New Chapter 12

Chapter 12
Inventory planning and control
Source: Corbis
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Inventory planning and control
Inventory planning and Operations

control
strategy
The market requires …
a quantity of products
and services at a Operations
particular time management
Design Improvement
The operation supplies ...
the delivery of a quantity of
products and services when
required Planning and
control
Key Terms
1-Inventory (also known as stock)
The stored accumulation of transformed resources in a process; usually applies t
material resources but may also be used for inventories of information; invento
of customers (or customers of customers) are usually called queues.
2-inventory reasons:
inventory reasons : supply–demand imbalance, there could also be several points
where such imbalance exists between different stages in the operation.
3- different levels of complexity of inventory relationships within an operation:
- the simplest level is the single-stage inventory system,
- Two-stage inventory system
-In many manufacturers of standard items, A multi-stage inventory system .there
three types of inventory.
1-The raw material and components inventories (sometimes called input inventor
receive goods from the operation’s suppliers;
2- work-in-progress inventories (or work-in-process) (WIP)
3- finished goods inventory.
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
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
A paper merchant must get its inventory planning and
control right
Key Terms
2-Types of inventory
The various reasons for an imbalance between the rates of supply and
demand at different points in any operation lead to the different types of
inventory. 5
-Buffer inventory
An inventory that compensates for unexpected fluctuations in supply and demand
can also be called a safety inventory.
Cycle inventory
Inventory that occurs when one stage in a process cannot supply all the items it
produces simultaneously and so has to build up inventory of one item while it
processes the others.
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
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
Key Terms
De-coupling inventory: The inventory that is used to allow
work centres or processes to operate relatively
independently. Thus de-coupling inventory creates the
opportunity for independent scheduling and processing
speeds between process stages.
Anticipation inventory:. Seasonal inventory used to
compensate for differences in the timing of supply and
demand, Inventory that is accumulated to cope with
expected future demand or interruptions in supply
Pipeline inventory
The inventory that exists because material cannot be
transported instantaneously.
Work-in-process (WIP)
The number of units within a process waiting to be processed
further (also called work-in-progress).
Key Terms
negative aspects of inventory.
 Inventory ties up money, in the form of working capital,
 Inventory incurs storage costs
 Inventory may become obsolete as alternatives become
available.
 Inventory can be damaged, or deteriorate.
 Inventory could be lost, or be expensive to retrieve,
 Inventory might be hazardous to store requiring special
facilities and systems for safe handling.
 Inventory uses space that could be used to add value.
 Inventory involves administrative and insurance costs.
Key Terms
Economic order quantity (EOQ)
The quantity of items to order that supposedly minimizes the total
cost of inventory management, derived from various formulae.
This approach attempts to find the best balance between the
advantages and disadvantages of holding stock. Generally,
holding costs are taken into account by including:
-working capital costs ,-storage costs, ,obsolescence risk costs.
-Order costs : cost of placing the order, price discount costs.
Sensitivity of the EOQ
Economic batch quantity (EBQ)
The amount of items to be produced by a machine or process that
supposedly minimizes the costs associated with production and
inventory holding.
Re-order point
Key Terms
The point in time at which more items are ordered, usually
calculated to ensure that inventory does not run out before the
next batch of inventory arrives.
Re-order level
The level of inventory at which more items are ordered, usually
calculated to ensure that inventory does not run out before the
next batch of inventory arrives. =The lead time *demind
Lead-time usage
The amount of inventory that will be used between ordering
replenishment and the inventory arriving, usually described by a
probability distribution to account for uncertainty in demand and
lead time.
The re-order point
re-order point (ROP) is the point at which stock will fall to zero minus the
order lead time. Alternatively, we can define the point in terms of the level
which the inventory will have reached when a replenishment order needs to
be placed. In this case this occurs at a re-order level (ROL) of 200 items
Re-order level. =The lead time *demind
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
Inventory profiles chart the variation in inventory level -inventory profile is a visual
representation of the inventory level over time.Average inventory -
The time interval between deliveries = Q / D
The frequency of deliveries = the reciprocal of the time interval = D/ Q
Order
• Steady and
quantity
• predictable
D
=Q demand (D) Slope = demand rate (D)
• D Average inventory
Inventory level
=Q2
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
D =1000
Q Re-order level ; A =400; B=100
B A
X*1000=0.1=100 X*1000 =0.4= 400 Re-order level=

The lead time
*demind
50=100/2 200 =400/2 Average inventory

= Q /2
0.1=100/1000 0.4=400/1000 The time interval

between deliveries
=Q/ D
10=1000/100 2.5= 1000/400 The frequency of

deliveries = D/ Q
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
Inventory planning allowing for shortages
Inventory level
Time
Shortages
Key Terms
Continuous review
An approach to managing inventory that makes inventory-related
decisions when inventory reaches a particular level, as opposed
to periodic review.
Periodic review as opposed to continuous review.

An approach to making inventory decisions that defines points in
time for examining inventory levels and then makes decisions
accordingly, the periodic approach orders at a fixed and regular
time interval. So the stock level of an item could be found,
Usage value
A term used in inventory control to indicate the quantity of items
used or sold multiplied by their value or price.
A periodic review approach to order timing
with probabilistic demand and lead time
Qm
Q1 Q2 Q3
Inventory level
T0 T1 T2 T3 Time
t1 t2 t3
tf tf tf
Pareto law
Key Terms
A general law found to operate in many situations that indicates that 20% of
something causes 80% of something else, often used in inventory
management (20% of products produce 80% of sales value) and
improvement activities (20% of types of problems produce 80% of
disruption).
ABC inventory control
An approach to inventory control that classes inventory by its usage value
and varies the approach to managing it accordingly. usage value (their
usage rate multiplied by their individual value). the Pareto law can be use
to classify the different types of items kept in an inventory by their usage
value. Although annual usage and value other criteria might also
contribute towards the (higher) classification of an item :Consequence of
stock-out. Uncertainty of supply. High obsolescence or deterioration
risk.
Perpetual inventory principle
A principle used in inventory control that inventory records should be
automatically updated every time items are received or taken out of stock
Source: Howard 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
inventory-related costs
operations managers must try to identify the costs which will be
affected by their decision. Several types of costs are directly
associated with order size.
Inventory costs
1 Cost of placing the order.
2 Price discount costs.
3 Stock-out costs.
4 Working capital costs.
5 Storage costs.
6 Obsolescence costs.
7 Operating inefficiency costs.
the costs will decrease as order size is increased; the first three
costs are like this, whereas the other costs generally increase
as order size is increased. The second point is that it may not
be the same organization that incurs the costs.
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
If the true costs of stock holding are taken into account,
and if the cost of ordering (or changeover) is reduced,
the economic order quantity (EOQ) is much smaller
Revised total
costs Revised
holding
costs
Original total
Cost
costs
s
Original
holding costs
Original order
costs
Revised order
costs
Revised Original
EOQ EOQ Order quantity
The probability distributions for order lead time and demand rate
combine to give the lead-time usage distribution
0.4 0.4
Probability
Probability
0.3 0.3
0.2 0.2
0.1 0.1
0 0
1 2 3 4 5 110 120 130 140
Order lead time Demand rate
0.4
Probability
0.3
0.2
0.1
0
100-199 200-299 300-399 400-499 500-599 600-699 700-799
Lead-time usage
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

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Chapter 12

Inventory planning and control

Inventory planning and Operations

Source: Alamy/Van Hilversum

Rate of demand from

Stock Sales Central Distribution Local Sales

e.g. Local retail store e.g. Automotive parts

Input Stage WIP Stage WIP Stage Finished

e.g. Television manufacturer

Re-order level (ROL)

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

Deliver Deliver Deliver Deliver Deliver Deliver

Instantaneous deliveries at a rate of D per period

Demand (D) = 1000 items per year

Plan B Average inventory

X*1000=0.1=100 X*1000 =0.4= 400 Re-order level=

50=100/2 200 =400/2 Average inventory

0.1=100/1000 0.4=400/1000 The time interval

10=1000/100 2.5= 1000/400 The frequency of

Source: Alamy/ArchivBerlin Fotoagentur GmbH

Periodic review as opposed to continuous review.

Pareto curve for stocked items

Percentage of types of items

Class B items – the

Class C items – the

250 Total costs

150 Holding costs

50 100 150 200 250 300 350 400

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

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X1000=0.1=100 X1000 =0.4= 400 Re-order level=