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BJTM3033: INVENTORY MANAGEMENT

Kamaruddin Radzuan Room: 4035, Block C, STML Building Tel: 04-9287138 Email: kamaruddin@uum.edu.my

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Contributions to overall grade: 5% Attendance 10% Presentation 20% Quizzes (2) 10% Assignment(1) 15% Final Project (1) 40% Final Exam

Definition of Inventory
Inventory
The stock of any item or resource used in an organization, includes raw materials, finished goods, and work-in-process.

Copyright 2005 The McGraw-Hill Companies. All rights reserved.

McGraw-Hill/Irwin 144

Types of Inventory
Raw Materials
Vendor-supplied items that have not had any labor added by the firm receiving the items.

Finished Goods
Completed products that are still in the possession of the firm that manufactured them.

Work-in-Process (WIP)
Items that have been partially processed but are still incomplete.
Copyright 2005 The McGraw-Hill Companies. All rights reserved.
McGraw-Hill/Irwin 145

Managerial Issues
Inventory is no longer viewed as an asset

Product life cycles are becoming shorter increasing the likelihood of product obsolescence.
Inventory concealing other problems. The high costs of inventory storage.
Copyright 2005 The McGraw-Hill Companies. All rights reserved.

McGraw-Hill/Irwin 146

The Functions of Inventory


To decouple or separate various parts of the production process To provide a stock of goods that will provide a selection for customers To take advantage of quantity discounts To hedge against inflation and upward price changes
Transparency Masters to accompany Heizer/Render Principles of Operations Management, 5e, and 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

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Reason for Maintaining Inventory


To protect against uncertainty:
Shortages of raw materials. Work-in-process variations. Changes in demand for finished products.

To support a strategic plan


As a cyclic demand buffer for a level-output strategy.

To take advantage of economies of scale


Large quantity purchases reduce the average total unit costs related to fixed ordering, setup costs, and transportation costs.
Copyright 2005 The McGraw-Hill Companies. All rights reserved.
McGraw-Hill/Irwin 148

The Material Flow Cycle

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2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

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The Material Flow Cycle


Input Other Wait Time Move Time Queue Time Setup Time Run Time

Output

Cycle Time

Transparency Masters to accompany Heizer/Render Principles of Operations Management, 5e, and

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.
2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 12-10

ABC Analysis
What is ABC Analysis ? Inventory aplication of what is known as the Pareto Principle. Pareto principle states Critical few and trivial many The objective is to separate the important from the unimportant

Divides on-hand inventory into 3 classes


A class, B class, C class

Basis is usually annual $ volume


$ volume = Annual demand x Unit cost

Policies based on ABC analysis


Develop class A suppliers more Give tighter physical control of A items Forecast A items more carefully
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2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

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Classifying Items as ABC


% Annual $ Usage
100 80 60 40 20 0 0
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Class A B C

% $ Vol 80 15 5

% Items 15 30 55

A B
50
12-12

C
100
2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

% of Inventory Items

Inventory Classifications
Inventory
1984-1994 T/Maker Co.

Process stage

Number & Value

Demand Type

Other

Raw Material WIP Finished Goods


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A Items B Items C Items

Independent Dependent

Maintenance Operating

2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

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Cycle Counting
Physically counting a sample of total inventory on a regular basis Used often with ABC classification
A items counted most often (e.g., daily)

Transparency Masters to accompany Heizer/Render Principles of Operations Management, 5e, and

2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

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Advantages of Cycle Counting


Eliminates shutdown and interruption of production necessary for annual physical inventories Eliminates annual inventory adjustments Provides trained personnel to audit the accuracy of inventory Allows the cause of errors to be identified and remedial action to be taken Maintains accurate inventory records
Transparency Masters to accompany Heizer/Render Principles of Operations Management, 5e, and 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 12-15

Periodic vs. Continous Inv. System


PERIODIC A method of inventory valuation for financial reporting purposes where a physical count of the inventory is performed at specific intervals. This accounting method for inventory valuation only keeps track of the inventory at the beginning of a period, the purchases made and the sales during the same period and is recorded under the asset section of the balance sheet. CONTINOUS A Method where information on inventory quantity and availability is updated on a continuous basis as a function of doing business. Generally this is accomplished by connecting the inventory system with order entry and in retail the point of sale system. In this case, book inventory would be exactly the same as, or almost the same, as the real inventory.

Disadvantages of Inventory
Higher costs
Item cost (if purchased) Ordering (or setup) cost
Costs of forms, clerks wages etc.

Holding (or carrying) cost


Building lease, insurance, taxes etc.

Difficult to control Hides production problems


Transparency Masters to accompany Heizer/Render Principles of Operations Management, 5e, and

2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

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Part No 1 2 3 4 5 6 7 8 9 10 Total

Unit Usage Unit Cost $ 1100 2 600 40 100 4 1300 1 100 60 10 25 100 2 1500 2 200 2 500 1 5510

Annual $ Usage 2200 24000 400 1300 6000 250 200 3000 400 500 38250

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Part No

Annual $ Usage

Cumulative $ Usage

Cumulative % $ Usage

Class

Part No 2 5 8 1 4 10 9 3 6 7

Annual $ Usage 24,000 6,000 3,000 2,200 1,300 500 400 400 250 200

Cumulative $ Usage 24,000 30,000 33,000 35,200 36,500 37,000 37,400 37,800 38,050 38,250

Cumulative % $ Usage 62.75 78.43 86.27 92.03 95.42 96.73 97.78 98.82 99.48 100.00

Class A A B B B C C C C C

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