Chapter 14: Inventory Management
Traditional Inventory Management
Inventory Costs
Ordering Cost
Setup Cost
Carrying Cost
Stockout costs
Traditional Reasons for Holding Inventory
balance ordering or setup costs and carrying costs.
satisfy customer demand
avoid shutting down manufacturing facilities
buffer against unreliable production processes
take advantage of discounts
hedge against future price increases.
machine failure
defective parts
unavailable parts
late delivery of parts
Economic Order Quantity: The Traditional Inventory Model
Order Quantity and Total Ordering and Carrying Costs
TC = PD/Q + CQ/2
Computing EOQ
Q = EOQ = sqrt(2PD/C)
Reorder Point
point in time when a new order should be placed
(or setup started)
Lead time: time required to receive the economic order
quantity once an order is placed or a setup is initiated
ROP = (Rate of usage x Lead time) + Safety stock
EOQ and Inventory Management
just-in-case
system
JIT Inventory Management
demand-pull system that requires goods to be pulled through the system by present demand rather than pushed through the system on a fixed schedule based on anticipated demand.
Basic Features of JIT
Plant Layout
Manufacturing cells
Grouping and Empowerment of Employees
minifactory
Total Quality Control
Traceability of Overhead Costs
directly traceable to products
Inventory Effects
reduces inventories to very low levels
Setup and Carrying Costs: The JIT Approach
Long-Term Contracts, Continuous Replenishment, Electronic Data Interchange, and JIT II
Due-Date Performance: The JIT Solution
by dramatically reducing lead times
Avoidance of Shutdown and Process Reliability: The JIT Approach
Total Preventive Maintenance
Total Quality Control
The Kanban System
ensure that parts or materials are available when
needed
zero defects
paying more attention to preventive maintenance
Discounts and Price Increases: JIT Purchasing versus
Holding Inventories
negotiate long-term contracts with a few chosen suppliers located as close to the production facility as possible and to establish more extensive supplier involvement
JIT’s Limitations
JIT is not an approach that can be purchased and plugged in with immediate results
high levels of stress among production workers
absence of inventory to buffer production interruptions
Theory of Constraints
recognizes that the performance of any organization is limited by its constraints
Basic Concepts
Throughput is the rate at which an organization generates
money through sales
Inventory is all the money the organization spends in turning materials into throughput
Operating expenses are defined as all the money the organization spends in turning inventories into throughput.
TOC, however, argues that lowering inventory helps produce a competitive edge by having better products, lower prices, and faster responses to customer needs.
TOC Steps
Step 1: Identify the Organization’s Constraint(s)
Step 2: Exploit the Binding Constraint(s)
major binding constraint is defined as the drummer
time buffer is the inventory needed to keep the constrained resource busy for a specified time interval
Ropes are actions taken to tie the rate at which material is released into the plant (at the first operation) to the production rate of the constrained resource
drum-buffer-rope process
Step 3: Subordinate Everything Else to the Decisions Made in Step 2
Step 4: Elevate the Binding Constraint(s)
Step 5: Repeat the Process