Chapter 21
Inventory Management:
Economic Order
Quantity, JIT, and the
Theory of Constraints
Vertue Volcano C1F015016
Fakultas Ekonomi dan Bisnis
Universitas Jenderal
Soedirman
2016
S1 Akuntansi
Program Alih
Jenjang
STAR BPKP
BATCH 3
Study Objectives
2016
1.
Describe the just-in-case inventory
management model.
2.
Discuss just-in-time (JIT) inventory
management.
3.
Explain the basic concepts of constrained
optimization.
4.
Define the theory of constraints, and tell
how it can be used to manage inventory.
S1 Akuntansi
Program Alih
Jenjang
STAR BPKP
BATCH 3
Just-in-Case Inventory
Management
2016
Three types of inventory costs can be
readily identified with inventory:
The cost of acquiring inventory.
The cost of holding inventory.
The cost of not having inventory on hand
when needed.
S1 Akuntansi
Program Alih
Jenjang
STAR BPKP
BATCH 3
Just-in-Case Inventory
Management
2016
Ordering Costs: The costs of placing
and receiving an order.
Examples: Clerical costs, documents,
insurance for shipment, and unloading.
Setup Costs: The costs of preparing
equipment and facilities so they can
be used to produce a particular
product or component.
Examples: Setup labor, lost income (from
idled facilities), and test runs.
4
S1 Akuntansi
Program Alih
Jenjang
STAR BPKP
BATCH 3
Just-in-Case Inventory
Management
2016
Stock-Out Costs: The costs of not
having sufficient inventory.
Examples: Lost sales, costs of expediting
(extra setup, transportation, etc.) and the
costs of interrupted production.
Carrying Costs: The costs of
carrying inventory.
Examples: Insurance, inventory taxes,
obsolescence, opportunity cost of capital
tied up in inventory, and storage.
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Just-in-Case Inventory
Management
Just-in-Case Inventory
Management
Economic Order Quantity
TC = PD/Q + CQ/2
Where
TC =
The total ordering (or setup) and
carrying cost
P=
The cost of placing and receiving an
order (or the cost of setting up a production run)
Q=
The number of units ordered each time
an order is placed (or the lot size for production)
D=
The known annual demand
C=
The cost of carrying one unit of stock for
one year
7
S1 Akuntansi
Program Alih
Jenjang
STAR BPKP
BATCH 3
Just-in-Case Inventory
Management
2016
Economic Order Quantity illustrated
Assume
P=
$40
per order
D=
25,000 units
C=
$2
per unitEOQ =
2DP C
(2 25,000 50)
40 $2
= 1,000,000
= 1,000
Just-in-Case Inventory
Management
When to Order or Produce
Example: Assume that the average rate of usage is
100 parts per day. Assume also that the
lead time is 4 days. What is the reorder
point?
Reorder point
= rate of usage lead time
= 4 100 = 400 units
An order should be placed when inventory
drops to 400 units.
Just-in-Case Inventory
Management
10
Just-in-Case Inventory
Management
Demand Uncertainty and Reordering
To avoid running out of parts, organizations often
choose to carry safety stock (extra inventory
carried to serve as insurance against fluctuations in
demand).
Example: If the maximum
usage of the VCR
part is 120 units per
day, the average
usage is 100 units
per day, and the lead
time is four days, the
safety stock is 80.
Maximum usage
Average usage
Difference
Lead time
Safety stock
120
(100)
20
4
80
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Just-in-Case Inventory
Management
12
S1 Akuntansi
Program Alih
Jenjang
STAR BPKP
BATCH 3
JIT Inventory Management
2016
Setup and Carrying Costs: The JIT Approach
JIT reduces the costs of acquiring inventory
to insignificant levels by
Drastically reducing setup time
Using long-term contracts for outside purchases
Carrying costs are reduced to insignificant
levels by reducing inventories to
insignificant levels.
13
S1 Akuntansi
Program Alih
Jenjang
STAR BPKP
BATCH 3
JIT Inventory Management
2016
Avoidance of Shutdown: the JIT
approach
Total preventive maintenance
to reduce machine failures
Total quality control
To reduce defective parts
The Kanban system
To control production
14
S1 Akuntansi
Program Alih
Jenjang
STAR BPKP
BATCH 3
JIT Inventory Management
2016
The Kanban system is responsible for
ensuring that the necessary products are
produced in the necessary quantities at the
necessary time.
A card system is used to monitor work in
process
A withdrawal Kanban
A production Kanban
A vendor Kanban
15
JIT Inventory Management
16
JIT Inventory Management
17
S1 Akuntansi
Program Alih
Jenjang
STAR BPKP
BATCH 3
JIT Inventory Management
2016
Managing discounts and price increases
Traditional: holding inventories
JIT: negotiate long-term contracts
Vendors
Careful selection; consider more than price
Close to production facility
Establish more extensive supplier involvement
18
S1 Akuntansi
Program Alih
Jenjang
STAR BPKP
BATCH 3
JIT Inventory Management
2016
JIT Limitations
Patience in implementation is needed.
Time is required.
JIT may cause lost sales and stressed
workers.
Production may be interrupted due to an
absence of inventory.
19
S1 Akuntansi
Program Alih
Jenjang
STAR BPKP
BATCH 3
Basic Concepts of
Constrained Optimization
2016
Every firm faces limited resources and
limited demand for each product.
External constraints (e.g., market demand)
Internal constraints (e.g., machine or labor time
availability)
Constrained optimization is choosing the
optimal mix given the constraints faced by
the firm.
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Basic Concepts of
Constrained Optimization
Linear Programming
A method that searches among possible solutions until
the optimal solution is identified
Example: Two products, X and Y,
provide contribution
margins of $300 and
$600, respectively.
The objective function:
Z = $300X + $600Y
The objective is to
maximize total
contribution margin.
21
Basic Concepts of
Constrained Optimization
Linear Programming
22
S1 Akuntansi
Program Alih
Jenjang
STAR BPKP
BATCH 3
Basic Concepts of
Constrained Optimization
2016
Internal constraints:
X+Y 80
X + 3Y 120
2C + Y 90
External constraints:
X 60
Y 100
Linear Programming
X+Y
X + 3Y
2C + Y
X
Y
X
Y
80
120
90
60
100
0
0
23
Basic Concepts of
Constrained Optimization
24
Basic Concepts of
Constrained Optimization
Linear Programming
Corner Point
X-Value
Y-Value
Z = $300X + $600Y
40
24,000
30
30
27,000
45
13,500
C is the optimal solution!
25
Theory of Constraints
Measures of Systems Performance
Throughput*
The rate at which an organization generates
money through sales
Inventory
The money the organization spends in turning
materials into throughput
Operating expenses
The money the organization spends in turning
inventories into throughput
Sales - Unit-level
Rev
Var Exp
*Throughput =
Time
26
S1 Akuntansi
Program Alih
Jenjang
STAR BPKP
BATCH 3
Theory of Constraints
2016
Five-Step Method for Improving
Performance
Identify an organizations constraints.
Exploit the binding constraints.
Subordinate everything else to the
decisions made in Step 2.
Elevate the organizations binding
constraints.
Repeat the process as a new constraint
emerges to limit output.
27
Theory of Constraints
28
Theory of Constraints
29
Theory of Constraints
30
End Chapter 21
Thank you
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