19 -1

CHAPTER

Inventory
Management

19 -2

Objectives
Objectives
1. Describe theAfter
traditional
inventory
studying
After studying this
this
managementchapter,
model. you should
chapter, you should
2. Discuss JIT inventory
management.
be
able
be able to:
to:
3. Explain the theory of constraints, and tell
how it can be used to manage inventory.

19 -3

Inventory
Inventory Costs
Costs
1. Ordering costs are the costs of
placing and receiving an order.
2. Setup costs are the costs of
preparing equipment and facilities
so they can be used to produce a
particular product or component.
3. Carrying costs are the costs of
carrying inventory.

19 -4

Traditional
Traditional Reasons
Reasons for
for Carrying
Carrying Inventory
Inventory
1. To balance ordering or setup costs and carrying costs.
2. To satisfy customer demand.
3. To avoid shutting down manufacturing facilities
because of machine failure, defective parts,
unavailable parts, or late delivery of parts.
4. To buffer against unreliable production processes.
5. To take advantage of discounts.
6. To hedge against future price increases.

19 -5

The
The Appropriate
Appropriate Inventory
Inventory Policy
Policy
Two Basic Questions Must be Addressed
How much should be ordered or

produced?
When should the order be placed or

the setup be performed?

The
The Traditional
Traditional Inventory
Inventory Model
Model
Total Costs = Ordering costs + Carrying costs
TC = PD/Q + CQ/2
Where TC = The total ordering (or setup) and carrying costs
P = The cost of placing and receiving an order (or the
cost of setting up a production run)
Q = The number of units ordered each time an order is
placed
D = The known annual demand
C = The cost of carrying one unit of stock for one year

19 -6

The
The Traditional
Traditional Inventory
Inventory Model
Model
Economic order
= 2PD/C
quantity (EOQ)
D = 10,000 units
Q = 1,000 units
P = $25 per order
C = $2 per unit

19 -7

The
The Traditional
Traditional Inventory
Inventory Model
Model
EOQ = ($2 x $25 x 10,000)/2
EOQ = 250,000
EOQ = 500 units

19 -8

Reorder
Reorder Point
Point
Demand
DemandisisCertain
Certain

Reorder point = Rate of usage x Lead time

Example: The producer uses 50 parts per day
and that the lead time is 4 days.
Reorder point = 4 x 50 = 200 units
Thus, an order should be placed when inventory
drops to 200 units.

19 -9

19 -10

Reorder
Reorder Point
Point
Demand
DemandisisCertain
Certain
Inventory (units)
(EOQ) 500
400
300
(ROP) 200
100
2

10 12
Days

14

16

18 20

19 -11

Reorder
Reorder Point
Point
Safety
SafetyStock
Stock

If the refrigerator part was used at a rate of 60

parts a day instead of 50, the firm would use 200
parts after three and one-third days. The safety
stock is determined as follows:
Maximum usage
Average usage
Difference
Lead time
Safety stock

60
50
10
x4
40

Reorder
Reorder Point
Point
Safety
SafetyStock
Stock

ROP = (Average rate of usage x Lead time) +

Safety stock
ROP = (50 x 4) + 40
ROP = 240 units

19 -12

19 -13

A Manufacturing Example
The manager of Benson Company is trying to determine
the size of the production runs for the blade fabrication.
The controller supplies the following information:
Average demand for blades
320 per day
Maximum demand for blades 340 per day
Annual demand for blades
80,000
Unit carrying cost
$5
Setup cost
$12,500
Lead time
20 days

19 -14

A Manufacturing Example
EOQ =

=
=

2PD
C

2 x 80,000 x 2,500
5
400,000,000

= 20,000 blades

19 -15

A Manufacturing Example
Maximum usage
Average usage
Difference
Lead time
Total safety stock

340
320
20
x20
400

Reorder point = (Average usage x Lead time) + Safety stock

= (320 x 20) + 400
= 6,800 units

19 -16

Traditional
Traditional Inventory
Inventory Systems
Systems

Push-through system
Significant inventories
Large supplier base
Short-term supplier contracts
Departmental structure
Specialized labor
Centralized services
Low employee involvement
Supervisory management style
Acceptable quality level
Driver tracing dominates

19 -17

Traditional
Traditional Manufacturing
Manufacturing Layout
Layout
Product A
Product B

A
Lathes

Department. 1

Each
Each process
process passes
passes
through
through departments
departments
that
that specialize
specialize in
in one
one
process.
process.

A
Abrasive
Grinders
Department 2

Welding
B Equipment
Department 3

Finished Product A
Finished Product B

19 -18

JIT
JIT Inventory
Inventory Systems
Systems

Pull-through system
Insignificant inventories
Small supplier base
Long-term supplier contracts
Cellular structure
Multiskilled labor
Decentralized services
High employee involvement
Facilitating management style
Total quality control
Direct tracing dominates

19 -19

JIT
JIT Inventory
Inventory Systems
Systems
JIT
JIT has
has two
two strategic
strategic objectives:
objectives:
To increase profits
To improve a
firms competitive
positions

19 -20

JUST-IN-TIME
JIT- PHILOSOPHY
JIT -TECHNIQUES first
known as the TOYOTA
Technique:
JIT - PURCHASING
JIT - PRODUCTION
JIT - DISTRIBUTION

JIT Purchasing
Requires suppliers to deliver parts and materials
just in time to be used in production.
Supply of parts must be linked to production which
is linked to demand.
Suppliers linked by long-term contracts.
Few chosen suppliers located as close to the
production facility as possible.

19 -21

19 -22

JIT Production/Manufacturing
JIT Manufacturing is a demand-pull system.
The objective is to eliminate waste by producing a
product only when it is needed and only in the
quantities demanded by customers.
Plant layout is managed as a cellular system, that
means, machines are grouped in semicircle. They
are arranged to perform a variety of operations
in sequence.

19 -23

JIT
JIT Manufacturing
Manufacturing Layout
Layout
Cell A

Grinder

Cell B

Grinder

Lathe

Welding

Lathe

Welding

Product
A

Finished
Product

Product
B

Finished
Product

19 -24

JIT And Inventory Management

Setup and Carrying Costs: The JIT Approach
JIT reduces the costs of acquiring inventory to
insignificant levels by:
1. Drastically reducing setup time
2. Using long-term contracts for outside
purchases
Carrying costs are reduced to insignificant levels by
reducing inventories to insignificant levels

19 -25

JIT And Inventory Management

Due Date Performance: The JIT Solution
Lead times are reduced so that the company can
meet requested delivery dates and to
respond quickly to customer demand.
Lead times are reduced by:
reducing setup times
improving quality
using cellular manufacturing

19 -26

JIT And Inventory Management

Avoidance of Shutdown: The JIT Approach
Total preventive maintenance to reduce machine
failures
Total quality control to reduce defective parts
Cultivation of supplier relationships to ensure
availability of quality raw materials and
subassemblies
The use of the Kanban system is also essential

19 -27

What
What is
is the
the Kanban
Kanban System?
System?
A Card System is used to monitor work-inprocess
A withdrawal Kanban
A production Kanban
A vendor Kanban

19 -28

Withdrawal
Withdrawal Kanban
Kanban
Item No.___________________
_____________
15670T07
Processing Process
Circuit Board
Item Name_________________

_____________
CB Assembly

TR6547 PC
Computer Type_____________

_____________

8
Box Capacity_______________

Subsequent Process
_____________

C
Box Type__________________

Final Assembly
_____________

19 -29

Production
Production Kanban
Kanban
Item No.___________________
_____________
15670T07
Process
Circuit Board
Item Name_________________
TR6547 PC
Computer Type_____________
8
Box Capacity_______________
C
Box Type__________________

_____________
CB Assembly

19 -30

Vendor
Vendor Kanban
Kanban
Item No.___________________
15670T08
Name of Receiving Co.
Computer Casing
Item Name_________________

_____________
Electro PC

8
Box Capacity_______________

Receiving Gate

C
Box Type__________________

75

Time to Deliver
Name of Supplier

8:30 A.M., 12:30 P.M., 2:30 P.M.

Garry Supply

19 -31

Kanban
Kanban Process
Process
(7)

Withdrawal
Store

Lot with P-Kanban

CD Assembly

(5)

(6) Signal
Remove
(4) P-Kanban

Attach
W-Kanban

CB Stores

(1)

Remove
W-Kanban
Attach to
Post

Attach to Post

Production
Ordering Post

(1)

(2), (3)
Withdrawal Post
Final Assembly

19 -32

JITs
JITs Limitations
Limitations
Time is required to build sound relationships
with suppliers.
Sharp reductions in inventory buffers may
cause a regimented workflow and high levels
of stress among production workers.
The absence of inventory to buffer production
interruptions.
Current sales are placed at risk to achieve
assurance of future sales.

19 -33

JIT And Inventory Management

Discounts and Price Increases: JIT Purchasing
Versus Holding Inventories
Careful vendor selection
Long-term contracts with vendors
Prices are stipulated (usually producing
a significant savings)
Quality is stipulated
The number of orders placed are reduced

19 -34

Theory
Theory of
of Constraints
Constraints
Three Measures of Organizational Performance
Throughput
Inventory
Operating expenses

19 -35

Theory
Theory of
of Constraints
Constraints
Five Steps to Improve Performance
1. Identify the organizations constraint(s).
2. Exploit the binding constraint(s).
3. Subordinate everything else to the
decisions made in Step 2.
4. Elevate the binding constraint(s).
5. Repeat the process.

19 -36

Drum-Buffer-Rope
Drum-Buffer-Rope System
System
Materials

Rope

Initial Process

Process C

Process A

Final Process

Process B
Time

Buffer

Drummer
Process

Finished Goods

19 -37

Drum-Buffer-Rope
Drum-Buffer-Rope System
System
Material for 12 Parts per Day
(Part X: 6 and Part Y: 6)

Confer
Confer
Company
Company
Rope

Time
12 Units
Part X

Finished Goods
6 Units Part X per Day
6 Units Part Y per Day

Grinding
Process
DRUMMER
Drilling
Process
Polishing
Process

Buffer
12 Units
Part Y

19 -38

Chapter Nineteen

The
The End
End

19 -39