class 16 - inventory management
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Inventory
InventoryManagement
Industrial Engineering
Inventory
Models
What is Inventory?
The total amount of goods and/or materials contained in a store or factoryat any given time
Types of Inventory
Raw material Purchased but not processed
Work-in-process Undergone some change but not completed A function of cycle time for a product
Maintenance/repair/operating (MRO) Necessary to keep machinery and processes productive
Finished goods Completed product awaiting shipment
Examples
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Inventory
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The Functions of Inventory
To decouple or separate various parts of the production processTo provide a stock of goods that will provide a selection for customersTo take advantage of quantity discountsTo hedge against inflation and upward price changes
The Material Flow Cycle
Examples
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Inventory
InventoryManagement
Industrial Engineering
Inventory
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The Material Flow Cycle
Examples
1 Run time: Job is at machine and being worked on
2 Setup time: Job is at the work station, and the work station isbeing "setup."
3 Queue time: Job is where it should be, but is not being
processed because other work precedes it.
4 Move time: The time a job spends in transit
5 Wait time: When one process is finished, but the job iswaiting to be moved to the next work area.
6 Other: "Just-in-case" inventory.
Other WaitTime
MoveTime
Queue
Time
SetupTime
RunTimeInput
Cycle Time
Output
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Inventory Management
InventoryManagement
Industrial Engineering
Inventory
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Inventory Management
How inventory items can be classifiedHow accurate inventory records can be maintained
Disadvantages of Inventory
Higher costs
Item cost (if purchased) Ordering (or setup) cost
Costs of forms, clerks wages etc. Holding (or carrying) cost
Building lease, insurance, taxes etc. Difficult to control Hides production problems
Examples
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Inventory Management
InventoryManagement
Industrial Engineering
Inventory
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Inventory Management Methods
ABC Analysis Record Accuracy
Cycle Counting Control of Service Inventory
Disadvantages of Inventory
Higher costs Item cost (if purchased) Ordering (or setup) cost
Costs of forms, clerks wages etc. Holding (or carrying) cost
Building lease, insurance, taxes etc. Difficult to control Hides production problems
Examples
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Inventory Management
InventoryManagement
Industrial Engineering
Inventory
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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 andnot the many trivial ones
Examples
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Inventory Management
InventoryManagement
Industrial Engineering
Inventory
Models
Independent versus Dependent Demand
Independent Demand - demand for item isindependent of demand for any other item
Dependent Demand - demand for item is dependentupon the demand for some other item
Inventory Costs
Holding Costs - associated with holding or carryinginventory over time
Ordering Costs - associated with costs of placingorder and receiving goods
Setup Costs - cost to prepare a machine or processfor manufacturing an order
Examples
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Inventory Management
InventoryManagement
Industrial Engineering
Inventory
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Holding Costs
Obsolescence InsuranceExtra staffing InterestPilferage DamageWarehousing
Ordering Costs
Supplies FormsOrder processing Clerical support
Setup Costs
Clean-up costs Re-tooling costsAdjustment costs
Examples
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Inventory Models
InventoryManagement
Industrial Engineering
Inventory
Models
Inventory Models
Fixed order-quantity models Economic Order Quantity (EOQ) Production Order Quantity (PEQ) Quantity Discount
Probabilistic models Fixed order-period models
EOQ Assumptions
Known and constant demand Known and constant lead time Instantaneous receipt of material No quantity discounts Only order (setup) cost and holding cost No stockouts
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Inventory Models
InventoryManagement
Industrial Engineering
Inventory
Models
Inventory Usage Over Time
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Inventory Models
InventoryManagement
Industrial Engineering
Inventory
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Objective is to minimize total costs
Examples
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Inventory Models
InventoryManagement
Industrial Engineering
Inventory
Models
Basic Fixed-Order Quantity (EOQ) Model Formula
Examples
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Inventory Models
InventoryManagement
Industrial Engineering
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Examples
POQ Model Equations
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Example
InventoryManagement
Industrial Engineering
Inventory
Models
Examples
Given the information below, what are the EOQ and reorderpoint?
Annual Demand = 1,000 units
Days per year considered in average daily demand = 365
Cost to place an order = SR 10
Holding cost per unit per year = SR 2.50
Lead time = 7 days Cost per unit = SR 15
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Example
InventoryManagement
Industrial Engineering
Inventory
Models
Examples
unitsunits or.=.
))(,(
=H
DS
=QOPT 9044389502
10000122
units/day.=days/year
runits/yea,=d 742
365
0001
units20or19.18=(7days)day2.74units/
=Ld=Rpoint,Reorder_
In summary, you place an optimal order of 90 units. In the
course of using the units to meet demand, when you only have20 units left, place the next order of 90 units.
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Example
InventoryManagement
Industrial Engineering
Inventory
Models
Examples
A showroom dealer whishes to determine the order size for itsbest selling model XYZ. The manger estimated the annual
demand for the model as 1000 units. His past record showseach order cost SR 250 to place an order. And. if one unitmodel carried for whole year, it cost SR1000. Assuming thedemand uniform and constant. Similarly assuming orderingcost and carrying cost constant, How many models managershould order to avoid no stock out situation.
If lead time is 5 days (assumed to be constant) at what level ofinventory on hand he should order the models.
d(TC) 0
dQ
2DSQ
H
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Example
InventoryManagement
Industrial Engineering
Inventory
Models
Examples
So, Q is approximately equal to 23
Reorder level = Average daily demand x Lead time
R = (1000/365) x 5 = 13 units
i.e. when inventory level drop to 13 the manager should orderfor 23 models
This case is of Fixed order quantity without safety stock