Becdoms ppt on inventory management

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Becdoms ppt on inventory management

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Becdoms ppt on inventory management

  1. 1. Inventory Management
  2. 2. Definitions <ul><li>Inventory- A physical resource that a firm holds in stock with the intent of selling it or transforming it into a more valuable state. </li></ul><ul><li>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 </li></ul>
  3. 3. Inventory <ul><li>Def. - A physical resource that a firm holds in stock with the intent of selling it or transforming it into a more valuable state. </li></ul><ul><li>Raw Materials </li></ul><ul><li>Works-in-Process </li></ul><ul><li>Finished Goods </li></ul><ul><li>Maintenance, Repair and Operating (MRO) </li></ul>
  4. 4. Expensive Stuff <ul><li>The average carrying cost of inventory across all mfg.. in the U.S. is 30-35% of its value. </li></ul><ul><li>What does that mean? </li></ul><ul><li>Savings from reduced inventory result in increased profit. </li></ul>
  5. 5. Zero Inventory? <ul><li>Reducing amounts of raw materials and purchased parts and subassemblies by having suppliers deliver them directly. </li></ul><ul><li>Reducing the amount of works-in process by using just-in-time production. </li></ul><ul><li>Reducing the amount of finished goods by shipping to markets as soon as possible. </li></ul>
  6. 6. Inventory Positions in the Supply Chain Raw Materials Works in Process Finished Goods Finished Goods in Field
  7. 7. Reasons for Inventories <ul><li>Improve customer service </li></ul><ul><li>Economies of purchasing </li></ul><ul><li>Economies of production </li></ul><ul><li>Transportation savings </li></ul><ul><li>Hedge against future </li></ul><ul><li>Unplanned shocks (labor strikes, natural disasters, surges in demand, etc.) </li></ul><ul><li>To maintain independence of supply chain </li></ul>
  8. 8. Inventory and Value <ul><li>Remember this? </li></ul><ul><ul><li>Quality </li></ul></ul><ul><ul><li>Speed </li></ul></ul><ul><ul><li>Flexibility </li></ul></ul><ul><ul><li>Cost </li></ul></ul>
  9. 9. Nature of Inventory: Adding Value through Inventory <ul><li>Quality - inventory can be a “buffer” against poor quality; conversely, low inventory levels may force high quality </li></ul><ul><li>Speed - location of inventory has gigantic effect on speed </li></ul><ul><li>Flexibility - location, level of anticipatory inventory both have effects </li></ul><ul><li>Cost - direct: purchasing, delivery, manufacturing </li></ul><ul><li>indirect: holding, stockout. </li></ul><ul><li>HR systems may promote this-3 year postings </li></ul>
  10. 10. Nature of Inventory: Functional Roles of Inventory <ul><li>Transit </li></ul><ul><li>Buffer </li></ul><ul><li>Seasonal </li></ul><ul><li>Decoupling </li></ul><ul><li>Speculative </li></ul><ul><li>Lot Sizing or Cycle </li></ul><ul><li>Mistakes </li></ul>
  11. 11. Design of Inventory Mgmt. Systems: Macro Issues <ul><li>Need for Finished Goods Inventories </li></ul><ul><ul><li>Need to satisfy internal or external customers? </li></ul></ul><ul><ul><li>Can someone else in the value chain carry the inventory? </li></ul></ul><ul><li>Ownership of Inventories </li></ul><ul><li>Specific Contents of Inventories </li></ul><ul><li>Locations of Inventories </li></ul><ul><li>Tracking </li></ul>
  12. 12. How to Measure Inventory <ul><li>The Dilemma : closely monitor and control inventories to keep them as low as possible while providing acceptable customer service. </li></ul><ul><li>Average Aggregate Inventory Value: how much of the company’s total assets are invested in inventory? </li></ul><ul><li>Ford:6.825 billion </li></ul><ul><li>Sears: 4.039 billion </li></ul>
  13. 13. Inventory Measures <ul><li>Weeks of Supply </li></ul><ul><ul><li>Ford: 3.51 weeks </li></ul></ul><ul><ul><li>Sears: 9.2 weeks </li></ul></ul><ul><li>Inventory Turnover (Turns) </li></ul><ul><ul><li>Ford: 14.8 turns </li></ul></ul><ul><ul><li>Sears: 5.7 turns </li></ul></ul><ul><ul><li>GM: 8 turns </li></ul></ul><ul><ul><li>Toyota: 35 turns </li></ul></ul>
  14. 14. Reasons Against Inventory <ul><li>Non-value added costs </li></ul><ul><li>Opportunity cost </li></ul><ul><li>Complacency </li></ul><ul><li>Inventory deteriorates, becomes obsolete, lost, stolen, etc. </li></ul>
  15. 15. Inventory Costs <ul><li>Procurement costs </li></ul><ul><li>Carrying costs </li></ul><ul><li>Out-of-stock costs </li></ul>
  16. 16. Procurement Costs <ul><li>Order processing </li></ul><ul><li>Shipping </li></ul><ul><li>Handling </li></ul><ul><li>Purchasing cost: c(x)= $100 + $5x </li></ul><ul><li>Mfg. cost: c(x)=$1,000 + $10x </li></ul>
  17. 17. Carrying Costs <ul><li>Capital (opportunity) costs </li></ul><ul><li>Inventory risk costs </li></ul><ul><li>Space costs </li></ul><ul><li>Inventory service costs </li></ul>
  18. 18. Out-of-Stock Costs <ul><li>Lost sales cost </li></ul><ul><li>Back-order cost </li></ul>
  19. 19. Independent Demand <ul><li>Independent demand items are finished products or parts that are shipped as end items to customers. </li></ul><ul><li>Forecasting plays a critical role </li></ul><ul><li>Due to uncertainty - extra units must be carried in inventory </li></ul>
  20. 20. Dependent Demand <ul><li>Dependent demand items are raw materials, component parts, or subassemblies that are used to produce a finished product. </li></ul><ul><li>MRP systems---next week </li></ul>
  21. 21. Design of Inventory Mgmt. Systems: Micro Issues <ul><li>Order Quantity </li></ul><ul><li>Economic Order Quantity </li></ul><ul><li>Order Timing </li></ul><ul><ul><ul><li>Reorder Point </li></ul></ul></ul>
  22. 22. Objectives of Inventory Control <ul><li>1) Maximize the level of customer service by avoiding understocking. </li></ul><ul><li>2) Promote efficiency in production and purchasing by minimizing the cost of providing an adequate level of customer service. </li></ul>
  23. 23. Balance in Inventory Levels <ul><li>When should the company replenish its inventory, or when should the company place an order or manufacture a new lot? </li></ul><ul><li>How much should the company order or produce? </li></ul><ul><li>Next: Economic Order Quantity </li></ul>
  24. 24. Models for Inventory Management: EOQ <ul><li>EOQ minimizes the sum of holding and setup costs </li></ul><ul><li>Q = 2DC o /C h </li></ul><ul><ul><li>D = annual demand </li></ul></ul><ul><ul><li>C o = ordering/setup costs </li></ul></ul><ul><ul><li>C h = cost of holding one unit of inventory </li></ul></ul>
  25. 25. Seatide <ul><li>EOQ = 2DC o /C h </li></ul><ul><ul><li>D = annual demand = 6,000 </li></ul></ul><ul><ul><li>C o = ordering/setup costs = $60 </li></ul></ul><ul><ul><li>C h = cost of holding one unit of inventory </li></ul></ul><ul><ul><li>$3.00 x 24% = .72 </li></ul></ul><ul><ul><li>2 x 6,000 x 60 </li></ul></ul><ul><ul><li>.72 </li></ul></ul>720,000 .72 1,000
  26. 26. Marginal Analysis Holding Costs Ordering Costs Units $
  27. 27. Reorder Point <ul><li>Quantity to which inventory is allowed to drop before replenishment order is made </li></ul><ul><li>Need to order EOQ at the Reorder Point: </li></ul><ul><ul><li>ROP = D X LT </li></ul></ul><ul><ul><li>D = Demand rate per period </li></ul></ul><ul><ul><li>LT = lead time in periods </li></ul></ul>
  28. 28. level of inventory average inventory units Q t time Sawtooth Model
  29. 29. <ul><li>based on reorder point - When inventory is depleted to ROP, order replenishment of quantity EOQ. </li></ul>Q - System Inventory Control
  30. 30. <ul><li>when demand is smooth and continuous, can operate response-based system by determining </li></ul><ul><ul><li>best quantity to replenish periodic demand (EOQ) </li></ul></ul><ul><ul><li>frequency of replenishment (ROP) </li></ul></ul><ul><ul><ul><li>Reorder Point </li></ul></ul></ul>Order Quantities
  31. 31. <ul><li>changing lead times </li></ul><ul><li>changing demand </li></ul><ul><li>Uncertainty creeps in: </li></ul><ul><ul><li>Plug in safety stock </li></ul></ul><ul><li>Safety stock - allows manager to determine the probability of stock levels - based on desired customer service levels </li></ul>Planning for Uncertainty
  32. 32. Inventory Model Under Uncertainty reorder Q m point safety stock time
  33. 33. Models for Inventory Management: Quantity Discount <ul><li>Basically EOQ with quantity discounts </li></ul><ul><li>To solve: </li></ul><ul><ul><li>1. Write out the total cost equation </li></ul></ul><ul><ul><li>2. Solve EOQ at highest price and no discounts </li></ul></ul><ul><ul><li>3. If Q min falls in a range with a lower price, recalculate EOQ assuming holding cost for that range. Call this Q 2 . </li></ul></ul><ul><ul><li>4. Evaluate the total cost equation at Q 2 at the next highest price break point. </li></ul></ul><ul><ul><li>OR Use a spreadsheet </li></ul></ul>
  34. 34. <ul><li>an alternative to ROP/Q-system control is periodic review method </li></ul><ul><li>Q-system - each stock item reordered at different times - complex, no economies of scope or common prod./transport runs </li></ul><ul><li>P-system - inventory levels for multiple stock items reviewed at same time - can be reordered together </li></ul><ul><li>higher carrying costs - not optimum, but more practical </li></ul>P-System Periodic Review Method
  35. 35. <ul><li>audit inventory level at interval (T) </li></ul><ul><li>quantity to place on order is difference between max. quantity (M) and amount on hand at time of review </li></ul><ul><li>management task - set optimal T and M to balance stock availability and cost </li></ul><ul><li>In ABC analysis, which items would use P-system??? </li></ul>Using P-System
  36. 36. Types of Inventory Systems <ul><li>By Degree of Control required </li></ul><ul><ul><li>often use grouping method, such as ABC </li></ul></ul>
  37. 37. Classifying Inventory Items <ul><li>ABC Classification (Pareto Principle) </li></ul><ul><li>A Items: very tight control, complete and accurate records, frequent review </li></ul><ul><li>B Items: less tightly controlled, good records, regular review </li></ul><ul><li>C Items: simplest controls possible, minimal records, large inventories, periodic review and reorder </li></ul>
  38. 38. Does ABC Classification Make Sense for an Assembler? <ul><li>i.e. – Gateway Computers </li></ul>
  39. 39. Planning Supply Chain Activities Anticipatory - allocate supply to each warehouse based on the forecast Response-based - replenish inventory with order sizes based on specific needs of each warehouse
  40. 40. <ul><li>determine requirements by forecasting demand for the next production run or purchase </li></ul><ul><li>establish current on-hand quantities </li></ul><ul><li>add appropriate safety stock based on desired stock availability levels and uncertainty demand levels </li></ul><ul><li>determine how much new production or purchase needed (total needed - on-hand) </li></ul>Anticipatory Inventory Control
  41. 41. <ul><li>replenishment, production, or purchases of stock are made only when it has been signaled that there is a need for product downstream </li></ul><ul><li>requires shorter order cycle time, often more frequent, lower volume orders </li></ul><ul><li>determine stock requirements to meet only most immediate planning period (usually about 3 weeks) </li></ul>Response-Based System
  42. 42. Service Level Achieved 1- expected number of units out of stock/year total annual demand <ul><li>Item fill rate (IFR): the probability of filling </li></ul><ul><li>an order for 1 item from current stock </li></ul><ul><li>Weighted Average Fill Rate ( WAFR): multiply </li></ul><ul><li>IFR for each stock item on an order weighted </li></ul><ul><li>by the ordering frequency for the item </li></ul>

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