Inventory Policy Decisions Deepa

3,274 views

Published on

Inventory Management - Policies - Handling - Ordering

Published in: Business, Technology
0 Comments
3 Likes
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total views
3,274
On SlideShare
0
From Embeds
0
Number of Embeds
2
Actions
Shares
0
Downloads
0
Comments
0
Likes
3
Embeds 0
No embeds

No notes for slide

Inventory Policy Decisions Deepa

  1. 1. What quantity you need ?How much is your budget ?Why you should not buy all in large quantity ?How much is your transport cost per order ? How many times you can go and get ? What is Inventory ?
  2. 2. Inventory Policy Decisions  Inventory are stocks or items used to support production (raw materials and WIP), support activities (maintenance, repair, and operating supplies) and customer service (finishes goods and spare parts).  The fact is inventory is both a valuable resource and a potential source of waste 1/30/2015 3
  3. 3. Why Inventory There are three basic reasons for keeping an inventory:  Time  Uncertainty  Economies of scale
  4. 4. Reasons To NOT Hold Inventory  Carrying cost  Valuable factory space  Obsolescence  Damage  Pilferage
  5. 5. Inventory Hides Problems Poor Quality Unreliable Supplier Machine Breakdown Inefficient Layout Bad Design Lengthy Setups 1/30/2015 6
  6. 6. To Expose Problems: Reduce Inventory Levels Poor Quality Unreliable Supplier Machine Breakdown Inefficient Layout Bad Design Lengthy Setups 1/30/2015 7
  7. 7. Remove Sources of Problems and Repeat the Process Poor Quality Unreliable Supplier Machine Breakdown Inefficient Layout Bad Design Lengthy Setups 1/30/2015 8
  8. 8. Types of Inventory  Cycle stock  Safety stock (buffer inventory)  Anticipation inventory  Others  Hedge inventories  Transportation inventory (pipeline)  Smoothing inventories 1/30/2015 9
  9. 9. Cycle Stock  Cycle stock refers to components or products that are received in bulk by a downstream partner, gradually used up, and then replenished again in bulk by the upstream partner 1/30/2015 10
  10. 10. Safety Stock  Extra inventory that companies hold to protect themselves against uncertainties  Demand  replenishment time 1/30/2015 11
  11. 11. Safety Stocks enable organizations to satisfy customer demand in the event of these possibilities:  Supplier may deliver their product late or not at all  The warehouse may be on strike  A number of items at the warehouse may be of poor quality and replacements are still on order  A competitor may be sold out on a product, which is increasing the demand for your products  Random demand (in reality, random events occur)  Machinery Breakdown  Unexpected increase in demand 1/30/2015 12
  12. 12. Anticipation Inventory  Inventory that is held in anticipation of customer demand.  price increase, a seasonal increase in demand, or even an impending labor strike.  at Halloween, Christmas, or the back-to-school season
  13. 13. Hedge Inventory  Inventory buildup to buffer against some event that may not happen.  Hedge inventory planning involves speculation related to potential labor strikes, price increases, unsettled governments, and events that could severely impair companies strategic initiatives. 1/30/2015 14
  14. 14. Transportation Inventory  Inventory that is moving from one link in the supply chain to the another 1/30/2015 15
  15. 15. Aggregate Control of Inventories  Inventory Turnover Ratio  ABC Classification  Risk Pooling 1/30/2015 16
  16. 16. Two “Classic” Systems for Independent Demand Items  Periodic review systems  Continuous (perpetual) review systems 1/30/2015 17
  17. 17. Periodic Review System (Orders at regular intervals) Inventory level Time2 4 6 1/30/2015 18
  18. 18. Determining the restocking level 1/30/2015 19 = average demand during the reorder period plus the replenishment lead time (if there is a delay getting new products in). SS = safety stock. This is a “cushion” of inventory held to mitigate the uncertainties of forecasts and lead times. Higher safety stock levels increase the likelihood that goods are available, but also drive up inventory levels and costs
  19. 19. Continuous Review System (Orders when inventory drops to R) L-T Q R How is the reorder point ROP established? Inventory level Time lead time to get a new order in 1/30/2015 20
  20. 20. Comparison of Periodic and Continuous Review Systems Periodic Review  Fixed order intervals  Variable order sizes  Convenient to administer  Orders may be combined  Inventory position only required at review Continuous Review  Varying order intervals  Fixed order sizes (Q)  Allows individual review frequencies  Possible quantity discounts  Lower, less-expensive safety stocks 1/30/2015 21
  21. 21. What is the “Best” Order Size Q? Determined by:  Inventory related costs  Order preparation costs and setup costs  Inventory carrying costs  Shortage and customer service costs  Other considerations  Out of pocket or opportunity cost?  Fixed, variable, or some mix of the two?
  22. 22. EOQ  D = annual demand of the product  S = Fixed cost incurred per order  C = cost per unit  h = Holding cost per year as a fraction of product cost
  23. 23. Holding Cost $ Q Holding cost increases as Q increases . . . (Q/2)×H H = h X C
  24. 24. Ordering Costs $ Q Ordering costs per year decrease as Q increases (why?) (Q/2)×H (D/Q)×S
  25. 25. No of orders per year = D / Q The purchasing manager makes a lot size decision to minimize the total cost the store incurs….????  Annual material cost  Annual Order cost  Annual holding cost Annual material cost = D C Annual order cost = (D / Q) S Annual holding cost = ( Q/ 2) h C
  26. 26. Total Annual Cost Annual material cost = D C Annual order cost = (D / Q) S Annual holding cost = ( Q/ 2) h C
  27. 27. Total Annual Costs and EOQ 0 500 1000 1500 2000 10 50 90 130 170 210 250 290 330 370 410 Order Quantity Q InventoryCost($) Holding Cost Ordering Cost Total Cost EOQ at minimum total cost
  28. 28. Economic Order Quantity (EOQ) Model  Cost Minimizing “Q”  Assumptions:  Uniform and known demand rate  Fixed item cost  Fixed ordering cost  Constant lead time H DS QEOQ 2* 
  29. 29. Aggregate Control of Inventories  Inventory Turnover Ratio  ABC Classification  Risk Pooling
  30. 30. Inventory Turnover Ratio  Measures the number of times, on average, the inventory is sold during the period. Its purpose is to measure the liquidity of the inventory.  Inventory turnover ratio = Cost of goods sold / Average inventory
  31. 31. STOCK/INVENTORY TURNOVER RATIO  (Average Inventory/Sales) x 365 for days  (Average Inventory/Sales) x 52 for weeks  (Average Inventory/Sales) x 12 for months Average Inventory or Stocks = (Opening Stock + Closing Stock) ----------------------------------------- 2  This ratio indicates the number of times the inventory is rotated during the relevant accounting period
  32. 32. ABC Classification Method IDEA Companies have thousands of items to track Methods like EOQ only justifiable for most important items.
  33. 33. What is the “Best” Order Size Q? Determined by:  Inventory related costs  Order preparation costs and setup costs  Inventory carrying costs  Shortage and customer service costs  Other considerations  Out of pocket or opportunity cost?  Fixed, variable, or some mix of the two? 1/30/2015 34
  34. 34. ABC Method 1. Determine annual $ usage for each item 2. Rank the items according to their annual $ usage 3. Let:  Top 20%  “A” items  roughly 80% of total $  Middle 30%  “B” items  roughly 15% of total $  Bottom “50%  “C” item  roughly 5% of total $ 1/30/2015 35
  35. 35. ABC Analysis Example Total $ Usage = $98,500 Item Cost Demand $ Usage A1 $46 200 $9,200 B2 $40 10 $400 C3 $5 6680 $33,400 D4 $81 100 $8,100 E5 $22 50 $1,100 F6 $6 100 $600 G7 $176 250 $44,000 H8 $6 150 $900 I9 $10 10 $100 J10 $14 50 $700 1/30/2015 36
  36. 36. Ranking by Annual $ Usage Item $ Usage Cumulative $ Usage % of Total $ Usage Class G7 $44,000 $44,000 44.67% A C3 $33,400 $77,400 78.58% A A1 $9,200 $86,600 87.92% B D4 $8,100 $94,700 96.14% B E5 $1,100 $95,800 97.26% B H8 $900 $96,700 98.17% C J10 $700 $97,400 98.88% C F6 $600 $98,000 99.49% C B2 $400 $98,400 99.90% C I9 $100 $98,500 100.00% C 1/30/2015 37
  37. 37. Market Two Risk Pooling  Consider these two systems: Supplier Warehouse One Warehouse Two Market One Market Two Supplier Warehouse Market One 1/30/2015 38
  38. 38. Risk Pooling  For the same service level, which system will require more inventory? Why?  For the same total inventory level, which system will have better service? Why?  What are the factors that affect these answers? 1/30/2015 39
  39. 39. Risk Pooling  Demand variability is reduced if one aggregates demand across locations.  More likely that high demand from one customer will be offset by low demand from another.  Reduction in variability allows a decrease in safety stock and therefore reduces average inventory. 1/30/2015 40
  40. 40. Virtual Inventory (Cross Filling)  Rarely are planned inventory levels so high to guarantee that customer demand can be filled immediately from available stock.  On average, a planned percentage of orders cannot be filled from their primary source without experiencing a backorder or a lost sale.  To counter stock outs, companies will frequently cross fill, or transship, the unfilled demand from a comparable secondary inventory location. 1/30/2015 41
  41. 41. Types of Pull Systems 1. Top-Up System 2. Signal Kanban 3. 2-Bin Kanban 4. 3-Bin Kanban 5. Multi-Card Kanban Simple but poor inventory control Complex but excellent inventory control 1/30/2015 42
  42. 42. Top-Up Pull System  Material is delivered at a set period, and any material that was consumed during this period is replenished.  Ideal for small, low-cost parts where high inventory control is not essential  E.g. Nuts, bolts, washers, etc. 1/30/2015 43
  43. 43. Top-Up Pull System Example Every month, the hardware supplier comes into the facility and fills up all of the hardware containers (nuts, bolts, screws, etc.). Each container is marked with a line to indicate how much to fill it. The inventory is equal to the average monthly consumption (cycle stock), plus a buffer to handle peak production periods (buffer stock), and an allowance for up to 2 days incase the supplier is late delivering. 1/30/2015 44
  44. 44. 2-Bin Kanban Pull System  Material is stored in 2 containers of a set quantity. Every period, a material handler takes away empty containers and returns them the next period.  Ideal for processes that consume many parts, especially if each part has a different rate of consumption  E.g. Assembly processes 1/30/2015 45
  45. 45. 2-Bin Kanban Pull System Example The material handler checks the assembly process every hour. As each container is emptied, it is placed in a specific location. The material handler retrieves these empty containers and spends the rest of the hour replenishing them. They then return the replenished containers to the assembly process and collect any containers that are now empty. 1/30/2015 46
  46. 46. Multi-Card Kanban Pull System  Cards are used to signify a set amount of material. When that material is consumed, the card is returned to the supplier to indicate that more inventory is required.  The supplier places returned cards on a board and uses them to determine which product to build next.  Ideal for processes that have an interval  E.g. Machining processes or Suppliers (where the interval = delivery frequency) 1/30/2015 47
  47. 47. Multi-Card Kanban Pull System Example At the end of each day, the Team leader collects the kanban sheets from the boxes of material that the assembly process opened. They fax these sheets to the supplier and shreds them. The supplier receives the faxed sheets and places them on a board. When this product is the highest on the board, the supplier will changeover. As each box is completed, the sheet is placed on it, and it is sent to shipping for delivery. 1/30/2015 48
  48. 48. 2-Bin Kanban Pull System Advantages:  Excellent control of inventory  Minimizes the amount of inventory required Disadvantages:  Requires signals to be sent repeatedly  Is more sensitive to changes in data than the other systems (needs to be kept up to date)  Requires delivery of material almost every period 1/30/2015 49
  49. 49. Supermarket Pull Systems supermarket Customer Process Supplier Process production kanban withdrawn product withdrawal kanban replenished product Purpose: Provide production instruction to upstream processes that cannot be linked in flow. 1/30/2015 50
  50. 50. Thank u … 1/30/2015 51

×