chapter 11 classroom ppt.ppt operations management

Operations management

1. 11-1Inventory Management
William J. Stevenson
Operations Management
8
th edition

2. 11-2Inventory Management
CHAPTER
11
Inventory
Management
McGraw-Hill/Irwin
Operations Management, Eighth Edition, by William J. Stevenson
Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

3. 11-3Inventory Management
Independent Demand
A
B(4) C(2)
D(2) E(1) D(3) F(2)
Dependent Demand
Independent demand is uncertain.
Dependent demand is certain.
Inventory: a stock or store of goods

4. 11-4Inventory Management
Types of InventoriesTypes of Inventories
Raw materials & purchased parts
Partially completed goods called
work in progress
Finished-goods inventories
(manufacturing firms)
or merchandise
(retail stores)

5. 11-5Inventory Management
Types of Inventories (Cont’d)Types of Inventories (Cont’d)
Replacement parts, tools, & supplies
Goods-in-transit to warehouses or customers

6. 11-6Inventory Management
Functions of InventoryFunctions of Inventory
To meet anticipated demand
To smooth production requirements
To decouple operations
To protect against stock-outs

7. 11-7Inventory Management
Functions of Inventory (Cont’d)Functions of Inventory (Cont’d)
To take advantage of order cycles
To help hedge against price increases
To permit operations
To take advantage of quantity discounts

8. 11-8Inventory Management
Objective of Inventory ControlObjective of Inventory Control
To achieve satisfactory levels of customer
service while keeping inventory costs within
reasonable bounds
Level of customer service
Costs of ordering and carrying inventory

9. 11-9Inventory Management
A system to keep track of inventory
A reliable forecast of demand
Knowledge of lead times
Reasonable estimates of
Holding costs
Ordering costs
Shortage costs
A classification system
Effective Inventory ManagementEffective Inventory Management

10. 11-10Inventory Management
Inventory Counting SystemsInventory 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. 11-11Inventory Management
Inventory Counting Systems (Cont’d)Inventory Counting Systems (Cont’d)
Two-Bin System - Two containers of
inventory; reorder when the first is empty
Universal Bar Code - Bar code
printed on a label that has
information about the item
to which it is attached
0
214800 232087768

12. 11-12Inventory Management
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 when demand exceeds
supply
Key Inventory TermsKey Inventory Terms

13. 11-13Inventory Management
ABC Classification SystemABC Classification System
Classifying inventory according to some
measure of importance and allocating control
efforts accordingly.
AA - very important
BB - mod. important
CC - least important
Figure 11.1
Annual
$ value
of items
AA
BB
CC
High
Low
Few Many
Number of Items

14. 11-14Inventory Management
Cycle CountingCycle 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?

15. 11-15Inventory Management
Economic order quantity model
Economic production model
Quantity discount model
Economic Order Quantity ModelsEconomic Order Quantity Models

16. 11-16Inventory Management
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
Assumptions of EOQ ModelAssumptions of EOQ Model

17. 11-17Inventory Management
The Inventory CycleThe Inventory Cycle
Figure 11.2
Profile of Inventory Level Over Time
Quantity
on hand
Q
Receive
order
Place
order
Receive
order
Place
order
Receive
order
Lead time
Reorder
point
Usage
rate
Time

18. 11-18Inventory Management
Total CostTotal Cost
Annual
carrying
cost
Annual
ordering
cost
Total cost = +
Q
2
H
D
Q
STC = +

19. 11-19Inventory Management
Cost Minimization GoalCost Minimization Goal
Order Quantity
(Q)
The Total-Cost Curve is U-Shaped
Ordering Costs
Q
O
A
n
n
u
a
l

C
o
s
t
(optimal order quantity)
TC
Q
H
D
Q
S 
2
Figure 11.4C

20. 11-20Inventory Management
Deriving the EOQDeriving 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.
Q =
2DS
H
=
2(Annual Demand)(Order or Setup Cost)
Annual Holding Cost
OPT

21. 11-21Inventory Management
Minimum Total CostMinimum Total Cost
The total cost curve reaches its minimum
where the carrying and ordering costs are
equal.
Q =
2DS
H
=
2(Annual Demand)(Order or Setup Cost)
Annual Holding Cost
OPT

22. 11-22Inventory Management
Production done in batches or lots
Capacity to produce a part exceeds the part’s
usage or demand rate
Assumptions of EPQ are similar to EOQ
except orders are received incrementally
during production
Economic Production Quantity (EPQ)Economic Production Quantity (EPQ)

23. 11-23Inventory Management
Only one item is involved
Annual demand is known
Usage rate is constant
Usage occurs continually
Production rate is constant
Lead time does not vary
No quantity discounts
Economic Production Quantity AssumptionsEconomic Production Quantity Assumptions

24. 11-24Inventory Management
Economic Run SizeEconomic Run Size
Q
DS
H
p
pu
0
2



25. 11-25Inventory Management
Total Costs with Purchasing CostTotal Costs with Purchasing Cost
Annual
carrying
cost
Purchasing
cost
TC = +
Q
2
H
D
Q
STC = +
+
Annual
ordering
cost
PD +

26. 11-26Inventory Management
Total Costs with PDTotal Costs with PD
C
o
s
t
EOQ
TC with PD
TC without PD
PD
0 Quantity
Adding Purchasing cost
doesn’t change EOQ
Figure 11.7

27. 11-27Inventory Management
Total Cost with Constant Carrying Costs Total Cost with Constant Carrying Costs
OC
EOQ Quantity
T
o
t
a
l

C
o
s
t
TC
a
TC
c
TC
b
Decreasing
Price
CC
a,b,c
Figure 11.9

28. 11-28Inventory Management
When to Reorder with EOQ OrderingWhen 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.

29. 11-29Inventory Management
Determinants of the Reorder PointDeterminants of the Reorder Point
The rate of demand
The lead time
Demand and/or lead time variability
Stockout risk (safety stock)

30. 11-30Inventory Management
Safety StockSafety Stock
LT Time
Expected demand
during lead time
Maximum probable demand
during lead time
ROP
Q
u
a
n
t
i
t
y
Safety stock
Figure 11.12
Safety stock reduces risk of
stockout during lead time

31. 11-31Inventory Management
Reorder PointReorder Point
ROP
Risk of
a stockout
Service level
Probability of
no stockout
Expected
demand
Safety
stock
0 z
Quantity
z-scale
Figure 11.13
The ROP based on a normal
Distribution of lead time demand

32. 11-32Inventory Management
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
Fixed-Order-Interval ModelFixed-Order-Interval Model

33. 11-33Inventory Management
Tight control of inventory items
Items from same supplier may yield savings
in:
Ordering
Packing
Shipping costs
May be practical when inventories cannot be
closely monitored
Fixed-Interval BenefitsFixed-Interval Benefits

34. 11-34Inventory Management
Requires a larger safety stock
Increases carrying cost
Costs of periodic reviews
Fixed-Interval DisadvantagesFixed-Interval Disadvantages

35. 11-35Inventory Management
Single period model: model for ordering of
perishables and other items with limited
useful lives
Shortage cost: generally the unrealized
profits per unit
Excess cost: difference between purchase
cost and salvage value of items left over at
the end of a period
Single Period ModelSingle Period Model

36. 11-36Inventory Management
Continuous stocking levels
Identifies optimal stocking levels
Optimal stocking level balances unit shortage
and excess cost
Discrete stocking levels
Service levels are discrete rather than
continuous
Desired service level is equaled or exceeded
Single Period ModelSingle Period Model

37. 11-37Inventory Management
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
Operations StrategyOperations Strategy

38. 11-38Inventory Management
Additional PowerPoint slides
contributed by
Geoff Willis,
University of Central Oklahoma.
CHAPTER
11

39. 11-39Inventory Management
Gortrac ManufacturingGortrac Manufacturing
GTS3
Inventory/Assessment/Reduction

40. 11-40Inventory Management
MaterialsMaterials
PS7
Washburn Guitars