Why is Inventory Important Inventory at Successive Stocking

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Why is Inventory Important?

Why is Inventory Important?

Inventory at Successive Stocking Points

Inventory at Successive Stocking Points

Water Tank Analogy Flow of Receipts (Raw Materials & Parts) Inventory Level Scrap or

Water Tank Analogy Flow of Receipts (Raw Materials & Parts) Inventory Level Scrap or Reject Flow Demand Flow (Finished Goods)

Outflow exceeds Inflow Demand Flow (Finished Goods) Flow of Receipts (Raw Materials & Parts)

Outflow exceeds Inflow Demand Flow (Finished Goods) Flow of Receipts (Raw Materials & Parts) Scrap or Reject Flow

Inflows exceed Outflows Demand Flow (Finished Goods) Flow of Receipts (Raw Materials & Parts)

Inflows exceed Outflows Demand Flow (Finished Goods) Flow of Receipts (Raw Materials & Parts) Scrap or Reject Flow

Types of Demand Independent • Item’s demand is influenced ONLY by market conditions and

Types of Demand Independent • Item’s demand is influenced ONLY by market conditions and is NOT related to production decisions for any other items. • Only end items • Demand must be forecast Examples – Cars, TVs, Bicycles, Number of Seats in a restaurant

Types of Demand Dependent • Item’s demand derives from the production decisions of its

Types of Demand Dependent • Item’s demand derives from the production decisions of its parents. • All intermediate and purchased items in manufacturing • Demand should be derived Examples – Car doors, Tv remotes, Bicycle tires, Number of T-bones for a given night

A Bill of Materials A B(3) C(2) D(3) E(2) G(1) C(1) F(2)

A Bill of Materials A B(3) C(2) D(3) E(2) G(1) C(1) F(2)

Pressures for Small Inventories • • • Interest/Opportunity Cost Storage and handling Property Taxes

Pressures for Small Inventories • • • Interest/Opportunity Cost Storage and handling Property Taxes Insurance premiums Shrinkage Spoilage

Pressures for Large Inventories • • • Customer Service Order/Setup Cost Labor/Equipment Utilization Transportation

Pressures for Large Inventories • • • Customer Service Order/Setup Cost Labor/Equipment Utilization Transportation Cost of Materials/Quantity Discounts

The Gaming Co.

The Gaming Co.

How Much? When!

How Much? When!

Annual cost (dollars) Economic Order Quantity Lot Size (Q)

Annual cost (dollars) Economic Order Quantity Lot Size (Q)

Annual cost (dollars) Economic Order Quantity Holding cost (HC) Lot Size (Q)

Annual cost (dollars) Economic Order Quantity Holding cost (HC) Lot Size (Q)

Annual cost (dollars) Economic Order Quantity Holding cost (HC) Ordering cost (OC) Lot Size

Annual cost (dollars) Economic Order Quantity Holding cost (HC) Ordering cost (OC) Lot Size (Q)

Economic Order Quantity Annual cost (dollars) Total cost = HC + OC Holding cost

Economic Order Quantity Annual cost (dollars) Total cost = HC + OC Holding cost (HC) Ordering cost (OC) Lot Size (Q)

Economic Order Quantity Annual cost (dollars) 3000 — Total cost = Q D (H)

Economic Order Quantity Annual cost (dollars) 3000 — Total cost = Q D (H) + (S) 2 Q 2000 — Holding cost = Q (H) 2 1000 — Ordering cost = 0— | 50 | 100 | 150 | 200 | 250 Lot Size (Q) | 300 | 350 | 400 D (S) Q

Economic Order Quantity Annual cost (dollars) 3000 — Total cost = 2000 — Q

Economic Order Quantity Annual cost (dollars) 3000 — Total cost = 2000 — Q D (H) + (S) 2 Q Birdfeeder costs(Current System) D = (18 /week)(52 weeks) = 936 units H = 0. 25 ($60/unit) = $15 S = $45 Q = 390 units Holding cost = Q (H) 2 1000 — Q D C= (H) + (S) 2 Q 0— | 50 | 100 | 150 Ordering cost = | 200 | 250 Lot Size (Q) | 300 | 350 | 400 D (S) Q

Economic Order Quantity Annual cost (dollars) 3000 — Total cost = 2000 — Q

Economic Order Quantity Annual cost (dollars) 3000 — Total cost = 2000 — Q D (H) + (S) 2 Q Birdfeeder costs (Current System) D = (18 /week)(52 weeks) = 936 units H = 0. 25 ($60/unit) = $15 S = $45 Q = 390 units Holding cost = Q (H) 2 1000 — Q D C= (H) + (S) 2 Q | | 0 — C = $2925 $3033 50 + $108 100 =150 200 Ordering cost = | 250 Lot Size (Q) | 300 | 350 | 400 D (S) Q

Economic Order Quantity Current cost Annual cost (dollars) 3000 — Total cost = 2000

Economic Order Quantity Current cost Annual cost (dollars) 3000 — Total cost = 2000 — Q D (H) + (S) 2 Q Birdfeeder costs D = (18 /week)(52 weeks) = 936 units H = 0. 25 ($60/unit) = $15 S = $45 Q = 390 units Holding cost = Q (H) 2 1000 — Q D C= (H) + (S) 2 Q | | 0 — C = $2925 $3033 50 + $108 100 =150 200 Ordering cost = | 250 Lot Size (Q) | 300 | 350 D (S) Q | 400 Current Q

Economic Order Quantity Current cost Annual cost (dollars) 3000 — Total cost = Q

Economic Order Quantity Current cost Annual cost (dollars) 3000 — Total cost = Q D (H) + (S) 2 Q 2000 — Holding cost = Q (H) 2 1000 — Ordering cost = 0— | 50 | 100 | 150 | 200 | 250 Lot Size (Q) | 300 | 350 D (S) Q | 400 Current Q

Economic Order Quantity Current cost Annual cost (dollars) 3000 — Birdfeeder costs (Optimal) Q

Economic Order Quantity Current cost Annual cost (dollars) 3000 — Birdfeeder costs (Optimal) Q D Total cost = D(H) + /week)(52 (S) = (18 weeks) = 936 units 2 Q H = 0. 25 ($60/unit) = $15 S = $45 Q = EOQ 2000 — EOQ = Q Holding cost = Q D(H) 2 DS 2 C= (H) + (S) 2 H Q 1000 — Ordering cost = 0— | 50 | 100 | 150 | 200 | 250 Lot Size (Q) | 300 | 350 D (S) Q | 400 Current Q

Economic Order Quantity Current cost Annual cost (dollars) 3000 — Birdfeeder costs (Optimal) Q

Economic Order Quantity Current cost Annual cost (dollars) 3000 — Birdfeeder costs (Optimal) Q D Total cost = D(H) + /week)(52 (S) = (18 weeks) = 936 units 2 Q H = 0. 25 ($60/unit) = $15 S = $45 Q = 75 units 2000 — EOQ = Q Holding cost = Q D(H) 2 DS 2 C= (H) + (S) 2 H Q 1000 — Ordering cost = 0— | 50 | 100 | 150 | 200 | 250 Lot Size (Q) | 300 | 350 D (S) Q | 400 Current Q

Economic Order Quantity Current cost Annual cost (dollars) 3000 — Birdfeeder costs (Optimal) Q

Economic Order Quantity Current cost Annual cost (dollars) 3000 — Birdfeeder costs (Optimal) Q D Total cost = D(H) + /week)(52 (S) = (18 weeks) = 936 units 2 Q H = 0. 25 ($60/unit) = $15 S = $45 Q = 75 units 2000 — EOQ = 1000 — Q Holding cost = Q D(H) 2 DS 2 C= (H) + (S) 2 H Q C = $562 + $562 = $1124 Ordering cost = 0— | 50 | 100 | 150 | 200 | 250 Lot Size (Q) | 300 | 350 D (S) Q | 400 Current Q

Economic Order Quantity Current cost Annual cost (dollars) 3000 — Birdfeeder costs (Optimal) Q

Economic Order Quantity Current cost Annual cost (dollars) 3000 — Birdfeeder costs (Optimal) Q D Total cost = D(H) + /week)(52 (S) = (18 weeks) = 936 units 2 Q H = 0. 25 ($60/unit) = $15 S = $45 Q = 75 units 2000 — EOQ = 1000 — Q Holding cost = Q D(H) 2 DS 2 C= (H) + (S) 2 H Q C = $562 + $562 = $1124 Ordering cost = 0— | 50 | 100 | 150 | 200 | 250 Lot Size (Q) | 300 | 350 D (S) Q | 400 Current Q

Economic Order Quantity Current cost Annual cost (dollars) 3000 — Birdfeeder costs (Optimal) Q

Economic Order Quantity Current cost Annual cost (dollars) 3000 — Birdfeeder costs (Optimal) Q D Total cost = D(H) + /week)(52 (S) = (18 weeks) = 936 units 2 Q H = 0. 25 ($60/unit) = $15 S = $45 Q = 75 units 2000 — EOQ = 1000 — Q Holding cost = Q D(H) 2 DS 2 C= (H) + (S) 2 H Q C = $562 + $562 = $1124 Ordering cost = Lowest cost 0— | 50 Best Q (EOQ) | 100 | 150 | 200 | 250 Lot Size (Q) | 300 | 350 D (S) Q | 400 Current Q

Economic Order Quantity Current cost Annual cost (dollars) 3000 — Total cost = Q

Economic Order Quantity Current cost Annual cost (dollars) 3000 — Total cost = Q D (H) + (S) 2 Q 2000 — Holding cost = Q (H) 2 1000 — Ordering cost = Lowest cost 0— | 50 Best Q (EOQ) | 100 | 150 | 200 | 250 Lot Size (Q) | 300 | 350 D (S) Q | 400 Current Q

Five Assumptions of the EOQ • • CONSTANT demand rate Two relevant COSTS Item

Five Assumptions of the EOQ • • CONSTANT demand rate Two relevant COSTS Item INDEPENDENCE CERTAINTY in demand, lead time and supply • Whole LOTS

Realistic? • No Way. . . • . . . . BUT, since EOQ

Realistic? • No Way. . . • . . . . BUT, since EOQ is relatively insensitive to errors, IT WORKS ANYWAY!

How Much? When!

How Much? When!

On-hand inventory Reorder Point Order received Q OH R Time

On-hand inventory Reorder Point Order received Q OH R Time

Reorder Point On-hand inventory IP Order received Q OH R Order placed L TBO

Reorder Point On-hand inventory IP Order received Q OH R Order placed L TBO

Reorder Point IP On-hand inventory IP Order received Q Q OH OH R Order

Reorder Point IP On-hand inventory IP Order received Q Q OH OH R Order placed L TBO Time

Reorder Point On-hand inventory IP IP Order received Q OH R Order placed L

Reorder Point On-hand inventory IP IP Order received Q OH R Order placed L 1 TBO 1 L 2 TBO 2 L 3 TBO 3 Time

Reorder Point / Safety Stock Lower Florida Keys Health System Basic Surgery Cart Demand

Reorder Point / Safety Stock Lower Florida Keys Health System Basic Surgery Cart Demand During Lead Time (units) 100 200 300 400 500 600 Probability 0. 10 0. 15 0. 20 0. 25 0. 05

Reorder Point / Safety Stock Lower Florida Keys Health System Basic Surgery Cart Demand

Reorder Point / Safety Stock Lower Florida Keys Health System Basic Surgery Cart Demand During Lead Time (units) 100 200 300 400 500 600 Probability 0. 10 0. 15 0. 20 0. 25 0. 05 Cumulative Probability 0. 10 0. 25 . 045 0. 70 0. 95 1. 00

Reorder Point / Safety Stock Lower Florida Keys Health System Basic Surgery Cart Demand

Reorder Point / Safety Stock Lower Florida Keys Health System Basic Surgery Cart Demand During Lead Time (units) 100 200 300 400 500 600 Probability 0. 10 0. 15 0. 20 0. 25 0. 05 Cumulative Probability 0. 10 0. 25 . 045 0. 70 0. 95 1. 00 Desired Cycle-Service Level = 95%

Reorder Point / Safety Stock Lower Florida Keys Health System Basic Surgery Cart Demand

Reorder Point / Safety Stock Lower Florida Keys Health System Basic Surgery Cart Demand During Lead Time (units) 100 200 300 400 500 600 Probability 0. 10 0. 15 0. 20 0. 25 0. 05 Cumulative Probability 0. 10 0. 25 . 045 0. 70 0. 95 1. 00 Desired Cycle-Service Level = 95% Reorder Point = 500 units

Reorder Point / Safety Stock Lower Florida Keys Health System Basic Surgery Cart Demand

Reorder Point / Safety Stock Lower Florida Keys Health System Basic Surgery Cart Demand During Lead Time (units) 100 200 300 400 500 600 Probability 0. 10 0. 15 0. 20 0. 25 0. 05 Cumulative Probability 0. 10 0. 25 . 045 0. 70 0. 95 1. 00 Desired Cycle-Service Level = 95% Reorder Point = 500 units

Reorder Point / Safety Stock Lower Florida Keys Health System Basic Surgery Cart Demand

Reorder Point / Safety Stock Lower Florida Keys Health System Basic Surgery Cart Demand During Safety 100 stock 200 = Reorder Lead Time (units) 300 point 400 - DDLT 500 Probability Cumulative Probability 600 DDLT 0. 10 = 100(0. 10) 200(0. 15) 0. 15 +0. 20 0. 25. . . 600(0. 05) 0. 25 0. 05 = 355 units Safety stock 0. 25 = 500. 045 - 355 =0. 70 145 units 0. 10 0. 95 Desired Cycle-Service Level = 95% Reorder Point = 500 units 1. 00

Reorder Point / Safety Stock Cycle-service level = 85% Probability of stockout (1. 0

Reorder Point / Safety Stock Cycle-service level = 85% Probability of stockout (1. 0 - 0. 85 = 0. 15) Average demand during lead time R z L

Reorder Point / Safety Stock Demand during lead time = 36 units On-hand inventory

Reorder Point / Safety Stock Demand during lead time = 36 units On-hand inventory L = 15 Cycle/service level = 90% R Time

Reorder Point / Safety Stock Demand during lead time = 36 units L =

Reorder Point / Safety Stock Demand during lead time = 36 units L = 15 Cycle/service level = 90% On-hand inventory z = 1. 28 Safety stock = z L = 19. 2 20 R Reorder point = 36 + 20 = 56 Time

Reorder Point / Safety Stock Demand during lead time = 36 units L =

Reorder Point / Safety Stock Demand during lead time = 36 units L = 15 Cycle/service level = 90% On-hand inventory z = 1. 28 Safety stock = z L = 19. 2 20 56 Reorder point = 36 + 20 = 56 Time

Reorder Point / Safety Stock Demand during lead time = 36 units On-hand inventory

Reorder Point / Safety Stock Demand during lead time = 36 units On-hand inventory L = 15 When Cycle/service level = 90% L not given, but L and t are known: L = t L z = 1. 28 Safety stock = z L = 19. 2 19 55 Reorder point = 36 + 19 = 55 Time

Current Practice Papers

Current Practice Papers