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INVENTORY MANAGEMENT

MINE6029 Mining Project Management and Operational Readiness


WASM Kalgoorlie, 2nd Semester 2017
Dr Apurna Ghosh

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Inventory Control

• Definition

Inventory control is the processes employed to maximize a company's


use of inventory. The goal of inventory control is to generate the
maximum profit from the least amount of inventory investment without
intruding upon customer satisfaction levels.

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Inventory performance measures

• Inventory value: the dollar value of all spares and repairables that are
maintained in inventory and currently in order.

• Stock turnover ratio: (also known as stock rotation) is the value of stock
issues per time period expressed as a percentage of average inventory
value.

• Service level: The service level is the probability of meeting clients’


requests from existing stock. The starting point for managing spares is
to define the required service level. eg. “for defined critical spares, a
service level of 99% will apply”.

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Spares classification

Spare parts
inventory
systems

Non-repairable Repairable
components components

High rotation Low rotation


items items

Low rotation
items

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Spares classification

Spares are classified according to their:


 frequency of use (“rotation”)
 criticality level, and
 repairable or non repairable nature.

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Critical spares

The criticality level of spares is typically determined


according to:

 criticality for production (those components associated


with high stock-out costs);

 lead time criticality (time required between the order and


arrival and acceptance of spares by the warehouse); and

 cost criticality (typically a Pareto analysis is used to


undertake an ABC analysis of inventory to determine
those spares responsible for 70%, 20% and 10%
respectively of annual inventory value).
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Copper Mine Example

Stock-out consequence Lead time Annual consumption cost


A – Production loss A – Lead time > 150 days A – item within top 70% of annual costs
B – Delay in maintenance work B – Lead time between 45 and 150 days B – item within next 20% of annual costs
C – Some inconvenience, but not critical C – Lead time < 45 days C – item within 10% remaining costs.

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Criticality No. items Inventory Stock Service Automatic Recommended
Value US$ Rotation level reorder reorder tactics
AAA 46 1,497,499 10 100% no Manual control of
inventory levels,
AAB 25 157,988 8 100% no tracking of
ABA 38 101,889 6 100% no purchases and

Inventory ABB 58 1,516,906 10 100% no


frequent checks.
Strict coordination
ABA 93 356,651 8 100% no with maintenance.
distribution for a ABB 27,213 394,934 6 100% no Investigate
alternative transport
ACA 30 185,167 10 100% no means to reduce
copper mine ACB 30 65,345 8 100% no lead time.

ACC 20 10,901 6 100% no


Subtotal 595 4,287,282
BAA 26 311,785 8 85% yes Automatic
generation of
BAB 139 557,231 4 85% yes purchase orders.
BAC 482 424,588 3 85% yes Continuous
monitoring of
BBA 71 528,956 8 80% yes reprovisioning
BBB 358 1,157,517 4 80% yes algorithms to
minimise tracking
BBC 1,158 830,801 3 80% yes
effort. Low cost and
BCA 46 324,085 8 70% yes high rotation items
BCB 204 376,754 4 70% yes should by-pass
planner approval.
BCC 488 242,669 3 70% yes
Subtotal 2,972 4,754,386
CAA 14 151,666 5 70% yes Low cost and high
rotation items
CAB 176 575,621 3 70% yes should bypass the
CAC 1,948 881,666 3 70% yes planner. Continuous
monitoring of
CBA 19 77,350 5 60% yes reprovisioning
CBB 384 1,089,207 3 60% yes algorithms to
minimise tracking
CBC 5,632 2,044,851 3 60% yes
effort.
CCA 9 44,485 5 55% yes
CCB 252 276,420 3 55% yes
CCC 3,447 645,468 3 55% yes
Subtotal 11,881 5,786,734
TOTAL
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Sparing decisions

The problem of spares supply and stores management


can be summarised as (Lawrenson, 1986):
 how much to order,
 how much to allow for delivery
 organisation of people
 organisation of procedures
 where to order from, and
 where to store the parts.

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High rotation components

 For high rotation components,


most inventory management
systems automatically replenish
a batch of components, defined
by the Economic Order Quantity
(EOQ), when inventory levels fall
below a trigger point known as
the Economic Order Point
(EOP).

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Constant demand, zero lead time

Stock
Q

Average = ½ Q

time

Cost = P x I x ½ Q
P is the price of the component and
I is the factor associated with the holding costs
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Economic Order Quantity

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Economic Order Quantity

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Total stockholding and ordering costs
EOQ is the quantity at which total inventory cost will be minimum and
ordering cost will be equal to inventory holding cost.

Total cost
Cost ($/unit)

Holding cost = P x I x Q/2

P x I x ½ Q = C x D/Q
Ordering cost = C x D/Q
EOQ Order Quantity
D is the annual demand for components
Q is the order quantity
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Example

 D = 120 items per year


 C = $20 per order
 P = $100 each, and
 I = 20% per year,

½
Then EOQ = [(2x120x20)/)0.2x100)] = 15.49
or 15 spares, when rounded.

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Economic Order Point (EOP)

•The reorder point is the inventory level at which a new


order is placed.

•Order must be made while there is enough stock in place to


cover demand during lead time.

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EOP Constant demand, constant lead time

Stock
Q
Q
Average =
R 2

time

TL TL
Formulation of EOP:
R = dTL, where d = demand rate per time period
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and TL = lead time


The Inventory use follows
Normal distribution

+∞ 1 1 𝑥𝑥−µ 2

𝑓𝑓 𝑥𝑥 = � 𝑒𝑒 2 σ 𝑑𝑑𝑑𝑑 … . . (1)
−∞ σ 2π
𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤, µ = 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚 𝑎𝑎𝑎𝑎𝑎𝑎 σ = 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑
𝑥𝑥 − µ
Considering =z
σ
𝑑𝑑𝑑𝑑 = σ𝑑𝑑𝑑𝑑
+∞ 1 1
− 𝑧𝑧 2
φ 𝑧𝑧 = � 𝑒𝑒 2 𝑑𝑑𝑑𝑑 … … (2)
−∞ 2π
𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤, 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚 = 0 𝑎𝑎𝑎𝑎𝑎𝑎 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑=1
1
𝐼𝐼𝐼𝐼 𝑧𝑧 2 = 𝑡𝑡
2
𝑑𝑑𝑑𝑑 𝑑𝑑𝑑𝑑
2𝑧𝑧𝑧𝑧𝑧𝑧 = 2𝑑𝑑𝑑𝑑 𝑜𝑜𝑜𝑜, 𝑑𝑑𝑑𝑑 = =
𝑧𝑧 2𝑡𝑡
+∞ 1 𝑑𝑑𝑑𝑑
ψ 𝑡𝑡 = � 𝑒𝑒 −𝑡𝑡 …… 3
−∞ 2π 2𝑡𝑡
1
2 +∞ −𝑡𝑡 − 12
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Γ π
= ∫0 𝑒𝑒 𝑡𝑡 𝑑𝑑𝑑𝑑 = 2 = =1
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2 π π π
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Variable demand, constant lead time

Probability of demand

T x SD
demand
Mean demand D
Approx 6 x SD
If the mean demand = 50 items per month, and standard deviation
SD = 5 items per month, we can be 99.9% certain that demand will lie
between ±3 standard deviations, or 50 ± (3 x 5) items.
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Safety stock

 Suppose that there is a 2 month lead time to obtain spares


 Demand for spare may be high in month one and low in
month two.
 We would therefore not define the number of safety spares
as 2 x (3 x 5) = 30 components.
 In general, the rule is to increase the proportion by the
square root of the lead time. Thus an adequate number of
safety stock is 1.414 x (3 x 5) = 21.2, say 21 spares.
 Economic Order Point (EOP) = 2x50+21.2=121.2

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EOP for Variable demand, constant lead time

 The Economic Order Point (EOP) is calculated by;

EOP = D × TL + k × SD × T 1/ 2
L

where TL is the average lead time to obtain spares,


SD is the standard deviation of (D), and
k is a factor of safety selected to achieve a required service level.

Required service level Safety stock factor (k)


80% 0.84

90% 1.28

95% 1.65

99% 2.33

99.9% 3.0

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Example

 Suppose that the demand for oil filters varies between 36 and 54 per
month,
 lead time between ordering and receiving new oil filters is 2 months.
 Assuming demand is normally distributed, then the average demand is
(36+54)/2 = 45 units, and Standard deviation SD = (54-36)/6 = 3 units.
 Calculate EOP and Safety stock at 99% service level
Answer:
 For a 99% service level, the Economic Order Point (EOP) should be:
EOP = 45 x 2 + 2.33 x 3 x 21/2 = 90 + 9.9 units = 99.9 or 100 units.
Safety Stock is second term in reorder point formula: 9.9 units

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Repairables - demand for number of spares

The average demand for a spare can be calculated as:

N × µ × TR
S=
L
where S is the expected number of components to be replaced in TR,
N is the number of components in service,
µ is the average effective utilization of the equipment,
TR is the door-to-door turn around time to repair a component, and
L is the average life of the component.

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Low rotation spares - example

 A mill requires 50 electric motors each of 1250 hp to power


conveyors feeding the plant.
 A conveyor stoppage directly affects mill feed, causing
losses of $40,000 per hour.
 Due to the criticality of the motors, it is important to
adequately dimension the number of spares required.
 Average motor life is 1400 days, utilization is 98%, and it
takes on average 100 days to repair a motor and return it to
site.
 How many spares are required?
Answer:
D=
(N ⋅ µ ⋅ t ) = 50 × 0.98 ×100 = 3.5
Number of spares required = S
Lm 1400

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References

 Lawrenson, J. “Effective Spares Management”, MCB University Press,


England, 1996.

 Plossl, G.W. “Production and Inventory Control: Principles and


Techniques”, 2nd Edn, Prentice Hall, 443 pp., 1985

 Wong, J.; Chung, D.; Ngai, D.; Banjevic, D. & Jardine, A. “Evaluation
of Spares Requirements Using Statistical and Probability Analysis
Techniques”, ICOMS 96, paper 33, 1996.

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THANK YOU

MINE6029 Mining Project Management and Operational Readiness


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