In this chapter, the following content will be discussed: What is inventory, cost of inventory, benefits of inventory, multi period model, optimal quantity to order, safety stock, periodic review system, single period inventory model. | LSM733-PRODUCTION OPERATIONS MANAGEMENT By: OSMAN BIN SAIF LECTURE 31 1 CHAPTER : Inventory Management Functions of Inventory To decouple or separate various parts of the production process To decouple the firm from fluctuations in demand and provide a stock of goods that will provide a selection for customers To take advantage of quantity discounts To hedge against inflation 3 3 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 4 4 Inventory Management How inventory items can be classified How accurate inventory records can be maintained 5 5 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 Used to establish | LSM733-PRODUCTION OPERATIONS MANAGEMENT By: OSMAN BIN SAIF LECTURE 31 1 CHAPTER : Inventory Management Functions of Inventory To decouple or separate various parts of the production process To decouple the firm from fluctuations in demand and provide a stock of goods that will provide a selection for customers To take advantage of quantity discounts To hedge against inflation 3 3 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 4 4 Inventory Management How inventory items can be classified How accurate inventory records can be maintained 5 5 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 Used to establish policies that focus on the few critical parts and not the many trivial ones 6 6 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 $ $ 90,000 A #11526 500 77,000 A #12760 1,550 26,350 B #10867 30% 350 15,001 B #10500 1,000 12,500 B 72% 23% 7 7 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 #12572 600 $ $ 8,502 C #14075 2,000 .60 1,200 .5% C #01036 50% 100 850 .4% C #01307 1,200 .42 504 .2% C #10572 250 .60 150 .1% C 8,550 $232,057 5% 8 8 Holding, Ordering, and Setup Costs Holding costs - the costs of holding or “carrying” inventory over time Ordering costs - the costs of placing an order and receiving goods Setup costs - cost to prepare a machine or process for .
