11-1 Inventory Management

Inventory
Management and Scheduling

An Inventory is a stock or store of goods

11-2 Inventory Management

Types of Inventories
· Raw materials & purchased parts
· Partially completed goods called
work in progress
· Finished-goods inventories
· (manufacturing firms)
or merchandise
(retail stores)
11-3 Inventory Management

Types of Inventories (Cont’d)

· Replacement parts, tools, & supplies

· Goods-in-transit to warehouses or customers
11-4 Inventory Management

Functions of Inventory…discuss
· To meet anticipated demand
· To smooth production requirements
· To decouple operations
· To protect against stock-outs
· To take advantage of order cycles
· To help hedge against price increases
· To permit operations
· To take advantage of quantity discounts
11-5 Inventory Management

Inventory Counting Systems

· Periodic System
Physical count of items made at periodic
intervals
· Perpetual Inventory System
System that keeps track
of removals from inventory
continuously, thus
monitoring
current levels of
each item
11-6 Inventory Management

Inventory Counting Systems (Cont’d)

· Two-Bin System - Two containers of

inventory; reorder when the first is empty
(very elementary system)
· Universal Bar Code - Bar code
printed on a label that has
information about the item
to which it is attached
0

214800 232087768
11-7 Inventory Management

Key Inventory Terms

· Lead time: time interval between ordering

and receiving the order
· 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 inventory
· Shortage costs: costs resulting when demand
exceeds supply of inventory on hand; often
unrealized profit per unit
11-8 Inventory Management

ABC Classification System

Classifying inventory according to some

measure of importance and allocating control
efforts accordingly.
A - very important
B - mod. important
High
C - least important A
Annual
$ value B
of items

Low C
Few Many
Number of Items
11-9 Inventory Management

Cycle Counting

· One application of ABC concept is a guide to

cycle counting (A physical count of items in
inventory)
· Cycle counting management
· How much accuracy is needed?
· When should cycle counting be performed?
· Who should do it?
11-10 Inventory Management

Economic Order Quantity Model

· How much to order is frequently to be

determined by Economic order quantity
model
· EOQ is used to identify the order size that
will minimize the sum of the annual costs of
holding inventory and ordering inventory
11-11 Inventory Management

Assumptions of EOQ Model

· Only one product is involved

· Annual demand requirements known
· Demand is even throughout the year
· Lead time does not vary
· Each order is received in a single delivery
· There are no quantity discounts
11-12 Inventory Management

The Inventory Cycle

Profile of Inventory Level Over Time

Q Usage
Quantity rate
on hand

Reorder
point

Time
Receive Place Receive Place Receive
order order order order order
Lead time
11-13 Inventory Management

Total Cost

Annual Annual
Total cost = carrying + ordering
cost cost
Q + DS
TC = H
2 Q
11-14 Inventory Management

Cost Minimization Goal

The Total-Cost Curve is U-Shaped

Q D
TC  H  S
Annual Cost

2 Q

Ordering Costs

Order Quantity
QO (optimal order quantity)
(Q)
11-15 Inventory Management

Deriving the EOQ

Using calculus, we take the derivative of the

total cost function and set the derivative
(slope) equal to zero and solve for Q.

2
DS
2
(Annu
)
(
Ord
)
Q
= =
OPT
H Ann
11-16 Inventory Management

Minimum Total Cost

The total cost curve reaches its minimum where

the carrying and ordering costs are equal.william
j. stevenson
- production-operations management (5th ed.) (1)
.pdf 2DS 2(Annu )(
Ord )
Q
= =
OPT
H Annu
11-17 Inventory Management

When to Reorder with EOQ Ordering

· Reorder Point - When the quantity on hand

of an item drops to this amount, the item is
reordered
· Safety Stock - Stock that is held in excess of
expected demand due to variable demand
rate and/or lead time.
· Service Level - Probability that demand will
not exceed supply during lead time.
11-18 Inventory Management

Determinants of the Reorder Point

· The rate of demand

· The lead time
· Demand and/or lead time variability
· Stock out risk (safety stock)
11-19 Inventory Management

Safety Stock

Quantity

Maximum probable demand

during lead time

Expected demand
during lead time

ROP

Safety stock reduces risk of Safety stock

stockout during lead time LT Time