Inventory
Management
McGraw-Hill/Irwin
Learning Objectives
12-2
Learning Objectives
Inventory
Inventory: a stock or store of goods
Dependent Demand
C(2)
B(4)
D(2)
Independent Demand
E(1)
D(3)
F(2)
Inventory Models
Independent demand finished goods, items
that are ready to be sold
E.g. a computer
12-5
Types of Inventories
Raw materials & purchased parts
(manufacturing firms)
or merchandise
(retail stores)
12-6
12-7
Functions of Inventory
To meet anticipated demand
To smooth production requirements
To decouple operations
To protect against stock-outs
12-8
12-9
Ordering costs
Shortage costs
A classification system
12-11
12-13
A - very important
B - mod. important
C - least important
High
Annual
$ value
of items
B
C
Low
Low
High
Percentage of Items
12-15
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?
12-16
12-17
Q
Quantity
on hand
Usage
rate
Reorder
point
Receive
order
Place Receive
order order
Place Receive
order order
Time
Lead time
12-19
Total Cost
Annual
Annual
Total cost = carrying + ordering
cost
cost
TC =
Q
H
2
DS
Q
12-20
Annual Cost
Ordering Costs
QO (optimal order quantity)
Order Quantity
(Q)
12-21
2DS
=
H
12-22
DS
Q
12-23
12-24
12-25
Q0
2DS
p
H p u
12-26
DS
Q
PD
12-27
Figure 12.7
Adding Purchasing cost TC with PD
doesnt change EOQ
TC without PD
PD
EOQ
Quantity
12-28
TCa
TCb
Decreasing
Price
TCc
CC a,b,c
OC
EOQ
Quantity
12-29
12-30
12-31
Safety Stock
Quantity
Figure 12.12
ROP
Safety stock
LT
Time
12-32
Reorder Point
Figure 12.13
The ROP based on a normal
Distribution of lead time demand
Service level
Risk of
a stockout
Probability of
no stockout
Expected
demand
0
ROP
Quantity
Safety
stock
z
z-scale
12-33
Fixed-Order-Interval Model
Orders are placed at fixed time intervals
Order quantity for next interval?
Suppliers might encourage fixed
intervals
May require only periodic checks of
inventory levels
Risk of stockout
Fill rate the percentage of demand
filled by the stock on hand
12-34
Fixed-Interval Benefits
Tight control of inventory items
Items from same supplier may yield
savings in:
Ordering
Packing
Shipping costs
12-35
Fixed-Interval Disadvantages
Requires a larger safety stock
Increases carrying cost
Costs of periodic reviews
12-36
12-37
Cs
Cs + Ce
Ce
Cs
Service Level
Quantity
So
Balance point
12-39
Example 15
Cs
Quantity
Operations Strategy
Too much inventory
Tends to hide problems
Easier to live with problems than to
eliminate them
Costly to maintain
Wise strategy
Reduce lot sizes
Reduce safety stock
12-41