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Inventory Management

Inventory Management. Why is it necessary to have inventories?. To achieve transportation economies To achieve production economies To take advantage of quantity purchase discounts To maintain a source of supply To support the firm ’ s customer service policies.

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Inventory Management

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  1. Inventory Management

  2. Why is it necessary to have inventories? • To achieve transportation economies • To achieve production economies • To take advantage of quantity purchase discounts • To maintain a source of supply • To support the firm’s customer service policies

  3. Why is it necessary to have inventories? • To meet changing market conditions (e.g. seasonality, demand fluctuations, competition.) • To overcome the time and space differentials that exist between producers and consumers • To accomplish least total cost physical distribution commensurate with a desired level of customer service

  4. Functional Types of Inventory • In-transit stock (stock for delivery to customer) • Cycle stock (production stock within a production warehouse) • Safety stock (for unpredictable daily or weekly fluctuation in demand, also called buffer stock) • Speculative stock (materials brought forward for financial or supply reasons, or finished stock that is pre-planned for expected future increase in demand)

  5. Basic Economic Order Quantity (EOQ) • The EOQ concept is based on minimizing the total annual inventory stocking cost (TSC). The EOQ is considered to be the sum of the annual carrying costs and the annual ordering costs, thus: • TSC = Annual carrying cost + annual ordering cost

  6. Basic EOQ • Inventory is consumed at an uniform rate; when the level reaches a certain level (the order point). An order is placed with the supplier. • The supplier delivers the whole order at the end of the lead time (LT) • Since the level of inventory at the time of receiving order is zero, the inventory builds up instantaneously to the order quantity (Q), which becomes the maximum inventory.

  7. A continuous, constant, and known rate of demand. A constant and known replenishment cycle or lead time. A constant purchase price that is independent of the order quantity or time. A constant transportation cost that is independent of the order quantity or time. Assumptions of the Simple EOQ Mode

  8. Assumptions of the Simple EOQ Model • The satisfaction of all demand (no stockouts are permitted). • No inventory in transit. • Only one item in inventory, or at least no interaction among items. • An infinite planning horizon. • No limit on capital availability.

  9. The EOQ Model • S=The ordering cost (Dollars per order) • D=Annual demand or usage of the product (Number of units) • C=Annual inventory carrying cost (As a percentage of product cost or value) • V=Average cost or value of one unit of inventory

  10. Factors Influencing Safety Stocks • Forecast Error • Exposure to stock-out • Lead Time • Service Level Requirement

  11. The Use of Safety Stock Inventory On Hand Time Stock-out

  12. The Use of Safety Stock Inventory On Hand Stock-out is avoided Safety Stock Time

  13. Cost Trade-offs Required to Determine the Most Economic Order Quantity

  14. Cost Trade-offs Required to Determine the Most Economic Order Quantity

  15. Others: Inventory Management • Material Requirement Planning (MRP) • Supplying materials and component parts demand depends on the demand of specific end products. • Translate master production schedule into time-phased net inventory requirements and satisfy those requirements.

  16. Others: Inventory Management • Material Resources Planning (MPRII) • Includes input from the finance and marketing department. It focus on available resources such as labour hour, cost, computer…etc.

  17. Others: Inventory Management • Just-in-time Inventory (JIT) • Production quantities are ideally equal to delivery quantities. • Material purchased and finished goods delivered just in time to be used. • Achieve Five Rights: • Right Goods, Right Quantity, Right Time, Right Place and Right Condition.

  18. Others: Inventory Management • Distribution Resources Planning (DRP) • Vendor Managed Inventory (VMI / JIT II) • Integrated Inventory Management • …

  19. Question and Answer Session

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