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Inventory - I
Items from last class What is inventory Inventory Video Inventory Cost Structure Basic Ideas for Managing Independent Demand Inventory
Operations Management
Inventory Definition
Operations Management
Types of Inventory
Inputs
Raw Materials Purchased parts Maintenance and Repair Materials
Process
Outputs
Finished Goods Scrap and Waste
In Process
Partially Completed Products and (often on the Subassemblies factory floor)
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Types of Inventory
Work in process
Vendors
Work in process
Operations Management
Inventory Level
Demand Rate
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Independent demand
items demanded by external customers (Kitchen Tables)
Dependent demand
items used to produce final products (table top, legs, hardware, paint, etc.) Demand determined once we know the type and number of final products
Operations Management
Independent demand
Uncertain / forecasted Continuous Review / Periodic Review
Dependent demand
Requirements / planned Materials Requirements Planning / Just in Time
Operations Management
Pricing related:
Temporary price discounts Hedge against price increases Take advantage of quantity discounts
Transit
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Operations Management
Carrying cost
Financially calculable
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Bad Design
Lengthy Setups
Inefficient Layout
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Poor Quality
Lengthy Setups
Bad Design
Inefficient Layout
Machine Breakdown
Unreliable Supplier
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Video
Inventory concepts that occur in the textbook supply chain Watch for:
Difference between independent and dependent demand inventory How much and when to order
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Stock out cost Item costs, shipping costs and other cost subject to volume discounts
3% (1% - 4%)
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ABC Prioritization
Based on Pareto concept (80/20 rule) and total usage in dollars of each item. Classification of items as A, B, or C often based on $ volume.
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ABC Prioritization
A items: 20% of SKUs, 80% of dollars B items: 30 % of SKUs, 15% of dollars C items: 50 % of SKUs, 5% of dollars Three classes is arbitrary; could be any number. Percents are approximate. Danger: dollar use may not reflect importance of any given SKU!
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+Class B
+Class C
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20 10 0 10 20 30 40 50 60 70 80 90 100
Percentage of items
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Item 1 2 3 4 5 6 7 8 9 10 Total
Operations Management
Percent Usage
30.0% 25.0%
80.0% 60.0%
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Cumulative % Usage
A-items
Track carefully (e.g. continuous review) Sophisticated forecasting to assure correct levels
C-items
Track less frequently (e.g. periodic review) Accept risks of too much or too little (depending on the item)
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Demand rate D is constant, recurring, and known Amount in inventory is known at all times Ordering (setup) cost S per order is fixed Lead time L is constant and known. Unit cost C is constant (no quantity discounts) Annual carrying cost is i time the average $ value of the inventory No stockouts allowed. Material is ordered or produced in a lot or batch and the lot is received all at once
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Operations Management
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When to order?
Order when inventory falls to the Reorder Point-level R so we will just sell the last item as the new order comes in: R = DL
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When inventory falls to R, we order so as not to run out before the new order comes in. R=?
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R = D*L = (27.4)(10) = 274 yds (usually can neglect issues of working days vs weekends, etc.)
Dont forget to convert to consistent time units!
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EOQ Summary
How much to order?
Q = sqrt(2DS/iC)
When to order?
R = DL
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EOQ Exercise
Now you do it See Excel Spreadsheet: Excel_Inv_Examples.xls, EOQ tab Compute the values of R and Q and compare to the simulation Next see what happens when you have volume discounts (EOQ w Discount Tab)
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EOQ Example
Unit Cost C Holding cost factor i Ordering cost S Demand rate D Lead time L Solutions: Re-order point R Q = sqrt(2SD/(iC)) $0.45 /unit 25% /year $15.00 /order 10000 units/year 0.0192 year
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