Inventory Management
Definitions <ul><li>Inventory- A physical resource that a firm holds in stock with the intent of selling it or transformin...
Inventory <ul><li>Def. - A physical resource that a firm holds in stock with the intent of selling it or transforming it i...
Expensive Stuff <ul><li>The average carrying cost of inventory across all mfg.. in the U.S. is 30-35% of its value. </li><...
Zero Inventory? <ul><li>Reducing amounts of  raw materials  and  purchased parts  and  subassemblies  by having suppliers ...
Inventory Positions in the Supply Chain Raw Materials Works in Process Finished Goods Finished  Goods in Field
Reasons for Inventories <ul><li>Improve customer service </li></ul><ul><li>Economies of purchasing </li></ul><ul><li>Econo...
Inventory and Value <ul><li>Remember this? </li></ul><ul><ul><li>Quality </li></ul></ul><ul><ul><li>Speed </li></ul></ul><...
Nature of Inventory: Adding Value through Inventory <ul><li>Quality  - inventory can be a “buffer” against poor quality; c...
Nature of Inventory: Functional Roles of Inventory <ul><li>Transit </li></ul><ul><li>Buffer </li></ul><ul><li>Seasonal </l...
Design of Inventory Mgmt. Systems:  Macro Issues <ul><li>Need for Finished Goods Inventories </li></ul><ul><ul><li>Need to...
How to Measure Inventory <ul><li>The Dilemma : closely monitor and control inventories to keep them as low as possible whi...
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 w...
Reasons Against Inventory <ul><li>Non-value added costs </li></ul><ul><li>Opportunity cost </li></ul><ul><li>Complacency <...
Inventory Costs <ul><li>Procurement costs </li></ul><ul><li>Carrying costs </li></ul><ul><li>Out-of-stock costs </li></ul>
Procurement Costs <ul><li>Order processing </li></ul><ul><li>Shipping </li></ul><ul><li>Handling </li></ul><ul><li>Purchas...
Carrying Costs <ul><li>Capital (opportunity) costs </li></ul><ul><li>Inventory risk costs </li></ul><ul><li>Space costs </...
Out-of-Stock Costs <ul><li>Lost sales cost </li></ul><ul><li>Back-order cost </li></ul>
Independent Demand <ul><li>Independent demand  items are finished products or parts that are shipped as end items to custo...
Dependent Demand <ul><li>Dependent demand  items are raw materials, component parts, or subassemblies that are used to pro...
Design of Inventory Mgmt. Systems: Micro Issues <ul><li>Order Quantity </li></ul><ul><li>Economic Order Quantity </li></ul...
Objectives of Inventory Control <ul><li>1) Maximize the level of customer service by avoiding understocking. </li></ul><ul...
Balance in Inventory Levels <ul><li>When should the company replenish its inventory, or when should the company place an o...
Models for Inventory Management: EOQ <ul><li>EOQ minimizes the sum of holding and setup costs </li></ul><ul><li>Q =  2DC o...
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  = order...
Marginal Analysis Holding Costs Ordering Costs Units $
Reorder Point <ul><li>Quantity to which inventory is allowed to drop before replenishment order is made </li></ul><ul><li>...
level of inventory  average inventory units Q t  time Sawtooth Model
<ul><li>based on reorder point -  When inventory is depleted to ROP, order replenishment of quantity EOQ. </li></ul>Q - Sy...
<ul><li>when demand is smooth and continuous, can operate response-based system by determining   </li></ul><ul><ul><li>bes...
<ul><li>changing lead times </li></ul><ul><li>changing demand </li></ul><ul><li>Uncertainty creeps in: </li></ul><ul><ul><...
Inventory Model Under Uncertainty reorder  Q m point  safety stock time
Models for Inventory Management: Quantity Discount <ul><li>Basically EOQ with quantity discounts </li></ul><ul><li>To solv...
<ul><li>an alternative to ROP/Q-system control is  periodic review method </li></ul><ul><li>Q-system - each stock item reo...
<ul><li>audit inventory level at interval (T) </li></ul><ul><li>quantity to place on order is difference between max. quan...
Types of Inventory Systems <ul><li>By Degree of Control required </li></ul><ul><ul><li>often use grouping method, such as ...
Classifying Inventory Items <ul><li>ABC Classification (Pareto Principle) </li></ul><ul><li>A Items:  very tight control, ...
Does ABC Classification Make Sense for an Assembler? <ul><li>i.e. – Gateway Computers </li></ul>
Planning Supply Chain Activities Anticipatory - allocate supply to each warehouse based on the forecast Response-based - r...
<ul><li>determine requirements by forecasting demand for the next production run or purchase </li></ul><ul><li>establish c...
<ul><li>replenishment, production, or purchases of stock are made only when it has been signaled that there is a need for ...
Service Level Achieved 1-  expected number of units out of stock/year total annual demand <ul><li>Item fill rate (IFR):  t...
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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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