Hapter 12 Nventory Planning and Control: Source: Corbis

Chapter 12
Inventory planning and control
Source: Corbis
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Inventory planning and control
Inventory planning and

control
The market requires
a quantity of products
and services at a
particular time
The operation supplies ...
the delivery of a quantity of
products and services when
required
Operations
strategy
Design
Operations
management
Improvement
Planning and
control
Inventory is created to compensate for the differences in

timing between supply and demand
Rate of supply from
input process
Source: Alamy/Van Hilversum
Rate of demand from

output process
Inventory
Input
process
Output
process
Inventory
Single-stage and two-stage inventory systems

Single-stage
inventory system
Stock
Two-stage
inventory system
Sales
operation
Suppliers
e.g. Local retail store
Central
depot
Distribution
Local
distribution
point
Sales
operation
Suppliers
e.g. Automotive parts

distributor
A multi-stage inventory system
Input
stock
Stage
1
WIP
Stage
2
WIP
Stage
3
Finished
goods
stock
Suppliers
e.g. Television manufacturer
A multi-echelon inventory system
Garment
manufacturers
Cloth
manufacturers
Yarn
producers
Regional
warehouses
Retail
stores
A paper merchant must get its inventory planning and

control right
Inventory profiles chart the variation in inventory level

Order
quantity
=Q
Steady and
predictable
demand (D)
Slope = demand rate (D)
Inventory level
Average inventory
=Q
2
Time
Q
D
Instantaneous deliveries at a rate of D per period
Q
Two alternative inventory plans with different order

quantities (Q)
Inventory level
Demand (D) = 1000 items per year

400
Plan A
Q = 400
Average inventory
for plan A = 200
Plan B
100 Q = 100
Average inventory
for plan B = 50
Time
0.1 yr
0.4 yr
Traditional view of inventory-related costs

400
350
300
Costs
250
Total costs
200
150
Holding costs
100
Order costs
50
Economic order
quantity (EOQ)
50
100
150
200
250
Order quantity
300
350
400
Inventory level
Cycle inventory in a bakery
Produce A Produce B Produce C Produce A

Deliver
A
Deliver
B
Deliver
C
Deliver
A
Produce B Produce C
Deliver
B
Deliver
C
Time
Inventory level
Order
quantity
Q
Slope = P D
Source: Alamy/ArchivBerlin Fotoagentur GmbH
Inventory profile for gradual replacement of inventory
Slope = D
Q
P
Time
Inventory level
Inventory planning allowing for shortages
Time
Shortages
The re-order point
Demand (D) = 100 items per week
Inventory level
400
Re-order level
300
Re-order point
200
100
0
0
Order lead time
Time
Safety stock(s) helps to avoid stock-outs when demand

and/or order lead times are uncertain
Inventory level
Re-order level (ROL)

Distribution of
lead-time
usage
Q
d1
d2
S
t2
t1
Time
The probability distributions for order lead time and demand rate
combine to give the lead-time usage distribution
0.4
Probability
Probability
0.4
0.3
0.2
0.1
0
1 2 3 4 5
Order lead time
0.3
0.2
0.1
0
110 120 130 140

Demand rate
Probability
0.4
0.3
0.2
0.1
0
100-199
200-299
300-399 400-499 500-599

Lead-time usage
600-699
700-799
A periodic review approach to order timing

with probabilistic demand and lead time
Qm
Inventory level
Q1
T0
Q2
T1
T2
t1
tf
Q3
T3
t2
tf
Time
t3
tf
Source: Howard Smith Paper Group
Pareto curve for stocked items
Percentage of value of items
100
90
80
70
60
50
40
30
Class A
items
Class B
items
Class C
items
20
10
10
20
30
40
50
60
70
80
90
100
Percentage of types of items
Inventory classifications and measures
Class A items the

20% or so of high-value
items which account for
around 80% of the total
stock value
Class B items the

next 30% or so of
medium-value items
which account for
around 10% of the total
stock value
Class C items the

remaining 50% or so of
low-value items which
account for around the
last 10% of the total
stock value
If the true costs of stock holding are taken into account,

and if the cost of ordering (or changeover) is reduced,
the economic order quantity (EOQ) is much smaller
Revised
holding
costs
Cost
s
Revised total
costs
Original total
costs
Original
holding costs
Original order
costs
Revised
EOQ
Original
EOQ
Revised order
costs
Order quantity
The two-bin and three-bin re-ordering systems

Two-bin system
Bin 1
Items being
used
Bin 2
Re-order level
+ safety
inventory
Three-bin system
Bin 1
Items being
used
Bin 2
Bin 3
Re-order level
inventory
Safety
inventory
Key Terms Test

Inventory (also known as stock)
The stored accumulation of transformed resources in a process;
usually applies to material resources but may also be used for
inventories of information; inventories of customers (or
customers of customers) are usually called queues.
Buffer inventory
An inventory that compensates for unexpected fluctuations in
supply and demand; can also be called a safety inventory.
Cycle inventory
Inventory that occurs when one stage in a process cannot supply
all the items it produces simultaneously and so has to build up
inventory of one item while it processes the others.
Key Terms Test

De-coupling inventory
The inventory that is used to allow work centres or
processes to operate relatively independently.
Anticipation inventory
Inventory that is accumulated to cope with expected
future demand or interruptions in supply.
Pipeline inventory
The inventory that exists because material cannot be
transported instantaneously.
Key Terms Test

Work-in-process (WIP)
The number of units within a process waiting to be processed
further (also called work-in-progress).
Economic order quantity (EOQ)
The quantity of items to order that supposedly minimizes the total
cost of inventory management, derived from various formulae.
Economic batch quantity (EBQ)
The amount of items to be produced by a machine or process that
supposedly minimizes the costs associated with production and
inventory holding.
Key Terms Test

Re-order point
The point in time at which more items are ordered, usually calculated
to ensure that inventory does not run out before the next batch of
inventory arrives.
Re-order level
The level of inventory at which more items are ordered, usually
calculated to ensure that inventory does not run out before the
next batch of inventory arrives.
Lead-time usage
The amount of inventory that will be used between ordering
replenishment and the inventory arriving, usually described by a
probability distribution to account for uncertainty in demand and
lead time.
Key Terms Test

Continuous review
An approach to managing inventory that makes inventory-related
decisions when inventory reaches a particular level, as opposed
to periodic review.
Periodic review
An approach to making inventory decisions that defines points in
time for examining inventory levels and then makes decisions
accordingly, as opposed to continuous review.
Usage value
A term used in inventory control to indicate the quantity of items
used or sold multiplied by their value or price.
Key Terms Test

Pareto law
A general law found to operate in many situations that indicates that
20% of something causes 80% of something else, often used in
inventory management (20% of products produce 80% of sales
value) and improvement activities (20% of types of problems
produce 80% of disruption).
ABC inventory control
An approach to inventory control that classes inventory by its usage
value and varies the approach to managing it accordingly.
Perpetual inventory principle
A principle used in inventory control that inventory records should
be automatically updated every time items are received or taken
out of stock.

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Chapter 12

Inventory planning and control

Inventory planning and control

Inventory planning and

Inventory is created to compensate for the differences in

Source: Alamy/Van Hilversum

Rate of demand from

Single-stage and two-stage inventory systems

e.g. Local retail store

e.g. Automotive parts

A multi-stage inventory system

e.g. Television manufacturer

A multi-echelon inventory system

A paper merchant must get its inventory planning and

Inventory profiles chart the variation in inventory level

Slope = demand rate (D)

Two alternative inventory plans with different order

Demand (D) = 1000 items per year

Traditional view of inventory-related costs

Cycle inventory in a bakery

Produce A Produce B Produce C Produce A

Source: Alamy/ArchivBerlin Fotoagentur GmbH

Inventory profile for gradual replacement of inventory

Inventory planning allowing for shortages

The re-order point

Demand (D) = 100 items per week

Order lead time

Safety stock(s) helps to avoid stock-outs when demand

Re-order level (ROL)

110 120 130 140

300-399 400-499 500-599

A periodic review approach to order timing

Source: Howard Smith Paper Group

Pareto curve for stocked items

Percentage of value of items

Percentage of types of items

Inventory classifications and measures

Class A items the

Class B items the

Class C items the

If the true costs of stock holding are taken into account,

The two-bin and three-bin re-ordering systems

Key Terms Test

Key Terms Test

Key Terms Test

Key Terms Test

Key Terms Test

Key Terms Test

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