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Chapter 5 - Inventory management. Inventory management is presented in Chapter 5. Inventory is the life blood of any business. Most firms store thousands of different items. There are many inexpensive supply or operating type items. The type of business a firm is in will usually determine how much of the firm’s assets are invested in inventories. | 1 Chapter 5: Inventory Management Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved The Nature of Demand Independent demand Demands unrelated to other finished items Independently forecasted Dependent demand Demands directly derived from demand for another inventoried item Raw materials, components parts, and subassemblies 2 5 Primary Inventory Functions Pipeline inventory Cycle stocks Seasonal inventories Safety stocks Decoupling stocks 3 ABC Classification The classification of inventory items in terms of greater dollar usage value Dollar usage ($) = Example What is the dollar usage value of the following item? Annual usage or demand is 3,520 units Cost per unit is $5.50 Dollar usage ($) = 3,520 $5.50= $19,360 4 ABC Analysis Curve 5 Economic Order Size (EOQ) Model EOQ is the optimal lot size for purchasing Minimizes the total cost of ordering and holding inventory Place an order of EOQ when the inventory levels fall below . | 1 Chapter 5: Inventory Management Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved The Nature of Demand Independent demand Demands unrelated to other finished items Independently forecasted Dependent demand Demands directly derived from demand for another inventoried item Raw materials, components parts, and subassemblies 2 5 Primary Inventory Functions Pipeline inventory Cycle stocks Seasonal inventories Safety stocks Decoupling stocks 3 ABC Classification The classification of inventory items in terms of greater dollar usage value Dollar usage ($) = Example What is the dollar usage value of the following item? Annual usage or demand is 3,520 units Cost per unit is $5.50 Dollar usage ($) = 3,520 $5.50= $19,360 4 ABC Analysis Curve 5 Economic Order Size (EOQ) Model EOQ is the optimal lot size for purchasing Minimizes the total cost of ordering and holding inventory Place an order of EOQ when the inventory levels fall below reorder point (R) Simplified total cost associated with inventory Total Cost (TC)= Ordering Cost (CP) +Holding Cost(CH) 6 Economic Order Size (EOQ) : Cost of placing an order ($) : Per unit inventory cost per year ($) A : Annual demands 7 Reorder Point (ROP) Reorder Point (ROP) =Demand during lead time 8 L = lead time Demand during period i Classical EOQ model Assumptions Demand is continuous at a constant rate Constant lead time Constant unit price Fixed-order cost per order Fixed holding cost per unit 9 Classical EOQ model Assumptions (cont.) Instantaneous replenishment No shortages allowed No demand uncertainty No quantity discounts available 10 2. Demand Uncertainty and Safety Stock Relaxation No demand uncertainty Constant demand assumptions A probability distribution of demands E.g., Normal distribution of demands during lead time 11 Demand Uncertainty and Safety Stock (cont.) Safety stock Extra inventory carried to protect against stocking out because of demand uncertainty What is the appropriate level of safety stock to carry? 12 Safety Stock (SS) and Reorder Point (ROP) = Expected demand during lead time SS = Safety stock = Lead time expressed as some multiple of forecast interval Z = Number of standard deviations from the mean demand = Standard deviation of demand for forecast interval 13 Lumpy Demands For components of assembled products: Demands are not usually constant Inventory depletion for component parts tends to occur in discrete “lumps” because of lot sizing of the final product Requirements dependent on the final product are usually discontinuous 14 Questions? 15
