Inventory Management

The Material Flow Cycle

 The Material Flow Cycle
Other Wait Move Queue Setup Run
Input Time Time Time Time Time Output

Cycle Time

1 Run time: Job is at machine and being worked on

2 Setup time: Job is at the work station, and the work station is
being "setup."
3 Queue time: Job is where it should be, but is not being
processed because other work precedes it.
4 Move time: The time a job spends in transit
5 Wait time: When one process is finished, but the job is
waiting to be moved to the next work area.
 The Functions of Inventory

 To ”decouple” or separate various parts of the

production process
 To provide a stock of goods that will provide a
“selection” for customers
 To take advantage of quantity discounts
 To hedge against inflation and upward price
changes
 Disadvantages of Inventory

Higher costs.
Difficult to control
Hides production problems (lihat
di topik quality)
 Inventory Classifications

Inventory © 1984-1994
T/Maker Co.

Process Number & Demand

Other
stage Value Type

Raw Material A Items

Independent Maintenance
WIP B Items
Dependent Operating
Finished Goods C Items
 Types of Inventory

Raw material
Work-in-progress
Maintenance/repair/operating supply
Finished goods
 Independent versus
Dependent Demand

 Independent demand - demand for item is

independent of demand for any other item
 Dependent demand - demand for item is
dependent upon the demand for some other item
 Classifying Items as ABC
% Annual $ Usage Class % $ Vol % Items
100 A 80 15
B 15 30
80
C 5 55
60
40
A
B
20 C
0
0 50 100
% of Inventory Items
 ABC Analysis

 Divides on-hand inventory into 3 classes

 A class, B class, C class
 Basis is usually annual $ volume
 $ volume = Annual demand x Unit cost
 Policies based on ABC analysis
 Develop class A suppliers more
 Give tighter physical control of A items
 Forecast A items more carefully
 Inventory Costs

 Holding costs (H) - associated with holding or

“carrying” inventory over time
 Ordering costs (S) - associated with costs of
placing order and receiving goods
 Setup costs - cost to prepare a machine or
process for manufacturing an order
 Holding (Carrying) Costs
Obsolescence
Insurance
Extra staffing
Interest
Pilferage
Damage
Warehousing
Etc.
 Ordering Costs

 Forms
 Order processing
 Clerical support
 Etc.
 Setup Costs

Clean-up costs
Re-tooling costs
Adjustment costs
Etc.
 EOQ Model
How Much to Order?
Annual Cost

t C u r ve Q/2*H
al C os ve
To t u r
Minimum C o st C
l din g
total cost Ho

Order (Setup) Cost Curve D/Q*S

Optimal Order quantity

Order Quantity (Q*)
 Why Holding Costs Increase

 More units must be stored if more are ordered

Purchase Order Purchase Order

Description Qty. Description Qty.
Microwave 1 Microwave 1000

Order quantity Order quantity

 Why Order Costs Decrease
Cost is spread over more units
Example: You need 1000 microwave ovens
1 Order (Postage $ 0.33) 1000 Orders (Postage $330)

Purchase Order PurchaseOrder

Purchase Order
Description PurchaseOrder
Description
Purchase OrderQty.
Qty. Description Qty.
Qty.
Microwave 1000 Description
Microwave Qty. 11
Description
Microwave
Microwave
Microwave 11
Order quantity
 Inventory Models

Fixed order-quantity models Help

Helpanswer
answerthe
the
 Economic order quantity inventory
inventoryplanning
planning
questions!
questions!
 Production order quantity
 Quantity discount

Probabilistic models
Fixed order-period models
© 1984-1994
T/Maker Co.
 EOQ Assumptions

Known and constant demand

Known and constant lead time
Instantaneous receipt of material
No quantity discounts
No stockouts
 Inventory Usage Over Time

Order quantity = Q Usage Rate

(maximum inventory Average
level) Inventory
(Q*/2)
Inventory Level

Minimum
inventory 0
Time
 EOQ Model
When To Order
Inventory Level
Optimal Average
Order Inventory
Quantity (Q*/2)
(Q*)

Reorder
Point
(ROP)

Time
Lead Time
 Deriving an EOQ

1. Develop an expression for setup or ordering

costs
2. Develop an expression for holding cost
3. Set setup cost equal to holding cost
4. Solve the resulting equation for the best order
quantity
 EOQ Model Equations
Optimal Order Quantity 2 ×D ×S
= Q* =
H
D
Expected Number of Orders =N =
Q*
Expected Time Between Orders Working Days / Year
=T =
N
D D = Demand per year
d =
Working Days / Year S = Setup (order) cost per order
H = Holding (carrying) cost
ROP = d × L (Satuan?) d = Demand per day
TC ??? L = Lead time in days
Perusahaan suplier jarum suntik tanpa rasa sakit ke RS
bermaksud mengurangi biaya persediaan dg menentukan jml
jarum suntik yg optimum untuk setiap kali pemesanan.
Permitaan tahunan 1000 unit, biaya setup atau pemesanan
$10 per pesan, biaya penyimpanan per unit $0,5. (Asumsi:
workingdays per year 300; Lead time 3 days)

a. Berapa jumlah unit yg optimum untuk tiap kali

pemesanan?
b. Berapa kali dilakukan pemesanan dalam 1 th?
c. Berapa jarak waktu antar pesanan yg berurutan?
d. Berapa jml persediaan pd titik pemesanan ulang?
e. Berapa jumlah total biaya persediaan?
 Production Order Quantity Model

Answers how much to order and when to

order
Allows partial receipt of material
 Other EOQ assumptions apply
Suited for production environment
 Material produced, used immediately
Lower holding cost than EOQ model

Transparency Masters to accompany Heizer/Render – © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
Principles of Operations Management, 5e, and Operations 12-28
Management, 7e
 EOQ POQ Model
When To Order
Inventory Level
Optimal Average
Order Inventory
Quantity
(Q*)

Reorder
Point
(ROP)

Time
Lead Time
 EOQ POQ Model
When To Order
Both production
and usage take Usage only takes
Maximum place
place
inventory
level
Inventory Level

Time
 POQ Model Inventory Levels
Inventory Level
Inventory level with no demand

Production Max. Inventory

Portion of Cycle Q·(1- d/p)
Q*

Time
Supply Supply Demand portion of cycle with
Begins Ends no supply
 POQ Model Equations

= Q* = 2*D*S
Optimal Order Quantity
p
( )
H* 1 -
d
p

Maximum inventory level = Q* ( 1 -

d
p )
D D = Demand per year
Setup Cost = * S
Q S = Setup cost
H = Holding cost
Holding Cost = 0.5 * H * Q
( )
1-
d
p
d = Demand per day
p = Production per day
Perusahaan suplier jarum suntik tanpa rasa sakit ke RS bermaksud
mengurangi biaya persediaan dg menentukan jml jarum suntik yg
optimum untuk setiap kali pemesanan. Permitaan tahunan 1000 unit,
biaya setup atau pemesanan $10 per pesan, biaya penyimpanan per unit
$0,5. (Asumsi workingdays per year 300)
Informasi tambahan: Rata-rata permintaan jarum suntik adalah 4 unit per
hari. Sedangkan biaya produksi yang paling efisien adalah 8 unit per hari

a. Berapa jumlah unit yg optimum untuk tiap kali

pemesanan?
b. Berapa max inventory level?
c. Berapa TC ?
 Quantity Discount Model

 Reduced price when item is purchased in larger

quantities
 Other EOQ assumptions apply
 Trade-off is between lower price & increased
holding cost

Transparency Masters to accompany Heizer/Render – © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
Principles of Operations Management, 5e, and Operations 12-35
Management, 7e
 Quantity Discount Schedule

Discount Discount Discount Discount

Number Quantity (%) Price (P)
1 0 to 999 No discount $5.00
2 1,000 to 1,999 4 $4.80
3 2,000 and over 5 $4.75
Quantity Discount – How Much to
Order
 Quantity Discount Model
I = persentase biaya
Q* = 2*D*S penyimpanan thd
harga
I*P P = harga satuan stlh
discount

TC = PD + D*S/Q + ½ Q * (I*P)
Perusahaan suplier jarum suntik tanpa rasa sakit ke RS
bermaksud mengurangi biaya persediaan dg menentukan
jml jarum suntik yg optimum untuk setiap kali pemesanan.
Permitaan tahunan 1000 unit, biaya setup atau
pemesanan $10 per pesan, biaya penyimpanan per unit
20% dari harga per unit setlah discount.
Berapa jumlah unit yg optimum untuk tiap kali
pemesanan agar biaya persediaan minimum?
a.Jika tanpa discount (gunakan rumus EOQ)
b.Discount 4%
c.Discount 5%
d.Dari ketiga kemungkinan, mana yg dipilih ?
 Fixed Period Model
Answers how much to order
Orders placed at fixed intervals
 Inventory brought up to target amount
 Amount ordered varies

No continuous inventory count

 Possibility of stockout between intervals
Useful when vendors visit routinely
 Example: P&G representative calls every 2 weeks

Transparency Masters to accompany Heizer/Render – © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
Principles of Operations Management, 5e, and Operations 12-42
Management, 7e
 Inventory Level in a Fixed Period
System
Various amounts (Qi) are ordered at regular time intervals
(p) based on the quantity necessary to bring inventory up to
target maximum
Target maximum

Q1 Q2 Q4
On-Hand Inventory

Q3

p p p

Time