12 – 1 operations management chapter 12 – inventory management © 2006 prentice hall, inc....
Post on 20-Dec-2015
253 views
TRANSCRIPT
12 – 1
Operations ManagementOperations ManagementChapter 12 – Inventory ManagementChapter 12 – Inventory Management
© 2006 Prentice Hall, Inc.
PowerPoint presentation to accompanyPowerPoint presentation to accompany Heizer/Render Heizer/Render Principles of Operations Management, 6ePrinciples of Operations Management, 6eOperations Management, 8e Operations Management, 8e
12 – 2
What is Inventory?
Stock of items kept to meet future demand
One of the most expensive assets of many companies representing as much as 50% of total invested capital
Operations managers must balance inventory investment and customer service
12 – 3
Inventory Management
Purpose of inventory management addresses these two basic inventory issues:
How many units to order?
When to order?
12 – 4
Types of Inventory
Raw material Purchased but not processed
Work-in-process (WIP) Undergone some change but not completed
Maintenance/repair/operating (MRO) Necessary to keep machinery and processes
productive
Finished goods Completed product awaiting shipment
12 – 5
Inventory and SCM
Bullwhip effect Demand information is distorted as it moves
away from end-use customer Higher safety stock is stored to compensate
Seasonal or cyclical demand Inventory provides independence from
vendors Take advantage of price discounts Inventory provides independence between
stages and avoids work stoppages
12 – 6
Inventory Management
Questions that need to be answered to determine how an inventory management system should be built (welcome back OPIM 203)
These are only the starting point
How are inventory items classified?
How can accurate inventory records can be maintained?
12 – 7
ABC Analysis
Divides inventory into three classes based on annual dollar volume Class A - high annual dollar volume
Class B - medium annual dollar volume
Class C - low annual dollar volume
Used to establish policies that focus on the few critical parts and not the many trivial ones
12 – 8
ABC Analysis
A ItemsA Items
B ItemsB ItemsC ItemsC Items
Pe
rce
nt o
f an
nua
l do
llar
usa
ge
80 80 –
70 70 –
60 60 –
50 50 –
40 40 –
30 30 –
20 20 –
10 10 –
0 0 – | | | | | | | | | |
1010 2020 3030 4040 5050 6060 7070 8080 9090 100100
Percent of inventory items Figure 12.2Figure 12.2
12 – 9
ABC Analysis
Other criteria than annual dollar volume may be used Anticipated engineering changes
Delivery problems
Quality problems
High unit cost
12 – 10
Record Accuracy Accurate records are a critical ingredient
in production and inventory systems
Allows organization to focus on what is needed
Necessary to make precise decisions about ordering, scheduling, and shipping
Incoming and outgoing record keeping must be accurate
Stockrooms should be secure
Losses may come from pilferage
12 – 11
Independent Versus Dependent Demand
Independent demand - the demand for item is independent of the demand for any other item in inventory
Dependent demand - the demand for item is dependent upon the demand for some other item in the inventory
12 – 12
Inventory Costs
Holding cost - the cost of holding or “carrying” inventory over time
Ordering cost - the cost of placing an order and receiving goods
Setup cost - cost to prepare a machine or process for manufacturing an order
Shortage cost – temporary or permanent loss of sales when demand cannot be met
12 – 13
Holding Costs
Category
Cost (and Range) as a Percent of Inventory Value
Housing costs (including rent or depreciation, operating costs, taxes, insurance)
6% (3 - 10%)
Material handling costs (equipment lease or depreciation, power, operating cost)
3% (1 - 3.5%)
Labor cost 3% (3 - 5%)
Investment costs (borrowing costs, taxes, and insurance on inventory)
11% (6 - 24%)
Pilferage, space, and obsolescence 3% (2 - 5%)
Overall carrying cost 26%
Table 12.1Table 12.1
12 – 14
Inventory Models for Independent Demand
Basic economic order quantity
Production order quantity
Quantity discount model
Need to determine when and how Need to determine when and how much to ordermuch to order
12 – 15
Basic EOQ Model
1. Demand is known, constant, and independent
2. Lead time is known and constant
3. Receipt of inventory is instantaneous and complete
4. Quantity discounts are not possible
5. Only variable costs are setup and holding
6. Stockouts can be completely avoided / No shortages allowed
Important assumptionsImportant assumptions
12 – 16
Inventory Usage Over Time
Figure 12.3Figure 12.3
Order Order quantity = Q quantity = Q (maximum (maximum inventory inventory
level)level)
Inve
nto
ry le
vel
Inve
nto
ry le
vel
TimeTime
Usage rateUsage rate Average Average inventory inventory on handon hand
QQ22
Minimum Minimum inventoryinventory
12 – 17
Minimizing Costs
Objective is to minimize total costsObjective is to minimize total costs
Table 11.5Table 11.5
An
nu
al c
ost
An
nu
al c
ost
Order quantityOrder quantity
Curve for total Curve for total cost of holding cost of holding
and setupand setup
Holding cost Holding cost curvecurve
Setup (or order) Setup (or order) cost curvecost curve
Minimum Minimum total costtotal cost
Optimal Optimal order order
quantityquantity
12 – 18
The EOQ Model
QQ = Number of pieces per order= Number of pieces per orderQ*Q* = Optimal number of pieces per order (EOQ)= Optimal number of pieces per order (EOQ)DD = Annual demand in units for the Inventory item= Annual demand in units for the Inventory itemSS = Setup or ordering cost for each order= Setup or ordering cost for each orderHH = Holding or carrying cost per unit per year= Holding or carrying cost per unit per year
Annual setup cost Annual setup cost == ((Number of orders placed per yearNumber of orders placed per year) ) x (x (Setup or order cost per orderSetup or order cost per order))
Annual demandAnnual demand
Number of units in each orderNumber of units in each orderSetup or order Setup or order cost per ordercost per order
==
= (= (SS))DDQQ
Annual setup cost = SDQ
12 – 19
The EOQ Model
QQ = Number of pieces per order= Number of pieces per orderQ*Q* = Optimal number of pieces per order (EOQ)= Optimal number of pieces per order (EOQ)DD = Annual demand in units for the Inventory item= Annual demand in units for the Inventory itemSS = Setup or ordering cost for each order= Setup or ordering cost for each orderHH = Holding or carrying cost per unit per year= Holding or carrying cost per unit per year
Annual holding cost Annual holding cost == ((Average inventory levelAverage inventory level) ) x (x (Holding cost per unit per yearHolding cost per unit per year))
Order quantityOrder quantity
22= (= (Holding cost per unit per yearHolding cost per unit per year))
= (= (HH))QQ22
Annual setup cost = SDQ
Annual holding cost = HQ2
12 – 20
The EOQ Model
QQ = Number of pieces per order= Number of pieces per orderQ*Q* = Optimal number of pieces per order (EOQ)= Optimal number of pieces per order (EOQ)DD = Annual demand in units for the Inventory item= Annual demand in units for the Inventory itemSS = Setup or ordering cost for each order= Setup or ordering cost for each orderHH = Holding or carrying cost per unit per year= Holding or carrying cost per unit per year
Optimal order quantity is found when annual setup cost Optimal order quantity is found when annual setup cost equals annual holding costequals annual holding cost
Annual setup cost = SDQ
Annual holding cost = HQ2
DDQQ
SS = = HHQQ22
Solving for Q*Solving for Q*22DS = QDS = Q22HHQQ22 = = 22DS/HDS/H
Q* = Q* = 22DS/HDS/H
12 – 21
An EOQ Example
Determine optimal number of needles to orderDetermine optimal number of needles to orderD D = 1,000= 1,000 units unitsS S = $10= $10 per order per orderH H = $.50= $.50 per unit per year per unit per year
Q* =Q* =22DSDS
HH
Q* =Q* =2(1,000)(10)2(1,000)(10)
0.500.50= 40,000 = 200= 40,000 = 200 units units
12 – 22
An EOQ Example
Determine optimal number of needles to orderDetermine optimal number of needles to orderD D = 1,000= 1,000 units units Q* Q* = 200= 200 units unitsS S = $10= $10 per order per orderH H = $.50= $.50 per unit per year per unit per year
= N = == N = =Expected Expected number of number of
ordersorders
DemandDemandOrder quantityOrder quantity
DDQ*Q*
N N = = 5= = 5 orders per year orders per year 1,0001,000200200
12 – 23
An EOQ Example
Determine optimal number of needles to orderDetermine optimal number of needles to orderD D = 1,000= 1,000 units units Q*Q* = 200= 200 units unitsS S = $10= $10 per order per order NN = 5= 5 orders per year orders per yearH H = $.50= $.50 per unit per year per unit per year
= T == T =Expected Expected
time between time between ordersorders
Number of working Number of working days per yeardays per year
NN
T T = = 50 = = 50 days between ordersdays between orders250250
55
12 – 24
An EOQ Example
Determine optimal number of needles to orderDetermine optimal number of needles to orderD D = 1,000= 1,000 units units Q*Q* = 200= 200 units unitsS S = $10= $10 per order per order NN = 5= 5 orders per year orders per yearH H = $.50= $.50 per unit per year per unit per year TT = 50= 50 days days
Total annual cost = Setup cost + Holding costTotal annual cost = Setup cost + Holding cost
TC = S + HTC = S + HDDQQ
QQ22
TC TC = ($10) + ($.50)= ($10) + ($.50)1,0001,000200200
20020022
TC TC = (5)($10) + (100)($.50) = $50 + $50 = $100= (5)($10) + (100)($.50) = $50 + $50 = $100