Chapter 12 Independent Demand Inventory Management

Operations Management by R. Dan Reid & Nada R. Sanders 2nd Edition Wiley 2005 PowerPoint Presentation by R. . !lo"g# $ %&'

Inventories in t#e ("pply !#ain

Independent vs. Dependent Demand

Independent demand items are )inis#ed goods or ot#er items sold to someone o"tside t#e *ompany Dependent demand items are materials or *omponent parts "sed in t#e prod"*tion o) anot#er item +e.g., )inis#ed prod"*t-

.ypes o) Inventory/ 'ow Inventory is %sed

0nti*ipation or seasonal inventory (a)ety sto*1/ b"))er demand )l"*t"ations 2ot$si3e or *y*le sto*1/ ta1e advantage o) 4"antity dis*o"nts or p"r*#asing e))i*ien*ies Pipeline or transportation inventory (pe*"lative or #edge inventory prote*ts against some )"t"re event, e.g. labor stri1e Maintenan*e, repair, and operating +MR5inventories

5b6e*tives o) Inventory Management

Provide a**eptable level o) *"stomer servi*e +on$time delivery0llow *ost$e))i*ient operations Minimi3e inventory investment

Relevant Inventory !osts

Item Cost olding Costs Ordering Cost Shortage Costs
Cost per item plus any other direct costs associated with getting the item to the plant Capital! storage! and ris" cost typically stated as a # o$ the unit %alue! e.g. 1&'2&# (i)ed! constant dollar amount incurred $or each order placed *oss o$ customer goodwill! +ac" order handling! and lost sales

5rder 7"antity (trategies

*ot'$or'lot (i)ed'order ,uantity Min'ma) system Order n periods 5rder e8a*tly w#at is needed )or t#e ne8t period 5rder a predetermined amo"nt ea*# time an order is pla*ed W#en on$#and inventory )alls below a predetermined minim"m level, order eno"g# to re)ill "p to ma8im"m level 5rder eno"g# to satis)y demand )or t#e ne8t n periods

E8amples o) 5rdering 0pproa*#es

*ot $or *ot -)ample Re4"irements Pro6e*ted$on$'and +:05rder Pla*ement 9 =0 0 ;0 2 =0 0 =0 : <5 0 <5 ; <0 0 <0 5 55 0 55 < >5 0 >5 = =5 0 =5 > >5 >5

(i)ed Order .uantity -)ample with Order .uantity o$ 2// 9 2 : ; Re4"irements =0 =0 <5 <0 Pro6e*ted$on$'and +:09<0 ?0 25 9<5 5rder Pla*ement 200 200 Min'Ma) -)ample with min.0 &/ and ma).0 2&/ units 9 2 : Re4"irements =0 =0 <5 Pro6e*ted$on$'and +:09>0 990 9>5 5rder Pla*ement 220 9;0 Order n 1eriods with n 0 2 periods 9 Re4"irements =0 Pro6e*ted$on$'and +:09:5 5rder Pla*ement 9=5

5 55 990

< >5 25

= =5 950 200

> >5 <5

; <0 925

5 55 =0

< >5 9<5 9>0

= =5 ?0

> >5 9<5 9<0

2 =0 <5

: <5 0

; <0 9;0 200

5 55 >5

< >5 0

= =5 >5 9<0

> >5 0

.#ree Mat#emati*al Models )or Determining 5rder 7"antity

-conomic Order .uantity 3-O. or . System4

0n optimi3ing met#od "sed )or determining order 4"antity and reorder points Part o) continuous re%iew system w#i*# tra*1s on$ #and inventory ea*# time a wit#drawal is made 0 model t#at allows )or in*remental prod"*t delivery Modi)ies t#e E57 pro*ess to *onsider *ases w#ere 4"antity dis*o"nts are available

-conomic 1roduction .uantity 3-1.4

.uantity Discount Model

E*onomi* 5rder 7"antity

-O. 5ssumptions6

Demand is 1nown @ *onstant $ no sa)ety sto*1 is re4"ired 2ead time is 1nown @ *onstant &o 4"antity dis*o"nts are available 5rdering +or set"p- *osts are *onstant 0ll demand is satis)ied +no s#ortages.#e order 4"antity arrives in a single s#ipment

E57/ .otal !ost E4"ation

TC EOQ D Q = Q S + 2 H

Where TC = total annual cost D = annual demand Q = quantity to be ordered H = annual holding cost S = ordering or setup cost

E57 .otal !osts

.otal ann"al *osts A ann"al ordering *osts B ann"al #olding *osts

.#e E57 Corm"la

Minimi3e t#e .! by ordering t#e E57/ 2 DS EOQ = H

W#en to 5rder/ .#e Reorder Point

Wit#o"t sa)ety sto*1/

R = dL
where R = reorder point in units d = daily/weekly demand in units L = lead time in days/weeks

Wit# sa)ety sto*1/

where SS = safety stock in units

R = dL + SS

E57 E8ample

Wee1ly demand A 2;0 "nits &o. o) wee1s per year A 52 5rdering *ost A D50 %nit *ost A D95 0nn"al *arrying *#arge A 20E 2ead time A 2 wee1s

E57 E8ample (ol"tion

D = 52 240 = 12,480 units / year

H = 0"2 15 = ! per unit per year

2 DS 2 12,480 50 Q= = = #44"$8 #45 units H
D Q 12,480 #45 TC = Q S + 2 H = #45 50 + 2 = $#%"44 + $#%"5 = !1,$ 4"$4 R = dL = 240 2 = 480 units

EP7 +E*onomi* Prod"*tion 7"antity- 0ss"mptions

(ame as t#e E57 e8*ept/ inventory arrives in in*rements @ is drawn down as it arrives

EP7 E4"ations

0d6"sted total *ost/

TC EPQ

D I MAX = Q S + 2 H

Ma8im"m inventory/

I MAX

d = Q 1 p
EPQ = 2 DS d H 1 p

0d6"sted order 4"antity/

EP7 E8ample

0nn"al demand A 9>,000 "nits Prod"*tion rate A 2500 "nitsFmont# (et"p *ost A D>00 0nn"al #olding *ost A D9> per "nit 2ead time A 5 days &o. o) operating days per mont# A 20

EP7 E8ample (ol"tion

d= 18,000 = 1500 units / month& p = 2500 units / month 12

Q=

2 DS 2 18,000 800 = = 2000 units d 1500 18 1 H 1 p 2500

I MAX

d 1500 = Q 1 p = 2000 1 2500 = 800 units

D I MAX 18,000 800 TC = S + H = 800 + 18 Q 2000 2 2 = %,200 + %,200 = 14,400

EP7 E8ample (ol"tion +*ont.

.#e reorder point/

1500 R = dL = 5 = %5 units 20

Wit# sa)ety sto*1 o) 200 "nits/

1500 R = dL + SS = 5 + 200 = 5%5 units 20

7"antity Dis*o"nt Model 0ss"mptions

(ame as t#e E57, e8*ept/

%nit pri*e depends "pon t#e 4"antity ordered

0d6"sted total *ost e4"ation/

TCQD

D Q = S Q + 2 H + PD

7"antity Dis*o"nt Pro*ed"re

!al*"late t#e E57 at t#e lowest pri*e Determine w#et#er t#e E57 is )easible at t#at pri*e

Will t#e vendor sell t#at 4"antity at t#at pri*eG

I) yes, stop i) no, *ontin"e !#e*1 t#e )easibility o) E57 at t#e ne8t #ig#er pri*e
!ontin"e to t#e ne8t slide ...

7D Pro*ed"re +*ontin"ed

!ontin"e "ntil yo" identi)y a )easible E57 !al*"late t#e total *osts +in*l"ding total item *ost- )or t#e )easible E57 model !al*"late t#e total *osts o) b"ying at t#e minim"m 4"antity re4"ired )or ea*# o) t#e *#eaper "nit pri*es Compare the total cost o$ each option & choose the lowest cost alternati%e 5ny other issues to consider7

7D E8ample

0nn"al Demand A 5000 "nits 5rdering *ost A D;? 0nn"al *arrying *#arge A 20E %nit pri*e s*#ed"le/
7"antity %nit Pri*e 0 to ??? D5.00 9000 to 9??? D;.>0 2000 and over D;.=5

7D E8ample (ol"tion

(tep 9
QP =!4"%5 2 5,000 4$ = = %18 ( not feasi !e ) 0"2 4"%5
2 5,000 4$ = %14 ( not feasi !e ) 0"2 4"80

QP =!4"80 =

QP =!5"00

2 5,000 4$ = = %00 ( feasi !e ) 0"2 5"00

7D E8ample (ol"tion +!ont.

(tep 2
5,000 %00 = 4$ + 0"2 5"00 + 5"00 5000 = !25,%00 %00 2
5,000 1000 = 4$ + 0"2 4"80 + 4"80 5000 = !24,%25 1000 2 5,000 2000 = 4$ + 0"2 4"%5 + 4"%5 5000 = !24,822"50 2000 2

TCQ =%00
TCQ =1000 TCQ = 2000

W#at i) Demand is %n*ertainG

(a)ety (to*1 and (ervi*e 2evel

5rder$*y*le servi*e level is t#e probability t#at demand d"ring lead time wonHt e8*eed on$#and inventory. Ris1 o) a sto*1o"t A 9 +servi*e levelMore sa)ety sto*1 means greater servi*e level and smaller ris1 o) sto*1o"t

(a)ety (to*1 and Reorder Point

Wit#o"t sa)ety sto*1/ R = dL

where R = reorder point in units d = daily demand in units L = lead time in days

Wit# sa)ety sto*1/ R = dL + SS

where SS = safety stock in units

Reorder Point Determination

SS = " dL
i"e",

R = dL + " dL

R A reorder point d A average daily demand 2 A lead time in days 3 A n"mber o) standard deviations asso*iated wit# desired servi*e level A standard deviation o) demand d"ring lead time

(a)ety (to*1 E8ample

Daily demand A 20 "nits 2ead time A 90 days (.D. o) lead time demand A 50 "nits (ervi*e level A ?0E Determine/ 9. (a)ety sto*1 2. Reorder point

(a)ety (to*1 (ol"tion

(tep 9 determine 3 +rom )ppendi* ( '
" = 1"28

(tep 2 determine sa)ety sto*1 SS = 1"28 50 = #4 units (tep : determine reorder point
R = dL + SS = 20 10 + #4 = 2#4 units

0 ! Inventory !lassi)i*ation

58C classi$ication is a met#od )or determining level o) *ontrol and )re4"en*y o) review o) inventory items 0 Pareto analysis *an be done to segment items into val"e *ategories depending on ann"al dollar vol"me 5 Items typi*ally 20E o) t#e items a**o"nting )or >0E o) t#e inventory val"e$"se 7 system 8 Items typi*ally an additional :0E o) t#e items a**o"nting )or 95E o) t#e inventory val"e$"se 7 or P C Items .ypi*ally t#e remaining 50E o) t#e items a**o"nting )or only 5E o) t#e inventory val"e$"se P

58C -)ample/ t#e table below s#ows a sol"tion to an 0 ! analysis. .#e in)ormation t#at is re4"ired to do t#e analysis is/ Item I, %nit D Jal"e, and 0nn"al %nit %sage. .#e analysis re4"ires a *al*"lation o) 0nn"al %sage D and sorting t#at *ol"mn )rom #ig#est to lowest D val"e, *al*"lating t#e *"m"lative ann"al D vol"me, and gro"ping into typi*al 0 ! *lassi)i*ations.

Item 0nn"al %sage +D- Per*entage o) .otal D !"m"lative Per*entage o) .otal D 90< 9<,500 :;.; :;.; 990 92,500 2<.9 <0.5 995 ;500 ?.; <?.? 905 :200 <.= =<.< 999 2250 ;.= >9.: 90; 2000 ;.2 >5.5 99; 9200 2.5 >> 90= 9000 2.9 ?0.9 909 ?<0 2 ?2.9 99: >=5 9.> ?:.? 90: =50 9.< ?5.5 90> <00 9.: ?<.> 992 <00 9.: ?>.9 902 500 9 ??.9 90? 500 9 900.9

Item !lassi)i*ation 0 0

! ! ! ! ! ! ! ! !

Inventory Re*ord 0**"ra*y

Inaccurate in%entory records can cause6

2ost sales Disr"pted operations Poor *"stomer servi*e 2ower prod"*tivity Planning errors and e8pediting

9wo methods are a%aila+le $or chec"ing record accuracy

Periodi* *o"nting$p#ysi*al inventory !y*le *o"nting$daily *o"nting o) pre$spe*i)ied items provides t#e )ollowing advantages/

.imely dete*tion and *orre*tion o) ina**"rate re*ords Elimination o) lost prod"*tion time d"e to "ne8pe*ted sto*1 o"ts (tr"*t"red approa*# "sing employees trained in *y*le *o"nting

!#apter 92 'W 0ssignment

Problems <, =, ? 9:, 9<, 9=, 22 2;.