Production and Operation Managements Inventory Control Subject to Known Demand Prof.JIANG Zhibin Dr.GENG Na Department of Industrial Engineering Management Shanghai Jiao Tong University
Production and Operation Managements Prof. JIANG Zhibin Dr. GENG Na Department of Industrial Engineering & Management Shanghai Jiao Tong University Inventory Control Subject to Known Demand
Contents .Types of Inventories .Motivation for Holding Inventories; .Characteristics of Inventory System; .Relevant Costs; .The EOO Model: .EOQ Model with Finite Production Rate Quantity Discount Models .Resource-constrained multiple product system .EOQ models for production planning Power-of-two policies
Contents •Types of Inventories •Motivation for Holding Inventories; •Characteristics of Inventory System; •Relevant Costs; •The EOQ Model; •EOQ Model with Finite Production Rate •Quantity Discount Models •Resource-constrained multiple product system •EOQ models for production planning •Power-of-two policies
Introduction .Inventory is the stock of any item or resource used in an organization. .An inventory system is the set of policies and controls that monitors levels of inventory or determines what levels should be maintained. "Generally,inventory is being acquired or produced to meet the need of customers; .Dependant demand system-the demand of components, subassemblies,and assemblies are intersected (lower levels depend on higher level)-MRP(Material Requirement Planning)system;
Introduction •Inventory is the stock of any item or resource used in an organization. •An inventory system is the set of policies and controls that monitors levels of inventory or determines what levels should be maintained. •Generally , inventory is being acquired or produced to meet the need of customers; •Dependant demand system-the demand of components, subassemblies, and assemblies are intersected (lower levels depend on higher level)-MRP ( Material Requirement Planning) system;
Introduction The fundamental problem of inventory management -When to place order for replenish the stock -How much to order? The complexity of the resulting model depends on the assumptions about the various parameters of the system The major distinction is between models for known demand and random demand
Introduction • The fundamental problem of inventory management : When to place order for replenish the stock ? How much to order? • The complexity of the resulting model depends on the assumptions about the various parameters of the system The major distinction is between models for known demand and random demand
Introduction .The current investment in inventories in USA is enormous; .It amounted up to $1.57 trillion in the third quarter of 2007; It accounts for 20-25%of the total annual GNP(general net product); .There exists enormous potential for improving the efficiency of economy by scientifically controlling inventories; Farm 11粉 7对 Inventory model $174.6 s1146 billion billion discussed here are most Retail 30% Monufocturing Fig.4-1 (29周 applicable to $472.5 Breakdown of boa 3454.9 billion the Total manufacturing, Wholesale Investment in 239 wholesale,and retail Inventories 353.6 billion in the U.S sectors,composing 82 Economy (2007) Total investment-$1,570.2 billion of the total Survey of Current Business Uuly 2007)
Introduction •The current investment in inventories in USA is enormous; •It amounted up to $1.57 trillion in the third quarter of 2007; •It accounts for 20-25% of the total annual GNP (general net product); •There exists enormous potential for improving the efficiency of economy by scientifically controlling inventories; Fig. 4-1 Breakdown of the Total Investment in Inventories in the U.S. Economy (2007) Inventory model discussed here are most applicable to manufacturing, wholesale, and retail sectors, composing 82 % of the total
Types of Inventories A natural classification is by value added from manufacturing (the values are added to inventories at each level of the manufacturing operations,finally all values are cumulated with finished goods): Raw materials-Resources required in the production or processing activity of the firm. Components-Raw materials or subassemblies that will later be included into a final product. Work-in-process(WIP)-the inventory either waiting in the system for processing or being processed. It may includes component inventories and some raw materials; the level of WIP is taken as a measure of the efficiency of a production scheduling system. JIT aims at reducing WIP to zero. .Finished good-also known as end items-the final products
Types of Inventories A natural classification is by value added from manufacturing (the values are added to inventories at each level of the manufacturing operations, finally all values are cumulated with finished goods): • Raw materials-Resources required in the production or processing activity of the firm. • Components-Raw materials or subassemblies that will later be included into a final product. • Work-in-process (WIP)-the inventory either waiting in the system for processing or being processed. It may includes component inventories and some raw materials; the level of WIP is taken as a measure of the efficiency of a production scheduling system. JIT aims at reducing WIP to zero. •Finished good-also known as end items-the final products
Why Hold Inventories .For economies of scale-It may be economical to produce a relatively large number of items in each production run and store them for future use Coping with Uncertainties Uncertainty in demand; VUncertainty in lead time Uncertainty in supply .For speculation- Purchase large quantities at current low prices and store them for future use. Cope with considerable fluctuation in price of costly commodities required in large quantities; Cope with labor strike;
Why Hold Inventories •For economies of scale-It may be economical to produce a relatively large number of items in each production run and store them for future use. •Coping with Uncertainties Uncertainty in demand; Uncertainty in lead time Uncertainty in supply •For speculation- Purchase large quantities at current low prices and store them for future use. Cope with considerable fluctuation in price of costly commodities required in large quantities; Cope with labor strike;
Why Hold Inventories .For Transportation Pipeline inventories is the inventory moving from point to point,e.g., materials moving from suppliers to a plant,from one operation to the next in a plant. It exists for purpose of transportation or materials handling in a plant; .Smoothing-Producing and storing inventory in anticipation of peak demand helps to alleviate the disruptions caused by changing production rates and workforce level. .Logistics-To cope with constraints in purchasing,production,or distribution of items that may cause a system maintain inventory; Purchase an item in minimum quantities; Logistics of manufacture-zero inventory is impossible in order to keep continuity in manufacturing process; .Control costs-More inventory need less and simpler control
Why Hold Inventories •For Transportation Pipeline inventories is the inventory moving from point to point, e.g., materials moving from suppliers to a plant, from one operation to the next in a plant. It exists for purpose of transportation or materials handling in a plant; •Smoothing-Producing and storing inventory in anticipation of peak demand helps to alleviate the disruptions caused by changing production rates and workforce level. •Logistics-To cope with constraints in purchasing, production, or distribution of items that may cause a system maintain inventory; Purchase an item in minimum quantities; Logistics of manufacture-zero inventory is impossible in order to keep continuity in manufacturing process; •Control costs-More inventory need less and simpler control
Why we should control the inventory Inventory Level 库存水平 Working efficiency Working efficiency Machin Machine down Quality down quality delay delay WIP WIP lost Shut down lost Production plan Shut down Production plan (a)Higher inventory level (b)Lower inventory level
Why we should control the inventory Quality Working efficiency delay Production plan Machine down Shut down WIP lost Inventory Level (a) Higher inventory level quality Working efficiency delay Production plan Machine down Shut down WIP lost 库存水平 (b) Lower inventory level
Characteristics of Inventory Systems Demand:patterns and characteristics Constant versus variable; ·Known versus random 图Lead Time Ordered from the outside; ·Produced internally Review patterns Continuous-supermarket; Periodic-regular stock-taking for a grocery store; Excess demand-demand that cannot be filled immediately from stock; backordered or lost. 国 Changing inventory Limited shelf life-perishability; Become obsolete-obsolescence;
Characteristics of Inventory Systems Demand: patterns and characteristics • Constant versus variable; • Known versus random Lead Time • Ordered from the outside; • Produced internally Review patterns • Continuous-supermarket; • Periodic-regular stock-taking for a grocery store; Excess demand-demand that cannot be filled immediately from stock; backordered or lost. Changing inventory • Limited shelf life- perishability; • Become obsolete- obsolescence;