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									Chapter 12 – Inventory
Management

        Definition, objectives, historical
        evolution, EOQ, service levels,
                     models


Rev. 09/25/06      SJSU Bus 140 - David Bentley   1
      What Is Inventory?
   Material owned for use in product or as
    operating supply
   Has value (usually)
   Need for product or to support production
   Other?



    Rev. 09/06/01   SJSU Bus 140 - David Bentley   2
      Inventory Types - 1
   Raw Material (RM) – purchased
        “true” raw material
        Component parts
   Work-in-process (WIP) – manufactured in-
    house
        Assemblies
        Sub-assemblies
        Fabricated parts

    Rev. 09/06/01     SJSU Bus 140 - David Bentley   3
      Inventory Types - 2
   Finished Goods (FGI)
        Completed products
   Raw Materials in Process (RIP)
        Found in lean operations (JIT) environments
        Combines RM and WIP
   Operating supplies
   Goods in transit

    Rev. 03/02/05     SJSU Bus 140 - David Bentley     4
      Major Objectives
    Never have a stockout
         Customer dissatisfaction
         Production disruption
    Never carry excess inventory
         Inventory is an asset but it is not free
    In other words – walk a tightrope!


    Rev. 09/06/01       SJSU Bus 140 - David Bentley   5
    Inventory Related Costs
   Carrying costs                           Ordering costs
        Obvious                                  People
               Capital                                 Purchasing staff
           Holding*
            
                                                        Receiving
        Semi-obvious                                   Inspection
                Obsolescence
            
                                                  Order transmission
               Inventory
                management                        Purchasing supplies
        Hidden                                   Occupancy
               Idle stock                              Purchasing
               Scrap and rework                        Receiving
* Next slide


 10/01/02                      SJSU Bus 140 - David Bentley                 6
      Holding costs – Stock Related
    Personnel
    Equipment
    Occupancy (rent and utilities)
    Interest
    Insurance
    Taxes
    Security
    Shrinkage and damage
    10/01/02         SJSU Bus 140 - David Bentley   7
      Historical Evolution of I/C - 1
   Record keeping
   Answer 2 questions
        When to order
        How much to order
   When?
        Sawtooth diagram & ROP (see next slide)
        ROP = d X LT

    Rev. 10/01/02     SJSU Bus 140 - David Bentley   8
    Sawtooth diagram & ROP
                                            Profile of Inventory Level Over Time
Q                Usage
                   rate

Quantity
on hand


Reorder
point



                                                                        Time
      Receive        Place Receive                  Place    Receive
      order          order order                    order    order
                          Lead time
 Rev. 03/01/02            SJSU Bus 140 - Source: Stevenson                  9
      ROP Limitations
   Assumes demand is known and linear
   Relies on instantaneous replenishment when
    inventory reaches zero
   Assumes lead time is known and constant
   Has no relationship to future usage
   Treats each item independently
   Encourages safety stock


    10/01/02       SJSU Bus 140 - David Bentley   10
      Historical Evolution of I/C - 2
   How Much?
        Cost of inventory & EOQ
        Balance carrying (holding) and ordering costs
        EOQ = square root of 2DS/IC
        Variations
              Multiple delivery (manufacturing: EMQ or EPQ)
              Quantity discounts



    Rev. 10/01/02          SJSU Bus 140 - David Bentley        11
      EOQ Limitations
   Assumes ordering costs are accurately
    known
   Assumes carrying costs are accurately
    known
   Results in always carrying a certain amount
    of inventory
   Focuses on mechanics, not basics
        No emphasis on changing costs

    10/01/02         SJSU Bus 140 - David Bentley   12
    Additional ordering models
   Fixed-order interval
       Frequency is set
       Quantity varies with each order
   Single-period model
       One-time order
       Perishables, refurbishing contracts
   Alternative: ABC approach (Pareto!)
       Based on dollar usage over a fixed period
       Order “A” often, “C” rarely, “B” in between
Rev. 10/01/02        SJSU Bus 140 - David Bentley     13
  ABC Classification System
Classifying inventory according to some
measure of importance and allocating
control efforts accordingly.
                                   High
      A - very important                       A
                               Annual
                              $ volume                   B
      B - mod. important      of items

                                    Low                           C
      C - least important                     Few              Many
                                                    Number of Items
Rev. 03/01/02    SJSU Bus 140 - Source: Stevenson                 14
      Inventory Counting Systems - 1
   Periodic
        Full physical (“wall-to-wall”)
   Two bin
        Bulk and shelf
        Stockroom minimum (SRM)




    Rev. 10/10/01       SJSU Bus 140 - David Bentley   15
    Inventory Counting Systems - 2
   Perpetual
       Transaction recording and balance
        maintenance
       Historical evolution
       Cycle counting (using ABC)




Rev. 10/10/01       SJSU Bus 140 - David Bentley   16
  Inventory Metrics
      Inventory Turnover
           T = CGS
                 AI
      Expected Annual Shortages
           E(N) = E(n) x D
                          Q
      Service Level
           SLANNUAL = 1 - (E(N)/D)

Rev. 09/19/05       SJSU Bus 140 - David Bentley   17

								
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