Chapter 10

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					Chapter 8


     Inventory Management
Introduction
Radio Frequency Identification
(RFID)
   Conventional bar codes are replaced
    with computer chips or smart tags.
   Use wireless technology to track
    inventory.




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Wal-Mart RFID
   Early adopter of RFID is Wal-Mart.
   By January 2005, 53 of its top 100
    suppliers were sending RFID-tagged
    goods to its three distribution centers in
    the Dallas, Texas area.
   Wal-Mart’s goal is to have all top 100
    suppliers shipping RFID-tagged goods
    by the end of February 2005 in addition
    to 37 other suppliers.
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Wal-Mart RFID continued
   The impetus for Wal-Mart’s investment in
    RFID was the lack of visibility it had into
    its backroom storage areas.
   The major drawback to RFID is its cost.
   In 2005, the cost of smart tags was
    $0.25 each if purchased in volume, and
    $0.75 if purchased in smaller quantities.
   The stated goal in the industry is to get
    the price of smart tags down to $.05
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Vendor-Managed Inventory (VMI)
   With VMI, suppliers are given
    responsibility for managing the inventory
    carried by their retail or wholesale
    customers.
   Rich Products, a $2 billion family-owned
    food company headquartered in Buffalo,
    NY, has a partnership with IBM to
    provide VMI services to the grocery
    industry for its frozen food items.
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General Considerations
Functions of Inventories
   Transit Inventories
   Buffer Inventories (safety stocks)
   Anticipation Inventories
   Decoupling Inventories
   Cycle Inventories



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Forms of Inventories
   Raw materials
   Maintenance, repair, and operating
    supplies
   Work-in-process (WIP)
   Finished goods




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Inventory-Related Costs
   Ordering or setup costs
   Inventory carrying or holding costs
   Stockout costs
   Opportunity costs
   Cost of goods



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Decisions in Inventory Management
   When to order?

   How much to order?




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Types of Inventory Management
Systems
   Reorder point systems
       time between orders varies
       constant order quantity
   Periodic review systems
       time between orders fixed
       order quantity varies
   Material requirements planning (MRP)
       dependent demand items
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Fluctuations in Inventory




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Reorder Point Systems
   Reorder point
   Lead time
   Two-bin system
   Perpetual inventory system




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A Reorder Point System




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Periodic Review System
     maximum inventory level
   - on-hand inventory
   - on-order quantity
   + demand over lead time
     reorder quantity



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Periodic Review System Without
Considering On-Order Quantity




             Chapter 8 - Inventory Management   17
Periodic Review System (Assumes
None On Order at Time of Reorder)




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Priorities for Inventory Management:
The ABC Concept
   A items
       15-20% of items that account for 75-80% of
        annual inventory value
   B items
       30-40% of items that account for                 15% of
        annual inventory value
   C items
       40-50% of items that account for 10-15% of
        annual inventory value
                      Chapter 8 - Inventory Management            19
ABC Inventory Categories




            Chapter 8 - Inventory Management   20
The Economic Order Quantity
(EOQ)
Assumptions
   Constant rate of demand
   Shortages not allowed
   Stock replenishment can be scheduled to
    arrive exactly when inventory drops to zero
   Purchase price, ordering cost, and per unit
    holding cost are independent of quantity
    ordered
   Items are ordered independently of each other

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Notation
   Q = order quantity

   U = annual usage

   CO = order cost per order

   CH = annual holding cost per unit
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Water Distributor’s Inventory Pattern




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Water Distributor’s Inventory Graph




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Annual Order Cost

  $




                            U
                               CO
                            Q

          Q
              Chapter 8 - Inventory Management   26
Annual Holding Cost

  $
                                      Q
                                         CH
                                      2




           Q
               Chapter 8 - Inventory Management   27
Graph of Annual Inventory Costs




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Finding an Optimal Policy
             Q       U
               CH    CO
             2       Q

             Q2 
                 CH  UCO
             2 

                2 UC O
            Q 2

                  CH
                  2UCO
            EOQ =
                   CH
             Chapter 8 - Inventory Management   29
Alternative Way of Deriving EOQ

                Q       U
         TAC =   C H    C O
                2       Q
         TAC C H  U 
                  2  CO
          Q   2   Q 


              CH  U
          0     2  CO
             2 Q 

               Chapter 8 - Inventory Management   30
Alternative Way of Deriving EOQ
continued


             U      CH
             2 CO 
            Q        2
                         Q2C H
            UC O       
                          2
            2 UC O
                    Q2
              CH
             2 UC O
                     Q
               CH


             Chapter 8 - Inventory Management   31
EOQ Example
   Given:
       25,000 annual demand
       $3 per unit per year holding cost
       $100 ordering costs


                     2(25,000)(100)
        EOQ =                        1291
                           3
                      Chapter 8 - Inventory Management   32
Cautions Regarding EOQ
   GIGO
   Exclude “sunk” costs
   Very small EOQ values my not be valid




                  Chapter 8 - Inventory Management   33
Chapter 8 - Inventory   34
   Management

				
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