Inventory Management

2009 Cengage Learning/South-Western

INVENTORY MANAGEMENT
Inventory Management refers to the process of formulation and administration of plans and policies to efficiently and satisfactorily meet production and merchandising requirements and minimize cost relative to inventories. Objective: To maintain inventory at a level that best balances the estimates of actual savings, the cost of carrying additional inventory, and the efficiency of inventory control.
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INVENTORY MANAGEMENT TECHNIQUES

Inventory Planning

Involves the determination of the quality and quantity and location of inventory, as well as the time of ordering, in order to minimize cost and meet future business requirements.
Examples: Economic Order Quantity; Reorder point; Just-in-Time(JIT) System

INVENTORY MANAGEMENT TECHNIQUES

Inventory Control

Involves regulation of inventory within predetermined level; adequate stocks should be able to meet business requirements, but the investment in inventory should be at the minimum.

SYSTEMS OF INVENTORY CONTROL

JUST-IN-TIME PRODUCTION SYSTEM a demand pull (driven by demand) system in which each component of a finished good is produced when needed by the next production stage. FIXED ORDER QUANTITY SYSTEM an order for a fixed quantity is placed when the inventory level reached the reorder point. This is consistent with EOQ concept.

PERIODIC REVIEW OR REPLACEMENT SYSTEM orders are made after a review of inventory level has been done at regular intervals.
OPTIONAL REPLENISHMENT SYSTEM - combination of fixed order and replacement systems. MATERIALS REQUIREMENT PLANNING (MRP) MRP is a push through system that is designed to plan and control materials used in production based on a computerized system that the manufactures finished goods based on demand forecasts.
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SYSTEMS OF INVENTORY CONTROL

MATERIALS REQUIREMENT PLANNING (MRP - II) A closed loop system that integrates various functional areas of a manufacturing company (e.g., inventories, production, sales and cash flows). It is developed as an extension of MRP. ENTERPRISE RESOURCE PLANNING (ERP) ERP integrates information systems of all functional areas in a company. Every aspect of operations is interconnected as the company is connected with its customers and suppliers. ABC Classification System inventories are classified for selective control A items high value requiring highest possible control B items medium cost items requiring normal control C items low cost items requiring the simplest possible control
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INVENTORY MODELS
A basic INVENTORY MODEL exists to assist in two inventory questions: 1. How many units should be ordered? 2. When should the units be ordered?

ECONOMIC ORDER QUANTITY

Economic Order Quantity the quantity to be ordered, which minimizes the sum of the ordering and carrying costs. where: a cost of placing one order(ordering cost) EOQ = 2aD k Assumptions of the EOQ Model 1. Demand occurs at a constant rate throughout the year. 2. Lead time on the receipt of the orders is constant 3. The entire quantity ordered is received at one time. 4. The unit costs of the items ordered are constant; thus, there can be no quantity discounts. 5. There are no limitations on the size of the inventory. D annual demand in units k annual cost of carrying one unit in inventory for one year

ECONOMIC ORDER QUANTITY

Ordering costs include those spent in placing and order, waiting for an order to be delivered, inspection and receiving costs, setup costs, and quantity discounts lost. Carrying costs - are those spent in transferring the goods from the receiving department to the warehouse, holding, maintaining, or warehousing inventories such as warehousing and storage costs, handling and clerical costs, property taxes and insurance, deterioration and shrinkage of stocks, obsolescence of stocks, interest, and return on investment.

ECONOMIC LOT SIZE (ELS)

Economic Lot Size when applied to manufacturing operations, the EOQ formula may be used to compute the Economic Lot Size (ELS) where: a set-up cost ELS = 2aD k D annual production requirement k annual cost of carrying one unit in inventory for one year

When the EOQ figure is available, the average inventory is computed as follows: Average Inventory = EOQ 2

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EOQ
1. AGI Company carries an inventory of shaving cream bottles that cost P25 each. The firms inventory carrying cost is 18% of the value of the inventory. It costs P38 to place, process, and receive an order. The firm uses 20,000 valves a year. Required: a. What ordering quantity minimizes the inventoSry costs associated with the shaving cream bottles? (Round to the nearest unit) b. How many orders will be placed each year if the EOQ is used?

c. What are the bottles carrying and ordering costs if the EOQ is used?

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EOQ
2. SUN publishes a book about nature. Set-up cost is P10. SUN prints 675 copies of the book evenly throughout the year. If the optimal production run (economic lot size) is 30, how much is the unit carrying cost per year?

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EOQ
3. Based on an EOQ analysis (assuming a constant demand), the optimal order quantity is 4,000 units. Annual inventory carrying cost equal 30% of the average inventory level. The company pays P5 per unit to buy the product, which sells for P12. The company pays P200 to place an order, and monthly demand for the product is 5,000 units. Required: a. Annual inventory carrying cost b. Total inventory order cost per year

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THE REORDER POINT

When to Reorder: When to reorder is a stock-out problem. i.e., the objective is to order at a point in time so as not to run out of stock before receiving the inventory ordered but to so early that an excessive quantity of safety stock is maintained. Lead time period between the time the order is placed and received Normal Time usage = Normal lead time x Average Usage Safety stock = (Maximum LT Normal LT) x Average Usage Reorder point if there is NO SS required = Normal lead time usage Reorder point if there is safety stock required = SS + NTU or MLT x Average usage
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REORDER POINT
4. The AGI Company purchases 25,600 units of bleaching soap per year. The average purchase lead time is 7 working days. Maximum lead-time is 10 working days. The company works 320 days per year.

Required: a. Units of safety stock that the company should carry

b. The reorder point for bleaching soap c. Assume that the lead time is always 7 days and no delay in delivery has been experienced by the company. What is the reorder point? How many units of safety stock must be kept by the company in this case?
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