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Chapter 12

supply chain

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50 views3 pages

Chapter 12

supply chain

Uploaded by

ASehgal
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
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Chapter 12: Inventory

Inventory Management

- The objective of inventory management is to strike a balance between inventory investment


and customer service
- One of the most expensive assets of many companies representing as much as 50% of total
invested capital
- Operations managers must balance inventory investment and customer service

Function of Inventory

- Inventory has functions that adds flexibility to a firm’s operations


1) To decouple or separate various parts of the production process
2) To decouple the firm from fluctuations in demand and provide a stock of goods that will provide
a selection for customers
3) To take advantage of quantity discounts
4) To hedge against inflation

Types of Inventory

- Raw material
o Purchased but not processed
- Work-in-process
o Undergone some change but not completed
o A function of cycle time for a product
- Maintenance/repair/operating (MRO)
o Necessary to keep machinery and processes productive
- Finished goods
o Completed product awaiting shipment

Managing Inventory

- Operations managers system manage inventory


- How inventory items can be classified
- How accurate inventory records can be maintained

ABC Analysis

- Divided on hand inventory into 3 classifications on basis of annual $ volume


- Divides inventory into three classes based on annual dollar volume
o Class A - high annual dollar volume
o Class B - medium annual dollar volume
o Class C - low annual dollar volume
- Used to establish policies that focus on the few critical parts and not the many trivial ones
- To determine annual dollar volume, measure the annual demand of each inventory item x cost
per unit
- Other criteria than annual dollar volume may be used
o Anticipated engineering changes
o Delivery problems
o Quality problems
o High unit cost

- Policies employed may include


o More emphasis on supplier development for A items
o Tighter physical inventory control for A items
o More care in forecasting A items
Record Accuracy

- Accurate records are a critical ingredient in production and inventory systems


- Allows organization to focus on what is needed
- Necessary to make precise decisions about ordering, scheduling, and shipping
- Incoming and outgoing record keeping must be accurate
- Stockrooms should be secure

Cycle Counting

- Items are counted and records updated on a periodic basis


- Often used with ABC analysis to determine cycle
- Has several advantages
1) Eliminates shutdowns and interruptions
2) Eliminates annual inventory adjustment
3) Trained personnel audit inventory accuracy
4) Allows causes of errors to be identified and corrected
5) Maintains accurate inventory records

Control of Service Inventories

- Can be a critical component of profitability


- Losses may come from shrinkage or pilferage
- Shrinkage: Retail inventory that is unaccounted for between receipt and sale
o Occurs from damage and theft from sloppy paperwork
o Inventory theft is also known as pilferage (small theft)
- Applicable techniques include
1) Good personnel selection, training, and discipline
2) Tight control on incoming shipments
3) Effective control on all goods leaving facility

Inventory Models

Independent vs Dependent

- Independent demand - the demand for item is independent of the demand for any other item in
inventory
- Dependent demand - the demand for item is dependent upon the demand for some other item
in the inventory
Holding, Ordering and Set up Cost

- Holding costs - the costs of holding or “carrying” inventory over time (ex. Cost related to
storage, such as insurance, extra staffing and interest payment)
- Ordering costs - the costs of placing an order and receiving goods (supplies, forms, order
processing, purchasing, clerical support)
- Setup costs - cost to prepare a machine or process for manufacturing an order (time and labour
to clean or change tools)

Inventory Models for Independent Demand

- Need to determine when and how much to order


- Demand models:

1) Basic economic order quantity


- Demand is known, constant, and independent
- Lead time is known and constant
- Receipt of inventory is instantaneous and complete
- Quantity discounts are not possible
- Only variable costs are setup and holding
- Stockouts can be completely avoided

2) Production order quantity


3) Quantity discount model

Minimizing Cost

- Objective is to minimize total costs


-

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