Chapter Twelve - Inventory Management

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Chapter Twelve - Inventory Management Powered By Docstoc
					                Hansen, Mowen, Elias & Senkow (ITP, 1998)

   Week 8 - Inventory
Management and Budgeting
    - Chapters 12, 13




         Chapter 12-1
                     Hansen, Mowen, Elias & Senkow (ITP, 1998)




Chapter 12 - Inventory Management




              Chapter 12-2
                              Hansen, Mowen, Elias & Senkow (ITP, 1998)



          Learning Objectives

   Describe the traditional inventory
    management model.
   Describe JIT inventory management.
   Describe the theory of constraints and
    explain how it can be used to manage
    inventory.




                       Chapter 12-3
                           Hansen, Mowen, Elias & Senkow (ITP, 1998)


Basics of Traditional Inventory
        Management


              Inventory Costs

         Ordering Costs
         Set-up Ordering costs
                 Costs
                 Carrying costs
         Carrying Costs
                 Stock-out costs




                    Chapter 12-4
                              Hansen, Mowen, Elias & Senkow (ITP, 1998)



              Inventory Costs
1. Ordering Costs: The costs of placing and
   receiving an order
   Examples: clerical costs and documents.
2. Carrying Costs: The costs of keeping inventory
   Examples: insurance and space costs.
3. Stockout Costs: The cost of not having sufficient
   inventory
   Examples: lost sales and cost of expediting.




                       Chapter 12-5
                              Hansen, Mowen, Elias & Senkow (ITP, 1998)


      Why Inventory is Needed:
          Traditional View
1. To balance ordering costs and carrying costs
2. To satisfy customer demand (e.g., meet delivery
   dates)
3. To avoid shutting down manufacturing facilities
   because of: machine failure, defective parts,
   unavailable parts, late delivery of parts.
4. To buffer against unreliable production processes
5. To take advantage of discounts
6. To hedge against future price increases



                       Chapter 12-6
                            Hansen, Mowen, Elias & Senkow (ITP, 1998)


      The Appropriate Inventory
               Policy
Two Basic Questions Must be Addressed

   How much should be ordered?
   When should the order be placed?




                     Chapter 12-7
                                    Hansen, Mowen, Elias & Senkow (ITP, 1998)



       Purchasing from the Outside
        Ordering Costs                        Carrying Costs




Cost




                         Optimal Level of Ordering and Carrying Costs
Low
                                                     High
                         Volume

                             Chapter 12-8
                                    Hansen, Mowen, Elias & Senkow (ITP, 1998)


              An Inventory Model
Total Costs = Ordering costs + Carrying costs
        TC = PD/Q + CQ/2

where TC = The total ordering (or set-up) and carrying cost
       P = The cost of placing and receiving an order
       Q = The number of units ordered each time an order is
           placed
       D = The estimated annual demand
       C = The cost of carrying one unit of stock for one year

Economic order quantity (EOQ) =
                                             2DP/C




                             Chapter 12-9
                                  Hansen, Mowen, Elias & Senkow (ITP, 1998)



           An EOQ Illustration

EOQ =    2DP/C

    D = 10,000 units
    P = $25 per order
    C = $2 per unit



EOQ =      (2 x 10,000 x 25)/2

   =       250,000

   =    500 units

                           Chapter 12-10
                                    Hansen, Mowen, Elias & Senkow (ITP, 1998)



                  Reorder Point
      Reorder point = Rate of usage x Lead time

500

400                                                               ROP

300

200

100                        Safety Stock

 0
      2   4   6   8   10    12     14        16   18    20



                             Chapter 12-11
                                    Hansen, Mowen, Elias & Senkow (ITP, 1998)



    Reorder Point (Continued)
Consider the following:

Maximum usage      60
Average usage     (50)
Difference         10
Lead time         x4
 Safety Stock      40


Reorder point = (Average rate of usage x Lead time) + Safety stock
             = 50 x 4 + 40
             = 240 units


                             Chapter 12-12
                                         Hansen, Mowen, Elias & Senkow (ITP, 1998)

      Traditional versus JIT Inventory
                Procedures
                            Inventory Control
                                System

Traditional Systems                                   JIT Systems
1. Balance orderingand carrying                1. Drive set-up and carrying
    costs                                        costs to zero
2. Satisfy customer demand                     2. Use due-date performance
3. Avoid Mfg. shutdowns                       *3. Total preventive maintenance
4. Take advantage of discounts                *4. Total quality control
5. Hedge against future price                 *5. The Kanban system
   increases



 *Rather than holding inventories as a hedge against plant-shutdowns,
 JIT attacks the plant-shutdown problem by addressing these issues.


                                  Chapter 12-13
                                   Hansen, Mowen, Elias & Senkow (ITP, 1998)


   JIT and Inventory Management
1. Ordering and Carrying Costs: The JIT Approach
   A. JIT reduces the costs of acquiring inventory to
       insignificant levels by:
       1. Drastically reducing ordering time
       2. Using long-term contracts for outside purchases
   B. Carrying costs are reduced to insignificant levels by
       reducing inventories to insignificant levels.

2. Due-Date Performance: The JIT Solution
   A. Lead times are reduced so that the company can meet
       requested delivery dates and to respond quickly to
       customer demand.
   B. Lead times are reduced by: reducing ordering times,
       improving quality, and using cellular layouts.


                            Chapter 12-14
                                  Hansen, Mowen, Elias & Senkow (ITP, 1998)



   JIT and Inventory Management
3. Avoidance of Shutdown: The JIT Approach
   A. Total preventive maintenance to reduce machine
        failures
   B. Total quality control to reduce the defective parts
   C. Cultivation of supplier relationships to ensure to
        ensure available of quality raw materials and
        subassemblies (the use of the Kanban system is also
        essential)
4. Discounts and Price Increases: JIT Purchasing Versus
   Holding Inventories
   A. Careful vendor selection
   B. Long-term contracts with vendors
        1. Prices are stipulated
        2. Quality is stipulated
        3. The number of orders placed are reduced
                           Chapter 12-15
                              Hansen, Mowen, Elias & Senkow (ITP, 1998)



  What is the Kanban System?
A Card System is used to monitor work-in-process


      A withdrawal Kanban
      A production Kanban
      A vendor Kanban




                       Chapter 12-16
                              Hansen, Mowen, Elias & Senkow (ITP, 1998)



     The Withdrawal Kanban
Item No.   TVD-114               Preceding Process

Item Name LCD Screen             Computer Assembly

Computer Type Compaq 4/25

Box Capacity 12                  Subsequent Process

Box Type AD-1942                 Final Assembly




                       Chapter 12-17
                              Hansen, Mowen, Elias & Senkow (ITP, 1998)



    The Production Kanban

   Item No.     TVD-114            Process

Item Name LCD Screen             Computer Assembly

Computer Type Contra 4/25

Box Capacity    12

Box Type ___C




                       Chapter 12-18
                                       Hansen, Mowen, Elias & Senkow (ITP, 1998)



           The Vendor Kanban
Item No.    TVD-114

Item Name Computer Chassis                Type Black Plastic

Box Capacity      12                   Location North Receiving Gate

Box Type Cardboard--Type A

Time to Deliver        8:30 AM., 12:30 P.M., 2:30 P.M.

Name of Vendor Hovey Supply Company




                                Chapter 12-19
                     Hansen, Mowen, Elias & Senkow (ITP, 1998)




Theory of Constraints

    Three Measures of Organizational
             Performance
   Throughput
   Inventory
            Throughput
    Operating expenses
            Inventory
        Operating Expenses




              Chapter 12-20
                               Hansen, Mowen, Elias & Senkow (ITP, 1998)


  The Theory of Constraints: Five
  Steps to Improve Performance
1. Identify an organization’s constraint(s).
2. Exploit the binding constraint (s).
3. Subordinate everything else to the decisions
  made in step 2.
4. Elevate the organization's binding constraint(s).
5. Repeat the process.




                        Chapter 12-21
                               Hansen, Mowen, Elias & Senkow (ITP, 1998)


            ABC Assumptions

   Activities consume resources
   Products or customers consume activities
   The concern is with consumption of resources
   Consumption has numerous causes
   Activities can be identified and measured
   Cost pools are homogeneous
   Costs in each pool are variable




                        Chapter 12-22
                               Hansen, Mowen, Elias & Senkow (ITP, 1998)


             TOC Assumptions
   The goal is to make money
   Throughput is revenue less some variable costs
   There is at least one constraint
   There are three resources: scarce bottleneck
    resources, nonbottleneck resources, and capacity
    constraint resources (CCR)
   Most operations have a few CCRs
   Fluctuation and random events occur
   Optimized production technology is stable


                        Chapter 12-23
                      Hansen, Mowen, Elias & Senkow (ITP, 1998)


            In short...

 ABC is most useful for long term
 decisions.

 TOC is most useful for short term
 decisions.



               Chapter 12-24
         Hansen, Mowen, Elias & Senkow (ITP, 1998)



The End




  Chapter 12-25

				
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