MAN3504 Exam 3 Chapter 13 Inventory Management Inventory Stock of items kept to meet future demand Items we keep on hand Purpose of inventory management How many units to order When to order Reasons to Hold Extra Inventory o o o o o Cycle Anticipation o Deals Balance the cost of ordering and holding inventory Seasonal or cyclical demand Aggregate planning Take advantage of quantity discounts Place larger order so it is cost effective o Buffer against demand variations Safety Stock o Extra inventory in case demand is higher than expected Decoupling Inventory o o o Work in progress inventory o Coupling Inventory A little controversial Breaks dependence of other work stations to keep assembly line going Can decouple from vendors in case they are unreliable o Makes it neater and less sloppy o Will have more because of lower inventory costs o Dependent on other work station Bullwhip Effect o o Little orders made at the retail customer level can trigger large orders as you move along the supply chain Ex Few purchases made at a store leads to massive ordering from a warehouse Type of Inventories Raw materials Purchased parts and supplies o o o Work in progress WIP partially completed o Items being transported Pipeline on the way Rolling on trucks More and more important as supply chains become bigger Inventory does not have to be stationary o Tools and equipment o Finished goods Two Forms of Demand o o Dependent o Independent Inventory Costs o Carrying Cost o Ordering Cost Control systems are different depending on the type of demand Demand for items used to produce final products Ex Tires for automobiles Demand for items used by external customers Ex Automobiles appliances computers and houses Cost of holding an item in inventory Cost of replenishing inventory Cost of placing orders Inspection cost Receiving cost o Shortage Cost Inventory Control Systems o Continuous System Costs incurred when demand cannot be met Costs of expediting shipments cost of gift card to make customer happy Fixed order quantity Constant amount ordered when inventory declines to predetermined level When to order depends on inventory level How much to order is constant Better because you can respond quickly and have more control Harder to implement because you need to monitor it all the time o Periodic System Amount to order will be different Fixed time period Order placed for variable amount after fixed passage of time When to order will be a fixed time on a calendar More likely to shortages Easier to manage Sometimes suppliers force this on you A disadvantage of periodic ordering is that it holds more safety stock ABC Classification A Items o The few items that typically account for a majority of business activity sales production Most important 5 15 of units 70 80 of value o B Items In between A and C 30 of units 15 of value o C Items The large number of items that typically account for a small percentage of business activity 50 60 of units 5 10 of value Economic Order Quantity EOQ o Optimal order quantity that will minimize total inventory costs In a continuous inventory system this is how much to order o o Co cost of placing an order Quantity discounts positively affects ordering costs o Cc annual per unit carrying cost Quantity discounts negatively affects carrying costs o D annual demand o Q order quantity find Q that minimizes carrying ordering costs Use the minimum quantity of each price break o o Total annual cost annual ordering cost annual carrying cost TC D Q Co Q 2 Cc Assumptions of Basic EOQ Model o Demand is known with certainty and is constant over time o No shortages are allowed o o Order quantity is received all at once Lead time for the receipt of orders is constant Reorder Point r Inventory level at which a new order is placed Signal to place order In a continuous inventory system this determines when to order r dL d demand rate per period L lead time o o o o o o o o o Quantity Discounts Safety Stock Price per unit decreases as order quantity increases o o Quantity discounts negatively affects carrying cost and positively affects ordering costs Buffer added to on hand inventory during lead time Stockout An inventory shortage The area to the left of a bell shape is the probability we won t stockout Service Level Probability that the inventory available during lead time will meet demand P demand during lead time Reorder Point Managerially we set a service level to achieve SL probability that we don t stockout during lead time Typically 90 99 If its 100 usually too much inventory Chapter 2 Quality Management What is Quality o o Customer s and producer s perspectives depend on each other Customer s Perspective Focus on fitness for use and PRICE Fitness for use o How well product or service does what is supposed to o Does the product or service do what I want it to do o Designing quality characteristics into a product or service Quality of design o Producer s Perspective Focus on production process and COST Quality of conformance Set up specs in which it needs to be achieved o o Making sure product or service is produced according to design o o Ensures that every step of process conforms to specs Reduces cost and improves the quality of the service or product Dimensions of Quality Manufactured Products Performance Features Reliability Conformance o Durability o Serviceability o Aesthetics Safety Perceptions o o o o o o o o Basic operating characteristics of a product how well a car handles Extra items added to basic features such as a stereo CD player Probability that a product will operate properly within an expected time frame Degree to which a product meets pre established standards internally developed How long product lasts before replacement Ease of getting repairs speed of repairs courtesy and competence of repair person How a product looks feels sounds smells or tastes Assurance that customer will not suffer injury from a product Subjective perceptions based on brand name advertising how cool one looks Service defects are not always easy to measure because service output is not usually a tangible item Quality in Services Dimensions of Quality Services Time and timeliness How long must a customer wait for service and is it completed on time o o o o o o o o o Is everything customer asked for provided Completeness Assurance Courtesy Consistency Does customer have confidence in the server s abilities Matters most with professional services Ex Doctor states you have a disease or Lawyer