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Chapter 12 Inventory planning and control 365 Critical commentary This approach to inventory classification can sometimes be misleading. Many professional inventory managers point out that the Pareto law is often misquoted. It does not say that 80 per cent of the SKUs (stock-keeping units) account for only 20 per cent inventory value. It accounts for 80 per cent of inventory ‘usage’ or throughput value, in other words sales value. In fact it is the slow-moving items (the C category items) that often pose the greatest challenge in inventory management. Often these slow-moving items, although only accounting for 20 per cent of sales, require a large part (typically between one-half and two-thirds) of the total investment in stock. This is why slow-moving items are a real problem. Moreover, if errors in forecasting or ordering result in excess stock in ‘A class’ fast-moving items, it is relatively unimportant in the sense that excess stock can be sold quickly. However, excess stock in a slow-moving C item will be there a long time. According to some inventory managers, it is the A items that can be left to look after themselves, it is the B and even more the C items that need controlling. Stock turn Measuring inventory In our example of ABC classifications we used the monetary value of the annual usage of each item as a measure of inventory usage. Monetary value can also be used to measure the absolute level of inventory at any point in time. This would involve taking the number of each item in stock, multiplying it by its value (usually the cost of purchasing the item) and summing the value of all the individual items stored. This is a useful measure of the investment that an operation has in its inventories but gives no indication of how large that investment is relative to the total throughput of the operation. To do this we must compare the total number of items in stock against their rate of usage. There are two ways of doing this. The first is to calculate the amount of time the inventory would last, subject to normal demand, if it were not replenished. This is sometimes called the number of weeks’ (or days’, months’, years’, etc.) cover of the stock. The second method is to calculate how often the stock is used up in a period, usually one year. This is called the stock turn or turnover of stock and is the reciprocal of the stock-cover figure mentioned earlier. Worked example A small specialist wine importer holds stocks of three types of wine, Chateau A, Chateau B and Chateau C. Current stock levels are 500 cases of Chateau A, 300 cases of Chateau B and 200 cases of Chateau C. Table 12.6 shows the number of each held in stock, their cost per item and the demand per year for each. The total value of stock = Σ(average stock level × cost per item) = (500 × 3) + (300 × 4) + (200 × 5) = 3,700 The amount of stock cover provided by each item stocked is as follows (assuming 50 sales weeks per year): stock 500 Chateau A, stock cover = = × 50 = 12.5 weeks demand 2,000 stock 300 Chateau B, stock cover = = × 50 = 10 weeks demand 1,500 stock 200 Chateau C, stock cover = = × 50 = 10 weeks demand 1,000 ➔
366 Part Three Planning and control Table 12.6 Stock, cost and demand for three stocked items Item Average number in stock Cost per item (£) Annual demand Chateau A 500 3.00 2,000 Chateau B 300 4.00 1,500 Chateau C 200 5.00 1,000 The stock turn for each item is calculated as follows: demand 2,000 Chateau A, stock turn = = = 4 times/year stock 500 demand 1,500 Chateau B, stock turn = = = 5 times/year stock 300 demand 1,000 Chateau C, stock turn = = = 5 times/year stock 200 To find the average stock cover or stock turn for the total items in the inventory, the individual item measures can be weighted by their demand levels as a proportion of total demand (4,500). Thus: A 2,000 D A 1,500 A Average stock cover = 12.5 × + 10 × ) + 10 × C 4,500 F C 4,500 C = 11.11 A 2,000 D A 1,500 D A Average stock turn = 4 × + 5 × + 5 × C 4,500 F C 4,500 F C = 4.56 1,000 D 4,500 F 1,000 D 4,500 F Inventory information systems Most inventories of any significant size are managed by computerized systems. The many relatively routine calculations involved in stock control lend themselves to computerized support. This is especially so since data capture has been made more convenient through the use of bar-code readers and the point-of-sale recording of sales transactions. Many commercial systems of stock control are available, although they tend to share certain common functions. Updating stock records Every time a transaction takes place (such as the sale of an item, the movement of an item from a warehouse into a truck, or the delivery of an item into a warehouse) the position, status and possibly value of the stock will have changed. This information must be recorded so that operations managers can determine their current inventory status at any time. Generating orders The two major decisions we have described previously, namely how much to order and when to order, can both be made by a computerized stock control system. The first decision, setting the value of how much to order (Q), is likely to be taken only at relatively infrequent intervals. Originally almost all computer systems automatically calculated order quantities
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sixth edition OperatiOns ManageMent
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Further reading in Operations Manag
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Pearson Education Limited Edinburgh
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Contents Guide to ‘operations in
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Contents ix Chapter 12 Inventory pl
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Guide to ‘operations in practice
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Guide to ‘operations in practice
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Making the most of this book and My
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Making the most of this book and My
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Preface xix Illustrations-based Ope
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To the Student . . . Making the mos
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About the authors Nigel Slack is th
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Publisher’s acknowledgements We a
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Part One INTRODUCTION This part of
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Chapter 1 Operations management 3 O
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Key operations questions Chapter 4
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Chapter 4 Process design Key questi
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88 Part Two Design Figure 4.2 The d
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90 Part Two Design Environmentally
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92 Part Two Design Figure 4.3 Diffe
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94 Part Two Design Professional ser
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96 Part Two Design Figure 4.4 Devia
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98 Part Two Design Figure 4.6 Proce
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100 Part Two Design Figure 4.8 Flow
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102 Part Two Design Given that an i
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104 Part Two Design From Little’s
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106 Part Two Design The relationshi
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108 Part Two Design Summary answers
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110 Part Two Design the grant appli
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Chapter 5 The design of products an
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114 Part Two Design hopeless lack o
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116 Part Two Design Core products a
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118 Part Two Design Figure 5.3 The
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120 Part Two Design Short case Squa
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122 Part Two Design Critical commen
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124 Part Two Design Reducing design
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126 Part Two Design Figure 5.7 A QF
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128 Part Two Design Purpose Basic f
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130 Part Two Design Interactive des
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132 Part Two Design Early conflict
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134 Part Two Design Summary answers
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136 Part Two Design similar. It was
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Chapter 6 Supply network design Key
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140 Part Two Design The supply netw
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142 Part Two Design a particularly
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144 Part Two Design and expanding o
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146 Part Two Design Figure 6.4 Offs
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148 Part Two Design Controversially
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150 Part Two Design Energy costs. O
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152 Part Two Design product and fas
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154 Part Two Design Figure 6.7 Cent
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156 Part Two Design The blue dotted
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158 Part Two Design Table 6.4 The a
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160 Part Two Design Figure 6.11 Rep
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162 Part Two Design Case study Disn
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164 Part Two Design plastic, and ap
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166 Part Two Design of a failing Di
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Supplement to Chapter 6 Forecasting
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170 Part Two Design Figure S6.2 Som
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172 Part Two Design Figure S6.3 Tim
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174 Part Two Design Table S6.3 Expo
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176 Part Two Design a comparative s
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178 Part Two Design Operations in p
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180 Part Two Design The basic layou
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182 Part Two Design In functional l
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184 Part Two Design Figure 7.5 The
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186 Part Two Design shown with thre
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188 Part Two Design Table 7.2 The a
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190 Part Two Design Combinatorial c
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192 Part Two Design The general fun
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194 Part Two Design Heuristic proce
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196 Part Two Design Figure 7.16 (a)
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198 Part Two Design the total work
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200 Part Two Design Working from th
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202 Part Two Design ● ● ● Hig
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204 Part Two Design Table 7.4 Stand
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Chapter 8 Process technology Key qu
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208 Part Two Design What is process
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210 Part Two Design be used where c
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212 Part Two Design Here we will ex
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214 Part Two Design E-business E-co
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216 Part Two Design Table 8.2 Examp
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218 Part Two Design Customer-proces
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220 Part Two Design ‘drive’ it.
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222 Part Two Design Figure 8.6 Diff
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224 Part Two Design Short case SVT
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226 Part Two Design Table 8.5 Prese
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228 Part Two Design Anticipating im
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230 Part Two Design Case study Roch
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232 Part Two Design Problems and ap
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234 Part Two Design Operations in p
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236 Part Two Design Human resource
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238 Part Two Design Table 9.2 Cause
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240 Part Two Design ● Group resou
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242 Part Two Design Job design Job
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244 Part Two Design ● ● ● ●
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246 Part Two Design Figure 9.7 A ty
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248 Part Two Design asked to contri
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250 Part Two Design ● ● ● Eff
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252 Part Two Design Table 9.3 Examp
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254 Part Two Design Qualified worke
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256 Part Two Design Case study Serv
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258 Part Two Design 3 4 5 Step 1 -
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260 Part Two Design them. This mean
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262 Part Two Design Work measuremen
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264 Part Two Design Figure S9.1 Tim
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Key operations questions Chapter 10
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Chapter 10 The nature of planning a
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270 Part Three Planning and control
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276 Part Three Make-to-stock Planni
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Part Four IMPROVEMENT Even the best
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Chapter 18 Operations improvement 5
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in both scientific management and m
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Chapter 19 Risk management Key ques
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Risk mitigation actions Chapter 19
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Part Five CORPORATE SOCIAL RESPONSI
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Notes on chapters 653 3 Sources inc
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Notes on chapters 655 ground data:
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Notes on chapters 657 national Jour
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Glossary 659 Breakthrough improveme
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Glossary 667 Reliability: when appl
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Glossary 669 Transformation process
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‘blue sky’ research projects 45
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cumulative representation 317-22 cu
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failures (continued) estimates of o
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inventories (continued) de-coupling
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mitigation of ethical practice brea
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precedence diagrams 197-9, 481 prec
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esources 7-8 business continuity 59
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supply chains (continued) meaning 3
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