!nventory Nanagement !

efinitions
!nventory physical resource that a firm
holds in stock with the intent of selling it or
transforming it into a more valuable state.
!nventory System 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
!nventory
ef. physical resource that a firm holds in
stock with the intent of selling it or
transforming it into a more valuable state.
Raw Naterials
Worksin#rocess
Finished Coods
Naintenance, Repair and Operating (NRO)
pensive Stuff
The average carrying cost of inventory
across all mfg.. in the U.S. is 303S of
its value.
What does that mean?
Savings from reduced inventory result
in increased profit.
ero !nventory?
Reducing amounts of raw materials and
purchased parts and subassemblies by
having suppliers deliver them directly.
Reducing the amount of worksin process
by using justintime production.
Reducing the amount of finished goods by
shipping to markets as soon as possible.
!nventory #ositions in the
Supply Chain
Raw
Materials
Works
in
Process
Finished
Goods
Finished
Goods
in Field
Reasons for !nventories
!mprove customer service
conomies of purchasing
conomies of production
Transportation savings
Hedge against future
Unplanned shocks (labor strikes, natural
disasters, surges in demand, etc.)
To maintain independence of supply chain
!nventory and value
Remember this?
Quality
Speed
Fleibility
Cost
!ature of !nventory: dding
value through !nventory
Quality inventory can be a buffer" against poor
quality, conversely, low inventory levels may force
high quality
Speed location of inventory has gigantic effect on
speed
Flexibility location, level of anticipatory inventory
both have effects
Cost direct: purchasing, delivery, manufacturing
indirect: holding, stockout.
HR systems may promote this3 year postings
!ature of !nventory:
Functional Roles of !nventory
Transit
Buffer
Seasonal
ecoupling
Speculative
Lot Sizing or Cycle
Nistakes
esign of !nventory Ngmt.
Systems: Nacro !ssues
!eed for Finished Coods !nventories
!eed to satisfy internal or eternal customers?
Can someone else in the value chain carry the
inventory?
Ownership of !nventories
Specific Contents of !nventories
Locations of !nventories
Tracking
How to Neasure !nventory
The ilemma: closely monitor and control
inventories to keep them as low as possible
while providing acceptable customer service.
Average Aggregate !nventory value:
how much of the company's total assets
are invested in inventory?
Ford:6.82S billion
Sears: 4.033 billion
!nventory Neasures
Weeks of Supply
Ford: 3.S1 weeks
Sears: 3.2 weeks
!nventory Turnover (Turns)
Ford: 14.8 turns
Sears: S.7 turns
CN: 8 turns
Toyota: 3S turns
Reasons gainst !nventory
!onvalue added costs
Opportunity cost
Complacency
!nventory deteriorates, becomes
obsolete, lost, stolen, etc.
!nventory Costs
#rocurement costs
Carrying costs
Outofstock costs
#rocurement Costs
Order processing
Shipping
Handling
Purchasing cost: c()= $100 + $S
Nfg. cost: c()=$1,000 + $10
Carrying Costs
Capital (opportunity) costs
!nventory risk costs
Space costs
!nventory service costs
OutofStock Costs
Lost sales cost
Backorder cost
!ndependent emand
!ndependent demand items are
finished products or parts that are
shipped as end items to customers.
Forecasting plays a critical role
ue to uncertainty etra units must
be carried in inventory
ependent emand
Dependent demand items are raw
materials, component parts, or
subassemblies that are used to produce
a finished product.
NR# systemsnet week
esign of !nventory Ngmt.
Systems: Nicro !ssues
Order Quantity
conomic Order Quantity
Order Timing
Reorder #oint
Objectives of !nventory
Control
1) Naimize the level of customer
service by avoiding understocking.
2) #romote efficiency in production and
purchasing by minimizing the cost of
providing an adequate level of customer
service.
Balance in !nventory 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: conomic Order Quantity
Nodels for !nventory Nanagement:
OQ
OQ minimizes the sum of holding and setup
costs
Q = 2C
o
/C
h
= annual demand
C
o
= ordering/setup costs
C
h
= cost of holding one unit of inventory
Seatide
OQ = 2C
o
/C
h
= annual demand = 6,000
C
o
= ordering/setup costs = $60
C
h
= cost of holding one unit of inventory
$3.00 24 = .72
2 6,000 60
.72
720,000
.72 1,000
Holding
Costs
Ordering
Costs
Narginal nalysis
Units
$
Reorder #oint
Quantity to which inventory is allowed to
drop before replenishment order is made
!eed to order OQ at the Reorder #oint:
RO# = X LT
= emand rate per period
LT = lead time in periods
level of inventory average
inventory
units
Q
t time
Sawtooth Nodel
based on reorder point When
inventory is depleted to RO#, order
replenishment of quantity OQ.
Q System !nventory
Control
when demand is smooth and
continuous, can operate response
based system by determining
best quantity to replenish periodic demand
(OQ)
frequency of replenishment (RO#)
Reorder #oint
Order Quantities
changing lead times
changing demand
Uncertainty creeps in:
#lug in safety stock
Safety stock allows manager to
determine the probability of stock levels
based on desired customer service
levels
Planning for Uncertainty
!nventory Nodel Under
Uncertainty
reorder Q
m
point
safety stock
time
Nodels for !nventory Nanagement:
Quantity iscount
Basically OQ with quantity discounts
To solve:
1. Write out the total cost equation
2. Solve OQ at highest price and no discounts
3. !f Q
min
falls in a range with a lower price,
recalculate OQ assuming holding cost for that
range. Call this Q
2
.
4. valuate the total cost equation at Q
2
at the net
highest price break point.
OR Use a spreadsheet
an alternative to RO#/Qsystem control is
periodic review method
Qsystem each stock item reordered at
different times comple, no economies of
scope or common prod./transport runs
#system inventory levels for multiple stock
items reviewed at same time can be
reordered together
higher carrying costs not optimum, but
more practical
PSystem
Periodic Review Nethod
audit inventory level at interval (T)
quantity to place on order is difference
between ma. quantity (N) and amount
on hand at time of review
management task set optimal T and N
to balance stock availability and cost
!n BC analysis, which items would use
#system???
Using PSystem
Types of !nventory Systems
By egree of Control required
often use grouping method, such as BC
Classifying !nventory !tems
ABC Classification (Pareto Principle)
A !tems: very tight control, complete and
accurate records, frequent review
B !tems: less tightly controlled, good
records, regular review
C !tems: simplest controls possible, minimal
records, large inventories, periodic review
and reorder
oes BC Classification Nake
Sense for an ssembler?
i.e. - Cateway Computers
Planning Supply Chain Activities
nticipatory allocate supply to each
warehouse based on the forecast
Responsebased replenish inventory
with order sizes based on specific
needs of each warehouse
determine requirements by forecasting
demand for the net production run or
purchase
establish current onhand 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 onhand)
Anticipatory !nventory
Control
replenishment, production, 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, often more
frequent, lower volume orders
determine stock requirements to meet only
most immediate planning period (usually
about 3 weeks)
ResponseBased System
Service Level Achieved
1
epected number of units out of stock/year
total annual demand
Wtem Iill rate (FR): the probability oI Iilling
an order Ior 1 item Irom current stock
WWeighted Average Fill Rate (WAFR): multiply
FR Ior each stock item on an order weighted
by the ordering Irequency Ior the item