05Lecture-ch13-inventory1.doc - RSM270 – Operations Management Lecture 05 Ch13 – Inventory Management ABC Analysis Deterministic EOQ Models 1

05Lecture-ch13-inventory1.doc - RSM270 – Operations...

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RSM270 – Operations Management Lecture 05 Ch13 – Inventory Management: ABC Analysis, Deterministic EOQ Models 1. Introduction to Inventory Management Amazon.com started as a “virtual” retailer – no inventory, no warehouses, no overhead; just computers taking orders to be filled by others Growth has forced Amazon.com to become a world leader in warehousing and inventory management Inventory Management: The objective of inventory management is to strike a balance between inventory investment and customer service One of the most expensive assets of many companies representing as much as 50% of total invested capital Operations managers must balance inventory investment and customer service Functions of Inventory 1. To decouple or separate various parts of the production process 2. To decouple the firm from fluctuations in demand and provide a stock of goods that will provide a selection for customers 3. To take advantage of quantity discounts 4. To hedge against inflation Types of Inventory Raw material o Purchased but not processed Work-in-process o Undergone some change but not completed o A function of cycle time for a product Maintenance/repair/operating o Necessary to keep machinery and processes productive Finished goods o Completed product awaiting shipment 1
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2. Managing Inventory – ABC Analysis Divides inventory into three classes based on annual dollar volume o Class A - high annual dollar volume o Class B - medium annual dollar volume o Class C - low annual dollar volume Used to establish policies that focus on the few critical parts and not the many trivial ones 2
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Policies employed may include More emphasis on supplier development for A items Tighter physical inventory control for A items More care in forecasting A items Other criteria than annual dollar volume may be used to determine ABC groupings Profit – To help company focus on products that generate most profit Revenue – To help company focus on products that generate most revenue Delivery problems – To help company focus on products that has delivery issues Quality problems – To help company focus on products that has quality issues Cycle Counting Companies need to periodically count their inventory to reconcile any differences between the quantities sitting on the shelf with what is recorded in system.
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