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Lecture 12

OM 300 Lecture 12: OM Chapter 12 Notes

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Operations Management
OM 300
David Cooper

Operations Management Chapter 12 Notes Inventory Management Inventory Management • The objective of inventory management is to strike a balance between inventory investment and customer service Importance of Inventory • One of the most expensive assets of many companies representing as much as 50% of total invested capital • Operations mangers must balance inventory investment and customer service Functions of Inventory 1. To decouple or separate various parts of the production process 2. To decouple the firm from fluctuations in demand and provide a stock of goods that will provide a selection for customers 3. To take advantage of quantity discounts 4. To hedge against inflation Types of Inventory • 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 process productive • Finished goods ➢ Completed product awaiting shipment Managing Inventory 1. How inventory items can be classified 2. How accurate inventory records can be maintained ABC Analysis • 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 volume dollar volume • Used to establish policies that focus on the few critical parts and not the many trivial ones • Other criteria than annual dollar volume may be used ➢ Anticipated engineering changes ➢ Delivery problems ➢ Quality problems ➢ High unit cost • Policies employed may include ➢ More emphasis on supplier development for A items ➢ Tighter physical inventory control for A items ➢ More care in forecasting A items Record Accuracy • Accurate records are a critical ingredient in production and inventory systems • Allows organization to focus on what is needed • Necessary to make precise decisions about ordering, scheduling, and shipping • Incoming and outgoing record keeping must be accurate • Stockrooms should be secure Cycle Counting • Items are counted and records updated on a periodic basis • Often used with ABC analysis to determine cycle • Has several advantages 1. Eliminates shutdowns and interruptions 2. Eliminates annual inventory adjustment 3. Trained personnel audit inventory accuracy 4. Allows causes of errors to be identified and corrected 5. Maintains accurate inventory records Control of Service Inventories • Can be a critical component of profitability • Losses may come from shrinkage or pilferage • Applicable techniques include 1. Good personnel selection, training, and discipline 2. Tight control on incoming shipments 3. Effective control on all goods leaving the facility Independent Versus Dependent Demand • Independent demand – the demand for item is independent of the demand for any other item in inventory • Dependent demand – the demand for item is dependent upon the demand for some other item in the inventory Holding, Ordering, and Setup Costs • Holding costs – the costs of holding or “carrying” inventory over time • Ordering costs – the costs of placing an order and receiving goods • Setup costs – cost to prepare a machine or process for manufacturing an order Inventory Models for Independent Demand • Need to determine when and how much to order 1. Basic economic order quantity 2. Production order quantity 3. Quantity discount model Basic EOQ Model • Important assumptions 1. Demand is known, constant, and independent 2. Lead time is known and constant 3. Receipt of inventory is instantaneous and complete 4. Quantity discounts are not possible 5. Only variable costs are setup and holding 6. Stockouts can be completely avoided Minimizing Costs • Objective is to minimize total costs Production Order Quantity Model • Used when inventory builds up over a period of time after an order is placed • Used when units are produced and sold simultaneously Quantity Discount Models • Reduced prices are often available when larger quantities are purchased • Trade-off is between reduced product cost and increased holding cost • Total cost = setup cost + holding cost + product cost • Steps in analyzing a quantity discount 1. For each discount, calculate Q* 2. If Q* for a discount doesn’t qualify, choose the smallest possible order size to get the discount 3. Compute the total cost for each Q* or adjusted valued from Step 2 4. Select the Q* that gives the lowest total cost Other Probabilistic Models • When data on demand during lead time is not available, there are other models available 1. When demand is variable and lead time is constant 2. When lead time is variable and demand is constant 3. When both de
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