Materials Management 2 Importance
Component of cost of goods sold (COGS)
Labor component of COGS declining
Significant increase in cost of materials
Direct
Indirect (overhead)

Inventory 4 One of the most expensive assets of many companies representing as much as 50% of total invested capital
Operations managers must balance inventory investment and customer service

Inventory :

Inventory What is inventory?
Stock of materials
Stored Capacity
Examples: 5

Inventory :

Inventory 6 Functions of inventory:
To meet anticipated customer demand
To decouple suppliers – production – distribution
To take advantage of quantity discounts
To hedge against inflation & price increases
To protect against delivery variations
To avoid production disruptions through use of Work-In-Process (WIP)

Inventory :

Inventory 7 Negative aspects of inventory:
Large inventories hide operational problems
Financial cost in carrying excess inventories
Risk of damage to goods held in inventory
Risk of product obsolescence

Inventory :

Inventory 8 Types of Inventory:
Raw material
Purchased but not processed
Work-in-process
Undergone some change but not completed
A function of cycle time for a product
Maintenance/repair/operating (MRO)
Necessary to keep machinery and processes productive
Finished goods
Completed product awaiting shipment

Inventory :

Inventory 9 Examples:
Raw material
Iron ore – steel mill
Flour – bakery
Work-in-process
Radiator – auto manufacturer
Draft contract – attorney

Inventory :

Inventory 10 Examples:
Maintenance / repair / operating supplies (MRO)
Lubricating oil – machine shop
Soap and shampoo – hotel
Finished goods
Candy bar – confectioner
Policy – insurance company

Inventory :

Inventory 11 Vendors Customers Transformation Process Raw
Materials Work in
process Finished goods

Water Tank Analogy :

Water Tank Analogy 12

ABC Analysis :

ABC Analysis How inventory items can be classified
How accurate inventory records can be maintained 13

ABC Analysis :

ABC Analysis Divides inventory into three classes based on annual dollar volume
Class A - high annual dollar volume
Class B - medium annual dollar volume
Class C - low annual dollar volume
Used to establish policies that focus on the few critical parts and not the many trivial ones 14

ABC Analysis :

ABC Analysis 15

ABC Analysis :

ABC Analysis 16

ABC Analysis :

ABC Analysis 17

ABC Analysis :

ABC Analysis 18

ABC Analysis :

ABC Analysis 19 Other criteria than annual dollar volume may be used
Key accounts
Anticipated engineering changes
Delivery problems
Quality problems
High unit cost

ABC Analysis :

ABC Analysis 20 Policies employed may include
More emphasis on supplier development for A items
Tighter physical inventory control for A items
More care in forecasting A items

Cycle Counting :

Cycle Counting Items are counted and records updated on a periodic basis
Often used with ABC analysis to determine cycle 21

Cycle Counting :

Cycle Counting Has several advantages
Eliminates shutdowns and interruptions
Eliminates annual inventory adjustment
Trained personnel audit inventory accuracy
Allows causes of errors to be identified and corrected
Maintains accurate inventory records 22

Cycle Counting :

Cycle Counting 23 5,000 items in inventory, 500 A items, 1,750 B items, 2,750 C items
Policy is to count A items every month (20 working days), B items every quarter (60 days), and C items every six months (120 days)

Control of Service Inventories :

Control of Service Inventories 24 Can be a critical component of profitability
Losses may come from shrinkage or pilferage
Applicable techniques include
Good personnel selection, training, and discipline
Tight control on incoming shipments
Effective control on all goods leaving facility

Control of Service Inventories :

Control of Service Inventories Shrinkage
Unaccounted retail inventory between receipt and sale
Due to damage, theft and sloppy paperwork
Theft also known as pilferage
Accounts for 1% to 3% of sales 25

Control of Service Inventories :

Control of Service Inventories Controls
Good personnel selection, training, and discipline
Tight control of incoming shipments
Effective control of all goods leaving the facility 26

Types of Demand :

Types of Demand Independent demand - the demand for item is independent of the demand for any other item in inventory
Refrigerator – goods
Hamburger – services 27

Types of Demand :

Types of Demand Dependent demand - the demand for item is dependent upon the demand for some other item in the inventory
Ice maker – goods
Ketchup – services 28

Materials Costs :

Materials Costs Holding costs - associated with holding or “carrying” inventory over time
Setup costs - associated with costs of placing order and receiving goods
Out-of-stock costs - cost of back order and cost of lost sales 29

Holding Costs :

Holding Costs Obsolescence
Insurance
Extra staffing
Cost of money (opportunity costs)
Pilferage
Damage
Warehousing 30

Holding Costs :

Holding Costs 31

Setup Cost :

Setup Cost Supplies
Forms
Order processing
Clerical support 32

Independent Demand Models :

Independent Demand Models Fixed order-quantity models
Economic order quantity (EOQ)
Production order quantity (POQ)
Quantity discount
Probabilistic models
Fixed order-period models 33

EOQ Model :

EOQ Model EOQ assumptions:
Known and constant demand
Known and constant lead time
Instantaneous receipt of material
No quantity discounts
Only order (setup) cost and holding cost
No stockouts 34

EOQ Model :

EOQ Model 35

EOQ Model :

EOQ Model 36

EOQ Model :

EOQ Model 37 Q = Number of pieces per order
Q* = Optimal number of pieces per order (EOQ)
D = Annual demand in units for the Inventory item
S = Setup or ordering cost for each order
H = Holding or carrying cost per unit per year Annual setup cost = (Number of orders placed per year)
x (Setup or order cost per order)

EOQ Model :

EOQ Model 38 Q = Number of pieces per order
Q* = Optimal number of pieces per order (EOQ)
D = Annual demand in units for the Inventory item
S = Setup or ordering cost for each order
H = Holding or carrying cost per unit per year Annual holding cost = (Average inventory level)
x (Holding cost per unit per year)

EOQ Model :

EOQ Model 39 Q = Number of pieces per order
Q* = Optimal number of pieces per order (EOQ)
D = Annual demand in units for the Inventory item
S = Setup or ordering cost for each order
H = Holding or carrying cost per unit per year Optimal order quantity is found when annual setup cost equals annual holding cost Solving for Q*

EOQ Model - Example :

EOQ Model - Example 40

EOQ Model - Example :

EOQ Model - Example 41

EOQ Model - Example :

EOQ Model - Example 42

EOQ Model - Example :

EOQ Model - Example 43

POQ Model :

POQ Model Answers how much to order and when to order
Allows partial receipt of material
Other EOQ assumptions apply
Suited for production environment
Material produced, used immediately
Provides production lot size
Lower holding cost than EOQ model 44

Quantity Discount Model :

Quantity Discount Model Answers how much to order & when to order
Allows quantity discounts
Reduced price when item is purchased in larger quantities
Other EOQ assumptions apply
Trade-off is between lower price & increased holding cost 45

Probabilistic Model :

Probabilistic Model Answer how much & when to order
Allow demand to vary
Follows normal distribution
Other EOQ assumptions apply
Consider service level & safety stock
Service level = 1 - Probability of stockout
Higher service level means more safety stock 46

Fixed Period Model :

Fixed Period Model Answers how much to order
Orders placed at fixed intervals
Inventory brought up to target amount
Amount ordered varies
No continuous inventory count
Possibility of stockout between intervals
Useful when vendors visit routinely
Example: Paul Mitchell representative calls on salon every two weeks 47

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By: Vitaman (35 month(s) ago)

excellent !