Lecture Operations management: Creating value along the supply chain (Canadian edition) - Chapter 13
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OPERATIONS MANAGEMENT:
Creating Value Along the Supply Chain,
Canadian Edition
Robert S. Russell, Bernard W. Taylor III, Ignacio Castillo, Navneet Vidyarthi
§
CHAPTER 13
Inventory Management
13-1
§
Learning Objectives
Elements of Inventory Management
Inventory Control Systems
Economic Order Quantity Models
Quantity Discounts
Reorder Point
Order Quantity for a Periodic Inventory
System
13-2
§
What Is Inventory?
Stock of items kept to meet future demand
Purpose of inventory management
how many units to order
when to order
13-3
§
Supply Chain Management
Bullwhip effect
demand information is distorted as it moves away from
the end-use customer
higher safety stock inventories to are stored to
compensate
Seasonal or cyclical demand
Inventory provides independence from vendors
Take advantage of price discounts
Inventory provides independence between stages
and avoids work stoppages
13-4
§
Quality Management in the Supply Chain
Customers usually perceive quality service as
availability of goods they want when they want
them
Inventory must be sufficient to provide high-quality
customer service in QM
13-5
§
Types of Inventory
Raw materials
Purchased parts and supplies
Work-in-process (partially completed) products
(WIP)
Items being transported
Tools and equipment
13-6
§
Two Forms of Demand
Dependent
Demand for items used to produce final products
Tires for autos are a dependent demand item
Independent
Demand for items used by external customers
Cars, appliances, computers, and houses are examples
of independent demand inventory
13-7
§
Inventory Costs
Carrying cost
cost of holding an item in inventory
Ordering cost
cost of replenishing inventory
Shortage cost
temporary or permanent loss of sales when demand
cannot be met
13-8
§
Inventory Control Systems
Continuous system (fixed-order-quantity)
constant amount ordered when inventory declines to
predetermined level
Periodic system (fixed-time-period)
order placed for variable amount after fixed passage
of time
13-9
§
ABC Classification
Class A
5 – 15 % of units
70 – 80 % of value
Class B
30 % of units
15 % of value
Class C
50 – 60 % of units
5 – 10 % of value
13-10
§
ABC Classification
PART
1
2
3
4
5
6
7
8
9
10
UNIT COST
ANNUAL USAGE
$ 60
350
30
80
30
20
10
320
510
20
90
40
130
60
100
180
170
50
60
120
13-11
§
ABC Classification
13-12
§
ABC Classification
13-13
§
Economic Order Quantity (EOQ) Models
EOQ
optimal order quantity that will minimize total inventory
costs
Basic EOQ model
Production quantity model
13-14
§
Assumptions of Basic EOQ Model
Demand is known with certainty and is constant
over time
No shortages are allowed
Lead time for the receipt of orders is constant
Order quantity is received all at once
13-15
§
Inventory Order Cycle
13-16
§
EOQ Cost Model
13-17
§
EOQ Cost Model
13-18
§
EOQ Cost Model
Annual
cost ($)
Total Cost
Slope = 0
CcQ
Carrying Cost =
2
Minimum
total cost
CoD
Ordering Cost =
Q
Optimal order
Qopt
Order Quantity, Q
13-19
§
EOQ Example
Cc = $0.75 per gallon
Qopt =
2CoD
Cc
Qopt =
2(150)(10,000)
(0.75)
Co = $150
Qopt = 2,000 gallons
Orders per year = D/Qopt
= 10,000/2,000
= 5 orders/year
D = 10,000 gallons
CoD
CcQ
TCmin =
+
Q
2
TCmin
(150)(10,000)
= 2,000
(0.75)(2,000)
+
2
TCmin = $750 + $750 = $1,500
Order cycle time = 311 days/(D/Qopt)
= 311/5
= 62.2 store days
13-20
§
Production Quantity Model
Order is received gradually, as inventory is
simultaneously being depleted
AKA non-instantaneous receipt model
assumption that Q is received all at once is relaxed
p - daily rate at which an order is received over
time, a.k.a. production rate
d - daily rate at which inventory is demanded
13-21
§
Production Quantity Model
13-22
§
Production Quantity Model
p = production rate
d = demand rate
Maximum inventory level = Q -
Q
d
p
=Q1Average inventory level =
d
p
Q
d
1p
2
2CoD
Qopt =
d
Cc 1
p
CoD CcQ
d
TC = Q + 2 1 - p
13-23
§
Production Quantity Model
13-24
§
Production Quantity Model
Number of production runs =
10,000
D
=
= 4.43 runs/year
2,256.8
Q
Maximum inventory level = Q 1 -
d
p
= 2,256.8 1 -
32.2
150
= 1,772 gallons
13-25
§
