “A” items with large effort
– Financial value dictates very small
inventory
IV. FINANCIAL INVENTORY PERFORMANCE

Financial Implications of Inventory

• Inventory is often a very large portion of the Asset
portion of the balance sheet

• Inventory turns = (annual cost of goods sold)/

(average inventory value)

‘Inventory turns’ is a common measure of

effectiveness of many production systems
Example 1: Inventory Turns
Annual cost of goods sold is $24 million a year and the average inventory is
$6 million. Given that inventory turns were increased to 12 times per year,
and the cost of carrying inventory is 25% of the average inventory.

Problem:
a). What is the inventory turns..?.
b). What would be the reduction in inventory..?.
c). What will be the savings be..?.

Solution:
a). Inventory turns = (Annual CGS)/(Average Inventory in Dollars)
= $24,000,000 / $6,000,000 = 4..
b). Average inventory = (Annual CGS)/(Inventory turns)
= $24,000,000/12 = $2,000,000
Reduction in inventory = $6,000,000–$2,000,000 = $4,000,000
c). What will the savings be if the cost of carrying inventory is 25%.
Reduction in inventory = $4,000,000
Savings = 0.25 x $4,000,000 = $1,000,000
Example 2: Days of Supply

A company has 9,000 units on hand and the annual usage is

48,000 units. There are 240 working days.

Problem:
What is the days of supply?

Solution:

Average daily usage = 48,000/240 = 200 units.

Days of supply = (Inventory on hand) / (Average daily usage)

= 9,000 / 200
= 45 days..
Income Statement (Profit & Loss)

Dollars
Revenue (sales) $1,200,000
Cost of Goods Sold
- Direct Material $ 600,000
- Direct Labor $ 240,000
- Overhead $ 200,000
Total Cost of Goods Sold $1,040,000
Gross Profit $ 160,000
Thank you