OPMT 1175 Warehousing / Distribution Topic: Managing Inventory Week 4

[Audio] "Welcome everyone to our meeting on warehouse management and inventory policies. As a teacher in Higher Education I am eager to guide you through this presentation and share valuable insights on effectively managing your warehouse and making informed decisions on inventory. So let's dive in and explore the world of operations management together..

Homework.

[Audio] In this third slide we will be covering the topic of facility capacities and excess demand. As we have already discussed Denver is facing a shortage that requires our attention in managing our network effectively. To find the most suitable solution it is essential for us to review our forecasts and capacities. By doing so we can identify the facility or combination of facilities that can handle the excess demand. This step is crucial in ensuring the efficient use of our resources and minimizing costs. Let's now move on to the spreadsheet and analyze the available capacities at each facility. Remember this last step plays a significant role in the overall network design process..

[image] Channel Network for ABC Distnöuton Transportation Cost Forecast/lnventory Location Los Angeles Costs Location Cincinnati USS'Ton we (Avg.) 0.85 1.30 1.25 0.75 0.95 Estimated Ship Tm- Wes 1.600 1,400 1,100 Capac tynnventory Tons 600,000 500,000 400,000 400,000 400,000 600,000 2.900, CapacityITons Avaiable 5,000 (15,000) 30,000 5,000 10,000 20,000 Total Tons 595.000 515,000 370,000 395,000 390,000 580,000 2845.000 Transfer Qty Capac tylTcns Avalable 5.000 -15,000 30,000 5.000 10,000 20.000 55.000 Value.

[Audio] We will now examine question number five which requires us to identify the most suitable facility or combination of facilities to accommodate the excess demand in Denver based on their current capacity. The next slide displays the most cost-effective option which involves shipping 15 000 tons from the facility. For further information regarding this scenario please refer to the supplementary class materials..

Inventory Review?.

[Audio] We have reached slide 7 out of 36 which focuses on the significance of inventory in a company's operations management. As many of you may already know inventory is a crucial asset for a company accounting for up to 50% of its total capital. Thus it is essential for operations managers to balance inventory investment while maintaining high levels of customer satisfaction. The success of a business heavily relies on its ability to effectively manage inventory. As operations managers it is our responsibility to maintain the right amount of inventory to meet demand without sacrificing customer service. This requires constant monitoring and analysis of inventory levels as well as finding the most efficient ways to order and manage inventory. Proper inventory management not only reduces costs and improves cash flow but also enhances overall efficiency and productivity. That is why understanding the importance of inventory and implementing effective management policies is crucial for any company's success. In the next slide we will discuss different methods for determining when to order inventory and calculating the necessary amount. Now let's move on to slide 8..

[Audio] Let's now move on to discuss the four types of inventory. These are raw material work-in-process maintenance/repair/operating (M-R-O--) and finished goods inventory. Each of these categories plays a crucial role in the operations management of a company. First we have raw material inventory which consists of materials that have been purchased but not yet processed. These materials will eventually be used to create the final product that will be sold to customers. Next we have work-in-process inventory. This refers to products that have undergone some changes in the production process but are not yet completed. The level of work-in-process inventory is often a reflection of the cycle time for a particular product. Maintaining efficient machinery and processes is vital for any company and this is where M-R-O inventory comes in. It includes necessary items such as spare parts tools and supplies that keep the business running smoothly. Lastly we have finished goods inventory which is the completed product that is ready to be shipped to customers. As you can see each type of inventory serves a specific purpose in ensuring the smooth operations of a company. Moving forward we will discuss how to determine the appropriate levels of inventory for each category. Stay tuned for more information on our A-B-C analysis and inventory policies..

[Audio] Welcome to slide number nine. We will be discussing A-B-C analysis an important step in setting up an effective inventory control system. This method is based on the Pareto principle stating that 80% of effects come from 20% of causes. This means a small number of items have a significant impact on total inventory value. A-B-C analysis divides inventory into three classes based on annual dollar volume. Class A items have high volume Class B has medium and Class C has low. This allows for focused allocation of resources. The goal is to prioritize critical parts of inventory rather than wasting resources on trivial items. Class A items make up 15% of inventory but contribute to 70%-80% of dollar usage. Class B makes up 30% but only contributes to 15%-25% of usage. Class C may be 55% of inventory but only has 5% usage. A-B-C analysis helps establish policies that focus on critical inventory parts leading to efficient management. Let's move on to the next slide..

Other criteria than annual dollar volume may be used Anticipated engineering changes Delivery problems Quality problems High unit cost.

Managing Inventory.

[Audio] Students welcome to slide number 12 out of 36. We will be discussing inventory management an important topic in operations management. It is a crucial decision as companies invest a significant amount of money in inventory. Finding the right balance between inventory investment and customer service is essential. As highlighted in the slide companies can tie up millions of dollars in inventory leading to potential profit loss due to lost interest revenue. On the other hand inadequate inventory management can result in delays backorder costs and even lost sales. In severe cases it has led to businesses going bankrupt. Hence having effective inventory management policies is critical to avoid these issues. This includes determining when to order inventory calculating the required amount and performing an A-B-C analysis. By implementing these strategies companies can achieve the desired balance between inventory investment and customer service. Thank you for listening let's move on to the next slide..

[Audio] Welcome back class. We are now on slide number 13 discussing the functions of inventory. As we know inventory serves as a stock of goods for meeting customer demand and mitigating demand fluctuations. However it also has other functions. Firstly inventory allows firms to separate different stages of production reducing the risk of delays. Secondly it allows for quantity discounts resulting in cost savings. Another function is hedging against inflation. However it's important to mention the potential downsides of having excess inventory such as holding costs and difficulty in control and storage. Too much inventory can also lead to obsolescence and delays in responding to market demands. In contrast having no extra inventory can expose underlying issues and create long-term competitive advantages. So while inventory brings benefits it's crucial for firms to manage and monitor levels carefully. Moving on we will discuss A-B-C analysis for classifying inventory. Thank you..

[Audio] In slide 14 of our presentation on warehouse management and inventory policies we will discuss the importance of reducing inventories in different functions and how we can achieve this. A chart shows the various inventory functions and methods to reduce inventory in each one. Take a moment to think about ways to decrease inventory for each function and share your ideas on the slide or whiteboard. The first function is in-transit inventories which can be lowered by having supply chain companies close to each other and using cross-docking. Safety inventories used for unexpected demand can be reduced by building strong relationships with suppliers and using high-quality materials. To decrease cycle inventories we can implement measures to reduce ordering and setup times. Next anticipation inventories acquired in advance for promotions or seasonal demand can be reduced by creating supply and demand sources that extend seasons. Lastly decoupling inventories used as a buffer for uncertainties can be lowered by focusing on machine maintenance and designing products for postponement. Reducing inventories in these functions leads to better efficiency cost savings and improved warehouse management. Thank you and in the next slide we will continue discussing ways to decrease inventories..

[Audio] Moving on to slide 15 we will discuss inventory management. This entails managing the stock of items for future use or sale. A major aspect of inventory management is deciding the proper amount of inventory to order and when to place those orders. These decisions are vital for smooth operations and to avoid excess or insufficient inventory levels. Let's examine how we can make these decisions in inventory management..

Timing??.

Minimize Total Inventory Cost and Maintain Satisfied Service Level. Fundamental Questions: How much to order? When to order?.

[Audio] Let's now proceed to slide number 18 where we will cover the significance of knowing when to make an order. As we have previously mentioned placing an order too late can lead to not having enough inventory also known as a stockout. On the other hand ordering too early can result in excess inventory and additional costs. This is where order quantity systems come into play. These systems assist in determining the optimal amount of inventory to order reducing the risk of stockouts and excessive expenses. There are different types of order quantity systems including fixed order systems and order point systems. These systems play a crucial role in determining the timing of orders. Hence it is crucial to comprehend and effectively implement them in warehouse management. We will delve deeper into these systems shortly. Next we will move on to discussing when and how to order inventory..

[Audio] In this class we will discuss the periodic review system a method in operations management that determines when to place orders for different amounts of inventory at regular time intervals. This system is often used for products with a short shelf life as it saves money to receive large deliveries at once. It is also useful when ordering costs are low and frequent orders are not necessary. Moving on we will learn about the various applications of the Fixed Order or Periodic Review System..

[Audio] We will now discuss the periodic review system a type of inventory management method that involves setting specific review periods and placing orders at the beginning of each period. This system is commonly used for calculating inventory needs conducting A-B-C analysis and establishing inventory policies. On the slide we can see three review periods (Q1 Q2 and Q3) all the same length denoted by "R" and "L" labels. This system allows for efficient and organized inventory management by ensuring consistent ordering at set intervals. The units in stock on this slide represent inventory levels during each review period. By utilizing this system companies can better understand their inventory needs and reduce the risk of stockouts or overstocking. In summary the periodic review system helps optimize warehouse management and establish effective inventory policies for companies. Next slide for more information on this topic..

T = D (R + L) + SS Order quantity = T – I. Periodic Review System Formula.

[Audio] Now let's take a look at the order point system. This is a crucial calculation in warehouse management as it ensures that we have enough material to meet demand during the replenishment lead time while also accounting for any unexpected fluctuations in demand and supply with the inclusion of safety stock. The formula for order point is simple: OP equals demand multiplied by lead time plus safety stock. This ensures that we have enough inventory on hand to keep our operations running smoothly. Moving on let's discuss when to order. The timing of our orders is crucial and can greatly impact our inventory levels and overall efficiency. We will explore different ordering techniques to determine the most optimal time to replenish our inventory. By understanding these concepts we can improve our warehouse management and ensure a smooth and steady workflow..

[Audio] Continuing our discussion on warehouse management let's delve into the inventory cycle. This involves tracking inventory levels over time represented by the quantity on hand (Q). Remember maintaining an optimal inventory level requires determining when to order and how much to order. This is where conducting an A-B-C analysis comes in. By categorizing items by importance and usage we can establish inventory policies. Moving on we have the receive order and place order steps which occur during the lead time. It's important to consider the reorder point indicating when to place an order to avoid stockouts. Finally the usage rate is the rate at which inventory is used over time. Understanding these components is key to efficient warehouse operations. Thank you for your attention now onto the next slide..

[Audio] Moving on to slide 24 we'll be discussing the basic model for determining order point. This model considers three main factors: quantity time and demand. Accurately calculating the required amount of inventory is essential for efficient warehouse management to meet demand and prevent stockouts. The first factor quantity refers to the necessary inventory based on historical data and sales projections. Time is also important considering lead time for replenishment to avoid delays. Lastly demand or the rate of consumer purchases affects the amount of inventory needed. By combining these factors we can establish an accurate order point using the basic model. This model also takes into account the stockout point where inventory needs to be reordered to prevent running out. In summary the basic model for determining order point is a vital tool for operations management and contributes to efficient warehouse management. Let's move on to the next slide to discuss conducting an A-B-C analysis for inventory policies..

[Audio] In this discussion we will cover the impact of demand on inventory management and the use of trigger points. Demand can fluctuate affecting our inventory levels which is why we rely on trigger points to guide our ordering decisions. Our inventory is divided into A B and C categories in the A-B-C analysis which helps us establish appropriate inventory policies and order points to account for potential demand fluctuations. Additionally we must also consider safety stock to prevent stockouts. With this understanding we can now focus on optimizing our warehouse management and inventory levels..

[Audio] On the previous slide we discussed the A-B-C analysis for establishing inventory policies. Now let's move on to the next step in warehouse management: the order point calculation. This calculation is essential in determining when to order inventory. The order point calculation takes into account two key factors: demand and lead time. First we need to consider the amount of material that is required to satisfy demand during the replenishment lead time. This is the time it takes for inventory to be delivered and restocked. Second we also need to factor in safety stock. This is the extra inventory we keep on hand to account for any unexpected variances in demand and supply. So how do we calculate the order point (O-P---)? It's a simple formula: demand multiplied by lead time plus safety stock. This gives us the minimum amount of inventory that we need to have on hand to keep up with demand. Now let's take a closer look at the order point system. This system ensures that we have enough inventory on hand at all times to prevent stockouts and maintain customer satisfaction. By regularly calculating the order point we can ensure that we always have the right amount of inventory to meet demand. In terms of ordering techniques there are various methods that can be used to determine the order point. Some common techniques include the economic order quantity (E-O-Q--) method and the reorder point method. Each method has its own advantages and disadvantages and it's important to choose the one that best suits your company's needs. Remember inventory management is crucial in operations management and the order point calculation plays a significant role in ensuring efficient and effective warehouse management. So keep these key points in mind as you continue to analyze and improve your company's inventory policies..

Question.

[Audio] Next we will calculate the order point for our inventory. As mentioned previously our S-K-U lead time is 4 weeks and our average demand is 200 units per week. In addition to this we also have a safety stock of 1 week's demand to ensure we always have enough inventory on hand. When determining the order point we need to consider both the lead time and safety stock as well as the order quantity of 2 000 units. This will provide us with a more accurate understanding of when it is necessary to reorder inventory in order to maintain optimum levels. Now with this information can someone please determine the order point? Please take a moment to think about it and then we will discuss the answer.".

How Much To Order??.

[Audio] Let's now focus on slide 30 which presents the overall yearly expense related to warehouse management. As mentioned earlier having a good grasp of when to place orders for inventory is essential in maintaining efficient operations. The total annual cost is made up of two elements: the yearly ordering cost and the yearly holding cost. These costs must be accurately calculated in order to determine the optimal inventory policies for our company. The final factor to consider is the basic order quantity also known as the economic order quantity. This is the ideal amount to order that minimizes the total annual cost. Conducting an A-B-C analysis is important in establishing inventory policies and ensuring a cost-effective approach. Moving on to slide 31 we will delve deeper into this topic..

[Audio] We have now reached slide 31 which contains a table with data on the evaluation of different inventory policies. The table shows the annual demand order costs order quantity cost per unit carrying cost rate and total cost for each policy. The economic order quantity is calculated for each policy representing the optimal order quantity that minimizes total inventory costs by considering both ordering and carrying costs. As shown in the table increasing the order quantity results in a decrease in ordering cost but an increase in carrying cost creating a trade-off. By calculating the E-O-Q for each policy we can determine the most cost-effective option for our company aiding in inventory management decisions. Thank you and let's continue to the next slide for further discussion..

[Audio] Let's now look at slide number 32 where we will discuss the concept of total cost in relation to inventory management. As we have previously discussed there are two main components of inventory cost: ordering costs and carrying costs. To briefly review ordering costs refer to the expenses incurred when placing an order for new inventory such as processing and transportation fees. Carrying costs on the other hand refer to the expenses associated with holding inventory in stock including storage insurance and potential obsolescence. To determine the most optimal level of inventory to order we must consider both of these costs. This is where the economic order quantity (E-O-Q--) formula comes into play. By calculating the E-O-Q we can determine the ideal order quantity that minimizes both ordering and carrying costs resulting in the lowest total cost. In summary when managing inventory it is important to consider both ordering and carrying costs to find a cost-efficient solution. The economic order quantity formula helps us achieve this goal by determining the ideal amount of inventory to order. Let's continue to our next slide where we will discuss conducting an A-B-C analysis to establish inventory policies..

[Audio] We will now proceed to slide number 33 where the concept of inventory carrying cost and ordering cost will be discussed. As we have previously seen managing inventory is a critical aspect of operations management. It is necessary to determine the most suitable amount of inventory to hold in order to minimize costs. This is where the concepts of inventory carrying cost and ordering cost come into play. Inventory carrying cost refers to the cost of holding inventory for a certain period of time and includes expenses such as storage insurance and obsolescence. On the other hand ordering cost involves the expenses associated with placing an order for inventory including the cost of processing the order transportation and handling fees. To find the optimal amount of inventory to order we use a formula called Economic Order Quantity or E-O-Q--. This formula considers both the inventory carrying cost and the ordering cost to determine the most cost-effective order quantity. By minimizing the total cost we can effectively manage inventory and ensure efficient operations. The E-O-Q can be calculated using the formula shown on the slide. It is important to remember that by finding the E-O-Q we can determine the best balance between inventory carrying cost and ordering cost to improve warehouse management and inventory policies. So let us focus on this formula and see how it can help us make informed decisions. Let us now move on to the next slide to further explore this concept..

[Audio] Welcome back. As we continue our discussion on warehouse management let's now take a closer look at the total annual cost. This is an important factor to consider when determining when to order inventory and calculating the required amount of inventory. On this slide we can see that the total annual cost is composed of two components the annual ordering cost and the annual holding cost. The annual ordering cost refers to the expenses incurred each time an order is placed for inventory such as transportation costs and processing fees. On the other hand the annual holding cost is the cost of storing and managing inventory including rent insurance and labor costs. By understanding the total annual cost we can determine the most cost-effective approach to managing inventory. This brings us to the concept of basic economic order quantity or E-O-Q--. This is the optimal order quantity that minimizes the total annual cost of ordering and holding inventory. In simple terms it is finding the sweet spot between ordering too much and holding excess inventory and ordering too little and constantly needing to restock. Remember the goal is to find the balance between keeping costs low while still having enough inventory to meet demand. With this in mind let's move on to our next slide to discuss the different approaches to conducting an A-B-C analysis to establish inventory policies..

For example, if A = 8,000 units S = $25 per order i = 25% = 0.25 c = $10 per unit.

[Audio] Students in this final slide of our presentation we will discuss the E-O-Q calculation or Economic Order Quantity which is crucial in warehouse management and inventory control. It helps determine the ideal amount of inventory to order. Let's consider the factors for this calculation – annual demand of 12 000 units ordering cost of $100 unit cost of $16 and carrying cost of 20%. The E-O-Q formula considers all these factors to determine the optimal quantity of inventory to order. Our calculations show an E-O-Q of 600 units meaning that ordering 600 units at a time will result in the lowest total cost for our inventory. However this is based on assumptions and not a perfect solution. It serves as a starting point for inventory management. This concludes our presentation on warehouse management and its significance in operations management. Thank you for listening and all the best in your future endeavors..