Industrial Engineering

Inventory

What is Inventory?
Inventory Management
The total amount of goods and/or materials contained in a store or factory at any given time

Types of Inventory
Inventory Models
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

Examples

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Inventory

The Functions of Inventory

Inventory Management
To decouple or separate various parts of the production process To provide a stock of goods that will provide a selection for customers To take advantage of quantity discounts To hedge against inflation and upward price changes

Inventory Models

The Material Flow Cycle

Examples

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Inventory

The Material Flow Cycle

Inventory Management
Input

Other

Wait Time

Move Time

Queu e Time

Setup Time

Run Time

Output

Cycle Time

Inventory Models

Examples

1 Run time: Job is at machine and being worked on 2 Setup time: Job is at the work station, and the work station is being "setup." 3 Queue time: Job is where it should be, but is not being processed because other work precedes it. 4 Move time: The time a job spends in transit 5 Wait time: When one process is finished, but the job is waiting to be moved to the next work area. 6 Other: "Just-in-case" inventory.
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Inventory Management

Inventory Management
Inventory Management
How inventory items can be classified How accurate inventory records can be maintained

Disadvantages of Inventory
Inventory Models

Examples

Higher costs Item cost (if purchased) Ordering (or setup) cost Costs of forms, clerks wages etc. Holding (or carrying) cost Building lease, insurance, taxes etc. Difficult to control Hides production problems

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Inventory Management

Inventory Management Methods

Inventory Management
ABC Analysis Record Accuracy Cycle Counting Control of Service Inventory

Disadvantages of Inventory
Inventory Models

Examples

Higher costs Item cost (if purchased) Ordering (or setup) cost Costs of forms, clerks wages etc. Holding (or carrying) cost Building lease, insurance, taxes etc. Difficult to control Hides production problems

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Inventory Management

ABC Analysis
Inventory Management

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

Inventory Models

Examples

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Inventory Management

Independent versus Dependent Demand

Inventory Management

Independent Demand - demand for item is independent of demand for any other item Dependent Demand - demand for item is dependent upon the demand for some other item

Inventory Models

Inventory Costs

Examples

Holding Costs - associated with holding or carrying inventory over time Ordering Costs - associated with costs of placing order and receiving goods Setup Costs - cost to prepare a machine or process for manufacturing an order
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Inventory Management

Holding Costs
Inventory Management

Obsolescence Extra staffing Pilferage Warehousing Ordering Costs

Insurance Interest Damage

Inventory Models

Supplies Order processing

Examples

Forms Clerical support

Setup Costs
Clean-up costs Adjustment costs Re-tooling costs
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Inventory Models

Inventory Models
Inventory Management

Inventory Models

Fixed order-quantity models Economic Order Quantity (EOQ) Production Order Quantity (PEQ) Quantity Discount Probabilistic models Fixed order-period models

EOQ Assumptions
Examples

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
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Inventory Models

Inventory Usage Over Time

Inventory Management

Inventory Models

Examples

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Inventory Models

Objective is to minimize total costs

Inventory Management

Inventory Models

Examples

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Inventory Models

Basic Fixed-Order Quantity (EOQ) Model Formula

Inventory Management

Inventory Models

Examples

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Inventory Models

POQ Model Equations

Inventory Management

Inventory Models

Examples

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Example

Inventory Management

Given the information below, what are the EOQ and reorder point?

Annual Demand = 1,000 units Days per year considered in average daily demand = 365
Inventory Models

Cost to place an order = SR 10 Holding cost per unit per year = SR 2.50

Lead time = 7 days

Examples

Cost per unit = SR 15

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Example
2 DS = H 2( 1,000 )( 10 ) = 89.443 units or 90 units 2.50

Inventory Management

QOPT =

Inventory Models

1,000 units/yea r d= = 2.74 units/day 365 days/year

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Reorder point, R = d L = 2.74units/day (7days) = 19.18 or 20 units

Examples

In summary, you place an optimal order of 90 units. In the course of using the units to meet demand, when you only have 20 units left, place the next order of 90 units.
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Example

Inventory Management

Inventory Models

A showroom dealer whishes to determine the order size for its best selling model XYZ. The manger estimated the annual demand for the model as 1000 units. His past record shows each order cost SR 250 to place an order. And. if one unit model carried for whole year, it cost SR1000. Assuming the demand uniform and constant. Similarly assuming ordering cost and carrying cost constant, How many models manager should order to avoid no stock out situation. If lead time is 5 days (assumed to be constant) at what level of inventory on hand he should order the models.

Examples

d (TC) 0 dQ

2DS Q H
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Example

So, Q is approximately equal to 23

Inventory Management

Reorder level = Average daily demand x Lead time R = (1000/365) x 5 = 13 units

Inventory Models

i.e. when inventory level drop to 13 the manager should order for 23 models

Examples

This case is of Fixed order quantity without safety stock

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