Inventory - Part 1

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  • Inventory - Part 1

    1. 1. Reasons for Inventory <ul><li>To create a buffer against uncertainties in supply & demand </li></ul><ul><li>To take advantage of lower purchasing and transportation cost associated with high volume </li></ul><ul><li>To take advantage of economies of scale associated with manufacturing products in batches </li></ul><ul><li>To build up seasonal demand for promotional sales </li></ul><ul><li>To accommodate product flowing from one location to another (work in process or in transit) </li></ul><ul><li>To exploit speculative opportunities for buying and selling commodities and other products </li></ul>
    2. 2. Goals: Reduce Cost, Improve Service <ul><li>By effectively managing inventory: </li></ul><ul><ul><li>Xerox eliminated $700 million inventory from its supply chain </li></ul></ul><ul><ul><li>Wal-Mart became the largest retail company utilizing efficient inventory management </li></ul></ul><ul><ul><li>GM has reduced parts inventory and transportation costs by 26% annually </li></ul></ul>
    3. 3. Goal: Reduce Cost, Improve Service <ul><li>By not managing inventory successfully </li></ul><ul><ul><li>In 1994, “IBM continues to struggle with shortages in their ThinkPad line” (WSJ, Oct 7, 1994) </li></ul></ul><ul><ul><li>In 1993, “Liz Claiborne said its unexpected earning decline is the consequence of higher than anticipated excess inventory” (WSJ, July 15, 1993) </li></ul></ul><ul><ul><li>In 1993, “Dell Computers predicts a loss; Stock plunges. Dell acknowledged that the company was sharply off in its forecast of demand, resulting in inventory write downs” (WSJ, August 1993) </li></ul></ul>
    4. 4. Inventory <ul><li>Where do we hold inventory? </li></ul><ul><ul><li>Suppliers and manufacturers </li></ul></ul><ul><ul><li>warehouses and distribution centers </li></ul></ul><ul><ul><li>retailers </li></ul></ul><ul><li>Types of Inventory </li></ul><ul><ul><li>WIP </li></ul></ul><ul><ul><li>raw materials </li></ul></ul><ul><ul><li>finished goods </li></ul></ul><ul><li>Why do we hold inventory? </li></ul><ul><ul><li>Economies of scale </li></ul></ul><ul><ul><li>Uncertainty in supply and demand </li></ul></ul>
    5. 5. Why Inventory Reduction <ul><li>Business processes reduce or eliminate inventories mainly by reducing or eliminating uncertainties that make them necessary </li></ul><ul><li>Better communication and coordination of activities across company functions and between the company and its vendors and customers can greatly reduce uncertainties. </li></ul>
    6. 6. Ways to Reduce Uncertainties <ul><li>Improving the accuracy of forecasts by developing better forecasting methods </li></ul><ul><li>Promoting better communication between supply chain managers and marketing and sales managers </li></ul><ul><li>Sharing supply chain information with vendors and other third party providers </li></ul><ul><li>Consolidating number of locations where products are held </li></ul><ul><li>Reducing product variety </li></ul><ul><li>Postponing product customization to downstream stage of the supply chain </li></ul>
    7. 7. Role of Inventory in the Supply Chain Cost Availability Efficiency Responsiveness
    8. 8. Inventory Policy Reduce Buffer Inventory Economies of Scale Supply / Demand Variability Seasonal Variability Cycle Inventory Safety Inventory Seasonal Inventory Match Supply & Demand <ul><li>Reduce fixed cost </li></ul><ul><li>Aggregate across products </li></ul><ul><li>Volume discounts </li></ul><ul><li>EDLP </li></ul><ul><li>Promotion on Sell </li></ul><ul><li>thru </li></ul><ul><li>Quick Response measures </li></ul><ul><ul><li>Reduce Info Uncertainty </li></ul></ul><ul><ul><li>Reduce lead time </li></ul></ul><ul><ul><li>Reduce supply uncertainty </li></ul></ul><ul><li>Accurate Response measures </li></ul><ul><ul><li>Aggregation </li></ul></ul><ul><ul><li>Component commonality and postponement </li></ul></ul>
    9. 9. Role of Inventory in the Supply Chain <ul><li>Overstocking: Amount available exceeds demand </li></ul><ul><ul><li>Liquidation, Obsolescence, Holding </li></ul></ul><ul><li>Understocking: Demand exceeds amount available </li></ul><ul><ul><li>Lost margin and future sales </li></ul></ul><ul><li>Goal: Matching supply and demand </li></ul>
    10. 10. Understanding Inventory <ul><li>The inventory policy is affected by: </li></ul><ul><ul><li>Demand Characteristics </li></ul></ul><ul><ul><li>Lead Time </li></ul></ul><ul><ul><li>Number of Products </li></ul></ul><ul><ul><li>Objectives </li></ul></ul><ul><ul><ul><li>Service level </li></ul></ul></ul><ul><ul><ul><li>Minimize costs </li></ul></ul></ul><ul><ul><li>Cost Structure </li></ul></ul>
    11. 11. Cost Structure <ul><li>Order costs </li></ul><ul><ul><li>Fixed </li></ul></ul><ul><ul><li>Variable </li></ul></ul><ul><li>Holding Costs </li></ul><ul><ul><li>Insurance </li></ul></ul><ul><ul><li>Maintenance and Handling </li></ul></ul><ul><ul><li>Taxes </li></ul></ul><ul><ul><li>Opportunity Costs </li></ul></ul><ul><ul><li>Obsolescence </li></ul></ul>
    12. 12. EOQ: A View of Inventory* Time Inventory Order Size Note: • No Stockouts • Order when no inventory • Order Size determines policy Avg. Inventory
    13. 13. EOQ:Total Cost* Total Cost Order Cost Holding Cost
    14. 14. EOQ: Calculating Total Cost* <ul><li>Purchase Cost Constant </li></ul><ul><li>Holding Cost: (Avg. Inven) * (Holding Cost) </li></ul><ul><li>Ordering (Setup Cost): Number of Orders * Order Cost </li></ul><ul><li>Goal: Find the Order Quantity that Minimizes These Costs: </li></ul>
    15. 15. Fixed costs: Optimal Lot Size and Reorder Interval (EOQ) <ul><li>R: Annual demand </li></ul><ul><li>S: Setup or Order Cost </li></ul><ul><li>C: Cost per unit </li></ul><ul><li>h: Holding cost per year as a fraction of product cost </li></ul><ul><li>H: Holding cost per unit per year </li></ul><ul><li>Q: Lot Size </li></ul><ul><li>T: Reorder interval </li></ul>
    16. 16. Example <ul><li>Demand, R = 12,000 computers per year </li></ul><ul><li>Unit cost, C = $500 </li></ul><ul><li>Holding cost, h = 0.2 </li></ul><ul><li>Fixed cost, S = $4,000/order </li></ul><ul><li>Q = 980 computers </li></ul><ul><li>Cycle inventory = Q/2 = 490 </li></ul><ul><li>Flow time = Q/2R = 0.49 month </li></ul><ul><li>Reorder interval, T = 0.98 month </li></ul>
    17. 17. EOQ: Another Example <ul><li>Book Store Mug Sales </li></ul><ul><ul><li>Demand is constant, at 20 units a week </li></ul></ul><ul><ul><li>Fixed order cost of $12.00, no lead time </li></ul></ul><ul><ul><li>Holding cost of 25% of inventory value annually </li></ul></ul><ul><ul><li>Mugs cost $1.00, sell for $5.00 </li></ul></ul><ul><li>Question </li></ul><ul><ul><li>How many, when to order? </li></ul></ul>

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