OperationsManagementInventoryManagement.pptVIP

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 Types of Inventory Raw material Work-in-progress Maintenance/repair/operating supply Finished goods Disadvantages of Inventory Higher costs Item cost (if purchased) Ordering (or setup) cost Costs of forms, clerks’ wages etc. Holding (or carrying) cost Building lease, insurance, taxes etc. Difficult to control Hides production problems 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 Classifying Items as ABC Inventory Costs Holding costs - associated with holding or “carrying” inventory over time Ordering costs - 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. Inventory Holding Costs(Approximate Ranges) Category Housing costs (building rent, depreciation, operating cost, taxes, insurance) Material handling costs (equipment, lease or depreciation, power, operating cost) Labor cost from extra handling Investment costs (borrowing costs, taxes, and insurance on inventory) Pilferage, scrap, and obsolescence Overall carrying cost Cost as a % of Inventory Value 6% (3 - 10%) 3% (1 - 3.5%) 3% (3 - 5%) 11% (6 - 24%) 3% (2 - 5%) 26% Ordering Costs Supplies Forms Order processing Clerical support Etc. Setup Costs Clean-up costs Re-tooling costs Adjustment costs Etc. Inventory Models Fixed order-quantity models Economic order quantity Production order quantity Quantity discount Probabili