Inventory Management

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Chapter 8

• Inventory Management

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Introduction
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Radio Frequency Identification (RFID)

• Conventional bar codes are replaced with computer
  chips or smart tags.
• Use wireless technology to track inventory.

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Wal-Mart RFID

• Early adopter of RFID is Wal-Mart.
• By January 2005, 53 of its top 100 suppliers were
  sending RFID-tagged goods to its three
  distribution centers in the Dallas, Texas area.
• Wal-Marts goal is to have all top 100 suppliers
  shipping RFID-tagged goods by the end of February
  2005 in addition to 37 other suppliers.

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Wal-Mart RFID continued

• The impetus for Wal-Marts investment in RFID was
  the lack of visibility it had into its backroom
  storage areas.
• The major drawback to RFID is its cost.
• In 2005, the cost of smart tags was 0.25 each if
  purchased in volume, and 0.75 if purchased in
  smaller quantities.
• The stated goal in the industry is to get the
  price of smart tags down to .05

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Vendor-Managed Inventory (VMI)

• With VMI, suppliers are given responsibility for
  managing the inventory carried by their retail or
  wholesale customers.
• Rich Products, a 2 billion family-owned food
  company headquartered in Buffalo, NY, has a
  partnership with IBM to provide VMI services to
  the grocery industry for its frozen food items. 

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General Considerations
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Functions of Inventories

• Transit Inventories
• Buffer Inventories (safety stocks)
• Anticipation Inventories
• Decoupling Inventories
• Cycle Inventories

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Forms of Inventories

• Raw materials
• Maintenance, repair, and operating supplies
• Work-in-process (WIP)
• Finished goods

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Inventory-Related Costs

• Ordering or setup costs
• Inventory carrying or holding costs
• Stockout costs
• Opportunity costs
• Cost of goods

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Decisions in Inventory Management

• When to order?
• How much to order?

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Types of Inventory Management Systems

• Reorder point systems
• time between orders varies
• constant order quantity
• Periodic review systems
• time between orders fixed
• order quantity varies
• Material requirements planning (MRP)
• dependent demand items

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Fluctuations in Inventory
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Reorder Point Systems

• Reorder point
• Lead time
• Two-bin system
• Perpetual inventory system

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A Reorder Point System
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Periodic Review System

• maximum inventory level
• - on-hand inventory
• - on-order quantity
• demand over lead time
• reorder quantity

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Periodic Review System Without Considering
On-Order Quantity
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Periodic Review System (Assumes None On Order at
Time of Reorder)
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Priorities for Inventory Management The ABC
Concept

• A items
• 15-20 of items that account for 75-80 of annual
  inventory value
• B items
• 30-40 of items that account for 15 of annual
  inventory value
• C items
• 40-50 of items that account for 10-15 of annual
  inventory value

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ABC Inventory Categories
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The Economic Order Quantity (EOQ)
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Assumptions

• Constant rate of demand
• Shortages not allowed
• Stock replenishment can be scheduled to arrive
  exactly when inventory drops to zero
• Purchase price, ordering cost, and per unit
  holding cost are independent of quantity ordered
• Items are ordered independently of each other

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Notation

• Q order quantity
• U annual usage
• CO order cost per order
• CH annual holding cost per unit

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Water Distributors Inventory Pattern
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Water Distributors Inventory Graph
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Annual Order Cost

Q
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Annual Holding Cost

Q
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Graph of Annual Inventory Costs
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Finding an Optimal Policy
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Alternative Way of Deriving EOQ
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Alternative Way of Deriving EOQ continued
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EOQ Example

• Given
• 25,000 annual demand
• 3 per unit per year holding cost
• 100 ordering costs

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Cautions Regarding EOQ

• GIGO
• Exclude sunk costs
• Very small EOQ values my not be valid

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