Production Planning &

Control:
Inventory (Phase A)
 Learning Outcomes

1. Describe or Explain:
The functions of inventory and basic inventory
models

2. Identify or Define:
Holding, Ordering, and Setup Costs
 Discussion

1. What is inventory?

2. Why we need inventories?

 What is Inventory?
Stock of materials
Stored capacity 1995
Corel Corp.

Examples

1984-1994 T/Maker Co. 1984-1994 T/Maker Co.

1995 Corel Corp.
 Types of Inventories

1. Raw materials & purchased parts

2. Partially completed goods called
work in progress
3. Finished-goods inventories
(manufacturing firms)
or merchandise
(retail stores)
 Types of Inventories (Contd)
4. Replacement parts, tools, & supplies
5. Goods-in-transit to warehouses or customers
The Material Flow Cycle
 The Material Flow Cycle
Other Wait Move Queue Setup Run
Input Time Time Time Time Time Output

Cycle Time

1 Run time: Job is at machine and being worked on

2 Setup time: Job is at the work station, and the work station is being
"setup."
3 Queue time: Job is where it should be, but is not being processed
because other work precedes it.
4 Move time: The time a job spends in transit
5 Wait time: When one process is finished, but the job is waiting to be
moved to the next work area.
6 Other: "Just-in-case" inventory.
 Functions of Inventory

1. To meet anticipated demand

2. To smooth production requirements
3. To protect against stock-outs
Functions of Inventory (Contd)

4. To take advantage of order cycles

5. To help hedge against price increases
6. To take advantage of quantity discounts
 Disadvantages of Inventory

1. Higher costs
1. Item cost (if purchased)
2. Ordering (or setup) cost
1. Costs of forms, clerks wages etc.
3. Holding (or carrying) cost
1. Building lease, insurance, taxes etc.

2. Difficult to control
3. Hides production problems
 Inventory Costs

1. Holding costs - associated with holding or

carrying inventory over time
2. Ordering costs - associated with costs of
placing order and receiving goods
3. Setup costs - cost to prepare a machine or
process for manufacturing an order
 Holding (Carrying) Costs
Obsolescence
Insurance
Extra staffing
Interest
Pilferage
Damage
Warehousing
Etc.
 Inventory Holding Costs
(Approximate Ranges)
Cost as a
Category % of Inventory Value
Housing costs (building rent, depreciation, 6%
operating cost, taxes, insurance) (3 - 10%)

Material handling costs (equipment, lease 3%

or depreciation, power, operating cost) (1 - 3.5%)
Labor cost from extra handling 3%
(3 - 5%)
Investment costs (borrowing costs, taxes, 11%
and insurance on inventory) (6 - 24%)

Pilferage, scrap, and obsolescence 3%

(2 - 5%)
Overall carrying cost 26%
 Ordering Costs

Supplies
Forms
Order processing
Clerical support
Etc.
 Setup Costs

Clean-up costs
Re-tooling costs
Adjustment costs
Etc.
CLASS END