Quản trị kinh doanh - Inventory management

Inventory ManagementLearning outcomesAt the end of this lecture, students should be able toDefine inventoryUnderstand the various types of inventoryUnderstand the reasons for keeping inventoryUnderstand the inventory models (EOQ, POQ, QD)Managing Facilitating GoodsFactoryWholesalerDistributorRetailerCustomerReplenishment orderReplenishment orderReplenishment orderCustomer orderProduction DelayWholesalerInventoryShipping DelayShipping DelayDistributorInventoryRetailerInventoryItem WithdrawnWhat is inventory?Inventory is the raw materials, component parts, work-in-process, or finished products that are held at a location in the supply chain.Inventory decisions are high-risks and high-impacts from the perspective of logistics operationsInventory management is important to avoid under-stocking or over-stocking.What are the two main issues that need attention to ensure proper management of inventory level?Order Quantity- how much to order (EOQ/lot sizes)Order Points- when to place an order (Reorder point)Types of InventoryRaw materialPurchased but not processedWork-in-processUndergone some change but not completedA function of cycle time for a productMaintenance/repair/operating (MRO)Necessary to keep machinery and processes productiveFinished goodsCompleted product awaiting shipment Type of Inventory Type of Organization Supplies Raw In-Process Finished Materials Goods GoodsA. Retail systems 1. Sale of goods 2. Sale of services B. Wholesale / Distribution systems C. Manufacturing systems 1. Special project 2. Intermittent process . 3. Continuous process a. Process industries b. Repetitive mfging. ***************The Need for keeping Stock? To cater for both demand and supplyAs safety / protection (physical protection, against supplier uncertainty and non-forecasted demand)In anticipation of demandImprove customer serviceTo maintain independence of supply chainUnplanned shocks (labor strikes, natural disasters, surges in demand, etc.)Economies of purchasingEconomies of productionReasons Against InventoryNon-value added costsOpportunity costComplacencyInventory deteriorates, becomes obsolete, lost, stolen, etc.Elements of inventory CostItem costs:Per unit item cost is determine by the source in which it was obtainedExternal source- purchase price paid for the itemSometimes includes additional charges like duties, insuranceInternal source- composed of labour and material cost and any other factory overheadHolding costs/ carrying costs:Any items that are held as inventory will incur cost such asCost of storage facility (insurance, security, warehouse rental, cooling, handling equipment, labour)Other costs such as damage to, theft of, deteoriation of, obsolescence of the held itemsOrdering costs:Anytime inventory items are ordered, there is a fixed cost associated with placing that order.It includes the cost of the clerical work to prepare, release, monitor and receive the orderShortage costs:It occurs whenever the demand for an item exceed the available inventory.Costs incur in the form of lost sales, loss of goodwill, customer irritation, etcUnderstocking (too few) results in missed deliveries, lost sales, dissatisfied customers, and production bottlenecks (idle workers or machines). Resulting underage cost.Overstocking (too many) ties up funds that might be more productive elsewhere. Resulting overage cost.Goal: matching supply with demand!Inadequate control of inventories can result in both under- and overstocking of items.Why control inventory?Objectives of Inventory Control1) Maximize the level of customer service by avoiding understocking.2) Promote efficiency in production and purchasing by minimizing the cost of providing an adequate level of customer service.How do you manage your inventory?How much do you buy? When?SodaMilk Toilet paperGasCerealCashRe-order pointEOQABC AnalysisInventory Models for Independent DemandBasic economic order quantityProduction order quantityQuantity discount modelNeed to determine when and how much to orderBasic EOQ ModelDemand is known, constant, and independentLead time is known and constantReceipt of inventory is instantaneous and completeQuantity discounts are not possibleOnly variable costs are setup and holdingStockouts can be completely avoidedImportant assumptionsInventory Usage Over TimeOrder quantity = Q (maximum inventory level)Inventory levelTimeUsage rateAverage inventory on handQ2Minimum inventoryMinimizing CostsObjective is to minimize total costsAnnual costOrder quantityCurve for total cost of holding and setupHolding cost curveSetup (or order) cost curveMinimum total costOptimal order quantityThe EOQ Model Q = Number of pieces per order Q* = Optimal number of pieces per order (EOQ) A = Annual demand in units for the Inventory item Co = Setup or ordering cost for each order Cc = Holding or carrying cost per unit per yearAnnual setup cost = (Number of orders placed per year) x (Setup or order cost per order)Annual demandNumber of units in each orderSetup or order cost per order== (Co)AQAnnual setup cost = CoAQThe EOQ Model Q = Number of pieces per order Q* = Optimal number of pieces per order (EOQ) A = Annual demand in units for the Inventory item Co = Setup or ordering cost for each order Cc = Holding or carrying cost per unit per yearAnnual holding/carrying cost = (Average inventory level) x (Holding cost per unit per year)Order quantity2= (Holding cost per unit per year)= (Cc)Q2Annual setup cost = CoAQAnnual holding cost = CcQ2The EOQ Model Q = Number of pieces per order Q* = Optimal number of pieces per order (EOQ) A = Annual demand in units for the Inventory item Co = Setup or ordering cost for each order Cc = Holding or carrying cost per unit per yearOptimal order quantity is found when annual setup cost equals annual holding costAnnual setup cost = CoAQAnnual holding cost = CcQ2AQCo = CcQ2Solving for Q*2ACo = Q2CcQ2 = 2ACo/CcQ* = 2ACo/CcThis is called Wilson’s Square root FormulaAn EOQ ExampleDetermine optimal number of needles to orderA = 1,000 unitsCo = $10 per orderCc = $.50 per unit per yearQ* =2ACoCcQ* =2(1,000)(10)0.50= 40,000 = 200 unitsAn EOQ ExampleDetermine optimal number of needles to orderA = 1,000 units Q* = 200 unitsCo = $10 per orderCc = $.50 per unit per year= N = =Expected number of ordersDemandOrder quantityAQ*N = = 5 orders per year 1,000200An EOQ ExampleDetermine optimal number of needles to orderA = 1,000 units Q* = 200 unitsCo = $10 per order N = 5 orders per yearCc = $.50 per unit per year= T =Expected time between ordersNumber of working days per yearNT = = 50 days between orders2505An EOQ ExampleDetermine optimal number of needles to orderA = 1,000 units Q* = 200 unitsCo = $10 per order N = 5 orders per yearCc = $.50 per unit per year T = 50 daysTotal annual cost = Setup cost + Holding costTC = Co + CcAQQ2TC = ($10) + ($.50)1,0002002002TC = (5)($10) + (100)($.50) = $50 + $50 = $100Robust ModelThe EOQ model is robustIt works even if all parameters and assumptions are not metThe total cost curve is relatively flat in the area of the EOQReorder PointsEOQ answers the “how much” questionThe reorder point (ROP) tells when to orderROP =Lead time for a new order in daysDemand per day= d x Ld = DNumber of working days in a yearLead-TimeLead-Time is the time taken between effecting an order and the item’s availabilityIt can occur both within and outside the business.It is a continuous process which entails a number of activities.Reorder Point CurveQ*ROP (units)Inventory level (units)Time (days)Lead time = LSlope = units/day = dReorder Point ExampleDemand = 8,000 DVDs per year250 working day yearLead time for orders is 3 working daysROP = d x Ld = DNumber of working days in a year= 8,000/250 = 32 units= 32 units per day x 3 days = 96 unitsProduction Order Quantity ModelUsed when inventory builds up over a period of time after an order is placedUsed when units are produced and sold simultaneouslyProduction Order Quantity ModelInventory levelTimeDemand part of cycle with no productionPart of inventory cycle during which production (and usage) is taking placetMaximum inventoryProduction Order Quantity Model Q = Number of pieces per order p = Daily production rate Cc = Holding cost per unit per year d = Daily demand/usage rate A = Annual demand Setup cost = (A/Q)Co Holding cost = 1/2 CcQ[1 - (d/p)](A/Q)Co = 1/2 CcQ[1 - (d/p)]Q2 =2ACoCc[1 - (d/p)]Q* =2ACoCc[1 - (d/p)]Production Order Quantity Example A = 1,000 units p = 8 units per day Co = $10 d = 4 units per day Cc = $0.50 per unit per yearQ* =2ACoCc[1 - (d/p)]= 282.8 or 283 hubcapsQ* = = 80,0002(1,000)(10)0.50[1 - (4/8)]Quantity Discount ModelsReduced prices are often available when larger quantities are purchasedTrade-off is between reduced product cost and increased holding costTotal cost = Setup cost + Holding cost + Product costTC = Co + + PDAQQCc2ExampleSandra buys 20,000 jeans every year from Emmanuel. The ordering cost per order is GHC100 and the carrying cost is GHC1 per unit per year. The price of a jeans is GHC5. Emmanuel offers a 5% discount if purchases are made in lots of 10,000 jeans or more. Determine whether the discount model is better than the EOQ model in this situationSolnA=20,000, Co=GHC100/order, Cc=GHC1/unit/year, price per unit=GHC5EOQ ModelTotal Cost(by EOQ model)= (A/Q)Co + (Q/2)Cc + cost of jeansTC=(20,000/2000)*100 + (2000/2)*1 + 20,000*5 =GHC102,000Q* =2ACoCcQ* =2(20,000)(100)1.0= 4,000,0 00 = 2000 unitsDiscount Model:A=20,000 jeans. Therefore, two orders (of 10,000 jeans each) can be placed to get 20,000 jeans in a yearCost of 20,000 jeans = GHC100,000Discount @ 5%=5% of GHC100,000 =GHC5,000Therefore,The net cost of 20,000 jeans after discount = GHC100,000-GHC5,000 = GHC95,000Total cost (after discount) = (A/Q)Co + (Q/2)Cc + cost of jeans after discount=(20,000/10,000)*100 + (10,000/2)*1 + 95,000=GHC100,200Hence the discount model should be implemented39Akpe na mi!