CHAPTER 17

CHAPTER 17: INVENTORY CONTROL

MAJOR ISSUES:

1. How much do we keep on hand and what kind?

2. What will be the costs?

3. How often do we order?

4. How much do we order/produce? (EOQ/EPL)

5. Protection from consequences of non-level demand. --> How much safety stock? (If any).

6. How can computer assist us?

7. How can we manage Inv. to gain competitive advantage?

TYPES:

1. Single period

Buy once--->sell

(may not necessary to plan for restock)

VS.

2. Multiple period

Buy--->Stock--->Sell---> Buy--->Stock--->Sell---> Buy--->Stock--->Sell ...

1. Independent

Demand not derived from demand for higher level item that the company produces or stocks

*FGI usually

MUST FORECAST DEMAND

2. Dependent

Demand derived from demand for high level item the company produces.

*Parts or materials used to make other items raw materials/components and WIP.

CAN BE CALCULATED

INDEPENDENT DEMAND SYSTEMS

1. Fixed Quantity (Q system)--same Q ordered each time ROP is reached. Time interval between orders is variable ROP considers LT and Safety stock. * Requires perpetual (continuous) monitoring.

2. Fixed Interval (P system)--different Q ordered at specific intervals. Q depends on what is needed to get back up to desired level of Inv. (Target). Good for joint replenishment items (purchase a number of items from some vendor-->Q discount -->(D) trans. costs.) Periodic system.

3. Minimum-Maximum System--Maximum target set min/ target set--->evaluate at fixed intervals and order if below min. large enough Q to get back up to max. Ideally won't run out before order gets in. Suitable for items which have low inv. holding costs relative to costs of constant monitoring and frequent ordering of small quantiti es. Q varies some and time varies by constant intervals. Hybrid system

4. Two Bin Systems

Normally, the objective in managing independent demand inventory systems is to: minimize total system costs while maintaining an acceptable level of customer service.

HOW MUCH IS ENOUGH?

Exactly enough to satisfy demand and keep from losing sales or stopping off prod. lines--->but NOT ONE UNIT MORE.

U.P.C Universal product code, bar-coding, RFID tags-important in Inv. mgt. systems.

IN EVALUATING SYSTEM COSTS ONE MUST CONSIDER ONLY RELEVANT COSTS.

Relevant--change as a consequence of decision

Non Relevant--don't change as consequence of decision

UNDERSTANDING THE BEHAVIOR OF COSTS.

Cost that Increase as Inv. levels Increase.

(U) cost of capital

(U) cost of storage space

(U) taxes and insurance

(U) quality costs

(U) coordination costs

(U) cost of poor responsiveness

(U) obsolescence

(U) pilferage and deterioration

VS.

Cost that Decrease as Inventory levels Increase

(D) ordering costs

(D) item costs (Q discounts)

(D) set-up costs (fewer set-ups)

(D) costs of missed sales

(D) other

MODELS--help us arrive at decision about the inv. levels that balance costs and result in lowest total system cost.

ECONOMIC ORDER QUANTITY (E.O.Q)

* Deterministic model--no uncertainty or probabilities to consider.

* Description: A model providing assistance in reaching a decision about the "best" quantity to order under appropriate conditions. (Assumptions are met)

* Objective: seeks to minimize total system (inventory) cost by balancing ordering costs and carrying costs--To determine the optimum quantity to order.

* The concept:

Find that Quantity that minimizes relevant system costs.

* The assumptions: (Of the traditional model)

1. Demand is uniform and known.

2. No quantity discounts.

3. All of the order will be received at once.

4. Lead times known-- minimum inventory level is O with no stockouts.

5. Ordering costs are constant (per order)

6. Holding costs as a % of the $ cost/unit are constant regardless of size of inventories held (no economies of scale).

7. Decision independent of decisions about other items.

ECONOMIC PRODUCTION LOT SIZE / ECONOMIC PRODUCTION QUANTITY

Formula: ((2*Da*S)/(H*(1-d/p)))

Total Cost: (EPL*(1-d/p)/2)*H + Da/EPL*S

note: S = setup cost

p = production rate

d = demand rate

(p and d must be stated in units for a common specified time frame--per week, per day, per month, etc.)

EPL model assumptions:

Only one item is involved
Annual Demand is known
Usage rate is constant
Usage is continuous but production occurs periodically--a production run.
Production rate is constant
Lead time for production is constant
No quantity discounts

EVALUATING QUANTITY DISCOUNTS

At times the opportunity to save money by purchasing larger quantities may present itself.

This relaxes another of the assumptions of the traditional EOQ model (#2--no quantity discounts)

How then do we evaluate our options?

* When discounts do exist it means item costs will differ and must now be considered in our decision--->changes cost formula.

We would like to take advantage of Quantity discounts and we would like to purchase the most economical quantity (lowest total inventory system cost). The most economical quantity may or may not be an EOQ.

* REMEMBER--->the objective is to purchase that Q which will result in the lowest total inventory system costs (normally based on total yearly costs).

ABC INVENTORY CLASS. SYSTEM:

Facilitates sorting of inventory items into groups according to the annual expenditures they cause. Very useful when you deal with many different items--->helps you decide how best to control inventory of various items.

Larger total $ expenditure-> more important to control--> likely to adopt fairly rigorous control techniques.

Smaller total $ expenditure-> less important to control--> likely to adopt less rigorous control techniques.

* costs ($) not the only thing that influences importance

STEPS:

1. Multiply cost per item by annual usage rate

2. Sort results in descending order

3. Number items consecutively

4. Start at top and calculate cumulative total % in terms of costs.

5. Look at each items contribution to total and categorize:

A. Top 10 to 20% of items-> 70% costs (total)

B. Next 20 to 30% of items-> 20% costs (total)

C. Last 50% of items-> 10% costs (total)