Supply chain management INVENTORY MANAGEMENT IN A SUPPLY CHAIN

1. INVENTORY MANAGEMENT
IN A SUPPLY CHAIN
1

2. Definitions
•Inventory-A physical resource that a firm holds in
stock with the intent of selling it or transforming it
into a more valuable state.
•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
2

3. Types of Inventory
• Raw materials
• Purchased parts and supplies
• Work-in-process (partially completed) products (WIP)
• Items being transported
• Tools and equipment
3

4. Inventory Costs
Carrying cost
cost of holding an item in inventory
Ordering cost
cost of replenishing inventory
Shortage cost
temporary or permanent loss of sales when
demand cannot be met
4

5. INTRODUCTION
 Most manufacturing organisations are networks of manufacturing
and distribution that produce raw material, transform them into
intermediate finished products and distribute the finished products
to customers.
 Often multiple managers are responsible for manufacturing ,
operations , logistics ,material distribution and transportation are
responsible for different parts of S.C. This leads to difficulty in
developing a coherent inventory handling policy
5

6. INTRODUCTION
Inventory is held at various levels of a
Supply Chain
6

7. Expensive Stuff
• The average carrying cost of inventory across all mfg.. in the U.S. is
30-35% of its value.
• What does that mean?
• Savings from reduced inventory result in increased profit.
7

8. Reasons for Inventories systems
•Improve customer service
•Economies of scales
•Transportation savings
•Hedge against future – buy today at lower cost
•Unplanned shocks (labor strikes, natural disasters,
surges in demand, etc.)
8

9. Components of Inventory Decisions
 Cycle inventory
◦ Average amount of inventory used to satisfy demand between
shipments
◦ Depends on lot size
 Safety inventory
◦ inventory held in case demand exceeds expectations
◦ costs of carrying too much inventory versus cost of losing sales
 Seasonal inventory
◦ inventory built up to counter predictable variability in demand
◦ cost of carrying additional inventory versus cost of flexible production
 Overall trade-off: Responsiveness ( to customer needs ) versus
efficiency of supply chain
◦ more inventory: greater responsiveness but greater cost
◦ less inventory: lower cost but lower responsiveness
9

10. Value creation through Inventory handling
• Remember this?
• Quality
Delivering right quality product to the customer
• Speed
Ensuring products are delivered in time
• Flexibility
Ability to take into account any variation in demand up and down the supply
chain
• Cost
Keeping the Inventory handling cost as low as possible
10

11. Design of Inventory Mgmt. Systems: Macro
Issues
 Need for Finished Goods Inventories
◦ Need to satisfy internal or external customers?
◦ Can someone else in the value chain carry the inventory?
 Ownership of Inventories
- proper accountability to minimize losses
 Specific Contents of Inventories
- knowing your inventory - visibility
 Locations of Inventories
- Placing inventory at the right place for quick order
 Tracking
- Locating where your inventory is to eliminate
uncertainty and timely delivery
11

12. Design of Inventory Mgmt. Systems: Micro
Issues
• Order Quantity
Economic Order Quantity
• Order Timing
• Reorder Point
12

13. Supply Chain Management and Uncertainty ( Bullwhip Effect )
 Bullwhip effect
◦ demand information is distorted as it moves away from the end-use customer
◦ higher safety stock inventories to are stored to compensate
 Inventory and back-order levels fluctuate considerably across the supply chain even
when customer demand doesn’t vary
 The variability worsens as we travel “up” the supply chain
Manufacturer
Wholesale
Distributors Consumers
Multi-tier
Suppliers Retailers
Time
Sales
Sales
Time
Sales
Time
Sales
Time
Bullwhip Effect
13

14. How to counter BullWhip Effect
 JIT ?
Difficult to implement - cost
 AGILITY
A key characteristic of an agile organization is flexibility. Agility
should not be confused with leanness. Lean is about doing
more with less.
can your company be lean and agile at the same time ?
ACHIEVING AGILITY
 market sensitive
 Virtual Supply Chain
 Process Integration
 Networking
14

15. A realistic approach – Hold inventory where it is
necessary
Decoupling Point
Decoupling point is where demand penetrates the supply chain
Ideally final assembly of a product should be done as much down the supply
chain as possible
In the first line the decoupling point is up the supply chain therefore
inventory will be in form of raw material
In the last line inventory is held as a product ready to be assembled
Which is better for the organisation ?
15

16. INVENTORY RELATED ISSUES
i. Lack of Information Sharing
 An effective supply chain performance is measured based on different
nodes joint performance
 Often each node performs its task independently without keeping in mind
the impact its activity will have on the over all supply chain network
e.g. Indiana based company started cutting inventory at manufacturing level
therefore its final assembly unit and point of distribution had to keep
inventory high to meet customer needs
 Therefore companies need to develop a metrics in which entire supply
chain performance is measured based on the overall performance
16

17. INVENTORY RELATED ISSUES
ii. Inadequate Definition of Customer Service
 Ideally a Supply Chain performance must be measured based on its
responsiveness to customers .Customer expect their products to be
delivered in time
 A dealer's order normally involves multiple orders e.g. a PC dealer
may order printer’s, computers and software's in one order. The
dealer is then selling these stocks to customers, supplier can ship
these products separately without adversely effecting dealers
business
 A customer who is ordering items online may demand all products to
be delivered as a single shipment.
17

18. INVENTORY RELATED ISSUES
iii. Inefficient information systems
 The database of different sites in a supply chain that informs of
environment , inventory , future production plans should be inter linked
 Delay in information would make it impossible to make short production
cycles leading to gross errors in inventory forecast errors
 e.g. Northern California base PC manufacturer developed a production
plan. It dependant on information about inventory status that was
collected from databases at a number of sites and functions. This forced
the manufacturer to plan on monthly basis resulting in longer planning
cycles which caused forecast errors . Manufacturing ends up building
wrong products leading to high inventory.
18

19. INVENTORY RELATED ISSUES
iv.Ignoring the Impact of Uncertainty
 There are many sources of uncertainties in a supply Chain e.g.
 supplier lead time
 quality of incoming material
 manufacturing process time
 customer demand etc.
 To reduce the impact of uncertainties a SC Manager should first understand the sources
of these uncertainties and magnitude of their impact. It is easier said than done
 Consequently companies may over stock and under stock others. They can miscalculate lead times for
material movement along the SC and invest in wrong resources for performance improvement.
 Emphasis of JIT is to closely monitor the performance
19

20. INVENTORY RELATED ISSUES
v. Product-Process Design without
Supply Chain Consideration
Many new approaches to product process design have been introduced. Products can be
manufactured and assembled at a fast rate but implications of supply chain inventory are
usually ignored or poorly understood. The saving that is made through improved production
process design could be lost.
Similarly product introduction into a market , without proper supply chain planning can create
problems like product unavailability , excessively long delivery lead times and unnecessary
expediting costs etc.
A US computer company made printers for worldwide distribution. The printers have a few
country specific components such as power supply and owners manual. The US factory
produces to meet demand forecasts but by the time printers reach regional distribution.
20

21. E.O.Q.
Assumptions
• Ordering cost is constant
• Rate of demand is constant
• Lead time is fixed
• Purchase price of the item is constant
( no discount)
• Replenishment is made instantaneously
• Whole batch is delivered at once
21

22. E.O.Q.
Variables
C= Cost per unit
D = Annual Demand
Q= Lot Size
S = Fixed cost incurred per order
h= holding cost per year as a fraction of
product/unit cost
H = hC = holding cost per year
22

23. E.O.Q.
Optimal Size = Q *
23

24. EOQ – EXAMPLE
Demand for the desktop computer at Best
buy is 1,000 units per month. Best Buy
incurs a fixed order placement,
transportation and receiving cost of $
4,000 each time an order is placed . Each
computer costs Best Buy $ 500 and the
retailer has a holding cost of 20 percent.
Evaluate the number of computers that the
store manager should order in each
replenishment lot.
24