Inventory Management,Chapter Four,2,CONTENTS,Inventory Functionality and Principles Inventory Carrying Cost Components Planning Inventory Managing Uncertainty Inventory Management Policies,Source:,Chapter 6,3,Section I,Inventory Types and Characteristics Inventory Functionality Inventory-Related Definitions,Inventory Functionality and Principles,4,Inventory Types and Characteristics,Raw Material Inventory,Maintenance /Repair/Operating Supply (MRO) Inventory,Finished Goods Inventory,Work-In-Process Inventory,5,Inventory Functionality,TABLE 4-1 Inventory Functionality - Geographical Specialization Allows geographical positioning across multiple manufacturing and distributive units of an enterprise. Inventory maintained at different locations and stages of the value-creation process allows specialization.Decoupling Allows economy of scale within a single facility and permits each process to operate at maximum efficiency rather than having the speed of the entire process constrained by the slowest. Supply/Demand Balancing Accommodates elapsed time between inventory availability (manufacturing, growing, or extraction) and consumption. Buffering Uncertainty Accommodates uncertainty related to demand in excess of forecast or unexpected delays in order receipt and order processing on delivery and is typically referred to as safety stock.,6,Inventory-Related Definitions,Service Level,Economic Order Quantity (EOQ),Average Inventory,Inventory Policy,7,Section II,Inventory Carrying Cost Components,Capital Cost Taxes Insurance Obsolescence Storage,8,Section III,Planning Inventory,Determining When to Order Determining How Much to Order,9,Determining When to Order,Reorder Point (in units) Formula R = D * TD = Average daily demand in units; T = Average performance cycle length in days (time between placing order and receiving order) That is, an order is initiated whenever there are R units products left in inventory When safety stock (SS) is necessary to accommodate uncertainty, the reorder point formula is: R = D * T + SS Source:P137,10,Illustration of Determining When to Order,If D = 10 units/day; andT =10 days ThenR = D * T= 10 units/day *10 days= 100 units,200,11,Illustration of Determining When to Order,If D = 10 units/day; T =10 days; andSS=50 units. ThenR = D * T+SS= 10 units/day *10 days+50 units=150 units,12,Exercise to Determine When to Order,Assume that you, distribution center manager for Guangzhou Kitchenwares, must determine when to re-supply your stock of spatulas. The DC experiences a daily demand of 400 spatulas. The average length of the performance cycle for spatulas is 14 days. You require that 500 spatulas be retained as safety stock to deal with demand uncertainty. a. Use simple reorder point logic to determine the order quantity for spatulas. b. If you require that 12000 spatulas be ordered, find your average inventory level of spatulas based on your answer to part (a).,13,Answers to Exercise,a. D=400 spatulas;T=14 days; andSS=500 spatulas R=D*T+SS= 400*14+500=6100 spatulas b. OQ=12000 AI=OQ/2+SS=12000/2+500=6500 spatulas,14,Determining How Much to Order,15,Determining How Much to Order,EOQ = Economic Order Quantity Co = Cost per Order Ci = Annual Inventory Carrying Cost % D = Annual Product Sales (in units) U = Cost per Product,EOQ =,2Co D,Ci,U,16,Illustration of Determining How Much to Order,Co = ￥ 19 per order; Ci = 20 % annually; D =2400 units; and U = ￥5 per unit. EOQ =?,EOQ =,2Co D,Ci,U,=,2*19*2400,0.2,5,*,= 302(round to 300),17,Exercise to Determine How Much to Order,Scenario: You recently completed a course in logistics management and now realize that there are significant costs associated with ordering and maintaining inventory at your distribution center. You have learned that the EOQ is the replenishment logic that minimizes these costs. In an effort to find the EOQ for measuring cups, you have gathered relevant data. You expect to sell 40,000 measuring cups this year. Your supplier acquires the measuring cups for ￥0.75 each from his Industry. He charges ￥8 for processing each order. In addition, you estimate your companys inventory carrying cost to be 12 percent annually. Find your EOQ for measuring cups. (questions a.) Assume that you accept ownership of products upon arrival at your DC.,18,Illustration of Determining How Much to Order, Co = ￥ 8 per order; Ci = 12 % annually; D =40000 cups; and U = ￥0.75 per cup.,EOQ =,2Co D,Ci,U,=,2*8*40000,0.12,0.75,*,= 2667(round to 2670),19,Further Reflection (homework): b. Now assume you must arrange for inbound transportation of the measuring cups since your supplier accepts ownership of products at the suppliers shipping point. Quantities of fewer than 4000 measuring cups cost 5 cents per unit to ship. Quantities of 4000 and above cost 4 cents per unit to ship. Determine the difference in total costs associated with an EOQ of 4000 units and the EOQ level found in part (a) when transportation costs must be considered. c. Given the information above and the low cost EOQ alternative determined in part (b), use period-order-quantity logic to determine the number of orders you would place each year for measuring cups and the time interval between orders.,