A) What is inventory? B) Why is inventory necessary? C) Some disadvantages of holding inventory D) The volume decision – how much to order E) The timing decision – when to place an order F) Inventory analysis and control systems

1. Slack, Chambers and Johnston, Operations Management, 6th Edition,
© Nigel Slack, Stuart Chambers, and Robert Johnston 201012.1
12.1
Chapter 12
Inventory planning and control
Photodisc. Kim Steele

2. Slack, Chambers and Johnston, Operations Management, 6th Edition,
© Nigel Slack, Stuart Chambers, and Robert Johnston 201012.2
12.2 Inventory is created to compensate for the differences in
timing between supply and demand
Input
process
Inventory
Output
process
Rate of supply from
input process
Rate of demand from
output processInventory

3. Slack, Chambers and Johnston, Operations Management, 6th Edition,
© Nigel Slack, Stuart Chambers, and Robert Johnston 201012.3
12.3
Types of Inventory
• Buffer Inventory: To compensate for the unexpected
fluctuations in supply & demand.
• Cycle Inventory: One or more stages in the process
cant supply all the items.
• De-coupling inventory: (process layout) Each batch
of WIP inventory joins a queue, awaiting its turn.
• Anticipating inventory: used to cope with the
seasonal demand.
• Pipeline inventory: exists as material cant be
transported instantly between points of supply &
demand..

4. Slack, Chambers and Johnston, Operations Management, 6th Edition,
© Nigel Slack, Stuart Chambers, and Robert Johnston 201012.4
12.4
Cycle inventory in a bakeryInventorylevel
Deliver
A
Produce A
Deliver
B
Produce B
Deliver
C
Produce C
Deliver
A
Produce A Produce B
Deliver
B
Produce C
Deliver
C
Time

5. Slack, Chambers and Johnston, Operations Management, 6th Edition,
© Nigel Slack, Stuart Chambers, and Robert Johnston 201012.5
12.5
e.g. Automotive parts
distributor
e.g. Local retail store
Single-stage
inventory system
Suppliers Suppliers
Stock Sales
operation
Central
depot
Distribution Local
distribution
point
Sales
operation
Two-stage inventory
system
Single-stage and two-stage inventory systems

6. Slack, Chambers and Johnston, Operations Management, 6th Edition,
© Nigel Slack, Stuart Chambers, and Robert Johnston 201012.6
12.6
e.g. Television manufacturer
Suppliers
Input
stock
Stage
1
A multi-stage inventory system
WIP Stage
2
WIP Stage
3
Finished
goods
stock

7. Slack, Chambers and Johnston, Operations Management, 6th Edition,
© Nigel Slack, Stuart Chambers, and Robert Johnston 201012.7
12.7
A multi-echelon inventory system
Yarn
producers
Cloth
manufacturers
Garment
manufacturers
Regional
warehouses
Retail
stores

8. Slack, Chambers and Johnston, Operations Management, 6th Edition,
© Nigel Slack, Stuart Chambers, and Robert Johnston 201012.8
12.8
Day-to-day inventory decisions
• How much an order
• When to order
• How to control the system

9. Slack, Chambers and Johnston, Operations Management, 6th Edition,
© Nigel Slack, Stuart Chambers, and Robert Johnston 201012.9
12.9
Inventory profiles chart the variation in inventory level
Time
per periodD
Q
Instantaneous deliveries at a rate of
Q
D
Inventorylevel
Steady and
predictable
demand (D) Slope = demand rate (D)
=
Average inventory
Q
2
Order
quantity = Q

10. Slack, Chambers and Johnston, Operations Management, 6th Edition,
© Nigel Slack, Stuart Chambers, and Robert Johnston 201012.10
12.10 Two alternative inventory plans with different
order quantities (Q)
Time
Inventorylevel
Plan A
Q = 400
Demand (D) = 1000 items per year
Average inventory
for plan A = 200
Average inventory
for plan B = 50
0.1 yr 0.4 yr
100
400
Plan B
Q = 100

11. Slack, Chambers and Johnston, Operations Management, 6th Edition,
© Nigel Slack, Stuart Chambers, and Robert Johnston 201012.11
12.11
Economic Order Quantity (EOQ)
• Holding costs = holding cost/unit × average
inventory
= Ch ×Q/2
• Ordering costs = ordering cost × number of
orders per period
= Co ×D/Q (D/Q= annual
demand/number of units in each order)

12. Slack, Chambers and Johnston, Operations Management, 6th Edition,
© Nigel Slack, Stuart Chambers, and Robert Johnston 201012.12
12.12
Economic Order Quantity (EOQ) cont’d
Optimal order quantity is found when annual
order cost equals annual holding cost
(D/Q) × Co = Q/2 × Ch
2DCo = Q²Ch
Q² = (2DCo)/Ch
Q* = √(2DCo)/Ch [here Q* represents
EOQ]