Nventory Planning and Control: Source: Corbis

Inventory planning and control
Source: Corbis
Slack, Chambers and Johnston, Operations Management 5 th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Learning Objectives
• What is inventory?
• Operations Objectives & Role of inventory
• Types of inventory
• Disadvantages of inventory
• Day-to-day inventory decisions
CASE Study
• Inventory Management at UK’s National
Blood Service (NBS)
Inventory
• Also called stock is a stored accumulation
of material resources in transformation
process.
• In Services the stocks are called as queues
Role of Inventory
• Why you keep inventory at home?
– Speed
– Dependability
– Flexibility
– Quality
– Cost
• Inventory Planning done differently by different
people. Student vs well-off employee
Inventory …. Contd.
• All operations keep inventory
• The value of inventory
• Why inventories exists?
Inventory is created to compensate for the differences in
timing between supply and demand
Rate of supply from
input process
Source: Alamy/Van Hilversum
Rate of demand from

Inventory output process
Input Output
process process
Inventory
Types of Inventory
• Buffer Inventory (safety inventory)
• Cycle Inventory
Cycle inventory in a bakery
Produce A Produce B Produce C Produce A Produce B Produce C

Inventory level
Deliver Deliver Deliver Deliver Deliver Deliver

A B C A B C
Time
Types of Inventory
• Buffer Inventory (safety inventory)
• Cycle Inventory
• De-coupling inventory
• Anticipation inventory
• Pipeline inventory
Disadvantages of holding inventory
• Inventory
– Ties up money
– Incurs storage costs
– May become obsolete
– Can damage
– Could be lost
– Might be hazardous to store
– Uses space
– Involves administrative and insurance expenses
The position of inventory
• Forms
– Raw material
– Components inventories
– Work-in-Progress
– Finished goods
• Position
– Single-stage
– Two-stage
– Multi-stage
– Multi-Echelon
Single-stage and two-stage inventory systems
Single-stage Two-stage
inventory system inventory system
Stock Sales Central Distribution Local Sales

operation depot distribution operation
point
Suppliers Suppliers
e.g. Local retail store e.g. Automotive parts
distributor
A multi-stage inventory system
Input Stage WIP Stage WIP Stage Finished

stock 1 2 3 goods
stock
Suppliers
e.g. Television manufacturer
A multi-echelon inventory system
Garment
manufacturers
Cloth Regional
manufacturers warehouses
Yarn Retail
producers stores
Day-to-day Inventory Decisions
• How much to order
• When to order
• How to control the system
How much to order?
• Inventory Costs
These costs decrease
– Cost of placing the order as order size increases
– Price discount cost

– Stock-out cost
– Working capital cost These costs increase
as order size increases
– Storage cost
– Obsolescence cost
– Operating inefficiency costs
Inventory profiles chart the variation in inventory level
Order
quantity Steady and
predictable
=Q demand (D) Slope = demand rate (D)
Average inventory
Inventory level
=Q
2
Q Time
D
Instantaneous deliveries at a rate of D per period

Q
Two alternative inventory plans with different order
quantities (Q)
Demand (D) = 1000 items per year
400 Plan A
Inventory level
Q = 400
Average inventory
for plan A = 200
Plan B Average inventory

100 Q = 100 for plan B = 50
Time
0.1 yr 0.4 yr
Traditional view of inventory-related costs
400
350
300
250 Total costs

Costs
200
150 Holding costs
100
Order costs
50
Economic order
quantity (EOQ)
50 100 150 200 250 300 350 400

Order quantity
Inventory profile for gradual replacement of inventory
Source: Alamy/ArchivBerlin Fotoagentur GmbH

Order
quantity
Q
Inventory level
Slope = P – D
Slope = D
Q Time
P
CASE Study: A paper merchant must get its
inventory planning and control right
Inventory planning allowing for shortages
Inventory level
Time
Shortages
The re-order point
Demand (D) = 100 items per week

400
Inventory level
Re-order level
300
Re-order point
200
100
0
0 1 2 3 4 5 6 7 8
Order lead time Time
Safety stock(s) helps to avoid stock-outs when demand
and/or order lead times are uncertain
Re-order level (ROL)

Distribution of
Inventory level
lead-time
Q usage
d1
d2
?
S
t1 t2
Time
When to Order
• There are two basic types of inventory
policy.
– Re-order level policies
– Re-order cycle policies
• Within these two categories there are

several variants.
When to Order
(Q,r) policy
• Re-order level policy (often implemented as a
two-bin system)
• An order for replenishment is placed when the
stock-in-hand equals or falls below a fixed value r
known as the re-order level. So the amount of
inventory held must be reviewed continuously.
When a replenishment order is placed it is for a
fixed quantity Q.
Inventory Level (Q, r) Policy
Leadtime Reorder level, r
Replenishment Replenishment
order placed order received Stockout
Time
The ‘two-bin’ and ‘three-bin’ re-ordering systems
Two-bin system Three-bin system
Bin 1 Bin 2 Bin 1 Bin 2 Bin 3
Items being Re-order level Items being Re-order level Safety

used + safety used inventory inventory
inventory
Re-order level policy with periodic
review
• An order for replenishment, for a fixed
quantity, Q, is placed if at a review the
stock-in-hand lies below or at r.
(R, T) Policy
• Re-order cycle policy, or cyclical review. The
stock-in-hand is reviewed periodically, at time
interval T, and a replenishment order, of variable
quantity, placed at every review. This variable
replenishment quantity is calculated as that
amount of stock which, if there were no lead time,
would bring the stock-in-hand up to a fixed level
R. This will be designated as a (R,T) policy.
(R, T) Policy
R
Inventory Level
Leadtime
Review takes
place and
replenishment Stockout
ordered
Review period
Time
(s,S) policy
• The stock-in-hand is reviewed periodically.
If it is at or below a level s a replenishment
order, of variable quantity, is placed; if not,
no order is placed. So the timing of orders
is based on the same criterion as in policy 2)
with s replacing r. The size of the
replenishment order, however, is calculated
on the same basis as for policy 3) (i.e. S less
the stock-in-hand).
Controlling the system
• ABC Inventory classification
• Inventory Control Systems
Source: How ard Smith Paper Group
Pareto curve for stocked items
100
Percentage of value of items
90
80
70
60
50
40 Class A Class B Class C
items items items
30
20
10
10 20 30 40 50 60 70 80 90 100
Percentage of types of items
Inventory classifications and measures
Class B items – the

next 30% or so of
Class A items – the medium-value items
20% or so of high-value which account for
items which account for around 10% of the total
around 80% of the total stock value
stock value
Class C items – the

remaining 50% or so of
low-value items which
account for around the
last 10% of the total
stock value
Different ordering policies
• Continuous review
• Periodic review
37
(R, Q) policy (continuous review)
R+Q
Inventory position
R
Inventory level
Time
L L
Policy structure optimal under quite general conditions!

38
(s, S) policy (periodic review)
S
Inventory position
Inventory level
Time
L L
T
39
Policy structure optimal under quite general conditions!
Goal
Determine the optimal order level (R or s)

and the optimal order quantity (Q or S-s)
40
Order quantity
The classical economic order quantity model (EOQ).
It was first derived by Harris (1913), but also Wilson (1934)
is recognized in connection with this model.
The model is based on the following assumptions:
 Demand is constant and continuous.

 The batch quantity does not need to be an integer.
 No shortages are allowed.
41
EOQ
Notation:
h = holding cost per unit and time unit,
A = ordering or setup cost,
d = demand per time unit,
Q = batch quantity,
C = costs per time unit.
42
EOQ – stock level over time
Q/d Time
43
EOQ (optimization)
Q d
Total cost C h A is convex
2 Q
dC h d 2Ad
  A0 gives Q* 
dQ 2 Q 2 h
Adh Adh
C 
*
  2Adh
2 2
C Q h 1 2Ad 1  Q Q * 
   
C * 2 2Ad 2Q h 2  Q * Q 
44
Time-varying demand
Period t 1 2 3 4 5 6 7 8 9 10
dt 50 60 90 70 30 100 60 40 80 20
Notation:
T = number of periods,
di = demand in period i, i = 1, 2, ..., T, (d1 > 0),
A = ordering cost,
h = holding cost per unit and time unit.
We wish to choose batch quantities so that the sum of the

ordering and holding costs is minimized. The problem
considered is usually denoted the
classical dynamic lot size problem.
45
The Silver-Meal heuristic
Choose to have a new delivery when the average
per period costs increase for the first time.
This means that the first delivery shall cover n periods

and the next delivery take place in period n + 1 if
k k 1
A  h  ( j  1)d j A  h  ( j  1)d j
j 2 j 2
 , 2  k  n,
k k 1
and
n 1 n
A  h  ( j  1)d j A  h  ( j  1)d j
j 2 j 2

n 1 n
46
Silver-Meal (continued)
T =10, ordering cost A = $300 , holding cost h = $1.
Period t 1 2 3 4 5 6 7 8 9 10
dt 50 60 90 70 30 100 60 40 80 20
Delivery in period 1 that cover 1, 2, 3, ... periods.

1 period 300/1=300
2 periods (300 + 60)/2 = 180 < 300,
3 periods (300 + 60 + 2  90)/3 = 180  180,
4 periods (300 + 60 + 2  90 + 3  70)/4 = 187.5 > 180.

1 period 300/1=300
2 periods (300 + 30)/2 = 165 < 300,
3 periods (300 + 30 + 2  100)/3 = 176.67 > 165.
47
Silver-Meal (continued)
Period t 1 2 3 4 5 6 7 8 9 10
dt 50 60 90 70 30 100 60 40 80 20

1 period 300/1=300
2 periods (300 + 60)/2 = 180 < 300,
3 periods (300 + 60 + 2  40)/3 = 146.67  180,
4 periods (300 + 60 + 2  40 + 3  80)/4 = 170 > 146.67.

1 period 300/1=300
2 periods (300 + 20)/2 = 160 < 300.
Period t 1 2 3 4 5 6 7 8 9 10
Quantity 200 100 200 100
48
A ‘cost balance’ heuristic
Choose to have a new delivery as soon as the
holding costs exceed the ordering cost.
The first delivery quantity cover n periods,

where n is determined by the condition
n n 1
h  ( j  1)d j  A  h  ( j  1)d j
j 2 j 2
49
Cost balance (continued)
Period t 1 2 3 4 5 6 7 8 9 10
dt 50 60 90 70 30 100 60 40 80 20

1 period 300/1=300
2 periods 60  300,
3 periods 60 + 2  90 = 240  300,
4 periods 60 + 2  90 + 3  70 = 450 > 300 .

1 period 300/1=300
2 periods 30  300,
3 periods 30 + 2  100 = 230  300,
4 periods 30 + 2  100 + 3  60 = 410 > 300 .
50
Cost balance (continued)
Period t 1 2 3 4 5 6 7 8 9 10
dt 50 60 90 70 30 100 60 40 80 20

1 period 300/1=300
2 periods 40  300,
3 periods 40 + 2  80 = 200  300,
4 periods 40 + 2  80 + 3  20 = 260  300.
Period t 1 2 3 4 5 6 7 8 9 10
Quantity 200 200 200
51
ABC Inventory classification
Class B items - the

next 30% or so of
Class A items - the medium-value
20% or so of high- items which
value items which account for around
account for around 10% of the total
80% of the total stock value
stock value
Class C items -
the remaining 50%
or so of low-value
items which
account for around
the last 10% of the
total stock value
ABC has become less important with stock control by computer

Enterprise Resource Planning (ERP) systems
52
KANBAN policy
A KANBAN policy uses N containers, each containing

Q units of the item and with a card on the bottom.
When a container becomes empty, the card (a KANBAN)
is used as an order for Q units.
53
KANBAN policy (Q=4, N=8)
product
card
Machine
Full containers with cards
Demands
Card
Cards and empty containers
send first
to avoid
delays
Supply / production
Stock
54
KANBAN versus (R,Q)
A KANBAN policy is very similar to an (R, Q) policy

with R = (N - 1)Q. But if there are already N outstanding
orders, i.e., no stock on hand, no more orders can be triggered
since no KANBANs are available. We can therefore interpret
a KANBAN policy as an (R, Q) policy where backorders are
not subtracted from the inventory position.
55

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Inventory planning and control

• In Services the stocks are called as queues

• Why inventories exists?

Source: Alamy/Van Hilversum

Rate of demand from

Produce A Produce B Produce C Produce A Produce B Produce C

Deliver Deliver Deliver Deliver Deliver Deliver

Stock Sales Central Distribution Local Sales

Input Stage WIP Stage WIP Stage Finished

e.g. Television manufacturer

– Price discount cost

Instantaneous deliveries at a rate of D per period

Demand (D) = 1000 items per year

Plan B Average inventory

250 Total costs

150 Holding costs

50 100 150 200 250 300 350 400

Source: Alamy/ArchivBerlin Fotoagentur GmbH

Demand (D) = 100 items per week

Re-order level (ROL)

• Within these two categories there are

Leadtime Reorder level, r

Two-bin system Three-bin system

Bin 1 Bin 2 Bin 1 Bin 2 Bin 3

Items being Re-order level Items being Re-order level Safety

Pareto curve for stocked items

Percentage of types of items

Class B items – the

Class C items – the

Policy structure optimal under quite general conditions!

Determine the optimal order level (R or s)

The model is based on the following assumptions:

 Demand is constant and continuous.

h = holding cost per unit and time unit,

A = ordering or setup cost,

d = demand per time unit,

C = costs per time unit.

We wish to choose batch quantities so that the sum of the

This means that the first delivery shall cover n periods

Delivery in period 1 that cover 1, 2, 3, ... periods.

Delivery in period 4 that cover 1, 2, 3, ... periods.

Delivery in period 6 that cover 1, 2, 3, ... periods.

Delivery in period 9 that cover 1, 2, 3, ... periods.

The first delivery quantity cover n periods,

Delivery in period 1 that cover 1, 2, 3, ... periods.

Delivery in period 4 that cover 1, 2, 3, ... periods.

Delivery in period 7 that cover 1, 2, 3, ... periods.

Class B items - the

ABC has become less important with stock control by computer

A KANBAN policy uses N containers, each containing

Full containers with cards

A KANBAN policy is very similar to an (R, Q) policy

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