Inventory Management I


Inventory-A physical resource that a firm holds in stock with the intent of selling it or transforming it into a more valuable state. Inventory System- A set of policies and controls that monitors levels of inventory and determines what levels should be maintained, when stock should be replenished, and how large orders should be 



Def. - A physical resource that a firm holds in stock with the intent of selling it or transforming it into a more valuable state. Raw Materials Works-in-Process Finished Goods Maintenance, Repair and Operating (MRO)

Expensive Stuff  

The average carrying cost of inventory across all mfg.. in the U.S. is 30-35% of its value. What does that mean? Savings from reduced inventory result in increased profit.

Reducing the amount of works-in process by using just-in-time production. Reducing the amount of finished goods by shipping to markets as soon as possible.   .Zero Inventory?  Reducing amounts of raw materials and purchased parts and subassemblies by having suppliers deliver them directly.

Inventory Positions in the Supply Chain Raw Materials Works in Process Finished Goods Finished Goods in Field .

natural disasters. etc.Reasons for Inventories        Improve customer service Economies of purchasing Economies of production Transportation savings Hedge against future Unplanned shocks (labor strikes.) To maintain independence of supply chain . surges in demand.

Inventory and Value  Remember this?     Quality Speed Flexibility Cost .

low inventory levels may force high quality Speed . HR systems may promote this-3 year postings . stockout. manufacturing indirect: holding.inventory can be a buffer against poor quality.location. delivery.Nature of Inventory: Adding Value through Inventory     Quality .location of inventory has gigantic effect on speed Flexibility .direct: purchasing. conversely. level of anticipatory inventory both have effects Cost .

Nature of Inventory: Functional Roles of Inventory        Transit Buffer Seasonal Decoupling Speculative Lot Sizing or Cycle Mistakes .

Systems: Macro Issues  Need for Finished Goods Inventories   Need to satisfy internal or external customers? Can someone else in the value chain carry the inventory?     Ownership of Inventories Specific Contents of Inventories Locations of Inventories Tracking .Design of Inventory Mgmt.

How to Measure Inventory     The Dilemma: closely monitor and control inventories to keep them as low as possible while providing acceptable customer service.825 billion Sears: 4. Average Aggregate Inventory Value: how much of the company s total assets are invested in inventory? Ford:6.039 billion .

Inventory Measures  Weeks of Supply   Ford: 3.8 turns Sears: 5.51 weeks Sears: 9.2 weeks Ford: 14.7 turns GM: 8 turns Toyota: 35 turns  Inventory Turnover (Turns)     .

Reasons Against Inventory     Non-value added costs Opportunity cost Complacency Inventory deteriorates. etc. . stolen. becomes obsolete. lost.

Inventory Costs    Procurement costs Carrying costs Out-of-stock costs .

000 + $10x .Procurement Costs      Order processing Shipping Handling Purchasing cost: c(x)= $100 + $5x Mfg. cost: c(x)=$1.

Carrying Costs     Capital (opportunity) costs Inventory risk costs Space costs Inventory service costs .

Out-of-Stock Costs   Lost sales cost Back-order cost .

extra units must be carried in inventory .Independent Demand    Independent demand items are finished products or parts that are shipped as end items to customers. Forecasting plays a critical role Due to uncertainty.

or subassemblies that are used to produce a finished product. MRP systems---next week .Dependent Demand   Dependent demand items are raw materials. component parts.

Systems: Micro Issues  Order Quantity Economic Order Quantity  Order Timing  Reorder Point .Design of Inventory Mgmt.

.Objectives of Inventory Control   1) Maximize the level of customer service by avoiding understocking. 2) Promote efficiency in production and purchasing by minimizing the cost of providing an adequate level of customer service.

Balance in Inventory Levels    When should the company replenish its inventory. or when should the company place an order or manufacture a new lot? How much should the company order or produce? Next: Economic Order Quantity .

Models for Inventory Management: EOQ   EOQ minimizes the sum of holding and setup costs Q = 2DCo/Ch D = annual demand Co = ordering/setup costs Ch = cost of holding one unit of inventory .

000 Co = ordering/setup costs = $60 Ch = cost of holding one unit of inventory $3.Seatide  EOQ = 2DCo/Ch D = annual demand = 6.72 1.000 .72 720.00 x 24% = .72 2 x 6.000 x 60 .000 .

Marginal Analysis Holding Costs $ Ordering Costs Units .

Reorder Point  Quantity to which inventory is allowed to drop before replenishment order is made Need to order EOQ at the Reorder Point: ROP = D X LT D = Demand rate per period LT = lead time in periods  .

Sawtooth Model level of inventory inventory units Q average t time .

System Inventory Control  based on reorder point .When inventory is depleted to ROP.Q . . order replenishment of quantity EOQ.

can operate responsebased system by determining   best quantity to replenish periodic demand (EOQ) frequency of replenishment (ROP)  Reorder Point .Order Quantities  when demand is smooth and continuous.

Planning for Uncertainty    changing lead times changing demand Uncertainty creeps in:  Plug in safety stock Safety stock .allows manager to determine the probability of stock levels .based on desired customer service levels .

Inventory Model Under Uncertainty reorder Qm point safety stock time .

recalculate EOQ assuming holding cost for that range.Models for Inventory Management: Quantity Discount   Basically EOQ with quantity discounts To solve: 1. Evaluate the total cost equation at Q2 at the next highest price break point. If Qmin falls in a range with a lower price. Write out the total cost equation 2. 4. Solve EOQ at highest price and no discounts 3. Call this Q2. OR Use a spreadsheet .

not optimum.inventory levels for multiple stock items reviewed at same time .P-System Periodic Review Method     an alternative to ROP/Q-system control is periodic review method Q-system ./transport runs P-system .can be reordered together higher carrying costs .each stock item reordered at different times . no economies of scope or common prod.complex. but more practical .

quantity (M) and amount on hand at time of review management task .set optimal T and M to balance stock availability and cost In ABC analysis.Using P-System     audit inventory level at interval (T) quantity to place on order is difference between max. which items would use P-system??? .

Types of Inventory Systems  By Degree of Control required  often use grouping method. such as ABC .

Classifying Inventory Items     ABC Classification (Pareto Principle) A Items: very tight control. large inventories. regular review C Items: simplest controls possible. minimal records. frequent review B Items: less tightly controlled. complete and accurate records. good records. periodic review and reorder .

Gateway Computers .Does ABC Classification Make Sense for an Assembler?  i.e.

allocate supply to each warehouse based on the forecast Response-based .replenish inventory with order sizes based on specific needs of each warehouse .Planning Supply Chain Activities Anticipatory .

on-hand) .Anticipatory Inventory Control     determine requirements by forecasting demand for the next production run or purchase establish current on-hand quantities add appropriate safety stock based on desired stock availability levels and uncertainty demand levels determine how much new production or purchase needed (total needed .

often more frequent. production.Response-Based System    replenishment. or purchases of stock are made only when it has been signaled that there is a need for product downstream requires shorter order cycle time. lower volume orders determine stock requirements to meet only most immediate planning period (usually about 3 weeks) .

Service Level Achieved ‡Item fill rate (IFR): the probability of filling an order for 1 item from current stock 1- expected number of units out of stock/year total annual demand ‡Weighted Average Fill Rate (WAFR): multiply IFR for each stock item on an order weighted by the ordering frequency for the item .

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