Edited By
JQuek
 Define the meaning of inventory management
 Be able to list and describe the inventory list
 Compare & contrast holdin...
 Inventory- A physical resource that a firm holds
in stock with the intent of selling it or
transforming it into a more v...
 Raw Materials
 Works-in-Process
 Finished Goods
 Maintenance, Repair and Operating (MRO)
 The average carrying cost of inventory across all
manufacturing plants.. in the U.S. is 30-35% of its
value.
 What does...
 Reducing amounts of raw materials and
purchased parts and sub-assemblies by
having suppliers deliver them directly.
 Re...
Raw
Materials
Works
in
Process
Finished
Goods
Finished
Goods
in Field
 Improve customer service
 Economies of purchasing
 Economies of production
 Transportation savings
 Hedge against fu...
 Remember this?
◦ Quality
◦ Speed
◦ Flexibility
◦ Cost
 Quality - inventory can be a “buffer” against poor quality;
conversely, low inventory levels may force high quality
 Sp...
 Transit : En-route goods or materials which are in the
ownership of the firm but in the possession of the
carrier.
 Sea...
 Lot Sizing : Inventory that results whenever quantity
price discounts, shipping costs, setup costs, or
similar considera...
 Need for Finished Goods Inventories
◦ Need to satisfy internal or external customers?
◦ Can someone else in the value ch...
 The Dilemma: closely monitor and control
inventories to keep them as low as possible while
providing acceptable customer...
 Non-value added costs (If you are not going to sell
them off immediately, why keep them?)
 Opportunity cost (If you did...
 Procurement costs
(Order processing, Shipping, Handling, Purchasing
costs, Manufacturing cost)
 Carrying costs
(Capital...
 Independent demand items are finished products
or parts that are shipped as end items to
customers. Forecasting plays a ...
 Order Quantity
Economic Order Quantity (EOQ)
is the number of units that a company should add
to inventory with each ord...
1. Maximize the level of customer service by
avoiding under-stocking.
2. Promote efficiency in production and purchasing
b...
 When should the company replenish its inventory,
or when should the company place an order or
manufacture a new lot?
 H...
 EOQ minimizes the sum of holding and setup
costs
Q = √2DCo/Ch
Where:
D = annual demand
Co = ordering/setup costs
Ch = co...
 EOQ = √2DCo / Ch
Where:
D = annual demand = 6,000
Co = ordering/setup costs = $60
Ch = cost of holding one unit of inven...
 Quantity to which inventory is allowed to drop
before replenishment order is made
 Need to order EOQ at the Reorder Poi...
 The number of days from when a company buys
the production inputs it needs to when those
items arrive at the manufacturi...
level of inventory average
inventory
units
Q
t time
The Sawtooth Model
 based on reorder point - When inventory is
depleted to ROP, order replenishment of quantity
EOQ.
 changing lead times
...
reorder Qm
point
safety stock
time
 an alternative to ROP/Q-system control is
periodic review method
 Q-system - each stock item reordered at
different tim...
 ABC Classification (Pareto Principle)
 A Items: very tight control, complete and
accurate records, frequent review
 B ...
Planning Supply Chain Activities
Anticipatory - allocate supply to each
warehouse based on the forecast
Response-based - r...
 determine requirements by forecasting demand
for the next production run or purchase
 establish current on-hand quantit...
 replenishment, production, or purchases of
stock are made only when it has been signaled
that there is a need for produc...
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NMIT-SUPPLY-CHAIN-MANAGEMENT-Lesson5

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NMIT-SUPPLY-CHAIN-MANAGEMENT-Lesson5

  1. 1. Edited By JQuek
  2. 2.  Define the meaning of inventory management  Be able to list and describe the inventory list  Compare & contrast holding inventory against having zero inventory
  3. 3.  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
  4. 4.  Raw Materials  Works-in-Process  Finished Goods  Maintenance, Repair and Operating (MRO)
  5. 5.  The average carrying cost of inventory across all manufacturing plants.. in the U.S. is 30-35% of its value.  What does that mean? Savings from reduced inventory result in increased profit.
  6. 6.  Reducing amounts of raw materials and purchased parts and sub-assemblies by having suppliers deliver them directly.  Reducing the amount of works-in process by using just-in-time production.  Reducing the amount of finished goods by shipping to markets as soon as possible.
  7. 7. Raw Materials Works in Process Finished Goods Finished Goods in Field
  8. 8.  Improve customer service  Economies of purchasing  Economies of production  Transportation savings  Hedge against future  Unplanned shocks (labor strikes, natural disasters, surges in demand, etc.)  To maintain independence of supply chain
  9. 9.  Remember this? ◦ Quality ◦ Speed ◦ Flexibility ◦ Cost
  10. 10.  Quality - inventory can be a “buffer” against poor quality; conversely, low inventory levels may force high quality  Speed - location of inventory has large effect on speed  Flexibility - location, level of anticipatory inventory both have effects  Cost - direct: purchasing, delivery, manufacturing indirect: holding, stock-out.
  11. 11.  Transit : En-route goods or materials which are in the ownership of the firm but in the possession of the carrier.  Seasonal : inventory built up to counter predictable variability in demand  Decoupling: This is a term used sometimes instead of safety stock to establish a buffer between product demand and product supply.  Speculative : refers to inventory that a business obtains and holds in anticipation of future demand, rather than to meet current demand.
  12. 12.  Lot Sizing : Inventory that results whenever quantity price discounts, shipping costs, setup costs, or similar considerations make it more economical to purchase or produce in larger lots than are needed for immediate purposes.  Mistakes : Incorrect unit count, unit measure, incorrect part number etc. Inventory is then added back to the original order.
  13. 13.  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  Specific Contents of Inventories  Locations of Inventories  Tracking
  14. 14.  The Dilemma: closely monitor and control inventories to keep them as low as possible while providing acceptable customer service.  Average Aggregate Inventory Value How much of the company’s total assets are invested in inventory? Value($) Wks of Supply Turnover Ford: 6.825 bil. 3.5 14.8 Sears: 4.039 bil. 9.2 5.7 G.M 8.0 Toyota 35.0
  15. 15.  Non-value added costs (If you are not going to sell them off immediately, why keep them?)  Opportunity cost (If you didn’t keep these items, what would you have done that might be better off?)  Complacency (Keeping inventory means you are lazy and consistently less competitive)  Inventory deteriorates, becomes obsolete, lost, stolen, etc.
  16. 16.  Procurement costs (Order processing, Shipping, Handling, Purchasing costs, Manufacturing cost)  Carrying costs (Capital (opportunity) costs, Inventory risk costs Space costs, Inventory service costs)  Out-of-stock costs (Lost sales costs, Back-order costs)
  17. 17.  Independent demand items are finished products or parts that are shipped as end items to customers. Forecasting plays a critical role. Due to uncertainty, extra units must be carried in inventory  Dependent demand items are raw materials, component parts, or sub-assemblies that are used to produce a finished product.
  18. 18.  Order Quantity Economic Order Quantity (EOQ) is the number of units that a company should add to inventory with each order to minimize the total costs of inventory—such as holding costs, order costs, and shortage costs.  Order Timing  Reorder Point (The level in which an inventory reaches where it signals that a replenishment is due)
  19. 19. 1. Maximize the level of customer service by avoiding under-stocking. 2. Promote efficiency in production and purchasing by minimizing the cost of providing an adequate level of customer service.
  20. 20.  When should the company replenish its inventory, or when should the company place an order or manufacture a new lot?  How much should the company order or produce?
  21. 21.  EOQ minimizes the sum of holding and setup costs Q = √2DCo/Ch Where: D = annual demand Co = ordering/setup costs Ch = cost of holding one unit of inventory
  22. 22.  EOQ = √2DCo / Ch Where: D = annual demand = 6,000 Co = ordering/setup costs = $60 Ch = cost of holding one unit of inventory $3.00 x 24% = 0.72 2 x 6,000 x 60 ═ .72 720,000 .72 1,000═
  23. 23.  Quantity to which inventory is allowed to drop before replenishment order is made  Need to order EOQ at the Reorder Point: ROP = D X LT D = Demand rate per period LT = lead time in periods
  24. 24.  The number of days from when a company buys the production inputs it needs to when those items arrive at the manufacturing plant. Order lead time can have a significant impact on a company's bottom line. It is a key component of delivery cycle time, along with the time it takes to make the product and the time it takes to deliver the product.
  25. 25. level of inventory average inventory units Q t time The Sawtooth Model
  26. 26.  based on reorder point - When inventory is depleted to ROP, order replenishment of quantity EOQ.  changing lead times  changing demand  Uncertainty creeps in: ◦ Plug in safety stock. Safety stock - allows manager to determine the probability of stock levels - based on desired customer service levels
  27. 27. reorder Qm point safety stock time
  28. 28.  an alternative to ROP/Q-system control is periodic review method  Q-system - each stock item reordered at different times - complex, no economies of scope or common product/transport runs  P-system - inventory levels for multiple stock items reviewed at same time - can be reordered together  higher carrying costs - not optimum, but more practical
  29. 29.  ABC Classification (Pareto Principle)  A Items: very tight control, complete and accurate records, frequent review  B Items: less tightly controlled, good records, regular review  C Items: simplest controls possible, minimal records, large inventories, periodic review and reorder NOTE: The HIGHER the VALUE of the Inventory, the TIGHTER the control
  30. 30. 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
  31. 31.  determine requirements by forecasting demand for the next production run or purchase  establish current on-hand quantities  add appropriate safety stock based on desired stock availability levels and uncertainty demand levels  determine how much new production or purchase needed (total needed - on-hand)
  32. 32.  replenishment, production, or purchases of stock are made only when it has been signaled that there is a need for product downstream  requires shorter order cycle time, often more frequent, lower volume orders  determine stock requirements to meet only most immediate planning period (usually about 3 weeks)

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