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Inventory management 091104161506 Phpapp02

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Inventory Management

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Inventory management 091104161506 Phpapp02

  1. 1. Inventory Management DSC 335
  2. 2. DSC 335 Roadmap Operations Strategy Process Management Process strategy/analysis Capacity analysis/planning Quality management Lean systems Supply Chain Mgmt. Supply chain dynamics Inventory management Case: Kristen’s Cookie Case: Blanchard Littlefield Game 1 Littlefield Game 2 Case: A Pain in Chain Beer game Decision Making Tools
  3. 3. Inventory <ul><li>Definition: the stock of any item or resource used in an organization </li></ul><ul><li>In the forms of </li></ul><ul><ul><li>Raw materials & component parts </li></ul></ul><ul><ul><li>Work in process </li></ul></ul><ul><ul><li>Finished products </li></ul></ul><ul><ul><li>Replacement parts, tools, & supplies </li></ul></ul><ul><ul><li>Goods-in-transit to warehouses or customers </li></ul></ul>
  4. 4. Inventory Example – a PC Manufacturer
  5. 5. How Much Inventory We Need to Manage <ul><li>In 2006 (nation-wide), the monthly average inventory is </li></ul><ul><ul><li>Retail: $ 486 B </li></ul></ul><ul><ul><li>Wholesale: $ 381 B </li></ul></ul><ul><ul><li>Manufacturing: $ 470 B </li></ul></ul><ul><ul><li>Total: $1,337 B </li></ul></ul>
  6. 6. Inventory in Balance Sheets data from finance.yahoo.com Inventory ($million) % in Current Assets % in Total Assets Wal-Mart 32,191 73.46% 23.30% Target 7,797 50.80% 20.59% Bestbuy 3,338 41.80% 28.14% Amazon 877 26.00% 20.10% Exxon Mobil 9,321 12.71% 4.47% Boeing 8,105 35.27% 15.65% GM 21,394 34.44% 4.56% Ford 10,271 16.32% 3.72% Toyota 13,799 15.10% 5.64% Cisco 1,371 5.34% 3.17% Solectron 1,516 34.84% 28.22% Dell 576 3.25% 2.49% Apple 270 1.86% 1.57% HP 7,750 16.06% 9.45%
  7. 7. Pressure to Cut Inventory Days of Inventory
  8. 8. Sun’s Incentive Compensation to Boost Supply-Chain Performance <ul><li>Bob Ferrari, a former employee of Sun Microsystems, says Sun is on the cutting edge of incentive compensation. Within Ferrari’s business unit at Sun, compensation metrics was weighted toward the supply chain. “On-time delivery, inventory turns, and customer satisfaction were all tied into pay,” Ferrari says. </li></ul><ul><li>– Jennifer Caplan, CFO.com </li></ul>
  9. 9. Why Hold Inventory?
  10. 10. Why Not to Hold Inventory?
  11. 11. Cost of Holding Inventories <ul><li>Annual holding cost of inventory is 30 to 35% of its value! This means: </li></ul><ul><ul><li>Retail: $ 486 B </li></ul></ul><ul><ul><li>Wholesale: $ 381 B </li></ul></ul><ul><ul><li>Manufacturing: $ 470 B </li></ul></ul><ul><ul><li>Total: $1,337 B </li></ul></ul><ul><ul><li>Total inventory holding cost </li></ul></ul><ul><ul><li>= $ 1,337 B * 30% = $ 400 Billion !! </li></ul></ul>
  12. 12. Inventory Control <ul><li>Managerial Objectives for Inventories </li></ul><ul><ul><li>Minimize the investment/cost tied in inventories. </li></ul></ul><ul><ul><li>Meet the inventory availability needs of customers. </li></ul></ul><ul><li>Inventory control answers two questions. </li></ul><ul><ul><li>How much to order? </li></ul></ul><ul><ul><li>When to order? </li></ul></ul><ul><li>Coping with uncertainty is challenging. </li></ul><ul><ul><li>Forecast demand and lead times. </li></ul></ul><ul><ul><li>Sets stock availability levels (service levels). </li></ul></ul>
  13. 13. Economic Order Quantity (EOQ) Model
  14. 14. Economic Order Quantity (EOQ) Model <ul><li>Key Assumption 1 : All aspects are known with certainty </li></ul><ul><ul><li>Constant demand stream (No demand variability) </li></ul></ul><ul><ul><li>Constant setup cost per order (independent of size of order) </li></ul></ul><ul><ul><li>Constant annual holding cost per unit </li></ul></ul><ul><ul><li>Constant lead time (= zero in the basic setting) </li></ul></ul><ul><ul><ul><li>Instant replenish </li></ul></ul></ul><ul><ul><li>No backorders are allowed </li></ul></ul>
  15. 15. Managerial Questions <ul><li>When to order/produce (assuming zero lead time)? </li></ul><ul><ul><li>When your inventory reaches zero </li></ul></ul><ul><li>How much to order/produce? </li></ul><ul><ul><li>Let’s see… </li></ul></ul>
  16. 16. How Much Should We Order? Time Inventory Inventory Large order size Small order size Time Slope = Demand rate High Low Low High Same Same Holding cost Order setup cost Purchase cost Large order size Small order size
  17. 17. Economic Order Quantity (EOQ) Model <ul><li>Data (inputs to the model) </li></ul><ul><ul><li>D = Demand rate (units / yr) </li></ul></ul><ul><ul><li>c = Cost of purchasing or producing a unit ($ / unit) </li></ul></ul><ul><ul><li>S = Setup cost or per order or per production run ($) </li></ul></ul><ul><ul><li>H = Annual holding cost per unit of inventory ($ / (unit•yr)) </li></ul></ul><ul><ul><li>H is often taken as a percentage of the unit cost: </li></ul></ul><ul><ul><li>H = i  c , where i is annual percentage holding cost </li></ul></ul><ul><li>Decision: Q = Quantity of an order (units) </li></ul><ul><li>Objective: To minimize the total cost </li></ul><ul><ul><li>Let’s see how to compute the total cost … </li></ul></ul>
  18. 18. Total Cost (TC) <ul><li>Number of orders per year = D / Q ( / yr) </li></ul><ul><li>Annual ordering cost = (D / Q)  S ($ / yr) </li></ul><ul><li>Average inventory = Q / 2 (units) </li></ul><ul><li>Annual holding cost = (Q / 2)  H ($ / yr) </li></ul><ul><li>Annual purchase cost = c  D ($ / yr) </li></ul>Slope = D (units/year) Inventory Q Time
  19. 19. Inventory Management at South Face <ul><li>Here are some facts about The South Face retail shop: </li></ul><ul><li>D : 1200 jackets / year </li></ul><ul><li>S: $2,000 </li></ul><ul><li> c: $200 per jacket </li></ul><ul><li> i: 25% / year </li></ul><ul><li>What order size ( Q ) would you recommend for The South Face ? </li></ul>retailer warehouse
  20. 20. The South Face
  21. 21. The South Face
  22. 22. The South Face
  23. 23. The South Face
  24. 24. The South Face
  25. 25. Finding the Optimal Q (EOQ) Ordering Cost Q OPT (optimal order quantity) Q Holding cost Cost Lowest Cost
  26. 26. Calculating EOQ <ul><li>The EOQ formula: </li></ul><ul><li># orders / year = </li></ul><ul><li>Time between orders </li></ul>EOQ = 2 DS H TBO EOQ = EOQ D D EOQ
  27. 27. Example: Application 12.1 <ul><li>Suppose that you are reviewing the inventory policies on an $80 item stocked at a hardware store. The current policy is to replenish inventory by ordering in lots of 360 units. Additional information is: </li></ul>D = 60 units per week, or 3,120 units per year S = $30 per order H = 25% of selling price, or $20 per unit per year What is the EOQ? SOLUTION EOQ = = 2 DS H = 97 units 2(3,120)(30) 20
  28. 28. (cont’d) <ul><li>What is the total annual cost of the current policy ( Q = 360), and how does it compare with the cost with using the EOQ? </li></ul>Current Policy EOQ Policy Q = 360 units Q = 97 units C = 3,600 + 260 C = $3,860 C = (360/2)(20) + (3,120/360)(30) C = 970 + 965 C = $1,935 C = (97/2)(20) + (3,120/97)(30)
  29. 29. (cont’d) <ul><li>What is the time between orders (TBO) for the current policy and the EOQ policy, expressed in weeks? </li></ul>TBO 360 = TBO EOQ = SOLUTION (52 weeks per year) = 6 weeks 360 3,120 (52 weeks per year) = 1.6 weeks 97 3,120
  30. 30. Notes on EOQ <ul><li>EOQ is driven by cost minimization </li></ul><ul><ul><li>Holding cost + Setup cost </li></ul></ul><ul><li>Total cost curve is fairly flat near the optimal point  EOQ is “robust”, i.e, some errors in parameters estimation will not lead to large cost increase. </li></ul><ul><li>At EOQ, Holding cost = Ordering cost </li></ul><ul><ul><li>Is that always true if holding cost or setup cost take different forms? Not necessarily. </li></ul></ul>
  31. 31. Managerial Insights – Sensitivity Analysis TABLE 12.1 | SENSITIVITY ANALYSIS OF THE EOQ Parameter EOQ Parameter Change EOQ Change Comments Demand ↑ ↑ Increase in lot size is in proportion to the square root of D . Order/Setup Costs ↓ ↓ Weeks of supply decreases and inventory turnover increases because the lot size decreases. Holding Costs ↓ ↑ Larger lots are justified when holding costs decrease. 2 D S H 2 D S H 2 DS H
  32. 32. What Happens When Lead Time > 0? Slope = D (units/yr) = d (units/day) Q Time Reorder Point (ROP) Receive order Place order Receive order Lead time: L (days) Reorder Point: ROP = d  L Reminder: Keep time units consistent!
  33. 33. <ul><li>A cloth item is held in stock at a retail store, c = $0.1 per yard; H = $0.75 per yard/yr; S= $150 per order; D = 10,000 yards/yr. What’s the EOQ? </li></ul><ul><ul><li>Note : There are 311 operating days per year for the store </li></ul></ul>Exercise
  34. 34. (cont’d) When to Order? <ul><li>Reorder Point (R): level of inventory at which to place a replenishment order </li></ul><ul><li>R = d x L </li></ul><ul><li>d = demand rate per period , L = lead time </li></ul>
  35. 35. What if demand is uncertain? – Inventory Control Systems <ul><li>Continuous review ( Q ) system </li></ul><ul><ul><li>Also known as Reorder Point (ROP) system </li></ul></ul><ul><ul><li>Constant amount ordered when inventory declines to predetermined level </li></ul></ul><ul><ul><li>Fixed-order-quantity system and </li></ul></ul><ul><li>Fixed-time-period system (Periodic review) </li></ul><ul><ul><li>Order placed for a variable amount after fixed passage of time </li></ul></ul>

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