Objectives of Inventory Management:
minimise working capital investment
minimise inventory carrying costs
minimise scrap and rework
provide the highest level of customer service possible for the investment.
Inventory management tasks
make decisions about:
replenishment production runs
Inventory must be managed differently for:
Independent demand: influenced by market conditions
Dependent demand: derived from the production of parent items.
ABC Inventory management methodologies:
ABC analysis (Parato) of inventory
select a criterion (sales / usage) based on importance
rank inventory items on criterion
calculate cumulative sales and/or usage for all items
assign items into A, B, C groups
assign inventory levels and warehouse locations for each item.
ABC classification, where items are not of equal importance:
A-items: few items (ex. 20 %) which have a high rate of usage and/or high unit cost and account for 80 % of total value of usage in the inventory
B-items: number of items (ex. 30 %) which in total account for 15 % of total value of usage
C-items: great many items (ex. 50 %) with low individual usage and/or low unit value which in total account for only 5 % of total value of usage
ABC and inventory control efforts:
A-items: very careful management and careful estimates of future usage.
B-items: routine management and routine effort in forecasting demand.
C-items: little effort in forecasting demand, however be careful for strategic items (safety stock).
Inventory Management Systems:
Inventory management systems include:
two-bin replenishment system
used for low value , non-critical items (i.e.... class C items)
relies on visual inspection of declining inventory
one bin contains enough material to meet needs between the time one order is received and another is placed
second bin (also called the "reserve bin") contains enough material to meet needs between placing an order and receiving the materials
if production taps into the reserve bin, additional materials must be ordered immediately
reorder point system: amount ordered when inventory declines to a predetermined level (ROP)
when to order (reorder point)
how much to order (order quantity)
periodic review systems:
after predetermined fixed passages of time, orders are placed for variable amounts
how much to order (order quantity)
how long between orders (reorder time
Materials Requirements Planning (MRP):
assumes variable demand throughout production
calculates component requirements based on the Master Production Schedule (MPS), Bill of Material and inventory data
materials are purchased only when the MPS has them scheduled for use
materials are pushed through a plant
MRP II systems share information with other functional departments, outside the operations area (i.e., purchasing, sales, cost accounting). These systems plan the use of company resources, including scheduling raw materials, vendors, production, equipment and processes
JIT: A different approach to reordering:
activities add no value are waste, material only is supplied when it is requested from the next step in the production process (pull system)
these requests are called kanban.
How Much to Order:
Economic Order Quantity (EOQ):
lot size that minimizes total annual inventory holding and ordering costs
annual demand is constant
forecast is perfect (no random error)
costs are constant and linear
lead time is known and constant.
Economic Order Quantity (EOQ): variations
quantity discounts: product cost is function of the order quantity
variations in demand: safety stock
variations in lead time: safety stock.
When to Order:
Reorder point (R.O.P.)
Min - Max
Level of safety stock with a set service level requires
tracking of historical sales to find:
establish % service level
find Z-score from distribution table
SS = (Z-score) * Standard Deviation
Reasons for excess inventory include:
lack of market demand.
Inventory Counting Methods:
a few experienced people count continuously throughout the year
timely detection of errors
fewer mistakes in item identification
minimal loss of production time
systematic improvement of record accuracy.
End of year:
many inexperienced people count inventory in a short hectic period once per year
no correction or cause of errors
many mistakes in item identification
plant and warehouse shutdown for inventory
no improvement of inventory accuracy.
Suggestions - A step action plan:
Find out why you have inventories
Analyse the present situation
Do an ABC-analysis
Define the inventory levels
Define the inventory system
Define key performance indicators
Introduce key performance follow-up reports
Print and analyse lists of slow-moving Class C items
try to move the order de coupling point to an early stage in the supply chain to reduce inventory holding (carrying) cost
ABC - item management
shorten replenishment cycles.
Key Performance indicators:
stockholding x 52 weeks / annual usage
comparison of % of demand actually satisfied with defined service level
number of back orders