[LOGISTICS AND SUPPLY CHAIN MANAGEMENT PROGRAM. Course: WAREHOUSE ENGINEERING MANAGEM! T Chapter 2: Inventory, Stock Analysis and classifying products Lecturer: Assoc. Prof. Dr. Ho Thi Thu Hoa Assoc. Prof. Dr Ho Thi Thu Hoa1. Product classification 2. Demand management and forecasting 3. Inventory function and principles 4. Inventory costs and service 5. Inventory models (Replenishment methods) 6. ABC and Pareto analysis 7. Cases Assoc. Prof. Dr Ho Thi Thu Hoa1. Richards, G. (2014). Warehouse management: a complete guide to improving efficiency and minimizing costs in the modern warehouse. Kogan Page Publishers. 2. Richards, G. (2018). Warehouse management: a complete guide to improving efficiency and minimizing costs in the modern warehouse. Kogan Page Publishers. (Chapter 2-3) Manzini, Ricardo. Warehousing in the Global Supply Chain. Springer: 2012 Tompkins, J. A., White, J. A., Bozer, ¥. A., & Tanchoco, J. M. A. (2010). Facilities planning. John Wiley & Sons 5. Alan Hrrison and et. (2014), Logistics management and strategy competing through the supply chain (fifth edition), Pearson 6. Martin Christopher(2011), Logistics & Supply Chain Management (4th Edition), Prentice Hall 7. Arnold, Tony J. R,, Chapman, S.N., Clive, L. M (2016), Introduction to Materials ‘Management, 7ed. Pearson: 2016. (Chapter 8, 9, 10, 11) ‘ited from MSe Mal Thuy Dung and MSc Nguyen Hoang Huy: Teaching materials for WAREHOUSE ENGINEERING MANAGEMENT. Some definitions - Working stock - Cycle stock Safety stock - Speculative stock - Seasonal stock Assoc. Prof. Dr Ho Thi Thu HoaSome definitions + Working stock. This is likely to be the major element of stock within a distribution depot’s stock-holding, and it should reflect the actual demand for the product. + Cycle stock. This refers to the major production stock within a production warehouse, and it reflects the batch sizes or production run lengths of the manufacturing process Safety stock. This is the stock that is used to cover the unpredictable daily or weekly fluctuations in demand. It is sometimes known as ‘buffer’ stock, as it creates a buffer to take account of this unpredictability : Speculative stock. This can be raw materials that are ‘bought forward’ for financial or supply reasons, o finished stock that is pre-planned to prepare for expected future increases in demand Seasonal stock, This is product that is stockpiled to allow for expected large increases in demand. Typically, this would include inventory built up prior to the Christmas demand peak. lea cacey Warehouses contain the following three types of inventory: v Fast-moving: items that sell out almost as fast as they're is produced Y Fast-moving consumer goods (FMCG) are products that are sold quickly and at a relatively low cost. ¥- Examples include non-durable household goods such as packaged foods, beverages, toiletries, candies, cosmetics, over-the-counter drugs, dry goods, and other consumables, v High-value: items that sell infrequently ¥ Hybrid: products that sell moderately quickly Warehouse management that need carefully classify their products are better able to efficiently stock inventory. Assoc. Prof. Dr Ho Thi Thu HoaThe FMCG Global 50' report e eo e e ies @ resco | ABINBev e oe eo Gps) @ys0n Gilg LOREAL @ ® ® wwe: DANONE Heineken’ Mondeléz, Kraft'Heinz @ @ oe. Se ° anem wag SUNTORY jr Altria Asahi Switzeiand's Nes isthe work's largest fast moving consumer goods company, folowed by two US- giants: Procter & Gamble and PepsiCo. Combined, he 40 largest FMCG companias in the world ‘generated over $1 tlion in sales over ther latost fnancial year. tips:twwn. consultancy uk/nows/2687-4/the-worlds-40 largest fast moving-consumor-goods.companios Product coding Each company will have a method of identifying products through some form of coding system The coding system maybe unique (ex: Shell group-10 number coding) or industry standards (ex: food industry-bar code labelling) * The reasons for it are universal: + Provides a unique identifier per product line/item. + Prevents duplication of stocks + Provides standardisation + Simplifies product identification for all suppliers, customers and users. + Can help in determining stock locations + Assists in pricing and costing: for example, with food supermarkets’ EPOS systems Assoc. Prof. Dr Ho Thi Thu HoaProduct handling groups The matrix could also be extended to Frama ene ow account for any specific product Mamata ec ch Gharacteristies For exanple: crate” _nees_perweck recs sey nok meta ‘temperature control: needing, yan mes cau mx separation and zoning anes per UR pallet pier pate * securit needing specific lockable/safe areas " i ak fem Gite hazard rating: needing segregation and possible temperature control and special fire protection + any other requirements that mean that products cannot be kept together. products with their individual charactristios 2. Demand management and forecasting Y Demand management is the function of recognizing and managing all demands for products. It ‘occurs in the short, medium, and long term. Y Demand management includes four major activities: Forecasting. Order processing. Making delivery promises. Interfacing between manufacturing planning and control and the marketplace. PRODUCTION =| _ MANNING MARKETPLACE Les] DENAND I MASTER +} PRODUCTION SCHEDULE Figure: Demand management and the manufacturing planning and contrl system Assoc. Prof. Dr Ho Thi Thu HoaDemand analysis + Determine product requirements from a stockholding point of view. + Itreflects the supply and demand cycle with the goods inwards and goods outwards operations of the warehouse. Demand is found in two basic forms: + Independent or random demand is that which is independent of all other products, ROL inventory management/ replenishment. ‘+ Independent demand is not related to the demand for any other product. it must be forecast + For example, ifa company makes wooden tables, the demand for the tables is independent. Use ROP/ + Dependent or predictive demand is that derived from consumer demand which produces ‘end use’ products or services + The demand for the sides, ends, legs, and tops depends on the demand for the tables, and these are dependent demand items, + Itcan be calculated Independent Demand eel (Forecast) Legs Ends Sides Top Hardware o @ @ m0) Kit a Dependent Demand (Calculated) Figure: Product ree Assoc. Prof. Dr Ho Thi Thu HoaFeature Dependent demand Independent demand Replenishment MRP ROPIROL method Material requirements planning Orientation Product components All individual parestems Demand patterns Lumpy and discrete More continuous ppatcerns pacterns Order signal Time phased ROPIROL ‘Time perspective Future production/sales Historic demand often will greaty help to predice the future Forecasts Forecast ison the final Forecast on all tems ‘end items only Safety stack Safety stock is carried Safety stock is carried for the end items Figure: Comparisons of dependent and independent demand Demand forecasting Forecasting demand helps the inventory holding decision process to find answers to questions about what to stock, how much to stock and what facilities are required. It is often said that ‘all mistakes in forecasting end up as an inventory problem — whether too much or too ttle!” ‘Actual monthly demand Rushton etal (2014) Assoc. Prof. Dr Ho Thi Thu HoaPrinciples of forecasting * Forecasts are usually wrong *Every forecast should include an estimate of error * Forecasts are more accurate for families or groups *Forecasts are more accurate for nearer time periods Forecasting Process Assoc. Prof. Dr Ho Thi Thu HoaCollection and Preparation of data Forecasts are usually based on historical data manipulated in some way using cither judgment or a statistical technique => the forecast is only as good as the data on which it is based To get good data, three principles of data collection: + Record data in the same terms as needed for the forecast + Record the circumstances relating to the data + Record the demand separately for different customer groups Forecasting Techniques ‘There are many forecasting methods, but they can usually be classified into three categories: qualitative, extrinsic, and intrinsic. projections based) ‘on external (extrinsic) indicators whieh relate to the + projections based on | | demand for a “use historcal | Judgment, intuition, | | company’s products Gata to forecast And inform opinions Assoc. Prof. Dr Ho Thi Thu Hoa 10Intrinsic Techniques Average demand. Moving averages Exponential smoothing Moving Average + Naive forecast + demand in current period is used as next period’s forecast + Simple moving average * uses average demand for a fixed sequence of periods + stable demand with no pronounced behavioral patterns + Weighted moving average *+ weights are assigned to most recent data Assoc. Prof. Dr Ho Thi Thu Hoa "1Moving Average: Naive Approach ORDERS MONTH PERMONTH FORECAST ‘nO Feb 90 120 Mar 100 90 Apr 75 100 May 110 75 June 50 110 suly 75 50 ‘aug 130 75 Soot “10 4130 oct 90 +10 Nov oo ~ 90 Simple Moving Average 2,2 MA,= — (jw 11 = number of periods in the moving average ,= demand in period Assoc. Prof. Dr Ho Thi Thu Hoa 123-month Simple Moving Average ORDERS —_-MOVING MONTH PERMONTH AVERAGE a Jan 720 - rm Feb 80 = MA, Mar 100 3 Age 15 103.8 May 110 883 = 9041104 130_ June 50 95.0 - 3 ‘uly 1 783 ug 130 783 - m9, 130 pe 110 orders for Nov oct °0 105.0 Nov - 110.0 Weighted Moving Average + Adjusts moving average method to more closely reflect data fluctuations WMA, where ZWD, 1 W, = the weight for period i, between 0 and 100 percent 1.00 Zw, Assoc. Prof. Dr Ho Thi Thu Hoa 13Example MONTH WEIGHT DATA August 17% 130 September 33% 110 October 50% 90 3 November Forecast WMA, = 5 W, D, = (0.50)(90) + (0.33)(110) + (0.17)(130) = 103.4 orders Exponential Smoothing Averaging method Weights most recent data more strongly Reacts more to recent changes Widely used, accurate method Assoc. Prof. Dr Ho Thi Thu Hoa 14Exponential Smoothing Fant aD, (1-a0F, where’ F,.. = forecast for next period D, = actual demand for present period F,= previously determined forecast for present period = weighting factor, smoothing constant Effect of Smoothing Constant O0sa2i0 Ife=0.20, then F,..= 0.20 D, + 0.80 F, a=, then F,.=00,+1 F,=F, Forecast does not reflect recent data a=, then F,..= 10,6 0F,=D, Forecast based only on most recent data Assoc. Prof. Dr Ho Thi Thu Hoa 15Exponential Smoothin 30 PERIOD MONTH DEMAND Fz = aD; + (1-a)F, 1 Jan 37 = (0.30)(37) + (0.7037) 2 Feb 40 =37 3 Mar a 4 Aor ar aD, +(1-a)F, 5 May 48 ' 3 way $ (0.30)(40) + (0.70)(37) 7 ul 43 +379 8 Aug 47 +a, $ oe 2 Fy3% ai + (1- @)F ro + Oct 52 = (0.30)(54) + (0.70)(50.84) " Nov 55 251.79 2 Dee 54 Exponential Smoothing FORECAST, F, PERIOD MONTH DEMAND (@=0.3) _(a=05), 1 Jan 37 = ~ 2 Feb 40 37.00 37.00 3 Mav 4 37.90 38.50 4 Apr a7 38.83 3375 5 May 45 38.28 38.37 6 Jun 50 40.29 41.88 7 dul 43 43.20 45.84 8 Aug a7 43.44 44.42 Q Sep 56 44.30 45.71 10 Oct 52 478i 50.85 " Nov 55 49.08 51.42 2 Dec 54 50.84 53.21 13 Jan - 51.79 5361 Assoc. Prof. Dr Ho Thi Thu Hoa 16Exponential Smoothing 7 ‘ etal 5 = 050 0 \ \ 40 ‘Orders 20 2 ‘= 0.30 Seasonality Many products have a seasonal or periodic demand pattern: Example: skis, lawnmowers, bathing suits, and Christmas tree lights Seasonal Index ‘Auseful indication of the degree of seasonal variation fora product is the seasonal index period average demand Seasonal index ~ rage demand forall periods yeriod average demand Season index = =e Assoc. Prof. Dr Ho Thi Thu Hoa 7Practice Answer “The seasonal indices can now be calculated as follows: Seasonal index = = yp = 075 (quarter 3) 095 (quarter) Total of seasonal indices = 4.00 Assoc. Prof. Dr Ho Thi Thu Hoa 18Seasonality Seasonal forecast ‘The equation for developing seasonal indices is also used to forecast seasonal demand ‘Seasonal demand = (seasonal index) (deseasonslized demand) Example: The company in the previous problem forecasts an ‘annual demand next year of 420 units, Calculate the forecast for yore aerage quater demand = 2 105 ui sgt uae de ety dan) pected second quar demand = 102 « 18 = 172 waite Forecast Accuracy + Tracking the forecast is the process of comparing actual demand with the forecast. * Forecast error is the difference between actual demand and forecast demand. Error can occur in as and random variation. + Random variation + Mean absolute deviation (MAD) sum of absolute deviations MAS number of observations Assoc. Prof. Dr Ho Thi Thu Hoa 19Bias Random variation Assoc. Prof. Dr Ho Thi Thu Hoa 20Mean Absolute Deviation 21D,- Fil MAD = where 1= period number D, = demand in period 1 F, = forecast for period 1 n= total number of periods | |= absolute value Mean Absolute Deviation _ =|D,-Fi MAD 7 where 1= period number D, = demand in period 1 F, = forecast for period 1 n= total number of periods | |= absolute value Assoc. Prof. Dr Ho Thi Thu Hoa 2MAD Example PERIOD DEMAND, D,_F,(a=0.3) (D,-F) 1D, a7 37.00 = 40 37.00 3,00 “1 3790 3.10 37 3883-183 45 38.28 6.72 50 4023 9.69 a 4320-020 ar 4314 3.86 56 4430 11.70 52 47a 49 55 4906 5.94 54 5084 3.15 57 79.31 MAD Calculation 2|D,- Fi) ae 53.39 1 85 MAD Assoc. Prof. Dr Ho Thi Thu HoaDefinition: Inventory is as a major asset that should provide return for the capital invested. The return ‘on inventory investment is the marginal profit on sales that would not occur without inventory. Donald Bowersox and David Closs and M, Bixby Cooper (2002): Supply Chain Logistics Management. 5 edition (2019) Why do we need to hold stock? v To keep down productions costs — setting up machines is expensive. Production needs to be as long as possible to achieve low unit cost v To accommodate variations in demand - demand is never regular. It varies v To take account of variable supply (lead) times — held to cover any delivery delays from suppliers v Buying costs — administrative costs associated with raising an order. Essential to balance buying costs with administrative costs using EOQ v To take advantage of quantity discounts — some products are offered at a Y cheaper unit cost when bought in bulk ¥ To account for seasonal fluctuations — some products are popular only in peak demand time. To address this while maintaining an even level of production, stock needs to be built up throughout the rest of the year. Rushton etal (2014) Assoc. Prof. Dr Ho Thi Thu Hoa 23- To allow for price fluctuations/speculation - prices of some products can fluctuate for a number of reasons. Some companies buy in bulk because of it + To help the production and distribution operations run more smoothly — stock is held to “decouple” two different operations + To provide customers with immediate service — essential in some highly competitive markets for companies to provide goods as soon as required - To minimize production delays caused by lack of spare parts — important not just for regular maintenance, but specially for breakdown of expensive plant and machinery, Spares held to minimise plant shutdown + Work-in-progress — to facilitate the production process by providing semi- finished stocks between different processes Rushton etal (2074) eer er rrr en enn Inventory function and principles * WHY holding | ——-To mest expected demand stock? To meet any future shortages — y . ~ Te ake advantage of uk purchasing To satisfy seasonal uetuatons and any ‘variations in usage and demand To allow production processes to flow smoothly and efficiently + Types of => stocks? intransit inventories safety or buffer stock speculative stock seasonal stock dead stock eyele stock Assoc. Prof. Dr Ho Thi Thu Hoa 24Discuss * Stockout/running out of stock, which costs may happen? * Stockout costs: + back-order: the customer is prepared to wait for some time * The percentage of items backordered & the number of backorder days + => measures of the quality of a company's customer service and the effectiveness of its inventory management + back-order costs, lost sales, possibly lost customers + How to reduce stockout costs? + carrying extra inventory to protect against those times when the demand during lead time is greater than forecast + Safety stock Example: Holding costs + A company carries an average annual inventory of GBP 1,000,000. If it estimates: + the costs of capital is 10% + Storage costs are 7% + Risk costs are 6% + What does it cost per year to carry this inventory Assoc. Prof. Dr Ho Thi Thu Hoa 25Inventory - Is created to compensate for the differences in timing between supply and demand Slack et al(2010) Fiato of supply {rom input process Rate of demand from output process Stack ot al(2013) Inventory accumulating Inventory ecucing Assoc. Prof. Dr Ho Thi Thu Hoa 26Inventory level + input (order quantity) and output (continuous demand) uae Tie Rushton t (2014) Cycle stock crnaivuno uy tung hy Assoc, Prof. Dr Ho Thi Thu Hoa 27safety or buffer stock ‘The average inventory for & period is equal to the opening inventory plus the ending inventory, divided by 2 + period opening inventory = order quantity + safety stock + period ending inventory = safety stock + Average inventory = (order quantiy + safety stock + safety stock)2 =02 +55 Inventory level with safety stock in place ‘Demand higher tan forecast 0 some rafty stock i wed i Coninuous Order | demand «quan Inventory level Safer orate’ stock Time Assoc. Prof. Dr Ho Thi Thu Hoa 28Example: safety or buffer stock *Order quantity is 1000 units (Q) and safety stock (SS) is 300 units. What is the average inventory? v There are four principal elements of inventory holding cost. They are: v 1. Capital cost: the cost of the physical stock. This is the financing charge that is the current cost of capital to a company or the opportunity cost of tying up capital that might otherwise be producing a better return if invested elsewhere. This is almost always the largest of the different elements of inventory cost. v 2. Service cost: the cost of stock management and insurance. v 3, Storage cost: the cost of space, handling and associated warehousing costs involved with the actual storage of the product. v 4. Risk cost: this occurs as a consequence of pilferage, deterioration of stock, damage and stock obsolescence. With the reduction in product life cycles and the fast rate of development and introduction of new products, this has become a very important aspect of inventory cost. It is one that is frequently underestimated by companies. It is particularly relevant to high-tech industries, the fashion industry, and fresh food and drink. Assoc. Prof. Dr Ho Thi Thu Hoa 29de reparation, flow up, recounting cost of esewng S poping voice Inventory costs = D: ~Costgaf storage and tres operations Bw cng bt xs approx. 20-30% in ‘Risk costs: eros 20-30% “tonnes damaged whe bang e " moved: pilferage The aim of inventory management is therefore to achieve the required service level at an acceptable cost This is a question of finding the balance between cost of holding stock and the cost of providing the required service at the level desired by the customer or consumer A key aspect in inventory management is dealing with uncertainty, not only with the supply and the customer or consumer demand, but also whether the uncertainty is ‘real’ (or is it caused by institutionalized and out-dated/ill- informed procedures and lack of communication Assoc. Prof. Dr Ho Thi Thu HoaLead time Lead time (LT) is a critical component in making inventory decisions, Example: If 70 items are used per week and the supply LT is 2 weeks, then the quantity to order to cover the demand during the supply LT (called the lead time demand) is 140 items. ‘Types of lead time: Lead time ‘Action By Pre-order Pi User conor reine Order pane Castro pt Sppler Order depuching Supper Prodan Making order = Supper Wershose Supe om sock Suppor Tat Tenporieg Serie faces Rectang Cinorer Pamere Pare Carron eile The problem of lead time variability The main issue to be resolved with lead time is not its length of time but the uncertainty and variability that can occur + If lead time (LT) is halved from 12 to 6 weeks but the lead time variability (LTV) stays the same at 4 weeks, then uv uy ou uv Assoc. Prof. Dr Ho Thi Thu HoaThe problem of lead time variability While we shall be looking at inventory improvements later, the following are some ways to reduce demand and supply lead time variability: Demand LTV ‘Supply LTV ~ Predictable orders/size/make Predictable LT up — Get correct quantity first time — Predictable order times —Data accuracy on what is — Data accuracy on what suppliediprice. customers want/when/price = Is it ‘end’ demand or institutional/“Forrester” demand? “~~ J Re-Order Point System. Perpetual inventory. Periodic Review. + When the stock level drops +Continual account of | + Cyclical review. Inventory to a predetermined level inventory transactions as|_levels are reviewed on a known as the re-order point, | they occur periodic basis a new order is automatically + Check the inventory by| + Replenishment quantities triggered for —pre- continuous _ stocktaking] are enough to bring stock determined quantity known (daily or at _frequent| levels up toa pre-determined as the re-order Quantity intervals) maximum stock level Assoc. Prof. Dr Ho Thi Thu HoaFixed point reorder system Sis the stock eve! Lethe end une sumed consan) (Q's he quantty ordered (const) Rushton etal (2074), Fixed point reorder system + The change in stock level can be seen by the pattem represented by the line S, When the stock level reaches the fixed point reorder level (B), a replenishment order is placed. This is for a fixed order quantity (Q). L represents the lead time for the order, and the figure shows that when the order arrives the stock level is increased by the set quantity that has been ordered. T represents the time period between orders, the length of which varies from one cycle to another for this system. + Fixed point reorder system requires the use of a specific stock level to trigger replenishment. The safety stock is a term used to describe the level of stock that is required stockouts, which might be caused by uncertainties in supply and demand. Rushton etal (2014) Assoc. Prof. Dr Ho Thi Thu Hoa 33Demand reorder timing + When to order? Re-order level (ROL)/re-order point + Management would be likely to fix a ROL nearer to maximum usage than to the average usage or minimum. + RO period) maximum usage (during lead time) x maximum lead time (delivery + Re-order quantity: + For small value items, management might choose a level which they estimate will minimise the administrative inconvenience of frequent re- ordering => cost-effective & suitable + Suggested Q = annual demand/number of orders Replenishment methods When the quantity of an item on hand in inventory falls to a predeterm called an order point ‘An order must be placed when there is enough stock on hand to satisfy demand from the time the order is placed until the new stock arrives (called the lead tim). The item s ordered when the quantity on hand falls to a level equal to the demand during the lead time plus the safety stock (or = ppur +88 (P= one point DDDLT = dad rig the Assoc. Prof. Dr Ho Thi Thu HoaExample Demand is 200 units week, the lead time is 3 weeks, and safery stocks 300 units. Ceteulte the order point answer DDLT + $8 200 x3 +300 900 unis Determining safety stock + Safety stock is intended to protect against uncertainty in supply and demand, + Uncertainty may occur in two ways: quantity uncertainty and timing uncertainty + There are two ways to protect against uncertainty: carry extra stock (called safety stock) or order early (called safety lead time) + The safety stock required depends on the following: + Variability of demand during the lead time. + Frequency of reorder. + Service level desired. + Length of the lead time. The longer the Iead time, the more safety stock has to be carried to provide a specified service level. This is one reason itis important to reduce lead times as much as possible. Assoc. Prof. Dr Ho Thi Thu Hoa 35Determining safety stock Variability of demand during the lead ti Weekly Demand Number of Weeks . 2 5s 3 3 sos. 474 7 En 875-904 2 925-074 7 . 975-1024 2 1025-1074 7 1075-1124 2 ‘Sete oem nae z verm-yoem 117S-124 3 1225-1274 2 Determining safety stock Average meat % The average or mean value isa the high point ofthe curve iste conta tendency ofthe distibuton Standard Deviation (Sigma) ig a. statistical value that ‘measures how closely the individual values cluster about the average + Calculate the deviation fr cach period by subtrectn eS sind hom he farelan Seman + Square each deviation + Add the squares ofthe deviations. + Divide the value instep 3 by the number of periods to determine the average ofthe squared deviations Caleuat the square root of the value calculated in Sepa Tiss he standard deviation Assoc. Prof. Dr Ho Thi Thu HoaDetermining safety stock Siena The service level is a statement of the percentage of time there is no stockout Safety factor. The service level is directly related to the number of _ standard deviations provided as safety stock and is usually called the safety factor. Determining safety stock Sat Fae Table of safety factor Assoc. Prof. Dr Ho Thi Thu Hoa 37Example If the standard deviation is 200 units, what safety stock should be carried to provide a service level of 90%? If the expected demand during the lead is 1500 units, what is the order point? From Figure 15, the sty factor fora sevice level of WF 6128, Therefore, ‘Say ck = sm sy foe 20 x 128 Onier pot = DIT + 88 1500 +256 1756 units = Most common approach . . for deciding how much Economic order quantity (EOQ) of any particular item to order when stock needs replenishing “eos ontrg oe Rushton etal (2014) Slack et al (2013) Assoc. Prof. Dr Ho Thi Thu Hoa 38The basic EOQ formula + EOQ (economic order quantity) or EBQ (economic batch quantity) is the order quantity for an item of stock which will minimise costs Demand & lead time = constant Economic order quantity (EO mode!) Total annual inventory cost (TAC)= Annual inventory carrying cost + annual ordering cost TAC min => £00 Legend: * Pe ordering costvND/order) + b> Anal dermanclunts) +c anal holding cost rte (8) + the holding cost per anitof stack or onetime period (elevant cost on) Then: + Annual ordering cost = number of orders * costs per order: ‘Annual carrying cost = average inventory® cost of carrying 1 unit for 1 year = Assoc. Prof. Dr Ho Thi Thu Hoa 39ECONOMIC ORDER QUANTITY MODEL Economic Order Quantity 1000 2000 3000 4000 S000 Ordering (Acquisition Costs Order 6099, wantity ey = Assoc, Prof. Dr Ho Thi Thu Hoa 40TAC => min Example + Suppose a company purchases goods for resale (i.e Big C) + The average cost of placing an order is VND 3,000,000. + The annual holding cost rate is estimated as 25% (0.25). * The annual demand for this product is 3,600 packages with the price of VND 1, 500, 000 per package. + The minimum order quantity is 175 packages (they are sold in pallets of 25 packages) Required: + Use Excel and tabulate the annual relevant costs for various order quantity + Calculate E00. (formula) Assoc. Prof. Dr Ho Thi Thu Hoa 44Example answer (using spreadsheet) Perpetual inventory record Permanent or static information ¢ oT 4 Pa variable or dynamic information 6 IIo oO 00 500 2 03 S00{r0t received) o 400 05 500 Note: 500 500 (400 +100) 100 600 400{not 100 issued) 100 600 ++ Up to date record of transaction; + the quantity on order but not receives + the quantiy allocated but nat issued; + the available balance Assoc. Prof. Dr Ho Thi Thu Hoa 42Units in stock Target (maxi) inventory tow Di demand peruntot teas time duration Rereview perod SS: safoty stock PERIODIC REVIEW a oe Lead wu time (L) Review (R) periodic ®) Target level as 0 o ®) (4R)+88 PERIODIC REVIEW “target (maximum) inventory evel D: demand per unitof ime Llead— time duration R: review period duration SSS: safely stock Ieinventoryin hand 1. Whats the target level? 2, How many %4 inch bolts should be ordered this time? ‘hardware company stocks nuts & bolts and orders them from a local supplier once every 2 weeks (10 working days). L= 2 days. The company has determined that the average demand for % inch bots is 160 per week (G working days), and it wants to keep a safety stock of 3 days’ supply on| hand, An orders to be placed this week, and stock on hand is 130 bolts Assoc. Prof. Dr Ho Thi Thu Hoa 43Answer 1.What is the target level? - D = 150/5 = 30 per working day 2 days = 10 days ~ $S=3 days’ supply = 90 units - |= 130 units - T= D(L#R) + 8S = 30 (2+10) +90 = 450 UNITS 2. Q=T-1= 450-130 = 320 UNITS Periodic review - The change in stock level can be seen by the pattern represented by the line S. T. represents the reorder cycle time, which is the regular interval at which stock is reviewed — say at the beginning of every month. An order is placed at a quantity (Q) that will bring the inventory for this product back to the predetermined stock level (P). Note that the quantity ordered includes an allowance for the time it takes for the product to be delivered from the supplier (this is the lead time, L). With this method, the quantity ordered is different each time an order is placed. Rushton etal (2074) Assoc. Prof. Dr Ho Thi Thu Hoa 44‘Trend line hoo Random Muctustion Rushton etal (2074) . Christophe (2016), Rushton tal (2014) Bullwhip effect prov (2016) (ere) : Manifestation of the way that demand signals can be considerably distorted as a result of multiple steps in the chain. As a result of this distortion, the data that is used as input to planning and forecasting activities can be flawed and hence forecast accuracy is reduced and more costs are incurred. Te npc of romana ety up prtuctn eure! Assoc. Prof. Dr Ho Thi Thu Hoa 45Bull whip effect in SC - “Push” versus “Pull” Supply chain "The dependencies between actors, activities and resources cause negative consequences when stocking level variability occurs upstream or| downstream in the supply chain due to the bullwhip effect (Svensson, 2005)." The Bullwhip Effect in Action Assoc. Prof. Dr Ho Thi Thu Hoa 46re Per econ Assoc. Prof. Dr Ho Thi Thu Hoa 47ABC system + Typically, thousands of independent demand items are held in inventory by a company, especially in manufacturing, but a small percentage is of such a high dollar value to warrant close inventory control « In general, about 5 to 15% of all inventory items account for 70 to 80% of the total dollar value of inventory. These are classified as Class A items. + Bitems represent approximately 30% of total inventory units but only about 15% of total inventory dollar value. + Citems generally account for 50 to 60% of all inventory units but represent only 5 to 10% of total dollar value. Russel and Taylor (2011) ABC analysis - Used to establish policies that focus on the few critical parts and not the many unimportant ones + Policies employed may include + More emphasis on supplier development for Aitems + Tighter physical inventory control for Aitems + More care in forecasting Aitems Russel and Taylor (2011) 3 Assoc. Prof. Dr Ho Thi Thu Hoa 48Steps in Making an ABC Analysis 1, Determine the annual usage for each item. 2. Multiply the annual usage of each item by its cost to get its total annual dollar usage. 3. List the items (decreasing order) according to their annual dollar usage. 4. Calculate the cumulative annual dollar usage and the cumulative percentage of items. 5. Examine the annual usage distribution and group the items into A, B, and C groups based on percentage of annual usage. Example problem A company manufactures a line of ten items. The usage and unit cost are shown in the following table, along with the annual dollar usage. The latter is obtained by multiplying the unit usage by the unit cost. a. Calculate the annual dollar usage for each item. b. List the items according to their annual dollar usage. ©. Calculate the cumulative annual dollar usage and the cumulative percentage of items d. Group items into an A, B, C classification. Assoc. Prof. Dr Ho Thi Thu Hoa 49Answer ee Answer. rat | mat | comme | camitve | Comine sie | Set | SURES] SPU | STMT | ce 2 | som | 20m fax fm | a 3 | om | sm [ma fm» | a i 2m | sa | ae | @ |e 3 vm | xe | we |= [a 7 ao | vam | wn | @ | © 3 = | zm | an |» | © Assoc. Prof. Dr Ho Thi Thu Hoa 50IKEAexample + Reducing “cost per touch” by having customers retrieve their inventory + In-store the company uses “minimum/maximum settings” to manage the levels of inventory: + Minimum number of products available before reordering + Maximum amount of particular product to order at one time + Point of Sale electronic system that monitors how much and what is being sold and what comes in from distribution centres to the store. This data is used to forecast demand for the next few days and order appropriate items + Focus on 20% of SKU that account for more than 80% of volume + In “high-flow warehouses” automatic storage and retrieval system drives down “costs per touch” — these products are in high demand + Products that are in low demand are stored in a low-flow warehouse and are manually processed. jps:/mm.youtube.comuatch?v-NOyBX0 GIN The Material Flow Cycle cycle time 95% ——_ Input _WaitforWaitto Move Waitin queue Setup Run Output SE inspection bemoved ‘ime foreperator time time =e Heizer ang Render (2011) Assoc. Prof. Dr Ho Thi Thu Hoa 51Pareto (80/20) analysis *In controlling inventory, 4 important questions answered: * What is the importance of the inventory item? + How are they to be controlled? + How much should be ordered at one time? * When should an order be placed? Pareto (80/20) analysis * An Italian economists, Vilfredo Pareto => Pareto’s law: + Relationship between the percentage of items and the percentage of annual value usage + Findings: * 80% of the value of stock => 20% of the stock items. * 80% of the value of purchasing => only 20% of suppliers * more expensive items should be controlled more Assoc. Prof. Dr Ho Thi Thu Hoa 52ABC ANALYSIS (p.270-274) reference book Modifying Pareto’s rule: 3 classifications of inventory and purchased items: A, B,C Summary of classes: Percentage of | Percentage value | Inventory tems ‘of annual usage | Management Class A items | About 20° About 80% | Close control ‘Class B items | About 30 ‘About 15% Regular review Class C items | About 5 About 5% | Infrequent review ABC ANALYSIS ABC or Pareto Curve (Class items 0 10 20 2040 so 60 7 80 99 100 Yottems Assoc. Prof. Dr Ho Thi Thu Hoa 53Group work * Work in a group of 5, discuss: + Disadvantages & advantages of each perpetual inventory model * Which products should Saigon Coop Mart apply this methods for? + Expensive products, hi-tech, perishable products 1. Mindmap 2. https://create.kahoot.it/my- library/kahoots/2d48a4b3-d15f-4c2b- 8547-041e149ff683 (check for lesson review) 3. Pin code for Kahoot (//kahoot.it) 4. Chapter 3: Preparation Assoc. Prof. Dr Ho Thi Thu Hoa 54