inventory concepts
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5. 1. Inventory Concepts. INVENTORY IS A LARGE AND COSTLY INVESTMENT . What are Inventories?. Finished product held for sale Goods in warehouses Work in process Goods in transit - PowerPoint PPT PresentationTRANSCRIPT
15Inventory Concepts
INVENTORY IS A
LARGE AND COSTLY
INVESTMENT
CR (2004) Prentice Hall, Inc.
What are Inventories?•Finished product held for sale•Goods in warehouses•Work in process•Goods in transit•Any owned or financially controlled
raw material, work in process, and/or finished good or service held in
anticipation of a sale but not yet sold
CR (2004) Prentice Hall, Inc.
Where are Inventories?Materialsources
Inboundtransportation
Production Outboundtransportation
Finished goodswarehousing
Customers
Inventory locations
Finished goods Shi
ppin
g
Inventoriesin-process
Rec
eivi
ng
Productionmaterials
9-4
Inventory Pipeline
Raw & In-Process Finished Goods
VendorIn-Transit
toMfr.
PlantWhse
Mfg.Process
Plant.Whse
In-Transit
to DCs
FieldWhse
Pick &Load
In-Transitto
CustmrCustomer
41
Inventory Decisions in Strategy
CR (2004) Prentice Hall, Inc.
PLA
NN
ING
OR
GA
NIZ
ING
CO
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OLL
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Transport Strategy• Transport fundamentals• Transport decisionsCustomer
service goals• The product• Logistics service• Ord. proc. & info. sys.
Inventory Strategy• Forecasting• Inventory decisions• Purchasing and supply
scheduling decisions• Storage fundamentals• Storage decisions
Location Strategy• Location decisions• The network planning process
PLA
NN
ING
IMPL
EMEN
TIN
G
CO
NTR
OLL
ING
Transport Strategy• Transport fundamentals• Transport decisionsCustomer
service goals• The product• Logistics service• Ord. proc. & info. sys.
Inventory Strategy• Forecasting• Inventory decisions• Purchasing and supply
scheduling decisions• Storage fundamentals• Storage decisions
Location Strategy• Location decisions• The network planning process
Inventory Management ObjectivesGood inventory management is a careful balancing act between stock availability and the cost of holding inventory.
, Stock out probability
Inventory Holding costs (inventory Carrying Costs)
•Service objectives- Setting stocking levels so that there is only a
specified probability of running out of stock•Cost objectives- Balancing conflicting costs to find the most
economical replenishment quantities and timingCR (2004) Prentice Hall, Inc.
MAIN AIMS OF INVENTORY MANAGEMENT
To improve cash flows To improve return on investment (ROI,
the benefit (return) of an investment is divided by the cost of the investments)
ROI= Gains from investment – Cost of investment Cost of Investment
$700,000 - $500,000 = 40% $500,000
MEASURES OF INVENTORY MANAGEMENT EFFECTIVENESS
The impact that inventory has on corporate profitability
Measures to decrease inventory-related costs include; reducing the number of backorders or
expedited shipments, purging obsolete or dead stock from the system, or improving the accuracy of forecasts.
MEASURES OF INVENTORY MANAGEMENT EFFECTIVENESS
(Cont.) Fill rate is a common measure of the customer service
performance of inventory.
Product fill rate: fraction of product demand satisfied from product in inventory (single item) computer
Order fill rate: percentage of units available when multiproduct order is received. Computer+mouse
A 96% fill rate means that 4% of requested units were unavailable when ordered by customer.
Cycle service level: if the store doesn’t run out of stock in 6 out of 10 replenishment cycles, the store achieves a CSL of 60 percent
MEASURES OF INVENTORY MANAGEMENT EFFECTIVENESS
(Cont.)
• inventory turnover ratio would be calculated as units sold divided by units on hand.
Inventory Turnover Comparisons
How to order?
When to order?
What to order?
How much to order?
Inventory Management Answers Four Important Questions
4 3
4 2 Why Hold Inventory?
1. It enables the firm to achieve economies of scale
2. It balances supply and demand3. It enables specialization in manufacturing4. It provides protection from uncertainties in
demand and order cycle5. It acts as a buffer between critical interfaces
within the channel of distribution
Economies of Scale Inventory is required if an organization is to
realize economies of scale in purchasing, transportation, or manufacturing.
Per unit price reductions!
The cost of maintaining this inventory must be “traded off” against the production savings realized.
Balancing Supply and Demand
Seasonal supply or demand may make it necessary for a firm to hold inventory. (finished goods)
Demand for a product may be relatively stable throughout the year, but raw materials may be available only at certain times during the year.
Ex: Canned fruits and vegetables
Specialization Inventory makes it possible for each of a firm’s
plants to specialize in the products that it manufactures.
The finished products can be shipped to field warehouses where they are mixed to fill customer orders.
Whirlpool Co.- cost savings through specializing manufacturing by plant location and the consolidation of warehouse operations
Focused Factories-specialization by facility
Protection From Uncertainties
Inventory is held as protection from uncertainties; that is, to prevent a stock out in the case of variability in demand or variability in the replenishment cycle.
Inventory planning is critical to successful manufacturing operations to protect from uncertainties.
Inventory As A Buffer
Inventory is held throughout the supply chain to act as a buffer for the following critical interfaces:� * supplier-procurement� * procurement-production� * production-marketing� * marketing-distribution� * distribution-intermediary� * intermediary-customer/user
Raw materialsinventory
Work-in-process inventory
Finished goods inventory at plant location
Supplier inventory
Finished goods inventory at
field locations
Consumer inventory
Retail inventory
Waste and by-products
Waste disposal
Reworking or repackaging
of product
THE LOGISTICS FLOW
Forward logistics flow
Reverse logistics flow
TYPES OF INVENTORIESInventories can be classified based on the reasons
for which they are accumulated.
In-transit inventories Speculative stock Seasonal stock Dead stock Cycle stock Safety or buffer stock
In-transit Inventories
In-transit inventories are items that are en route from one location to another
For calculating inventory carrying costs,in-transit inventory should be considered as inventory at the place of shipment origin since the items are not available for use, sale,etc.
Speculative Stock Speculative stock is inventory held for reasons
other than satisfying current demand
Materials may be purchased in volumes larger than necessary:
to receive quantity discounts, because of a forecasted price increase materials shortage, to protect against the possibility of a strike.
Seasonal Stock Seasonal stock is a form of speculative
stock that involves the accumulation of inventory before a seasonal period begins
This often occurs with agricultural products and seasonal items.
Ex: back-to-school
Dead Stock Dead stock refers to items for which no demand has been
registered for some specified period of time.
Dead stock might be obsolete throughout a company or only at one stock keeping (SKU) location.
J.C. Whitney Company-sells auto parts that are no longer produced
Transshipment of dead stock-Asia markets
Cycle Stock Cycle stock is inventory that results from
replenishment of inventory sold or used in production.
It is required in order to meet demand under conditions of certainty; that is, when the firm can predict demand and replenishment times (lead times).
Orders are scheduled to arrive just as the last unit is sold-no extra inventory beyond the cycle stock is required.
Lot or batch size: The quantity that a stage of supply chain either produces or purchases at a given time
Q: quantity in a lot or batch size
Cycle stock: Q / 2
Cycle Stock
Safety or Buffer Stock Safety or buffer stock is held in excess of cycle stock
because of uncertainty in demand or lead time. Average inventory at a stock keeping location that
experiences demand or lead time variability = half the order quantity (cycle stock)+ the safety stock
time
Inventory level
Factors Influencing Safety Stocks
Forecast error
Exposure to stockout
Lead time
Service level requirement
4 14
Under certainty
Demand per day:20 units Order quantity: 400 units Lead time: 10 days
200
400
0
Days 10 20 30 40 50 60
Inventory
Orderplaced
Orderarrival
Orderplaced Average
cycleinventory
A. Order quantity of 400 units
Orderarrival
The Effect of Reorder Quantity on Average Inventory Investment with Constant Demand and Lead Time
4 4
Demand:20 units
InventoryOrderplaced
Orderarriva l
Averagec
ycle
inventory
Days 10 20 30 40 50 600
100
200
B . Order quantity of 200 units
The Effect of Reorder Quantity on Average Inventory Investment with Constant Demand and Lead Time
45
Demand:20 units
Averagecycle
inventory
Orderarriva l
Orderplaced
C . Order quantity of 600 units
Days 10 20 30 40 50 60
Inventory
0
300
600
The Effect of Reorder Quantity on Average Inventory Investment with Constant Demand and Lead Time
46
Demand:20 units
With variable demand
Demand fluctuates between 15 and 25 units per day
Lead time is constant
A . W ith variab le demand
Average Inventory Investment Under Conditions of Uncertainty
Inventory
Averagecyc le
inventory
Ss(
a fe tytock
50)
yAve ra geinven to r(150 )
200
100
8 10 20 30 40Days{{
411
Demand:2025 units
Variable lead time
Lead time fluctuates between 8 and 12 days
Demand per day is constant
Average Inventory Investment Under Conditions of Uncertainty
B . W ith variab le lead tim e
Inventory
Averagecyc le
inventory
yAve ra geinven to r(140 )
200
100
10 12{ 20 30 40Day
Ss(
a fe tytock
40) s{
412
If orders arrive 2 days late
With variable demand and lead time
Lead time fluctuates between 8 and 12 Demand per day fluctuates between 15
and 25
C . W ith variab le dem and and lead tim e
Inventory
Averagecyc le
inventory
yAve ra geinven to r(200 )
200
100
10 12{ 20 30 40Day
ySs(
a fe t
0tock
10 ) s{ 8
Average Inventory Investment Under Conditions of Uncertainty
413
EOQ = 2PDCV
where:
P = The ordering cost (dollars per order)D = Annual demand or usage of the product
(number of units)C = Annual inventory carrying cost (as a percentage
of product cost or value)V = Average cost or value of one unit of inventory
The EOQ Model47
Size of order (Q)
Annual cost(dollars)
Lowest tota l cos t(EOQ )
Total cost
Inventorycarryingcost
Ordering cost
Cost Trade-offs Required to Determine the Most Economic Order Quantity
48
OrderQuantity (Q)
Numberof Orders(D/Q)
OrderingCost
PX (D/Q)
InventoryCarryingCost
1/2 Q X C X VTotalCost
406080
100120140160200300400
120806048403530241812
$ 4,800 3,200 2,400 1,920 1,600 1,400 1,200 960 720 480
$ 500 750
1,000 1,250 1,500 1,750 2,000 2,500 3,750 5,000
$ 5,300 3,950 3,400 3,170 3,100 3,150 3,200 4,460 4,470 5,480
49 Cost Trade-offs Required to Determine the Most Economic Order Quantity
D = 4800 units per yearP = $40 per order
C = $1 per unitV= $25 per unit
Assumptions of the Simple EOQ Model
A continuous, constant, and known rate of demand.
A constant and known replenishment cycle or lead time.
A constant purchase price that is independent of the order quantity or time.
A constant transporation cost that is independent of the order quantity or time.
The satisfaction of all demand (no stockouts are permitted).
No inventory in transit. Only one item in inventory, or at least no
interaction among items. An infinite planning horizon. No limit on capital availability.
410
Fixed order point policy: EOQ-an order is placed when inventory on hand reaches a predetermined min. level necessary to satisfy demand during order cycle
Fixed order interval policy: Inventory levels are reviewed at a certain –set time interval like every week
Fixed order point-Fixed order interval policy