Topics: Inventory, Economic order quantity, Normal distribution Pages: 20 (2776 words) Published: April 11, 2013
Chapter 6 Inventory Control

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Inventory is any stored resource used to satisfy a current or future need Common examples are raw materials, work-inprocess, and finished goods Lower inventory levels can reduce costs: Just-in-time system to streamline process and lower inventory Low inventory levels may result in stockouts and dissatisfied customers: 311 Japan Miyagi earthquake shocked global supply chains Most companies try to balance high and low inventory levels with cost minimization as a goal 2


Inventory may account for 50% of the total invested capital of an organization and 70% of the cost of goods sold Energy Costs Capital Costs

Labor Costs

Inventory Costs

Amazon Warehouse in Phoenix AZ



Inventory planning and control
Planning on What Inventory to Stock and How to Acquire It Forecasting Parts/Product Demand Controlling Inventory Levels

Feedback Measurements to Revise Plans and Forecasts
Figure 6.1


Importance of Inventory Control

The decoupling function
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Used as a buffer between stages in a manufacturing process Reduces delays and improves efficiency Seasonal products may be stored to satisfy off-season demand Materials can be stored as raw materials, work-in-process, or finished goods Labor can be stored as a component of partially completed subassemblies 6

Storing resources
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Importance of Inventory Control

Irregular supply and demand
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Demand and supply may not be constant over time Inventory can be used to buffer the variability Lower prices may be available for larger orders Extra costs associated with holding more inventory must be balanced against lower purchase price Stockouts may result in lost sales Dissatisfied customers may choose to buy from another supplier 7

Quantity discounts
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Avoiding stockouts and shortages
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Inventory Decisions

Two fundamental decisions in inventory control
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How much to order When to order

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The objective is to minimize total inventory costs Common inventory costs are    

Cost of the items (purchase or material cost) Cost of ordering Cost of carrying, or holding, inventory Cost of stockouts 8

Inventory Cost Factors
• •

• • • • •

Developing and sending purchase orders Processing and inspecting incoming inventory Bill paying Inventory inquiries Utilities, phone bills, and so on, for the purchasing department Salaries and wages for the purchasing department employees Supplies such as forms and paper for the purchasing department

Cost of capital Taxes Insurance Spoilage Theft Obsolescence Salaries and wages for warehouse employees Utilities and building costs for the warehouse

• • •

• •

Table 6.1

Supplies such as forms and paper for the 9 warehouse

Inventory Cost Factors

Ordering costs are generally independent of order quantity

The amount of work is the same no matter the size of the order

Carrying costs generally varies with the order quantity

The labor, space, and other costs increase as the order size increases

Of course, the actual cost of items purchased varies with the quantity purchased


How Much to Order

1. 2. 3. 4. 5.


Demand is known and constant Lead time is known and constant Receipt of inventory is instantaneous Purchase cost per unit is constant throughout the year The only variable costs are the placing an order, ordering cost, and holding or storing inventory over time, holding or carrying cost, and these are constant throughout the year Orders are placed so that stockouts or shortages are avoided completely 11

What’s the Tradeoff?

Advantage of ordering one stamp at a time: Low carrying cost 1 2

Advantage of ordering many stamps at a time: Low ordering cost 12

Inventory Usage Over Time...
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