Slide 1General ConsiderationsTypes of InventorySlide 4Forms of InventoriesSlide 6Placement of InventoriesInventory-Related CostsInventory-Related CostsDetermining inventory system performanceExample of measuring inventory system performanceExample of measuring inventory system performance (Continued)Slide 13Priorities for Inventory Management: The ABC AnalysisABC Inventory CategoriesThe Economic Order Quantity (EOQ)Economic Order QuantityWhen to use EOQSlide 19Slide 20Slide 21Slide 22Slide 23Slide 24Slide 25Slide 26Slide 27Slide 28Slide 29Slide 30Slide 31EOQ Example (1) Problem DataEOQ Example (1) SolutionEOQ Example (2)Independent vs. Dependent DemandDecisions in Inventory ManagementRoutine inventory decisionsSlide 38Types of Inventory Management SystemsContinuous Review (Reorder point system)Continuous Review SystemsSlide 42Slide 43Slide 44ExampleContinuous ReviewUncertain DemandReorder Point / Safety StockSlide 49Slide 50Slide 51Slide 52Lead Time DistributionsSlide 54Calculating Total Q Systems CostsSlide 56Periodic Review SystemPeriodic Review System Without Considering On-Order QuantitySlide 59Periodic Review System (Assumes None On Order at Time of Reorder)Supplement D Special Inventory (Price-Break) ModelsTotal Costs with Purchasing CostPrice-Break Example Problem DataPrice-Break Example SolutionSlide 65Procedure for Price-Break Models1Inventory ManagementInventory ManagementChapter 12Chapter 12© Prentice Hall 2007© Prentice Hall 20072 General ConsiderationsGeneral ConsiderationsMarketing-prefer large quantities of Marketing-prefer large quantities of inventoryinventoryAccounting/Finance-tied up capitalAccounting/Finance-tied up capitalOperations-tool that can be used to Operations-tool that can be used to promote efficient operation of the promote efficient operation of the production facilitiesproduction facilitiesInventories are simply allowed to Inventories are simply allowed to fluctuate so that production can be fluctuate so that production can be adjusted to its most efficient level.adjusted to its most efficient level.3 Types of InventoryTypes of InventoryPipeline Inventories: exist because Pipeline Inventories: exist because materials must be moved from one materials must be moved from one location to another.location to another.Buffer Inventories (safety stocks): provide Buffer Inventories (safety stocks): provide protection against irregularities or protection against irregularities or uncertainties in an item’s demand or uncertainties in an item’s demand or supply. supply. Anticipation Inventories: needed for Anticipation Inventories: needed for products with seasonal patterns of demand products with seasonal patterns of demand and uniform supply. and uniform supply.4 Types of InventoryTypes of InventoryCycle Inventories (Lot-size Cycle Inventories (Lot-size inventories): exists whenever orders inventories): exists whenever orders are made in larger quantities than are made in larger quantities than needed to satisfy immediate needed to satisfy immediate requirements. Results from ordering requirements. Results from ordering in batches or “lots” rather than as in batches or “lots” rather than as needed.needed.5 Forms of InventoriesForms of InventoriesRaw MaterialsRaw Materials: objects, commodities, : objects, commodities, elements, and items that are received elements, and items that are received (usually purchased) from outside the (usually purchased) from outside the organization to be used directly in the organization to be used directly in the production of the final output. production of the final output. Maintenance, repair, and operating Maintenance, repair, and operating supplies:supplies: used to support and used to support and maintain the operation, including maintain the operation, including spares, supplies, and stores. spares, supplies, and stores.6 Forms of InventoriesForms of InventoriesWork-In-Process (WIP):Work-In-Process (WIP): all the all the materials, parts, and assemblies that materials, parts, and assemblies that are being worked on or are waiting are being worked on or are waiting to be processed within the to be processed within the operations system. operations system. Finished GoodsFinished Goods: stock of completed : stock of completed products. products.7 Placement of InventoriesPlacement of InventoriesStandard: An item is made to stock Standard: An item is made to stock or ordered to stock and normally the or ordered to stock and normally the item is available upon request.item is available upon request.Special: An item made to order.Special: An item made to order.8 Inventory-Related Costs Inventory-Related Costs Ordering or Setup CostsOrdering or Setup Costs: ordering costs are associated : ordering costs are associated with outside procurement of material and setup costs are with outside procurement of material and setup costs are costs associated with internal procurement (i.e. internal costs associated with internal procurement (i.e. internal manufacture) of parts of material. manufacture) of parts of material. ExEx: writing the order, processing the order through the : writing the order, processing the order through the purchasing system, postage, processing invoices, handling, purchasing system, postage, processing invoices, handling, testing, inspection, transportation, setup labor, machine testing, inspection, transportation, setup labor, machine downtime due to a new setup, parts damaged during setup.downtime due to a new setup, parts damaged during setup.Inventory Carrying or Holding Costs: Inventory Carrying or Holding Costs: cost items related to cost items related to inventory quantity, items’ value, and length of the time the inventory quantity, items’ value, and length of the time the inventory is carried. inventory is carried. ExEx: interest on money invested in inventory and in the land, : interest on money invested in inventory and in the land, buildings, and equipment necessary to hold and maintain buildings, and equipment necessary to hold and maintain the inventory; heat, power, and light, salaries of security the inventory; heat, power, and light, salaries of security personnel, taxes and insurance on equipment; insurance on personnel, taxes and insurance on equipment; insurance on inventory, physical deterioration of the inventory.inventory, physical deterioration of the inventory.9 Inventory-Related CostsInventory-Related