Supply Chain Management: Indian Institute of Management Lucknow

Supply Chain Management
Inventory Management and Control
Indian Institute of Management

Lucknow
ABC Analysis
Divides inventory into three classes based on
annual monetary volume
Class A - high annual rupee volume
Class B - medium annual rupee volume
Class C - low annual rupee volume
Used to establish policies that focus on the few

critical parts and not the many trivial ones
1/13/2016
ABC Analysis
Item
Stock
Number
Percent of
Number of
Items
Stocked
#10286
20%
Annual
Volume
(units)
Unit
Cost
Annual
Dollar
Volume
1,000
$ 90.00
$ 90,000
#11526
500
154.00
#12760
1,550
#10867
#10500
1/13/2016
30%
Percent of
Annual
Dollar
Volume
Class
38.8% 72%
77,000
33.2%
17.00
26,350
11.3%
350
42.86
15,001
6.4% 23%
1,000
12.50
12,500
5.4%
ABC Analysis
Item
Stock
Number
Percent of
Number of
Items
Stocked
Annual
Volume
(units)
Unit
Cost
Annual
Dollar
Volume
Percent of
Annual
Dollar
Volume
Class
#12572
600
$ 14.17
$ 8,502
3.7%
#14075
2,000
.60
1,200
.5%
100
8.50
850
.4%
#01307
1,200
.42
504
.2%
#10572
250
.60
150
.1%
#01036
1/13/2016
50%
5%
Percent of annual dollar usage
ABC Analysis
80
70
60
50
40
30
20
10
0
A Items
B Items
C Items
|
10
20
30
40
50
60
70
80
Percent of inventory items

1/13/2016
90 100
Figure 11.2
5
Criteria other than annual rupee volume

Anticipated engineering changes
Delivery problems
Quality problems
High unit cost
1/13/2016
ABC Analysis Policy Implications

Policies employed shouldy include
More emphasis on supplier development for A
items
Tighter physical inventory control for A items
More care in forecasting A items
1/13/2016
Record Accuracy
Accurate records are a critical ingredient in production

and inventory systems
Allow organization to focus on what is needed
Necessary to make precise decisions about ordering,

scheduling, and shipping
Incoming and outgoing record keeping must be

accurate
Stockrooms should be secure

1/13/2016
Cycle Counting and PIC
Items are counted and records updated on a periodic basis
Often used with ABC analysis to determine cycle

Trained personnel audit inventory accuracy
Offers several advantages

Eliminates shutdowns and interruptions
Eliminates annual inventory adjustment
Allows causes of errors to be identified and corrected
Maintains accurate inventory records
1/13/2016
Cycle Counting Example

5,000 items in inventory, 500 A items, 1,750 B items, 2,750 C items
Policy is to count A items every month (20 working days), B items
every quarter (60 days), and C items every six months (120 days)
Item
Class
Quantity
500
Each month
1,750
Each quarter
2,750
Every 6 months
Cycle Counting Policy
Number of Items
Counted per Day
500/20 = 25/day
25/day
1,750/60 = 29/day
29/day
2,750/120 = 23/day
23/day
77/day
77/
day
1/13/2016
10
Exercise
Woodywood Furnitures has 5200 items in inventory. The owner
has identified that 9% items are in A category and 36% items are
in B category. She would like to establish a system in which all A
items are counted every 4 weeks, B items are counted every 13
weeks and C items are counted every 26 weeks. Calculate the
number of items to be counted each week.
5200 0.09 = 468
468 4= 117
117A items per day
5200 0.36= 1872
1872 13 = 144
144 B items per day
5200 0.55 = 2850
2860 26 = 110
110 C items per day
371 items
1/13/2016
11
Control of Service Inventories
Can be a critical component of profitability
Losses may come from shrinkage or pilferage
Applicable techniques include
Good personnel selection, training, and discipline
Tight control on incoming shipments
Effective control on all goods leaving facility
1/13/2016
12
Independent vs Dependent Demand

Independent demand - the demand for item is
independent of the demand for any other item
in inventory
Dependent demand - the demand for item is
dependent upon the demand for some other
item in the inventory
1/13/2016
13
Holding Costs
Category
Housing costs (including rent or depreciation,
operating costs, taxes, insurance)
Cost (and Range) as

a Percent of
Inventory Value
6% (3 - 10%)
Material handling costs (equipment lease or

depreciation, power, operating cost)
3% (1 - 3.5%)
Labour cost
3% (3 - 5%)
Investment costs (borrowing costs, taxes, and

insurance on inventory)
Pilferage, space, and obsolescence
11% (6 - 24%)
3% (2 - 5%)
26%
Overall carrying cost
Table 11.1
1/13/2016
14
Inventory Models for Independent Demand

Need to determine when and how much to order
Basic economic order quantity
Production order quantity
Quantity discount model
1/13/2016
15
Assumptions in Basic EOQ Model

1. Demand is known, constant, and independent
2. Lead time is known and constant
3. Receipt of inventory is instantaneous and complete
4. Quantity discounts are not possible
5. Only variable costs are setup and holding
6. Stockouts can be completely avoided
1/13/2016
16
Inventory level
Inventory Usage Over Time
Order quantity
= Q (maximum
inventory
level)
Usage rate
Average
inventory on
hand
Q
2
Minimum
inventory
Time
Figure 11.3
1/13/2016
17
Minimizing Costs
Objective is to minimize total costs
Annual cost
Curve for total

cost of holding
and setup
Table 11.4
1/13/2016
Holding cost
curve
Minimum
total cost
Setup (or order)

cost curve
Optimal order
quantity
Order quantity
18
The EOQ Model

D
Annual setup cost = S Q
Q
Q*
D
S
H
= Number of pieces per order

= Optimal number of pieces per order (EOQ)
= Annual demand in units for the Inventory item
= Setup or ordering cost for each order
= Holding or carrying cost per unit per year
Annual setup cost =
(Number of orders placed per year)

x (Setup or order cost per order)
Annual demand
Number of units in each order
D
(S)
Q
1/13/2016
Setup or order
cost per order
19
The EOQ Model

D
Q
Q*
D
S
H
Q
Annual holding cost =
H
2

Annual holding cost = (Average inventory level)

x (Holding cost per unit per year)
Order quantity
=
2
=
1/13/2016
(Holding cost per unit per year)
Q (H)
2
20
The EOQ Model

D
Q
Q*
D
S
H
Annual holding cost = H

Q
2
Optimal order quantity is found when annual setup cost

equals annual holding cost
D
Q
S =
H
Q
2
Solving for Q* 2DS = Q2H
Q2 = 2DS/H
Q* =
1/13/2016
2DS/H
21
An EOQ Example
Determine optimal number of hypodermic needles to order
D = 1,000 units
S = $10 per order
H = $.50 per unit per year
Q* =
2DS
H
Q* =
2(1,000)(10)
0.50
1/13/2016
= 40,000 = 200 units
22
An EOQ Example
Determine optimal number of needles to order
D = 1,000 units
Q* = 200 units
S = $10 per order
Expected
Demand
D
number of = N =
=
Order
quantity
Q*
orders
1,000
N=
= 5 orders per year
200
1/13/2016
23
An EOQ Example
D = 1,000 units
Q* = 200 units
S = $10 per order
N = 5 orders per year
Number of working
Expected time
days per year
between orders = T =
N
T=
1/13/2016
250
5
= 50 days between orders
24
An EOQ Example
D = 1,000 units
Q* = 200 units
S = $10 per order
T = 50 days
Total annual cost = Setup cost + Holding cost
D
Q
TC =
S +
H
Q
2
1,000
200
TC =
($10) +
($.50)
200
2
TC = (5)($10) + (100)($.50) = $50 + $50 = $100
1/13/2016
25
Robust Model
The EOQ model is robust because
It works even if all parameters and assumptions
are not met
The total cost curve is relatively flat in the area
of the EOQ
1/13/2016
26
EOQ Robustness Example

Management underestimated demand by 50%
D = 1,000 units 1,500 units
Q* = 200 units
S = $10 per order
T = 50 days
D
Q
TC =
S +
H
Q
2
1,500
200
TC =
($10) +
($.50) = $75 + $50 = $125
200
2
Total annual cost increases by only 25%
1/13/2016
27
...Example
Actual EOQ for new demand is 244.9 units
D = 1,000 units 1,500 units
Q* = 244.9 units
S = $10 per order
T = 50 days
D
Q
TC =
S +
H
Q
2
1,500
244.9
TC =
($10) +
($.50)
244.9
2
TC = $61.24 + $61.24 = $122.48
1/13/2016
Only 2% less
than the total cost
of $125 when the
order quantity
was 200
28

Supply Chain Management: Indian Institute of Management Lucknow

Transféré par

Informations du document

Description originale:

Titre original

Copyright

Formats disponibles

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

Formats disponibles

Supply Chain Management: Indian Institute of Management Lucknow

Transféré par

Droits d'auteur :

Formats disponibles

Supply Chain Management

Inventory Management and Control

Indian Institute of Management

Used to establish policies that focus on the few