Inventory Management INVENTORY Inflow > Outflow Inflow INVENTORY Inflow = Outflow INVENTORY The Law of the Bath Tub Arguments for Carrying Inventory Allows quick response to customer demands Balancing supply and.

Report
Inventory
Management
INVENTORY
Inflow > Outflow
Inflow < Outflow
INVENTORY
Inflow = Outflow
INVENTORY
The Law of the Bath Tub
Arguments for Carrying Inventory
Allows quick response to
customer demands
Balancing supply and demand
Protection from uncertainties
Buffer interface
Realizes economies of scale
through reduction of fixed costs
Keeps production line running
Supports long production runs
Disadvantages for Carrying Inventory
May become obsolete
Can be damaged or deteriorate
May be hazardous to store
May take up excessive W/H space
Could be totally lost or hidden
Opportunity Cost
Could be duplicated at different W/H
Inventory Management
Types of Inventory
Cycle stock
In-process or work-in-process
In-transit inventory
Safety stock or Buffer inventory
Seasonal stock
Promotional stock
Speculative stock
Dead stock
Consignment stock [held in customers W/H,
but charged when is used]
Inventory Management
Symptoms of Poor Inventory Management[4]
1.
2.
3.
4.
An increase in backorders
More cancelled customer orders
Insufficient storage space
Unnecessary obsolete products
Inventory Management
Financial Impact of Inventory [3]
1. Inventory is often a company’s largest asset
2. Inventories can account for 20% of total assets
3. Inventory costs may run up to 40- 50% of the
value of a product and ~ 40% of total
integrated logistics costs
Inventory Management
Definitions
• Inventory accuracy refers to how well the
inventory records agree with physical
count
• Cycle Counting is a physical inventorytaking technique in which inventory is
counted on a frequent basis rather than
once or twice a year
How to Measure Inventory
• The Dilemma: closely monitor and control
inventories to keep them as low as possible while
providing acceptable customer service.
• Average Aggregate Inventory Value:
how much of the company’s total assets are
invested in inventory?
• Ford: 6.825 billion
• Sears: 4.039 billion
Formulas for Measuring Supply-Chain
Performance
•
One of the most commonly used measures in all of
operations management is “Inventory Turnover”
Inventoryturnover
•
Cost of goodssold
Averageaggregateinventoryvalue
In situations where distribution inventory is dominant,
“Weeks of Supply” is preferred and measures how many
weeks’ worth of inventory is in the system at a particular
time
 Averageaggregateinventoryvalue
 52 weeks
Weeksof supply 
Cost of goodssold


Inventory Measures - Examples
• Weeks of Supply
– Ford: 3.51 weeks
– Sears: 9.2 weeks
Inventory Measures - Examples
• Weeks of Supply
– Ford: 3.51 weeks
– Sears: 9.2 weeks
• Inventory Turnover (Turns)
– Ford: 14.8 turns
– Sears: 5.7 turns
– GM: 8 turns
– Toyota: 35 turns
Example of Measuring SC Performance
Suppose a company’s new annual report claims their
costs of goods sold for the year is $160 million and
their total average inventory (production materials +
work-in-process) is worth $35 million. This
company normally has an inventory turn ratio of 10.
What is this year’s Inventory Turnover ratio? What
does it mean?
Inventory turnover

Cost of goods sold
Average aggregate inventory value
Example of Measuring Supply-Chain
Performance (Continued)
Cost of goodssold
Inventoryturnover
Averageaggregateinventoryvalue
= $160/$35
= 4.57
Since the company’s normal inventory turnover ration is
10, a drop to 4.57 means that the inventory is not
turning over as quickly as it had in the past. Without
knowing the industry average of turns for this company
it is not possible to comment on how they are
competitively doing in the industry, but they now have
more inventory relative to their cost of goods sold than
before.
Inventory Management
Inventory Costs [7]
1. Cost of placing an order
2. Price discount costs for large orders or Extra costs for
small orders
3. Stock-out costs
4. Working capital costs (funding for the lag between
paying our suppliers and receiving payment from our
customers)
5. Storage costs
6. Obsolescence costs
7. Production inefficient costs [hidden costs not realized
JIT]
Inventory Management
Inventory Costs
• Two types: ordering and carrying
Inventory Management
Ordering Costs [2]
• Cost of placing the order
• Price discount costs
Carrying or Holding Costs [10]
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Capital or opportunity cost
Storage space cost
Inventory service cost
Inventory risk cost
Insurance
Storage and handling
Depreciation
Deterioration
Taxes
Interest
Inventory carrying cost varies between 10 – 20 %
of the product cost.
While carrying costs increase,
Many orders,
low inventory
level
On-hand Inventory
ordering costs fall and vice versa
Q
Time
Few orders,
high inventory
level
On-hand Inventory
Q
Time
Inventory Management
OBJECTIVES: To determine the best ordering policy, i.e.
1. To decide how much, and
2. when to order
HOW MUCH?
Economic Order Quantity [EOQ] model
•One of the oldest and most commonly used in inventory control
•Based on a number of assumptions
Inventory Management
EOQ Assumptions
1. Continuous and known demand rate
2. Lead time/replenishment cycle is known and
constant
3. Price to purchase is independent of the
amount needed
4. Transportation costs remain constant
5. No stock outs (or shortages) are permitted
6. No inventory is in transit
7. The order quantity is received all at once
Inventory Management
The Inventory Order Cycle
Steady &
predictable
demand, D
Slope =
Demand rate
Average inventory =
Q
D
Inventory Level
Order
quantity,
Q
0
Q
Time
D
Instantaneous deliveries at a rate of
Q
D
per period
The Inventory Order Cycle
Q
Slope =
Demand rate
Average inventory =
Q
D
Inventory Level
Steady &
predictable
demand, D
0
Q
D
Time
• Average inventory = Q/D [2 shaded areas are equal]
• Time interval between deliveries = Q/D
• Frequency of deliveries, N =
reciprocal of the time interval = 1 / [Q/D] = D/Q
EOQ Cost Model
Annual
cost ($)
Total Cost
Slope = 0
CcQ
Carrying Cost =
2
Minimum
total cost
CoD
Ordering Cost = Q
Optimal order
Qopt
Order Quantity, Q
EOQ Cost Model
CO - cost of placing order
D - annual demand
CC - annual carrying cost/unit
Q - order quantity
Annual ordering cost =
Annual carrying cost
= ordering cost x No of orders
= holding cost/unit x average
inventory
= COD/Q
= CCQ/2
Total cost = COD/Q + CCQ/2
Co .D

Cc .Q
Q
2
2CoD
Q2 
Cc
2CoD
Q* 
Cc
TCmin 
CoD CcQ*
+
Q*
2
CoD CcQ
+
Q
2
TC
CoD Cc

+
Q
2
Q2
TC 
C D C
0- o + c
2
Q2
2CoD
Q* 
Cc
EOQ Model Cost Curves
Annual
cost ($)
Total Cost
curve
Slope = 0
Minimum
total cost
Carrying Cost = CcQ/2
Ordering Cost = CoD/Q
Optimal order Q*
(EOQ)
Total Costs
Ct
Order Quantity, Q
= Carrying Cost + Ordering Cost
=
CcQ/2
+
CoD/Q
EOQ, Q =
2 D Co
Cc
Example: Basic EOQ
QUESTION
The annual demand for a product is 8,000 units.
The ordering cost is € 30 per order. The cost of the
item is € 10 and the carrying cost has been
calculated at € 3 to carry out one item in stock for
one year. Calculate:
a.What is the EOQ?
b.The numbers of orders to be placed annually, and
c.The overall costs.
Example: Basic EOQ
ANSWER
D = 8,000 units
CO = € 30
CC = € 3
Q*

2CoD
Cc

2 (8,000) (30)
3
 400 units
Number of orders per year =
Total Costs
D
Q*

8,000
 20 orders
400
= Carrying Cost + Ordering Cost
Holding Costs = Average quantity in stock x Cost of holding item for 1 year
= 400/2 x 3 = € 600
Ordering Costs = Cost of ordering x Number of orders
= 30 x 20 = € 600
therefore Total Costs = € 600 + € 600 = € 1,200.
Example: Basic EOQ
Zartex Co. produces fertilizer to sell to
wholesalers. One raw material – calcium nitrate –
is purchased from a nearby supplier at $22.50 per
ton. Zartex estimates it will need 5,750,000 tons
of calcium nitrate next year.
The annual carrying cost for this material is 40%
of the acquisition cost, and the ordering cost is
$595.
a) What is the most economical order quantity?
b) How many orders will be placed per year?
c) How much time will elapse between orders?
Example: Basic EOQ
• Economical Order Quantity (EOQ)
D = 5,750,000 tons/year
Cc = .40(22.50) = $9.00/ton/year
Co = $595/order
EOQ =
2(5,750,000)(595)/9.00
= 27,573.135 tons per order
Example: Basic EOQ
• Total Annual Stocking Cost (TSC)
TSC = (27,573.135/2)(9.00)
+ (5,750,000/27,573.135)(595)
= 124,079.11 + 124,079.11
= $248,158.22 Note: Total Carrying Cost
equals Total Ordering Cost
Example: Basic EOQ
• Number of Orders Per Year
= D/Q
= 5,750,000/27,573.135
= 208.5 orders/year
• Time Between Orders Note: This is the inverse
of the formula above.
= Q/D
= 1/208.5
= .004796 years/order
= .004796(365 days/year) = 1.75 days/order
END

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