C H A P T E R 12
INVENTORY CONTROL MODELS
After completing this chapter, students will be able to: 1. Understand the importance of inventory control. 2. Use inventory control models to determine how much to order or produce and when to order or produce. 3. Understand inventory models that allow quantity discounts. 4. Understand the use of safety stock with known and unknown stockout costs.
5. Understand the importance of ABC inventory analysis. 6. Use Excel to analyze a variety of inventory control models.
12.1 12.2 12.3 12.4 12.5 12.6
12.7 12.8 12.9
Quantity Discount Models Use of Safety Stock ABC Analysis
Importance of Inventory Control Inventory Control Decisions Economic Order Quantity: Determining How Much to Order Reorder Point: Determining When to Order Economic Production Quantity: Determining How Much to Produce
Summary • Glossary • Solved Problems • Discussion Questions and Problems • Case Study: Sturdivant Sound Systems • Case Study: MartinPullin Bicycle Corporation • Internet Case Studies • Bibliography
CHAPTER 12 Inventory Control Models
Inventory is one of the most expensive and important assets of many companies, representing as much as 50% of total invested capital. Managers have long recognized that good inventory control is crucial. On one hand, a firm can try to reduce costs by reducing onhand inventory levels. On the other hand, customers become dissatisfied when frequent inventory outages, called stockouts, occur. Thus, companies must make the balance between low and high inventory levels. As you would expect, cost minimization is the major factor in obtaining this delicate balance. Inventory is any stored resource that is used to satisfy a current or future need. Raw materials, work-in-process, and finished goods are examples of inventory. Inventory levels for finished goods, such as clothes dryers, are a direct function of market demand. By using this demand information, it is possible to determine how much raw materials (for example, sheet metal, paint, and electric motors in the case of clothes dryers) and work-in-process are needed to produce the finished product. Every organization has some type of inventory planning and control system. A bank has methods to control its inventory of cash. A hospital has methods to control blood supplies and other important items. State and federal governments, schools, and virtually every manufacturing and production organization are concerned with inventory planning and control. Studying how organizations control their inventory is equivalent to studying how they achieve their objectives by supplying goods and services to their customers. Inventory is the common thread that ties all the functions and departments of the organization together. Figure 12.1 illustrates the basic components of an inventory planning and control system. The planning phase involves primarily what inventory is to be stocked and how it is to be acquired (whether it is to be manufactured or purchased). This information is then used in forecasting demand for the inventory and in controlling inventory levels. The feedback loop in Figure 12.1 provides a way of revising the plan and forecast based on experiences and observation. Through inventory planning, an organization determines what goods and/or services are to be produced. In cases of physical products, the organization must also determine whether to produce these goods or to purchase them from another manufacturer. When this has been determined, the next step is to forecast the demand. As discussed in Chapter 11, many mathematical techniques can be used in forecasting demand for a particular product. The emphasis in this chapter is on inventory control—that is, how to maintain adequate inventory levels within an organization to support a production or procurement plan that will satisfy the forecasted demand. In this chapter,...
Bibliography: Source: H. Lee, et al. “Hewlett-Packard Gains Control of Inventory and Service through Design for Localization,” Interfaces 23, 4 (July–August 1993): 1–11.
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