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1、Operations Management,Chapter 12 Inventory Management,PowerPoint presentation to accompany Heizer/Render Principles of Operations Management,7eOperations Management,9e,Outline,Global Company Profile:AFunctions of InventoryTypes of InventoryInventory ManagementABC AnalysisRecord AccuracyCycle Countin
2、gControl of Service Inventories,Outline Continued,Inventory ModelsIndependent vs.Dependent DemandHolding,Ordering,and Setup Costs,Outline Continued,Inventory Models for Independent DemandThe Basic Economic Order Quantity(EOQ)ModelMinimizing CostsReorder PointsProduction Order Quantity ModelQuantity
3、Discount Models,Outline Continued,Probabilistic Models and Safety StockOther Probabilistic ModelsFixed-Period(P)Systems,Learning Objectives,When you complete this chapter you should be able to:,Conduct an ABC analysisExplain and use cycle countingExplain and use the EOQ model for independent invento
4、ry demandCompute a reorder point and safety stock,Learning Objectives,When you complete this chapter you should be able to:,Apply the production order quantity modelExplain and use the quantity discount modelUnderstand service levels and probabilistic inventory models,A,A started as a“virtual”retail
5、er no inventory,no warehouses,no overhead;just computers taking orders to be filled by othersGrowth has forced A to become a world leader in warehousing and inventory management,A,Each order is assigned by computer to the closest distribution center that has the product(s)A“flow meister”at each dist
6、ribution center assigns work crewsLights indicate products that are to be picked and the light is resetItems are placed in crates on a conveyor.Bar code scanners scan each item 15 times to virtually eliminate errors.,A,Crates arrive at central point where items are boxed and labeled with new bar cod
7、eGift wrapping is done by hand at 30 packages per hourCompleted boxes are packed,taped,weighed and labeled before leaving warehouse in a truckOrder arrives at customer within a week,Inventory,One of the most expensive assets of many companies representing as much as 50%of total invested capitalOpera
8、tions managers must balance inventory investment and customer service,Functions of Inventory,To decouple or separate various parts of the production processTo decouple the firm from fluctuations in demand and provide a stock of goods that will provide a selection for customersTo take advantage of qu
9、antity discountsTo hedge against inflation,Types of Inventory,Raw 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 goodsComplete
10、d product awaiting shipment,The Material Flow Cycle,Figure 12.1,Inventory Management,How inventory items can be classifiedHow accurate inventory records can be maintained,ABC Analysis,Divides inventory into three classes based on annual dollar volumeClass A-high annual dollar volumeClass B-medium an
11、nual dollar volumeClass C-low annual dollar volumeUsed to establish policies that focus on the few critical parts and not the many trivial ones,ABC Analysis,ABC Analysis,ABC Analysis,Figure 12.2,ABC Analysis,Other criteria than annual dollar volume may be usedAnticipated engineering changesDelivery
12、problemsQuality problemsHigh unit cost,ABC Analysis,Policies employed may includeMore emphasis on supplier development for A itemsTighter physical inventory control for A itemsMore care in forecasting A items,Record Accuracy,Accurate records are a critical ingredient in production and inventory syst
13、emsAllows organization to focus on what is neededNecessary to make precise decisions about ordering,scheduling,and shippingIncoming and outgoing record keeping must be accurateStockrooms should be secure,Cycle Counting,Items are counted and records updated on a periodic basisOften used with ABC anal
14、ysis to determine cycleHas several advantagesEliminates shutdowns and interruptionsEliminates annual inventory adjustmentTrained personnel audit inventory accuracyAllows causes of errors to be identified and correctedMaintains accurate inventory records,Cycle Counting Example,5,000 items in inventor
15、y,500 A items,1,750 B items,2,750 C itemsPolicy is to count A items every month(20 working days),B items every quarter(60 days),and C items every six months(120 days),Control of Service Inventories,Can be a critical component of profitabilityLosses may come from shrinkage or pilferageApplicable tech
16、niques includeGood personnel selection,training,and disciplineTight control on incoming shipmentsEffective control on all goods leaving facility,Independent Versus Dependent Demand,Independent demand-the demand for item is independent of the demand for any other item in inventoryDependent demand-the
17、 demand for item is dependent upon the demand for some other item in the inventory,Holding,Ordering,and Setup Costs,Holding costs-the costs of holding or“carrying”inventory over timeOrdering costs-the costs of placing an order and receiving goodsSetup costs-cost to prepare a machine or process for m
18、anufacturing an order,Holding Costs,Table 12.1,Holding Costs,Table 12.1,Inventory Models for Independent Demand,Basic economic order quantityProduction order quantityQuantity discount model,Need to determine when and how much to order,Basic EOQ Model,Demand is known,constant,and independentLead time
19、 is known and constantReceipt of inventory is instantaneous and completeQuantity discounts are not possibleOnly variable costs are setup and holdingStockouts can be completely avoided,Important assumptions,Inventory Usage Over Time,Figure 12.3,Order quantity=Q(maximum inventory level),Minimizing Cos
20、ts,Objective is to minimize total costs,Table 11.5,The EOQ Model,Q=Number of pieces per orderQ*=Optimal number of pieces per order(EOQ)D=Annual demand in units for the inventory itemS=Setup or ordering cost for each orderH=Holding or carrying cost per unit per year,Annual setup cost=(Number of order
21、s placed per year)x(Setup or order cost per order),The EOQ Model,Q=Number of pieces per orderQ*=Optimal number of pieces per order(EOQ)D=Annual demand in units for the inventory itemS=Setup or ordering cost for each orderH=Holding or carrying cost per unit per year,Annual holding cost=(Average inven
22、tory level)x(Holding cost per unit per year),The EOQ Model,Q=Number of pieces per orderQ*=Optimal number of pieces per order(EOQ)D=Annual demand in units for the inventory itemS=Setup or ordering cost for each orderH=Holding or carrying cost per unit per year,Optimal order quantity is found when ann
23、ual setup cost equals annual holding cost,Solving for Q*,An EOQ Example,Determine optimal number of needles to orderD=1,000 unitsS=$10 per orderH=$.50 per unit per year,An EOQ Example,Determine optimal number of needles to orderD=1,000 units Q*=200 unitsS=$10 per orderH=$.50 per unit per year,An EOQ
24、 Example,Determine optimal number of needles to orderD=1,000 unitsQ*=200 unitsS=$10 per orderN=5 orders per yearH=$.50 per unit per year,An EOQ Example,Determine optimal number of needles to orderD=1,000 unitsQ*=200 unitsS=$10 per orderN=5 orders per yearH=$.50 per unit per yearT=50 days,Total annua
25、l cost=Setup cost+Holding cost,TC=(5)($10)+(100)($.50)=$50+$50=$100,Robust Model,The 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 EOQ,An EOQ Example,Management underestimated demand by 50%D=1,000 units Q*=200
26、 unitsS=$10 per orderN=5 orders per yearH=$.50 per unit per yearT=50 days,Total annual cost increases by only 25%,An EOQ Example,Actual EOQ for new demand is 244.9 unitsD=1,000 units Q*=244.9 unitsS=$10 per orderN=5 orders per yearH=$.50 per unit per yearT=50 days,TC=$61.24+$61.24=$122.48,Only 2%les
27、s than the total cost of$125 when the order quantity was 200,Reorder Points,EOQ answers the“how much”questionThe reorder point(ROP)tells when to order,=d x L,Reorder Point Curve,Figure 12.5,Reorder Point Example,Demand=8,000 iPods per year250 working day yearLead time for orders is 3 working days,RO
28、P=d x L,=8,000/250=32 units,=32 units per day x 3 days=96 units,Production Order Quantity Model,Used when inventory builds up over a period of time after an order is placedUsed when units are produced and sold simultaneously,Production Order Quantity Model,Figure 12.6,Production Order Quantity Model
29、,Q=Number of pieces per order p=Daily production rateH=Holding cost per unit per year d=Daily demand/usage ratet=Length of the production run in days,Production Order Quantity Model,Q=Number of pieces per order p=Daily production rateH=Holding cost per unit per year d=Daily demand/usage ratet=Length
30、 of the production run in days,However,Q=total produced=pt;thus t=Q/p,Production Order Quantity Model,Q=Number of pieces per order p=Daily production rateH=Holding cost per unit per year d=Daily demand/usage rateD=Annual demand,Production Order Quantity Example,D=1,000 units p=8 units per dayS=$10 d
31、=4 units per dayH=$0.50 per unit per year,Production Order Quantity Model,When annual data are used the equation becomes,Note:,Quantity Discount Models,Reduced prices are often available when larger quantities are purchasedTrade-off is between reduced product cost and increased holding cost,Total co
32、st=Setup cost+Holding cost+Product cost,Quantity Discount Models,Table 12.2,A typical quantity discount schedule,Quantity Discount Models,For each discount,calculate Q*If Q*for a discount doesnt qualify,choose the smallest possible order size to get the discountCompute the total cost for each Q*or a
33、djusted value from Step 2Select the Q*that gives the lowest total cost,Steps in analyzing a quantity discount,Quantity Discount Models,Figure 12.7,Quantity Discount Example,Calculate Q*for every discount,Quantity Discount Example,Calculate Q*for every discount,Quantity Discount Example,Table 12.3,Ch
34、oose the price and quantity that gives the lowest total costBuy 1,000 units at$4.80 per unit,Probabilistic Models and Safety Stock,Used when demand is not constant or certainUse safety stock to achieve a desired service level and avoid stockouts,ROP=d x L+ss,Annual stockout costs=the sum of the unit
35、s short x the probability x the stockout cost/unit x the number of orders per year,Safety Stock Example,ROP=50 unitsStockout cost=$40 per frameOrders per year=6 Carrying cost=$5 per frame per year,Safety Stock Example,ROP=50 unitsStockout cost=$40 per frameOrders per year=6 Carrying cost=$5 per fram
36、e per year,A safety stock of 20 frames gives the lowest total costROP=50+20=70 frames,Probabilistic Demand,Figure 12.8,Probabilistic Demand,Probabilistic Demand,Use prescribed service levels to set safety stock when the cost of stockouts cannot be determined,ROP=demand during lead time+ZsdLT,whereZ=
37、number of standard deviationssdLT=standard deviation of demand during lead time,Probabilistic Example,Average demand=m=350 kitsStandard deviation of demand during lead time=sdLT=10 kits5%stockout policy(service level=95%),Using Appendix I,for an area under the curve of 95%,the Z=1.65,Safety stock=Zs
38、dLT=1.65(10)=16.5 kits,Reorder point=expected demand during lead time+safety stock=350 kits+16.5 kits of safety stock=366.5 or 367 kits,Other Probabilistic Models,When demand is variable and lead time is constantWhen lead time is variable and demand is constantWhen both demand and lead time are vari
39、able,When data on demand during lead time is not available,there are other models available,Other Probabilistic Models,Demand is variable and lead time is constant,ROP=(average daily demand x lead time in days)+ZsdLT,Probabilistic Example,Average daily demand(normally distributed)=15Standard deviati
40、on=5Lead time is constant at 2 days90%service level desired,Z for 90%=1.28From Appendix I,Safety stock is about 9 iPods,Other Probabilistic Models,Lead time is variable and demand is constant,ROP=(daily demand x average lead time in days)=Z x(daily demand)x sLT,wheresLT=standard deviation of lead ti
41、me in days,Probabilistic Example,Daily demand(constant)=10Average lead time=6 daysStandard deviation of lead time=sLT=398%service level desired,Z for 98%=2.055From Appendix I,ROP=(10 units x 6 days)+2.055(10 units)(3)=60+61.65=121.65,Reorder point is about 122 cameras,Other Probabilistic Models,Both
42、 demand and lead time are variable,ROP=(average daily demand x average lead time)+ZsdLT,Probabilistic Example,Average daily demand(normally distributed)=150Standard deviation=sd=16Average lead time 5 days(normally distributed)Standard deviation=sLT=1 day95%service level desired,Z for 95%=1.65From Ap
43、pendix I,Fixed-Period(P)Systems,Orders placed at the end of a fixed periodInventory counted only at end of periodOrder brings inventory up to target level,Only relevant costs are ordering and holdingLead times are known and constantItems are independent from one another,Fixed-Period(P)Systems,Figure
44、 12.9,Fixed-Period(P)Example,Order amount(Q)=Target(T)-On-hand inventory-Earlier orders not yet received+Back ordersQ=50-0-0+3=53 jackets,3 jackets are back orderedNo jackets are in stockIt is time to place an orderTarget value=50,Fixed-Period Systems,Inventory is only counted at each review periodMay be scheduled at convenient timesAppropriate in routine situationsMay result in stockouts between periodsMay require increased safety stock,
