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Operation management
1.
© 2006 Prentice
Hall, Inc. 12 – 1 Operations Management Chapter 12 – Inventory Management © 2006 Prentice Hall, Inc. PowerPoint presentation to accompanyPowerPoint presentation to accompany Heizer/RenderHeizer/Render Principles of Operations Management, 6ePrinciples of Operations Management, 6e Operations Management, 8eOperations Management, 8e
2.
© 2006 Prentice
Hall, Inc. 12 – 2 InventoryInventory One of the most expensive assetsOne of the most expensive assets of many companies representing asof many companies representing as much as 50% of total investedmuch as 50% of total invested capitalcapital Operations managers must balanceOperations managers must balance inventory investment and customerinventory investment and customer serviceservice
3.
© 2006 Prentice
Hall, Inc. 12 – 3 Types of InventoryTypes of Inventory Raw materialRaw material Purchased but not processedPurchased but not processed Work-in-processWork-in-process Undergone some change but not completedUndergone some change but not completed A function of cycle time for a productA function of cycle time for a product Maintenance/repair/operating (MRO)Maintenance/repair/operating (MRO) Necessary to keep machinery and processesNecessary to keep machinery and processes productiveproductive Finished goodsFinished goods Completed product awaiting shipmentCompleted product awaiting shipment
4.
© 2006 Prentice
Hall, Inc. 12 – 4 Holding, Ordering, andHolding, Ordering, and Setup CostsSetup Costs Holding costs - the costs of holdingHolding costs - the costs of holding or “carrying” inventory over timeor “carrying” inventory over time Ordering costs - the costs ofOrdering costs - the costs of placing an order and receivingplacing an order and receiving goodsgoods Setup costs - cost to prepare aSetup costs - cost to prepare a machine or process formachine or process for manufacturing an ordermanufacturing an order
5.
© 2006 Prentice
Hall, Inc. 12 – 5 Holding CostsHolding Costs Table 12.1Table 12.1 •Housing costs (including rent or depreciation,Housing costs (including rent or depreciation, operating costs, taxes, insurance)operating costs, taxes, insurance) •Material handling costs (equipment lease orMaterial handling costs (equipment lease or depreciation, power, operating cost)depreciation, power, operating cost) •Labor costLabor cost •Investment costs (borrowing costs, taxes, andInvestment costs (borrowing costs, taxes, and insurance on inventory)insurance on inventory) •Pilferage, space, and obsolescencePilferage, space, and obsolescence
6.
© 2006 Prentice
Hall, Inc. 12 – 6 Inventory Models forInventory Models for Independent DemandIndependent Demand Basic economic order quantityBasic economic order quantity Production order quantityProduction order quantity Quantity discount modelQuantity discount model Need to determine when and howNeed to determine when and how much to ordermuch to order
7.
© 2006 Prentice
Hall, Inc. 12 – 7 Basic EOQ ModelBasic EOQ Model 1.1. Demand is known, constant, andDemand is known, constant, and independentindependent 2.2. Lead time is known and constantLead time is known and constant 3.3. Receipt of inventory is instantaneous andReceipt of inventory is instantaneous and completecomplete 4.4. Quantity discounts are not possibleQuantity discounts are not possible 5.5. Only variable costs are setup and holdingOnly variable costs are setup and holding 6.6. Stockouts can be completely avoidedStockouts can be completely avoided Important assumptionsImportant assumptions
8.
© 2006 Prentice
Hall, Inc. 12 – 8 Inventory Usage Over TimeInventory Usage Over Time Figure 12.3Figure 12.3 OrderOrder quantity = Qquantity = Q (maximum(maximum inventoryinventory level)level) InventorylevelInventorylevel TimeTime Usage rateUsage rate AverageAverage inventoryinventory on handon hand QQ 22 MinimumMinimum inventoryinventory
9.
© 2006 Prentice
Hall, Inc. 12 – 9 Minimizing CostsMinimizing Costs Objective is to minimize total costsObjective is to minimize total costs Table 11.5Table 11.5 AnnualcostAnnualcost Order quantityOrder quantity Curve for totalCurve for total cost of holdingcost of holding and setupand setup Holding costHolding cost curvecurve Setup (or order)Setup (or order) cost curvecost curve MinimumMinimum total costtotal cost OptimalOptimal orderorder quantityquantity
10.
© 2006 Prentice
Hall, Inc. 12 – 10 The EOQ ModelThe EOQ Model QQ = Number of pieces per order= Number of pieces per order Q*Q* = Optimal number of pieces per order (EOQ)= Optimal number of pieces per order (EOQ) DD = Annual demand in units for the Inventory item= Annual demand in units for the Inventory item SS = Setup or ordering cost for each order= Setup or ordering cost for each order HH = Holding or carrying cost per unit per year= Holding or carrying cost per unit per year Annual setup costAnnual setup cost == ((Number of orders placed per yearNumber of orders placed per year)) x (x (Setup or order cost per orderSetup or order cost per order)) Annual demandAnnual demand Number of units in each orderNumber of units in each order Setup or orderSetup or order cost per ordercost per order == = (= (SS))DD QQ Annual setup cost = S D Q
11.
© 2006 Prentice
Hall, Inc. 12 – 11 The EOQ ModelThe EOQ Model QQ = Number of pieces per order= Number of pieces per order Q*Q* = Optimal number of pieces per order (EOQ)= Optimal number of pieces per order (EOQ) DD = Annual demand in units for the Inventory item= Annual demand in units for the Inventory item SS = Setup or ordering cost for each order= Setup or ordering cost for each order HH = Holding or carrying cost per unit per year= Holding or carrying cost per unit per year Annual holding costAnnual holding cost == ((Average inventory levelAverage inventory level)) x (x (Holding cost per unit per yearHolding cost per unit per year)) Order quantityOrder quantity 22 = (= (Holding cost per unit per yearHolding cost per unit per year)) = (= (HH))QQ 22 Annual setup cost = S D Q Annual holding cost = H Q 2
12.
© 2006 Prentice
Hall, Inc. 12 – 12 The EOQ ModelThe EOQ Model QQ = Number of pieces per order= Number of pieces per order Q*Q* = Optimal number of pieces per order (EOQ)= Optimal number of pieces per order (EOQ) DD = Annual demand in units for the Inventory item= Annual demand in units for the Inventory item SS = Setup or ordering cost for each order= Setup or ordering cost for each order HH = Holding or carrying cost per unit per year= Holding or carrying cost per unit per year Optimal order quantity is found when annual setup costOptimal order quantity is found when annual setup cost equals annual holding costequals annual holding cost Annual setup cost = S D Q Annual holding cost = H Q 2 DD QQ SS == HH QQ 22 Solving for Q*Solving for Q* 22DS = QDS = Q22 HH QQ22 == 22DS/HDS/H Q* =Q* = 22DS/HDS/H
13.
© 2006 Prentice
Hall, Inc. 12 – 13 An EOQ ExampleAn EOQ Example Determine optimal number of needles to orderDetermine optimal number of needles to order DD = 1,000= 1,000 unitsunits SS = $10= $10 per orderper order HH = $.50= $.50 per unit per yearper unit per year Q* =Q* = 22DSDS HH Q* =Q* = 2(1,000)(10)2(1,000)(10) 0.500.50 = 40,000 = 200= 40,000 = 200 unitsunits
14.
© 2006 Prentice
Hall, Inc. 12 – 14 An EOQ ExampleAn EOQ Example Determine optimal number of needles to orderDetermine optimal number of needles to order DD = 1,000= 1,000 unitsunits Q*Q* = 200= 200 unitsunits SS = $10= $10 per orderper order HH = $.50= $.50 per unit per yearper unit per year = N = == N = = ExpectedExpected number ofnumber of ordersorders DemandDemand Order quantityOrder quantity DD Q*Q* NN = = 5= = 5 orders per yearorders per year 1,0001,000 200200
15.
© 2006 Prentice
Hall, Inc. 12 – 15 An EOQ ExampleAn EOQ Example Determine optimal number of needles to orderDetermine optimal number of needles to order DD = 1,000= 1,000 unitsunits Q*Q* = 200= 200 unitsunits SS = $10= $10 per orderper order NN = 5= 5 orders per yearorders per year HH = $.50= $.50 per unit per yearper unit per year = T == T = ExpectedExpected time betweentime between ordersorders Number of workingNumber of working days per yeardays per year NN TT = = 50= = 50 days between ordersdays between orders 250250 55
16.
© 2006 Prentice
Hall, Inc. 12 – 16 An EOQ ExampleAn EOQ Example Determine optimal number of needles to orderDetermine optimal number of needles to order DD = 1,000= 1,000 unitsunits Q*Q* = 200= 200 unitsunits SS = $10= $10 per orderper order NN = 5= 5 orders per yearorders per year HH = $.50= $.50 per unit per yearper unit per year TT = 50= 50 daysdays Total annual cost = Setup cost + Holding costTotal annual cost = Setup cost + Holding cost TC = S + HTC = S + H DD QQ QQ 22 TCTC = ($10) + ($.50)= ($10) + ($.50) 1,0001,000 200200 200200 22 TCTC = (5)($10) + (100)($.50) = $50 + $50 = $100= (5)($10) + (100)($.50) = $50 + $50 = $100
17.
© 2006 Prentice
Hall, Inc. 12 – 17 Robust ModelRobust Model The EOQ model is robustThe EOQ model is robust It works even if all parametersIt works even if all parameters and assumptions are not metand assumptions are not met The total cost curve is relativelyThe total cost curve is relatively flat in the area of the EOQflat in the area of the EOQ
18.
© 2006 Prentice
Hall, Inc. 12 – 18 Reorder PointsReorder Points EOQ answers the “how much” questionEOQ answers the “how much” question The reorder point (ROP) tells when toThe reorder point (ROP) tells when to orderorder ROPROP == Lead time for aLead time for a new order in daysnew order in days DemandDemand per dayper day == d x Ld x L d =d = DD Number of working days in a yearNumber of working days in a year
19.
© 2006 Prentice
Hall, Inc. 12 – 19 Reorder Point CurveReorder Point Curve Q*Q* ROPROP (units)(units) Inventorylevel(units)Inventorylevel(units) Time (days)Time (days) Figure 12.5Figure 12.5 Lead time = LLead time = L Slope = units/day = dSlope = units/day = d
20.
© 2006 Prentice
Hall, Inc. 12 – 20 Reorder Point ExampleReorder Point Example DemandDemand = 8,000= 8,000 DVDs per yearDVDs per year 250250 working day yearworking day year Lead time for orders isLead time for orders is 33 working daysworking days ROP =ROP = d x Ld x L d =d = DD Number of working days in a yearNumber of working days in a year = 8,000/250 = 32= 8,000/250 = 32 unitsunits = 32= 32 units per day xunits per day x 33 daysdays = 96= 96 unitsunits
21.
© 2006 Prentice
Hall, Inc. 12 – 21 Production Order QuantityProduction Order Quantity ModelModel Used when inventory builds up overUsed when inventory builds up over a period of time after an order isa period of time after an order is placedplaced Used when units are produced andUsed when units are produced and sold simultaneouslysold simultaneously
22.
© 2006 Prentice
Hall, Inc. 12 – 22 Production Order QuantityProduction Order Quantity ModelModel InventorylevelInventorylevel TimeTime Demand part of cycleDemand part of cycle with no productionwith no production Part of inventory cycle duringPart of inventory cycle during which production (and usage)which production (and usage) is taking placeis taking place tt MaximumMaximum inventoryinventory Figure 12.6Figure 12.6
23.
© 2006 Prentice
Hall, Inc. 12 – 23 Production Order QuantityProduction Order Quantity ModelModel Q =Q = Number of pieces per orderNumber of pieces per order p =p = Daily production rateDaily production rate H =H = Holding cost per unit per yearHolding cost per unit per year d =d = Daily demand/usage rateDaily demand/usage rate D =D = Annual demandAnnual demand Setup costSetup cost == ((DD//QQ))SS Holding costHolding cost == 1/21/2 HQHQ[1 - ([1 - (dd//pp)])] ((DD//QQ))S =S = 1/21/2 HQHQ[1 - ([1 - (dd//pp)])] QQ22 == 22DSDS HH[1 - ([1 - (dd//pp)])] QQ* =* = 22DSDS HH[1 - ([1 - (dd//pp)])]
24.
© 2006 Prentice
Hall, Inc. 12 – 24 Production Order QuantityProduction Order Quantity ExampleExample DD == 1,0001,000 unitsunits pp == 88 units per dayunits per day SS == $10$10 dd == 44 units per dayunits per day HH == $0.50$0.50 per unit per yearper unit per year QQ* =* = 22DSDS HH[1 - ([1 - (dd//pp)])] = 282.8= 282.8 oror 283283 hubcapshubcaps QQ* = = 80,000* = = 80,000 2(1,000)(10)2(1,000)(10) 0.50[1 - (4/8)]0.50[1 - (4/8)]
25.
© 2006 Prentice
Hall, Inc. 12 – 25 Quantity Discount ModelsQuantity Discount Models Reduced prices are often available whenReduced prices are often available when larger quantities are purchasedlarger quantities are purchased Trade-off is between reduced product costTrade-off is between reduced product cost and increased holding costand increased holding cost Total cost = Setup cost + Holding cost + Product costTotal cost = Setup cost + Holding cost + Product cost TC = S + + PDTC = S + + PD DD QQ QHQH 22
26.
© 2006 Prentice
Hall, Inc. 12 – 26 Quantity Discount ModelsQuantity Discount Models DiscountDiscount NumberNumber Discount QuantityDiscount Quantity Discount (%)Discount (%) DiscountDiscount Price (P)Price (P) 11 00 toto 999999 no discountno discount $5.00$5.00 22 1,0001,000 toto 1,9991,999 44 $4.80$4.80 33 2,0002,000 and overand over 55 $4.75$4.75 Table 12.2Table 12.2 A typical quantity discount scheduleA typical quantity discount schedule
27.
© 2006 Prentice
Hall, Inc. 12 – 27 Quantity Discount ModelsQuantity Discount Models 1.1. For each discount, calculate Q*For each discount, calculate Q* 2.2. If Q* for a discount doesn’t qualify,If Q* for a discount doesn’t qualify, choose the smallest possible order sizechoose the smallest possible order size to get the discountto get the discount 3.3. Compute the total cost for each Q* orCompute the total cost for each Q* or adjusted value from Step 2adjusted value from Step 2 4.4. Select the Q* that gives the lowest totalSelect the Q* that gives the lowest total costcost Steps in analyzing a quantity discountSteps in analyzing a quantity discount
28.
© 2006 Prentice
Hall, Inc. 12 – 28 Quantity Discount ExampleQuantity Discount Example Calculate Q* for every discountCalculate Q* for every discount Q* = 2DS IP QQ11** = = 700= = 700 cars ordercars order 2(5,000)(49)2(5,000)(49) (.2)(5.00)(.2)(5.00) QQ22** = = 714= = 714 cars ordercars order 2(5,000)(49)2(5,000)(49) (.2)(4.80)(.2)(4.80) QQ33** = = 718= = 718 cars ordercars order 2(5,000)(49)2(5,000)(49) (.2)(4.75)(.2)(4.75)
29.
© 2006 Prentice
Hall, Inc. 12 – 29 Quantity Discount ExampleQuantity Discount Example Calculate Q* for every discountCalculate Q* for every discount Q* = 2DS IP QQ11** = = 700= = 700 cars ordercars order 2(5,000)(49)2(5,000)(49) (.2)(5.00)(.2)(5.00) QQ22** = = 714= = 714 cars ordercars order 2(5,000)(49)2(5,000)(49) (.2)(4.80)(.2)(4.80) QQ33** = = 718= = 718 cars ordercars order 2(5,000)(49)2(5,000)(49) (.2)(4.75)(.2)(4.75) 1,0001,000 — adjusted— adjusted 2,0002,000 — adjusted— adjusted
30.
© 2006 Prentice
Hall, Inc. 12 – 30 Quantity Discount ExampleQuantity Discount Example DiscountDiscount NumberNumber UnitUnit PricePrice OrderOrder QuantityQuantity AnnualAnnual ProductProduct CostCost AnnualAnnual OrderingOrdering CostCost AnnualAnnual HoldingHolding CostCost TotalTotal 11 $5.00$5.00 700700 $25,000$25,000 $350$350 $350$350 $25,700$25,700 22 $4.80$4.80 1,0001,000 $24,000$24,000 $245$245 $480$480 $24,725$24,725 33 $4.75$4.75 2,0002,000 $23.750$23.750 $122.50$122.50 $950$950 $24,822.50$24,822.50 Table 12.3Table 12.3 Choose the price and quantity that givesChoose the price and quantity that gives the lowest total costthe lowest total cost BuyBuy 1,0001,000 units atunits at $4.80$4.80 per unitper unit
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