Professional Documents
Culture Documents
Inventory Management
12 1
Inventory Management
Concepts
Weeks of supply
Turns
ABC Analysis
Q System
Q Systems Total Costs
P System
Q System vs. P System
12 2
Inventory Management
12 3
Inventory Management
Weeks of supply = Average aggregate Inventory Value / Weekly Sales (at cost)
The Eagle Machine Company averaged $2M in inventory last year, and the
COGS was $10M. If the company has 52 business weeks per year, how many
weeks of supply are held in inventory? What is the inventory turnover rate?
12 4
ABC Analysis
100
90
Class C
Class B
80 Class A
70
60
50
40
30
20
10
0
10
20
30
40
50
60
70
80
90 100
Percentage of SKUs
Figure 12.1 Typical Chart Using ABC Analysis
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall.
12 5
Solved Problem 1
Bookers Book Bindery divides SKUs into three classes,
according to their dollar usage. Calculate the usage values of
the following SKUs and determine which is most likely to be
classified as class A.
SKU Number
Description
Boxes
Quantity Used
per Year
Unit Value
($)
500
3.00
Cardboard
(square feet)
18,000
0.02
Cover stock
10,000
0.75
Glue (gallons)
75
40.00
Inside covers
20,000
0.05
Reinforcing tape
(meters)
3,000
0.15
Signatures
150,000
0.45
12 6
Solved Problem 1
SKU
Number
Description
Boxes
Quantity
Used per
Year
Unit Value
($)
Annual Dollar
Usage ($)
500
3.00
1,500
Cardboard
(square feet)
18,000
0.02
360
Cover stock
10,000
0.75
7,500
Glue (gallons)
75
40.00
3,000
Inside covers
20,000
0.05
1,000
Reinforcing tape
(meters)
3,000
0.15
450
Signatures
150,000
0.45
67,500
Total
81,310
12 7
Solved Problem 1
12 8
Solved Problem 1
12 9
12 10
For
Tracks
Includes
12 11
Some Terms
Constant demand, constant lead time.
EOQ=Economic Order Quantity
Q=Order Quantity
D=Annual demand
S=Order cost per order
H=Annual holding cost per unit
TC=Total annual costs
TBO=Time between orders, order cycle time
R=Reorder Point, used when LT>0
d=demand rate, dbar mean demand rate
L=Lead time
12 12
Receive
order
Inventory depletion
(demand rate)
Average
cycle
inventory
1 cycle
Time
12 13
On-hand inventory
Order
received
IP
Order
received
OH
OH
IP
Order
received
Order
received
OH
R
Order
placed
Order
placed
L
TBO
Order
placed
L
TBO
Time
TBO
Figure 12.6 Q System When Demand and Lead Time Are Constant and Certain
12 14
12 15
12 16
Time
12 17
On-hand inventory
Order
received
IP
Order
received
IP
IP
Order
received
Order
received
R
Order
placed
Order
placed
Order
placed
0
L1
TBO1
L2
TBO2
L3
Time
TBO3
12 18
Probability of stockout
(1.0 0.85 = 0.15)
Average
demand
during
lead time
R
zdLT
Figure 12.9 Finding Safety Stock with a Normal Probability Distribution for an
85 Percent Cycle-Service Level
12 19
Q System
12 20
On-hand inventory
IP
Q1
IP
Order
received
OH
Order
received
Q2
IP
Q3
Order
received
OH
IP1
IP3
Order
placed
Order
placed
IP2
L
P
Time
Protection interval
Figure 12.10 P System When Demand Is Uncertain
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall.
12 21
12 22
Calculating P and T
EXAMPLE 12.7
Again, let us return to the bird feeder example. Recall that
demand for the bird feeder is normally distributed with a mean of
18 units per week and a standard deviation in weekly demand of
5 units. The lead time is 2 weeks, and the business operates 52
weeks per year. The Q system developed in Example 12.4 called
for an EOQ of 75 units and a safety stock of 9 units for a cycleservice level of 90 percent. What is the equivalent P system?
Answers are to be rounded to the nearest integer.
12 23
Calculating P and T
SOLUTION
We first define D and then P. Here, P is the time between
reviews, expressed in weeks because the data are expressed
as demand per week:
D = (18 units/week)(52 weeks/year) = 936 units
EOQ
75
(52) = 4.2 or 4 weeks
P=
(52) =
D
936
With d = 18 units per week, an alternative approach is to
calculate P by dividing the EOQ by d to get 75/18 = 4.2 or 4
weeks. Either way, we would review the bird feeder inventory
every 4 weeks.
12 24
Calculating P and T
We now find the standard deviation of demand over the
protection interval (P + L) = 6:
P L d P L 5 6 12.25units
Before calculating T, we also need a z value. For a 90 percent
cycle-service level z = 1.28. The safety stock becomes
Safety stock = zP + L = 1.28(12.25) = 15.68 or 16 units
We now solve for T:
T = Average demand during the protection interval + Safety stock
= d(P + L) + safety stock
= (18 units/week)(6 weeks) + 16 units = 124 units
12 25
12 26
12 27
IM in Action Video
12 28