Inventory management in supply chain
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This document discusses inventory management. It defines inventory as raw materials, work in progress, and finished goods. It outlines common myths in inventory management. Inventories are kept for reasons like improving customer service and hedging against uncertainties. The roles of inventory in the supply chain are described. Different types of demands and inventory management techniques like ABC analysis and the economic order quantity model are covered. The benefits and drawbacks of holding inventory are summarized. Different inventory counting and valuation methods are also discussed.
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Inventory management in supply chain
- 1. Inventory Management Winter 2014 ADM – eSupply Chain Management
- 2. Outline • What is inventory • Myths in inventory management • Reasons for having inventory • Rolls of Inventory in SCM • Types of Demands • Benefits/Drawbacks • Methods for inventories • Inventory Techniques
- 3. SCM/Inventories Supplier Manufacturing •Inventories Distributer Retailer •Goods in Transit Customer •Raw Materials •Finished Goods •Work in Progress •Finished Goods Traditional Supply Chain Management (SCM) G.Trites, J.Boritz, “e-business strategies, a Canadian perspective for a networked world” ,Pearson-Prentice Hall, 2009
- 4. What is Inventory? Raw Materials Component parts Work-in-Process Finished Products Planning Directing Controlling
- 5. Myths in Inventory Management The “SALES” data that we have in our company records, is all we need for inventory management” “The more expensive a software system is, the better it will help us control our inventory“ “We keep all of our sales histories by month, and this data is all we need to make good forecasts for inventory planning”
- 6. Reasons for Inventories o Improve Customer Service o Economies of purchasing o Economies of Production o Transportation Savings o Hedge against future o Unplanned shocks(labor strikes, natural disasters, surges in demand, etc) o To maintain independence in supply chain
- 7. Role of Inventory in Supply Chain Supply Chain Understocking : Demand exceeds amount available - Lost margin and future sales Overstocking : Amount available exceeds demand - Liquidation, Obsolescence, Holding Goal Matching Supply and Demand
- 8. Dependent Types of Demand • Demand for items used to produce final products. • Demand for items used by external customers. Independent
- 9. Benefits of Inventory Management Improve customer service Reduce inventory investment Increase the profitability of business Increase productivity Inventory is insurance
- 10. Drawbacks of Keeping Inventory • Inventory is expensive • Items deterioration • Products obsolescence
- 11. Inventory Management Techniques Stock Review EOQ Model Just In Time ABC Analysis
- 12. Methods For Supervising Inventory • • • • Manual Count Method Periodic Methods Perpetual Methods LIFO and FIFO Methods (Valuation Method)
- 13. Pros and Cons Methods Pros Cons Manual Count Method Identifying and removing broken items Time consuming Periodic Method Less upfront costs Outdated inventory information Perpetual Method The most up to date information A lot of data need to be uploaded LIFO Ideal for heavy products and producer of homogenous products Not ideal for products that have expiration dates FIFO Ideal for products that have Not suitable approach expiration dates and during the inflation period products with relatively short demand cycles
- 14. Inventory control Techniques < Always better control (ABC) classification > Annual $ Value of Items A A: very important B: important C: marginally important B C Low Low Percentage of Items High
- 15. Inventory Control Techniques <The EOQ Model> Constant Demand Rate No Allowed Stock-out Assumptions Outright orders Known Costs
- 16. Two Types of Cost Holding Cost: – – – – – Costs of storage space (E.g. warehouse depreciation) Security Insurance Forgone interest on working capital tied up in inventory Deterioration, theft, spoilage, or obsolescence Ordering Cost: – – – – Clerical costs of preparing purchase orders Some spent finding suppliers and expediting orders Transportation costs Receiving costs (E.g. unloading and inspection)
- 17. Development of EOQ Model • (a.) Develop a COST EQUATION (MODEL) QUANTITIVELY and QUANTITIVELY • TC = Holding cost + Setup Cost + DC D = annual demand in units C = cost of an individual item • (b.) Minimize the total cost equation (model) • (c.) Find REORDER QUANTITY
- 18. Inventory Usage Over Time Order Quantity Usage Rate [maximum inventory level] Q Inventory Control Average inventory on hand Q/2 0 Minimum Inventory Lead time Time
- 19. Minimizing Cost Total Cost of Holding and Setup (order) Annual Cost Minimum total cost Holding Cost Setup (order) Cost Optimal Order Quantity (Q*) Order Quantity
- 20. Inventory control Techniques <The EOQ Model> Q = Number of pieces per order Q* = Optimal number of pieces per order (EOQ) S = Setup or ordering cost for each order H = Holding or carrying cost per unit per year D = Annual demand in units for the inventory item Annual Holding Cost = (Number of orders placed per-year)*(Setup or order cost per order) = { Average inventory level } { Holding cost per unit per year } = {Q/2 } ( H )
- 21. Inventory control Techniques < The EOQ Model > Q = Number of pieces per order Q* = Optimal number of pieces per order (EOQ) S = Setup or ordering cost for each order H = Holding or carrying cost per unit per year D = Annual demand in units for the inventory item Annual Setup Cost = (Number of orders placed per-year)*(Setup or order cost per order) = { Annual demand / Number of units in each order } { Setup or order cost per order } = { D/Q } ( S )
- 22. < The EOQ Model > Q = Number of pieces per order S = Setup or ordering cost for each order Q* = Optimal number of pieces per order (EOQ) H = Holding or carrying cost per unit per year D = Annual demand in units for the inventory item Optimal order quantity is found when annual setup cost equals annual holding cost {Q/2 } ( H ) = = { D/Q } ( S ) Q* = √2DS/H
- 23. Ahmad Saymil,,“Operations Management:Toyota Production System (TPS), Just-inTime (JIT), and Lean Manufacturing Handout”, http://www.clt.astate.edu/asyamil/ Lowering Inventory /Reduces Waste Excessive Reducing inventory mask inventory reveals the problems problems so they can be solved. Unreliable Unreliable Vendors Unreliable Vendors Vendors Work in process inventory level (hides problems) Work in process inventory level Work in process Capacity inventory level Capacity Imbalances Scrap Capacity Imbalances Scrap Imbalances Scrap
- 25. “One of the great responsibilities that I have is to manage my assets wisely, so that they create value.” Alice Walton
- 26. Thank You!
Editor's Notes
- Classifying inventory according to some measure of importance and allocating control effects accordingly
- Demand rate is constant, recurring and known No stock-out are allowed Orders are delivered at once All costs are assumed to be known and constant All orders are placed independently (no joint orders)