TOM - Inventory Management

Most valuable type of inventory

finished goods

Most responsive type of inventory

Safety stock

A Items

• Very valuable or critical items

• MRI Machines

B Items

• Mass produced items that are less valuable but still needed

• Hospital Beds

C Items

• low value items

• Bandaids

Independent Demand

Demand for finished goods. Objective: provide high customer service w low inventory costs.

Dependent Demand

Demand for components of a product. Objective: support schedule by ensuring there are enough materials to meet needs of manufacturing.

Single Period

• must be sold within the period in which they are produced

• demand is variable + uncertain

• one shot ordering opportunity

Single Period - Cost of Uncertainty

• Excess Costs - Overage

• Shortage Costs - Underage

Service Level

= Optimal probability of no stock-out

Probability of running out of stock

• If SL = 95%, then you run out of stock 5% of the time

Multi Period “M”

EOQ, ROP, MRP apply

Two Multi-Period Inventory Management

EOQ Model & Periodic Review

EOQ Model/Continuous Review

Continuous Review: Reorder whenever inventory reaches a specified level and always reorder the same quantity (Q). Provides a high customer service level at low inventory costs. Fixed-order!

Periodic Review

Reorder at fixed time intervals where order quantities differ. “Every Monday, find out how many we need”

• Suppliers may encourage orders this way

• Grouped orders may reduce shipping costs

• Fixed time-period

Lead Time

time interval between customer ordering and receiving the order

Ordering Cost

• transportation costs, receiving costs, admin

• dependent on how frequently you want to place an order

• number of orders * cost per order

Holding Cost

• warehouse handling/rents, capital investment, loss/shrinking

• dependent on how much you want to keep on-hand

• amount of inventory * holding cost per unit per year

Ordering Cost

Holding Cost

Annual holding costs can also be expressed as percent of unit cost

H = i*C

Safety Stock

• Stock or inventory that is held in excess of expected demand, buffer

• Triggering an earlier ROP + rising holding costs

• Helps you deal with variable demand rate and variable lead time

Bil of materials (BOM)

Complete product description of materials, parts, and components

Trade-Off

Ordering larger Q to lower ordering costs makes holding costs rise b/c you have to store more Q

DRP Determining Reorder Point

Q is ordered every time inventory on hand drops to or below a pre-determined re-order point (R) Can’t wait until Q = 0 because then you will have nothing to satisfy customers.

Multiperiod implementation

• When you lose more than you make

• Variability of demand is small

• Need to scale

Considerations of ROP

• If demand is higher, need to order more sooner

• If LT is longer, customers won’t have anything to buy for a period

MRP (Materials Requirements Planning)

Helps calculate what the material requirements will be if the amount of product to be produced is known. Must know quantity and timing.