UMMC – Supply Chain Mgmt.

Course 6

Inventory Management 2

Course List

• • • • • • • • • Intro to SC Concepts Financials Logistics and Distribution Purchasing Inventory Management 1

Inventory Management 2

SC Technology Production Management Quality Control and Improvement

Inventory – Course 2

• Review of Course 1 Material • Inventory Decision Making • Determining Order Quantity • Determining Order Point • ABC Analysis • Periodic Inventory • Fixed Order Point • Perpetual Inventory • Fixed Order Quantity • Hybrid • Two Bin/Kan-ban

Review of Course 1

• • • • • • •

Types of Inventory Management Systems

Reorder point systems (Fixed order quantity systems) • • time between orders varies constant order quantity Periodic review systems (Fixed order period systems) • • time between orders fixed order quantity varies Hybrid Models Perpetual Tracking   Demand Driven (count how many leave inventory) Requires system to monitor & track continuously Physical Counts (Periodic System) Two-Bin System Material requirements planning (MRP) • dependent demand items

Reorder Point System

Lead Time

Time

Known as the Sawtooth model Reorder Point: When to order Safety Stock: How much to keep aside for unexpected Order Quantity: How much to order Lead Time: time from order placement to order receipt Order Point Safety Stock

Reorder Point

• • •

An is order placed when the on-hand inventory reaches a predetermined level (order point) Often used with the EOQ model Must allow enough stock to satisfy demand during the lead time (DDLT) Order point = demand during lead time + safety stock

OP = DDLT + SS

Reorder Point - Example Problem

Demand is 200 units per week, the lead time is three weeks, and the safety stock is 300 units. Calculate the order point.

OP = DDLT + SS = 200/wk x 3 weeks + 300 = 900 units

Order when the inventory falls below 900 units

Reorder Point

Points to Remember • Order quantities are usually fixed • Order intervals may vary • If the demand or the lead time changes the order point must be changed (or the safety stock will change) Average inventory = order quantity + safety stock 2

Fixed Order Quantity Systems

• • • • • • • Also known as Reorder point systems As demand for the inventoried item occurs, the inventory level drops When the inventory level drops to a critical point, the order point, the ordering process is triggered The amount ordered each time an order is placed is fixed or constant When the ordered quantity is received, the inventory level increases An application of this type system is the two-bin system A perpetual inventory accounting system is usually associated with this type of system

A Fixed Order Quantity System

Fixed Order Quantity Systems

• Using EOQ, fixed systems initiate replenishment orders when stock falls below a pre-determined (re-order) level • Re-order level is calculated as mean demand during the mean lead time, plus the safety stock • As a rough indicator, half the mean lead time usage can be taken as the safety stock (RoL = I.5DL) • Average stock levels stay more or less the same and are less responsive to changes in demand • There is a risk of stock outs with unexpected rising demand but outstanding re-supply orders can be chased • Risk of stock out is limited only to variations in demand in the lead-time period

PERPETUAL SYSTEM ADVANTAGES

• Efficient, meaningful order size • Safety stock need for lead time only • Relatively insensitive to forecast and parameter errors • Less attention on slow moving items

PERPETUAL INVENTORY SYSTEM

1. Variable Demand (slope) 2. Fixed reorder point B 3. Fixed reorder quantity AC 4. Fixed lead time DE = FG= HI 5. Variable time between orders DF FH

C B A 0 D E F G TIME SAFETY STOCK H I

PERPETUAL SYSTEM DISADVANTAGES

• Clerks may set order quantities • Lot sizes, reorder points, & safety stocks must be revised • Delays in posting transactions • Errors and mistakes in transactions • High freight and transportation charges • Fewer chances for dollar value discounts

Periodic Review System

• Also known as Reorder Cycle or Fixed Time System • We may need to set a maximum stock level or Par level (average demand + safety stock).

• At the routine re-order time current stock can be subtracted from the maximum to give the order quantity • Frequency of ordering could be based on EOQ • Safety stock must accommodate unexpected increases in demand and the risk of stock-out situation (higher level of safety stock) • Generally fixed time systems suit stock with stable/predictable demand patterns and low usage values

Periodic Review System

• As demand for the inventoried item occurs, the inventory level drops • When a prescribed period of time (EOP) has elapsed, the ordering process is triggered, i.e., the time between orders is fixed or constant • At that time the order quantity is determined using order quantity = upper inventory target - inventory level + EDDLT • After the lead time elapses, the ordered quantity is received , and the inventory level increases • The upper inventory level may be determined by the amount of space allocated to an item • This system is used where it is desirable to physically count inventory each time an order is placed

D C B 0 E

PERIODIC INVENTORY SYSTEM

1. Variable demand (slope) 2. Fixed review period FH =HJ 3. Variable reorder points C = B = D 4. Variable reorder quantities E-C 5. Variable lead time FG HI JK E-B E-D 6. Safety stock = OB (Reorder quantity = E - inventory level at review period

F G H I TIME SAFETY STOCK J K

Periodic Review System Without Considering On-Order Quantity

Single Period Inventory Models

• Order quantity decision covers only one period • Appropriate for perishable items, e.g., fashion goods, certain foods, magazines • Payoff tables may be used to analyze the decision under uncertainty • One of the following rules can be used in the analysis • greatest profit • least total expected long and short costs • least total expected costs

Hybrid Inventory Models

• Base stock model • Start with a certain inventory level • Whenever a withdrawal is made, an order of equal size is placed • Ensures that inventory maintained at an approximately constant level • Appropriate for very expensive items with small ordering costs

Hybrid Inventory Models

• • Optional replenishment model • Similar to the fixed order period model • Unless inventory has dropped below a prescribed level when the order period has elapsed, no order is placed • Protects against placing very small orders • Attractive when review and ordering costs are large . . . more

Two-bin Inventory System

• A variation of Fixed order quantity system • Uses two equally sized bins (bays, pallets, etc) • With the first bin empty, a new full bin is "called" to arrive before the second bin is exhausted • The ROL be thus be seen visually • With proper rotation system is efficient (little paperwork) • In a computerized environment the bins/pallets themselves can be bar coded and their movement/position and batch numbers of bin components can be traced