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INVENTORY CONTROL (known demand)

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Amjad Zabermawi

on 26 May 2014

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Transcript of INVENTORY CONTROL (known demand)

Spare parts
Components (subassemblies)
Introduction about inventory :
- What is inventory ?
- Types of inventory.
- Components of inventory.
Terminologies & Mathematical Rules.
Modeling Techniques.
ABC Analysis.
Terminologies in Inventory
(Known Demand)
Group: 7
- Amjad Zabermawi
- Abdulaziz Aljahdali
- Othman Alamri
Prepared For:
Dr. Nadim Emira
Models & Analysis
What is...?
Types of inventory
Components of ...
Inventory is the raw materials, component parts, work-in-process, or finished products that are held at a location in the supply chain
Inventory management or control :
The objective of inventory management is to strike a balance between inventory investment and customer service.

Independent Demand :
-The demand for item is independent of the demand for any other item in inventory
-The source of demand of this inventory coming from outside the company itself (such as a computer).
-An item has independent demand when we can’t control it or tie it directly to another item’s demand

Dependent Demand:
- The demand for item is dependent upon the demand for some other item in the inventory
- The source of demand of this inventory is directly dependent on internal decisions, primarily on the decision of how many of which product to produce at what time (such as the parts of computer).
-An item has dependent demand when the demand for an item is controlled directly, or tied to the production of something else.
An example is shown in the following figure . Item A is the independent demand item. All the other items are dependent demand. The quantities that go into the final item are shown in parentheses. Notice that two units of C are combined with one unit of B to make the final product. Similarly, two units of D and one unit of E are combined to make one unit of B.
Work in Progress WIP
Purchased products in retailing
Raw Materials
Finished goods
Cost Structure
Total Cost
Setup Cost
Cost to prepare a machine or process for manufacturing an order.
Holding Cost
The costs of holding or “carrying” inventory over time.
-Maintenance and Handling
-Opportunity Costs
-Obsolescence (risk of loosing some of its value)
Ordering Cost
The costs of placing an order and receiving goods.
Stock Out Cost
Annual ordering cost + Annual holding cost
TC= S(D/Q) + H(Q/2)
TC= total cost
D= demand in units per year (annual demand)
H= holding cost per year in dollars
S = order cost for one dollars
Q= order quantity per order

Total annual holding cost = (Q/2)H
Total annual ordering cost = (D/Q)S

Economic consequences of not being able to meet an internal or external demand from the current inventory. Such costs consist of internal costs (delays, labor time wastage, lost production, etc.) and external costs (loss of profit from lost sales, and loss of future profit due to loss of goodwill). Also called shortages costs.
Reorder Point
Characteristics of Inventory:
-constant versus variable
-known versus uncertain
Replenishment Lead Time
-periodic or continuous
-periodic or continuous
Excess demand
-back ordered or lost
Changing Inventory
-perishability of obsolescence

- After EOQ is determined, the second decision is when to order.
-Orders must usually be placed before inventory reaches 0 due to order lead time.
-Lead time is the time from placing the order until it is received.
-The reorder point (ROP) depends on the lead time (L).

Safety Stock :
Safety stock (SS) is extra inventory held to help prevent stock outs.
Frequently demand is subject to random variability (uncertainty).
If demand is unusually high during lead time, a stock out will occur if there is no safety stock.

Basic EOQ Model
Important assumptions:

Demand is known, constant, and independent.
Lead time is known and constant.
Receipt of inventory is instantaneous and complete.
Quantity discounts are not possible.
Only variable costs are setup and holding.
Stock outs can be completely avoided.

Optimal Quantity
Economic Ordering Quantity (EOQ)
Minimizing EOQ Model Costs
Only ordering and carrying costs need to be minimized (all other costs are assumed constant).
As Q (order quantity) increases:
-Carry cost increases.
-Ordering cost decreases (since the number of orders per year decreases).

At optimal order quantity (Q*):
Carrying cost = Ordering cost

Where :
D = demand rate
H = holding cost
S = setup or ordering cost
Just-In-Time Inventory Control model
ust In
What is JIT ?
Just In Time Inventory Control System is a system applied in Business management to lower the cost of production in the Inventory Department. This system works by allowing management only to order or procure what is immediately needed and avoid unnecessary expenses.
Advantages & Disadvantages
Funds that were tied up in inventories can be used elsewhere.
Areas previously used to store inventories can be used for other more productive uses.
Throughput time is reduced, resulting in greater potential output and quicker response to customers.
Defect rates are reduced, resulting in less waste and greater customer satisfaction
Implementing thorough JIT procedures can involve a major overhaul of business systems -it may be difficult and expensive to introduce.

JIT manufacturing also opens businesses to a number of risks, notably those associated with the supply chain. With no stocks to fall back on, a minor disruption in supplies to the business from just one supplier could force production to cease at very short notice.
ABC Analysis
ABC analysis is an inventory categorization method which consists in dividing items into three categories, A, B and C: A being the most valuable items, C being the least valuable ones. This method aims to draw managers’ attention on the critical few (A-items) and not on the trivial many (C-items).
What is ABC Analysis?
The steps in computing ABC analysis are:
a. Determine the annual usage in units for each item for the past one- year.

b. Multiply the annual usage quantity with the average unit price of each item to calculate the annual usage in US$ for each item.

c. Item with highest dollar usage annually is ranked first. Then the next lower annual usage item is listed till the lowest item is listed in the last.

d. Table 1 shows ranks of the items according to the annual usage in US$. for 10 items.

e. Arrange the items in the inventory by cumulative annual usage (dollars) and by cumulative percentage. Categorize the items in A, B , and C categories.


Example of ABC Analysis
Full transcript