Professional Documents
Culture Documents
Chapter 13
Inventory
Management
Independent Demand
A Dependent Demand
B(4) C(2)
Types of Inventories
• Raw materials & purchased parts
• Partially completed goods called
work in progress
• Finished-goods inventories
– (manufacturing firms)
or merchandise
(retail stores)
Functions of Inventory
• Periodic System
Physical count of items made at periodic
intervals
• Perpetual Inventory System
System that keeps track
of removals from inventory
continuously, thus
monitoring
current levels of
each item
214800 232087768
Low C
Few Many
Number of Items
Operations Management, Seventh Edition, by William J. Stevenson
McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
13-12 Inventory Management
Quantity
on hand
Reorder
point
Time
Receive Place Receive Place Receive
order order order order order
Lead time
Operations Management, Seventh Edition, by William J. Stevenson
McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
13-15 Inventory Management
Total Cost
Annual Annual
Total cost = carrying + ordering
cost cost
Q + DS
TC = H
2 Q
2 Q
Ordering Costs
Order Quantity
QO (optimal order quantity)
(Q)
Q + DS + PD
TC = H
2 Q
TC without PD
PD
0 EOQ Quantity
Operations Management, Seventh Edition, by William J. Stevenson
McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
13-23 Inventory Management
TCa
Total Cost
TCb
Decreasing
TCc Price
CC a,b,c
OC
EOQ Quantity
Operations Management, Seventh Edition, by William J. Stevenson
McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
13-24 Inventory Management
Safety Stock
Figure 13-12
Quantity
Expected demand
during lead time
ROP
Safety stock
LT Time
Reorder Point
Figure 13-13
Service level
Risk of
a stockout
Probability of
no stockout
ROP Quantity
Expected
demand Safety
stock
0 z z-scale
Fixed-Order-Interval Model
• Orders are placed at fixed time intervals
• Order quantity for next interval?
• Suppliers might encourage fixed
intervals
• May require only periodic checks of
inventory levels
Fixed-Interval Benefits
• Tight control of type A items
• Items from same supplier may yield
savings in:
– Ordering
– Packing
– Shipping costs
• May be practical when inventories
cannot be closely monitored
Fixed-Interval Disadvantages
• Requires a larger safety stock
• Increases carrying cost
• Costs of periodic reviews
Operations Strategy
• Too much inventory
– Tends to hide problems
– Easier to live with problems than to
eliminate them
– Costly to maintain
• Wise strategy
– Reduce lot sizes
– Reduce safety stock