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Slide12.

Chapter12
Inventory
management

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Slide12.2

Inventorymanagement
Direct

Design

Inventory
management

Operations
management

Develop

Deliver

The market requires a


quantityofproductsand
servicesataparticulartime
The operation supplies...
thedeliveryofaquantityof
productsandserviceswhen
required

Figure12.1Thischaptercoversinventorymanagement
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Slide12.3

Keyoperationsquestions
In Chapter 12 Inventory planning and control Slack et
al. identify the following key questions
What is inventory?
Why should there be any inventory?
How much should be ordered?
When should an order be placed?
How can inventory be controlled?

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Slide12.4

Inventorymanagement
Inventory is created to compensate for the differences in timing
between supply and demand

Inventory
accumulating

In-flow (supply from


previous process)
Time

Time

Inventory
reducing

Inventory

Out-flow(rate of demand
from output process)

Time

Figure12.2Inventoryiscreatedtocompensateforthedifferencesintimingbetweensupplyanddemand
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Slide12.5

Examplesofinventory
Process,
operationor
supplynetwork

Hotel

Inventories
Physicalinventories

Queuesofcustomers

Informationin
databases

Fooditems,drinks,
toiletitems

Hospital

Creditcard
application
process
Computer
manufacturer

Atcheckinandcheck Customerdetails,
out
loyaltycardholders,
cateringsuppliers
Dressings,disposable Patientsonawaiting
Patientmedical
instruments,blood
list,patientsinbed
records
waitingforsurgery,
patientsinrecovery
wards
Blankcards,form
Customerswaitingon Customerscreditand
letters
thephone
personalinformation
Componentsfor
assembly,packaging
materials,finished
computersreadyfor
sale

Customerswaitingfor
deliveryoftheir
computer

Customersdetails,
supplierinformation

Table12.1Examplesofinventoryheldinprocesses,operationsorsupplynetworks
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Slide12.6

Somereasonstoavoidinventories
Physicalinventories
Cost

Tiesupworkingcapital
andtherecouldbehigh
administrativeand
insurancecosts
Requiresstoragespace

Space

Quality

Operational/
organizational

Inventories
Queuesofcustomers

Digitalinformationin
databases
Primarilytime-costtothe Costofset-up,access,
customer,i.e.wastes
updateand
customerstime.
maintenance
Requiresareasfor
Requiresmemory
waitingorphonelinesfor capacity.Mayrequire
heldcalls
secureand/orspecial
environment

Maydeteriorateovertime, Mayupsetcustomersif
becomedamagedor
theyhavetowaittoo
obsolete
long.Maylose
customers
Mayhideproblems(see Mayputunduepressure
leansynchronization
onthestaffandso
Chapter15)
qualityiscompromised
forthroughput

Datamaybecorrupted
orlostorbecome
obsolete
Databasesneed
constantmanagement;
accesscontrol,
updatingandsecurity

Table12.2Somereasonstoavoidinventories

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Slide12.7

Somewaysinwhichphysicalinventorymaybereduced
Reasonfor
holdinginventory
Asaninsurance
against
uncertainty
Tocounteracta
lackofflexibility

Example
Safetystocksforwhen
demandorsupplyisnot
perfectlypredictable
Cyclestocktomaintainsupply
whenotherproductsarebeing
made

Totakeadvantage Suppliersoffertimelimited
ofrelativelyshort- speciallowcostoffers
termopportunities

Howinventorycouldbe
reduced
Improvedemandforecasting
Tightensupply,e.g.through
servicelevelpenalties
Increaseflexibilityof
processes,e.g.byreducing
changeovertimes(see
Chapter11)
Usingparallelprocesses
producingoutput
simultaneously(see
Chapter7)
Persuadesupplierstoadopt
everydaylowprices(see
Chapter13)

Table12.3Somewaysinwhichphysicalinventorymaybereduced

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Slide12.8

Somewaysinwhichphysicalinventorymaybereduced
(Continued)
Reasonfor
Example
holdinginventory
Toanticipate
Buildupstocksinlow
futuredemands
demandperiodsforusein
highdemandperiods
Toreduceoverall Purchasingabatchof
costs
productsinordertosave
deliveryandadministration
costs

Tofillthe
processing
pipeline

Itemsbeingdeliveredto
customer

Howinventorycouldbereduced
Increasevolumeflexibilityby
movingtowardsachase
demandplan(seeChapter11)
Reduceadministrationcosts
throughpurchasingprocess
efficiencygains
Investigatealternativedelivery
channelthatreducetransport
costs.
Reduceprocesstimebetween
customerrequestanddispatch
ofitems
Reducethroughputtimeinthe
downstreamsupplychain(see
Chapter13)

Table12.3Somewaysinwhichphysicalinventorymaybereduced(Continued)
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Slide12.9

Inventoryhasasignificanteffectonreturnonassets
Abilityto
supplyfrom
stock

Returnon =
Assets

Profit

Totalassets

Obsolescence,
damage,loss

RevenuesCosts

Storage
costs
Ordering
costs

Workingcapital+Fixedassets

Amountyou
owesuppliers

Amount
customersowe
you

Costof
funding
inventory

Figure12.4Inventorymanagementhasasignificanteffectonreturnonassets

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Slide12.10

Inventoryprofileschartthevariationininventorylevel
Steadyand
predictable
demand(D)

Order
quantity=Q

Slope=demandrate

Inventorylevel

Averageinventory
=Q
2

Q
D

Time

Instantaneousdeliveriesatarateof D perperiod
Q
Figure12.5Inventoryprofileschartthevariationininventorylevel

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Slide12.11

Twoalternativeinventoryplanswithdifferentorder
quantities(Q)

Inventorylevel

Demand(D)=1,000itemsper
year
400

PlanA
Q=400
Averageinventory
forplanA=200

PlanB
100 Q=100

Averageinventory
forplanB=50

Time
0.1yr

0.4yr

Figure12.6Twoalternativeinventoryplanswithdifferentorderquantities(Q)

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Slide12.12

Traditionalviewofinventory-relatedcosts
400
350
300

Costs

250

Totalcosts

200
150

Holdingcosts

100
Ordercosts

50

Economicorder
quantity(EOQ)
50

100

150

200

250

300

350

400

Orderquantity
Figure12.7Graphicalrepresentationoftheeconomicorderquantity
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Slide12.13

Inventorylevel

Cycleinventoryinabakery

ProduceA ProduceB ProduceC ProduceA


Deliver
A

Deliver
B

Deliver
C

Deliver
A

ProduceB ProduceC
Deliver
B

Deliver
C

Time
Figure12.3Cycleinventoryinabakery

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Slide12.14

Inventoryprofileforgradualreplacementofinventory

Inventorylevel

Order
quantity
Q
Slope=P D

Slope=D

Q
P

Time

Figure12.8Inventoryprofileforgradualreplacementofinventory

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Slide12.15

Inventory
level

Inventoryplanningallowingforshortages

Time

Shortages

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Slide12.16

There-orderpoint
Demand(D)=100itemsperweek

Inventorylevel

400

Orderquantity(Q)=400
Re-orderlevel

300

Re-orderpoint

200
100
0

Orderleadtime

Time

Figure12.11Re-orderlevel(ROL)andre-orderpoint(ROP)arederivedfromtheorderleadtime

anddemandrate

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Slide12.17

Safetystock(s)helpstoavoidstock-outswhendemand
and/ororderleadtimesareuncertain

Inventorylevel

Re-orderlevel(ROL)
Distributionof
lead-time
usage

Q
d1
d2

S
t2

t1
Time

Figure12.12Safetystock(s)helpstoavoidstock-outswhendemandand/ororderleadtimeare

uncertain

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Slide12.18

Theprobabilitydistributionsfororderleadtimeand
demandratecombinetogivethelead-timeusage
distribution
0.4
Probability

Probability

0.4
0.3
0.2
0.1
0

1 2 3 4 5
Orderleadtime

0.3
0.2
0.1
0

110 120 130 140


Demandrate

Probability

0.4
0.3
0.2
0.1
0

100199

120299

300399 400499 500599


Lead-timeusage

600699

700799

Figure12.13Theprobabilitydistributionsfororderleadtimeanddemandratecombinetogivethe

lead-timeusagedistribution
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Slide12.19

Aperiodicreviewapproachtoordertimingwith
probabilisticdemandandleadtime
Qm

Inventorylevel

Q1

T0

Q2

T1

T2
t1

tf

Q3

T3
t2

tf

Time
t3

tf

Figure12.14Aperiodicreviewapproachtoordertimingwithprobabilisticdemandandleadtime

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Slide12.20

Apapermerchantmustgetitsinventoryplanningand
controlright

Figure12.10Theroleofthepapermerchant
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Slide12.21

Paretocurveforstockeditems
Percentageofvalueofitems

100
90
80
70
60
50
40
30

ClassA
items

ClassB
items

ClassC
items

20
10
10

20

30

40

50

60

70

80

90

100

Percentageoftypesofitems
Figure12.16Paretocurveforitemsinawarehouse

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Slide12.22

Inventoryclassificationsandmeasures

ClassAitemsthe
20%orsoofhighvalueitemswhich
accountforaround
80%ofthetotal
stockvalue

ClassBitemsthe
next30%orsoof
medium-valueitems
whichaccountfor
around10%ofthe
totalstockvalue

ClassCitemsthe
remaining50%orso
oflow-valueitems
whichaccountfor
aroundthelast10%
ofthetotalstock
value

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Slide12.23

CriticismoftheEOQapproach
If the true costs of stock holding are taken into account, and if the cost of ordering (or
changeover) is reduced, the economic order quantity (EOQ) is much smaller

Revised
holding
costs

Costs

Revisedtotal
costs

Originaltotal
costs
Original
holdingcosts
Originalorder
costs

Revised
EOQ

Original
EOQ

Revisedorder
costs

Orderquantity

Figure12.9Ifthetruecostsofstockholdingaretakenintoaccount,andifthecostofordering(or

changeover)isreduced,theeconomicorderquantity(EOQ)ismuchsmaller
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Slide12.24

TheTwo-binandThree-binsystemsofreordering

Two-binsystem

Bin1

Bin2

Itemsbeing Reorderlevel
+safety
used
inventory

Three-binsystem

Bin1

Bin2

Bin3

Itemsbeing
used

Reorder
level
inventory

Safety
inventory

Figure12.15Thetwo-binandthree-binsystemsofre-ordering

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Slide12.25

Chapter12end-of-chaptercase

supplies4medics.c
om

Source:ALRF(ImagemoreCo.,Ltd)

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Slide12.26

supplies4medics.com
Questions
Prepare a spreadsheet-based ABC analysis of usage value.
Classify as follows:
A-Items: top 20% of usage value
B-Items: next 30% of usage value
C-Items: remaining 50% of usage value

Calculate the inventory weeks for each item, for each


classification, and for all the items in total. Does this suggest
that the OMs estimate of inventory weeks is correct?
If so, what is your estimate of the overall inventory at the end
of the base year, and how much might that have increased
during the year?

Based on the sample, analyze the underlying causes of the


availability problem described in the text.

Calculate the EOQs for the A-items.

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Slide12.27

supplies4medics.com(Continued)
Sample
number

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

Catalogue
reference
number*
11036
11456
11563
12054
12372
12774
12979
13063
13236
13454
13597
13999
14068
14242
14310
14405
14456
14675
14854
24943

Sales unit description **

DisposableAprons(10pk)
Ear-loopMasks(Box)
DrillType164
IncontinencePadsLarge
150mlSyringe
RectalSpeculum3Prong
PocketOrganiserBlue
OxygenTraumaKit
ZincOxideTape
DualHeadStethoscope
Disp.LatexCatheter
Roll-upWheelchairRamp
WashCleneTube
CervicalCollar
HeadWedge
Three-WheelScooter
NeonatalTrach.Tube
MouldableStripPaste
SequentialComp.Pump
ToiletSafetyFrame

Sales unit
cost
(Euro)
2.40
3.60
1.10
3.50
11.30
17.40
7.00
187.00
1.50
6.25
0.60
152.50
1.40
12.00
89.00
755.00
80.40
10.20
430.00
25.60

Last 12
months
Sales
(units)
100
6,000
220
35,400
430
65
120
40
1,260
10
3,560
12
22,500
140
44
14
268
1,250
430
560

Inventory as
at last year
end
(units)
0
120
420
8,500
120
20
160
2
0
16
12
44
10,500
24
2
5
6
172
40
18

Re-order
Quantity
(units)
10
1,000
250
10,000
100
20
500
10
50
25
20
50
8,000
20
10
5
100
100
50
20

*Referencenumbersareallocatedsequentiallyasnewitemsareaddedtocatalogue.
**Allquantitiesareinsalesunits(e.g.item,box,case,pack).
Table12.10Representativesampleof20catalogueItems

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Slide12.28

Sample
#
19

Unit
Cost
430.00

Annual
Sales
430

3.50

13
2

Classification
A

%ofUV

Inventory

184,900

Cum
UV
184,900

41.33

40

35,400

123,900

308,800

69.02

8,500

29,750

12.5

1.40

22,500

31,500

340,300

76.06

10,500

14,700

24.3

3.60

6,000

21,600

361,900

80.89

1,200

4,320

10.4

SubTotal

UV

361,900

Inventory Inventory
Value
Turns
17,200

65,970

5.49

Stock
weeks
4.8

9.5

17

80.40

268

21,547

383,447

85.70

482

1.2

20

25.60

560

14,336

397,783

88.91

18

461

1.7

18

10.20

1,250

12,750

410,533

91.76

172

1,754

7.2

16

755.00

14

10,570

421,103

94.12

3,775

18.6

SubTotal

59,203

6,473

9.15

5.7

187.00

40

7,480

428,583

95.79

374

2.6

11.30

430

4,859

433,442

96.88

120

1,356

14.5

15

89.00

44

3,916

437,358

97.75

178

2.4

11

0.60

3,560

2,136

439,494

98.23

12

0.2

1.50

1,260

1,890

441,384

98.65

0.0

12

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152.50
12
1,830
443,214
C
99.06
44
6,710
190.7
th