Inventory Control and Management Practice

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Inventory Management

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Inventory Management

CHAPTER

Operations Management

11

William J. Stevenson

Inventory Management

8th edition
McGraw-Hill/Irwin Operations Management, Eighth Edition, by William J. Stevenson Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

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Inventory Management

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Inventory Management

Types of Inventories

Inventory: a stock or store of goods

Independent Demand

A

Dependent Demand

Raw materials & purchased parts • Partially completed goods called work in progress • •

Finished-goods inventories


B(4)

C(2)

D(2)

E(1)

D(3)

F(2)

(manufacturing firms) or merchandise (retail stores)

Independent demand is uncertain. Dependent demand is certain.

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Inventory Management

Types of Inventories (Cont’d) (Cont’

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Inventory Management

Functions of Inventory

• •

Replacement parts, tools, & supplies Goods-in-transit to warehouses or customers

• • • •

To meet anticipated demand To smooth production requirements To decouple operations To protect against stock-outs

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Inventory Management

Functions of Inventory (Cont’d) (Cont’
To take advantage of order cycles To help hedge against price increases To permit operations To take advantage of quantity discounts

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Inventory Management

Objective of Inventory Control

• • • •



To achieve satisfactory levels of customer service while keeping inventory costs within reasonable bounds • •

Level of customer service Costs of ordering and carrying inventory

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Inventory Management

Effective Inventory Management
• • • •

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Inventory Counting Systems

A system to keep track of inventory A reliable forecast of demand Knowledge of lead times Reasonable estimates of • • •



Periodic System
Physical count of items made at periodic intervals



Perpetual Inventory System
System that keeps track of removals from inventory continuously, thus monitoring current levels of each item

Holding costs Ordering costs Shortage costs



A classification system

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Inventory Counting Systems (Cont’d) (Cont’
Two-Bin System - Two containers of inventory; reorder when the first is empty • Universal Bar Code - Bar code printed on a label that has information about the item to which it is attached •
0

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Key Inventory Terms

214800 232087768

Lead time: time interval between ordering and receiving the order • Holding (carrying) costs: cost to carry an item in inventory for a length of time, usually a year • Ordering costs: costs of ordering and receiving inventory • Shortage costs: costs when demand exceeds supply •

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ABC Classification System

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Cycle Counting

Figure 11.1

Classifying inventory according to some measure of importance and allocating control efforts accordingly.

• •

A physical count of items in inventory Cycle counting management • •

A - very important B - mod. important C - least important

How much accuracy is needed? When should cycle counting be performed? Who should do it?

High Annual $ value of items Low

A B C
Few Many



Number of Items

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Economic Order Quantity Models
• • •

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Assumptions of EOQ Model

Economic order quantity model Economic production model Quantity discount model

• • • • • •

Only one product is involved Annual demand requirements known Demand is even throughout the year Lead time does not vary Each order is received in a single delivery There are no quantity discounts

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The Inventory Cycle
Profile of Inventory Level Over Time

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Total Cost

Figure 11.2 Q
Quantity on hand

Usage rate

Annual Annual Total cost = carrying +...
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