Inventory Management
Inventory = the accumulation of transformed resources as they flow through processes, operations, or supply networks (Water Tank Analogy)
Physical Inventory: the accumulation of physical materials such as components, parts, finished goods or physical (paper) information records
Queues: the accumulation of customers, be they physical (people in an airport departure lounge) or virtual (waiting for services on a phone)
Databases: the accumulation of digital information, such as medical records or insurance details
Reasons to avoid accumulating inventory
Cost
Space
Quality
Operation/organisational
Benefits of Inventory
PI
Insurable against uncertainty
Counteract a lack of flexibility'
Allow operations to take advantage of short-term opportunities
Anticipate future demand
Reduce overall costs
Items can increase in value in storage
Fills the processing pipeline
Q
Help balance capacity and demand
Enable prioritisation
Give customers time to choose
Enable efficient use of resources
D
efficiently provide multi-level access
Speed up the process
How to reduce PI
Improve demand forecasting
Tighten supply (service-level penalties)
Increase flexibility of processes (reducing changeover time)
Use parallel processes to produce output
Persuade suppliers to adopt everyday low prices
Increase volume flexibility by moving towards a chase demand
Reduce administration costs through purchasing-process efficiency gains
Investigate alternative delivery channel that reduces transport costs
Reduce process time between customer request and dispatch of items
Reduce throughput time in the downstream supply chain
Day-to-day inventory decisions
How much to order (volume decision)
When to order (timing decision)
How to control the system
VD factors:
Cost of placing the order
Preparing the order
Communication with suppliers
Arranging for delivery
Making payments and maintaining internal records of the transaction
Price discount costs
Stock-out costs
working-capital costs
Storage costs
Obsolescence costs
Operating inefficiency costs
Inventory profiles
Average inventory = Q / 2 (due to the two shaded areas being equal
Time intervals between deliveries = Q / D
Frequency of deliveries = the reciprocal of the time interval = Q / D
Economic Order Quantity (EOQ) ((VD))
attempts to find the best balance between the advantages and disadvantages of holding stock
Holding costs are considered by including
Working capital costs
Storage costs
Obsolescence risk costs
HC = Holding cost per unit x average inventory (Ch x Q/2 )
Ordering costs are considered by including
Cost of placing the order (including transportation of items if relevant)
Price discount costs
OC = ordering cost x number of orders per period (Co x D / Q)
Therefore total costs = ChQ/2 x CoD/Q
Another way of expressing this is: Qo=EOQ=√(2CoD / Ch)
When using EOQ:
The time between order = EOQ / D
Order frequency = D / EOQ per period
The Economic Batch Quantity (EBQ) ((VD))
The minimum-cost batch quantity for this profile is called the economic batch quantity (EBQ), the economic manufacturing quantity (EMQ), or the production order quantity (POQ)
Here:
Maximum stock level = M
The slope of inventory build-up = P - D (MP / Q)
Therefore:
MP / Q = P - D
M = O(P - D) / P
As before, TC = HC + OC, and so
Ct = (ChQ(P-D)) / 2P+CoD / Q
dCt / dQ=(Ch(P-D)) / 2P- CoD / Q^2
Again, equating to 0 and solving Q, EBQ =
√(2CoD / (Ch(1-(D / P)))
the timing decision
Continuous and periodic review
CR: the approach of making the replenishment timing decision
PR: sacrifices the use of fixed, and therefore possibly optimum, order quantity
The time interval
The interval between placing orders, t1, is usually calculated on a deterministic basis, and derived from the EOQ
Therefore, EOQ= √(2CoD / Ch)
The optimum time interval between orders: tf=EOQ / D
Two-bin and three-bin systems
Two-Bin: involves storing the re-order point quantity plus the safety inventory quantity in the second bin and using parts from the first bin
Three-bin: the safety inventory is stored in a third bin, so it is clear when demand is exceeding that which was expected
Controlling inventory
Operation Managers need to
have to discriminate between different stocked items, so that they can apply a degree of control to each item that is appropriate so its importance
need to invest in an information-processing system that can cope with their particular set of inventory-control circumstances
ABC system
discriminating between different stock items is to rank them by the usage value
Generally, a relatively small proportion of the total range of items contained in an inventory will account for a large proportion of the total usage value (Pareto Law)
Types of classes
Type A
20% or so of high, usage-value items that account for around 80% of the total usage value
Type B
medium usage value, usually the next 30% of items, which often account for around 10% of the total usage value
Type C
low usage value items that, although comprising around 50% of the total types of items stocked, accounts for around 10% of the total usage value of the operation
Determining criteria
Annual usage
Value
Consequences of stock-out
Uncertainty of supply
High obsolescence or deterioration risk
more complex stock classification systems might include these criteria by classifying on an ABC basis for each (A/B/A)
Category A item by value
Class B item by consequence of stock-out
Class A item for obsolescence risk
Measuring Inventory
Monetary value
Inventory Information Systems
Most inventories of any significant size are managed by computerised systems
shared common functions:
Updating Stock Records
Generating orders
Generating Inventory Reports
Forecasting
Common Problems
The current description of inventory systems has assumes
a) Have a reasonably accurate idea of costs, such as holding or ordering costs
b) Have accurate information that really does indicate the actual level of stock and sales
The underlying causes of errors include
Keying errors
Quantity errors
Damaged or deteriorating inventory not recorded
The wrong items being taken out of stock, but the records not being updated
Delays between the transactions and the records being updated
Items being stolen from the inventory