Operations Management: Inventory Management Principles and Models

This PowerPoint presentation provides a comprehensive overview of inventory management, a critical aspect of operations management. It begins by highlighting the importance of inventory, its functions, and the various types, including raw materials, work-in-process, MRO, and finished goods. The presentation then delves into key inventory management techniques, such as ABC analysis, which categorizes inventory items based on their annual dollar volume, and cycle counting, a method for maintaining accurate inventory records. It also covers the control of service inventories. The presentation further explores inventory models for independent demand, including the basic Economic Order Quantity (EOQ) model, the production order quantity model, and quantity discount models. It explains the concepts of holding costs, ordering costs, and setup costs, and demonstrates how to minimize total costs. Reorder points, safety stock, and probabilistic models are also discussed, providing a complete understanding of inventory management principles and practices. This is a valuable resource for students studying operations management.

12 - 1© 2011 Pearson Education, Inc. publishing as Prentice Hall
12 Inventory
Management
PowerPoint presentation to accompany
Heizer and Render
Operations Management, 8e

12 - 2© 2011 Pearson Education, Inc. publishing as Prentice Hall
Outline
 The Importance of Inventory
 Functions of Inventory
 Types of Inventory
 Managing Inventory
 ABC Analysis
 Record Accuracy
 Cycle Counting
 Control of Service Inventories
 Inventory Models
 Independent vs. Dependent Demand
 Holding, Ordering, and Setup Costs

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Outline – Continued
 Inventory Models for Independent Demand
 The Basic Economic Order Quantity (EOQ) Model
 Minimizing Costs
 Reorder Points
 Production Order Quantity Model
 Quantity Discount Models
 Probabilistic Models and Safety Stock
 Other Probabilistic Models
 Single-Period Model
 Fixed-Period (P) Systems

12 - 4© 2011 Pearson Education, Inc. publishing as Prentice Hall
Learning Objectives
When you complete this chapter you should be able
to:
1. Conduct an ABC analysis
2. Explain and use cycle counting
3. Explain and use the EOQ model for independent
inventory demand
4. Compute a reorder point and safety stock
5. Apply the production order quantity model
6. Explain and use the quantity discount model
7. Understand service levels and probabilistic
inventory models

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Inventory Management
The objective of inventory management is to
strike a balance between inventory
investment and customer service

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Importance of Inventory
 One of the most expensive assets of many
companies representing as much as 50% of
total invested capital
 Operations managers must balance inventory
investment and customer service

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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

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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 processes
productive
 Finished goods
 Completed product awaiting shipment

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The Material Flow Cycle
Figure 12.1
Input Wait for Wait to Move Wait in queue Setup Run Output
inspection be moved time for operator time time
Cycle time
95% 5%

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Managing Inventory
1. How inventory items can be classified
2. How accurate inventory records can be
maintained

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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 annual dollar volume
 Idea to establish inventory policies that focus
resources on the few critical inventory parts and
not the many trivial ones

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ABC Analysis
Item
Stock
Number
Percent
of
Number
of Items
Stocked
Annual
Volume
(units) x
Unit
Cost =
Annual
Dollar
Volume
Percent
of
Annual
Dollar
Volume Class
#10286 20% 1,000 $ 90.00 $ 90,000 38.8% A
#11526 500 154.00 77,000 33.2% A
#12760 1,550 17.00 26,350 11.3% B
#10867 30% 350 42.86 15,001 6.4% B
#10500 1,000 12.50 12,500 5.4% B
72%
23%
#12572 600 $ 14.17 $ 8,502 3.7% C
#14075 2,000 .60 1,200 .5% C
#01036 50% 100 8.50 850 .4% C
#01307 1,200 .42 504 .2% C
#10572 250 .60 150 .1% C
8,550 $232,057 100.0%
5%