Bus 301: Business Logistics

Inventory Strategies-Overview

Drivers of Supply Chain Performance(we have seen how this can impact)

Facilities (Manufacturing Strategies)– places where inventory is stored, assembled, or fabricated (outsourcing issues)– production sites and storage sites (where manufactured)

Inventory (Inventory Strategies)– raw materials, WIP, finished goods within a supply chain (where located)– inventory policies (push vs pull strategies)

Transportation – moving inventory from point to point in a supply chain (inconsistent delivery times)– combinations of transportation modes and routes (best routing)

Information Technology– data and analysis regarding inventory, transportation, facilities throughout the supply

chain (replace inventory with information)– potentially the biggest driver of supply chain performance

Internal Supply Chain Management (ISCM)That leads to the next element……

Manufacturing (Part I)

Inventory Strategies (Part II)

Forecasting (Part III)Information Technology (Part IV)

Inventory: Role in the Supply Chain (GSW Hot Dogs and Match Game)

Inventory exists because of a mismatch between supply and demandSource of cost and influence on responsivenessImpact on material flow time (time elapsed between when material enters the supply chain to when it exits the supply chain)

Examples of Disasters

Cisco’s Inventory Disaster: Lack of demand and inventory visibility as market slows leads to $2.2 billion inventory write-off and stock price cut in half Nike’s Planning System Perplexity: New planning system causes inventory and order woes, blamed for $100 revenue miss as stock loses 20%

We Have Seen The Functions of Inventory As Helping….

Meet anticipated demand

Smooth production requirements

Decouple components of the production-distribution system

Protect against stock-outs

Take advantage of order cycles

Hedge against price increases & leverage quantity discounts

Operations, finance, and marketing have interest in inventories.

Poor inventory management hampers operations, diminishes customer satisfaction, and increases operating costs.

A typical firm probably has tied in inventories about – 30 percent of its current assets

– 90 percent of its working capital (Current Assets – Current Liabilities)

Both Understocking and Overstocking are undesirable;

Understocking; lost sales, dissatisfied customers, production lost.

Overstocking; tied up funds, physical holding cost, obsolescence.

Inventory Issues

Inventory management has a trade-off decision between level of Customer Service and Inventory Cost.

How do we measure Customer Satisfaction? Number and quantities of sales lost, back orders, customer complains.

How do we measure Inventory Costs?

– Inventory turns (the ratio of the annual cost of goods sold to average investment in inventories),

– Days of inventory on hand (days of sales that can be supplied from existing inventories).

Questions About of Inventory Control

Industry Upper Quartile Median Lower Quartile

Dairy 34.4 19.3 9.2

Electronic Components 9.8 5.7 3.7

Computers 9.4 5.3 3.5

Publishing 9.8 2.4 1.3

Consumer Electronics 6.2 3.4 2.3

Appliances 8.0 5.0 3.8

Industrial Chemical 10.3 6.6 4.4

Inventory Turns Per Year

Types of Inventories That We Have Seen In Our Examples…

Raw materials & purchased parts

Work-in-progress

Finished-goods inventories

Replacement parts, tools, & supplies

Goods-in-transit to warehouses or customers (Pipeline Inventory)

 

Automobile Firm

Assembly Plant DealershipEngine Plant

Output Inventory

Finished engines

Automobile

-

In-Prcess Inventory

Unfinished engines

Unfinished Automobile

Automobile

Process

Engine plant

Assembly plant

Dealership (sales)

Input Inventory

Castings

Finished engines, chassis, etc

Automobile

Automobile Firm

Assembly Plant DealershipEngine Plant

Output Inventory

Finished engines

Automobile

-

In-Prcess Inventory

Unfinished engines

Unfinished Automobile

Automobile

Process

Engine plant

Assembly plant

Dealership (sales)

Input Inventory

Castings

Finished engines, chassis, etc

Automobile

This Means Balancing Cost and Service By A Firm’s Being…

More responsive in their order processingAble to manage volumes of SC informationCapable with limited transportation resourcesAble to position inventory correctly

Supply Chain Inventory Costs

Material Costs - average price paid per unit. Influenced by volume discounts which which make it amenable to economies of scale.Fixed Ordering Costs - costs that are not influenced by the lot size. Costs include:– Buyer Time- the incremental cost of buyer placing an extra

order.– Transportation- fixed cost of transportation. LTL pricing has a

fixed and variable cost.– Receiving cost- fixed part of the cost of receiving e.g.

administrative costs, purchase order matching, updating records etc.

Supply Chain Inventory Costs

Holding Costs- often a percentage of per unit cost of product.– Cost of capital- opportunity cost of capital. Commonly, the

weighted average cost of capital (WACC) is used to calculate this.

– Obsolescence - perishables, microprocessors, non-perishables

– Handling and Storage costs– Damage, security, taxes, insurance

Two Basic Questions Raised By Inventory Decisions

How much inventory should be ordered?When should inventory be order?

A Side Not for Marketing Impact of Quantity Discounts

If pricing decisions are made independently by the stages of the supply chain, the supply chain profit will be sub-optimal.In the case of commodity products where the market determines the prices, manufacturers can avail of lot size-based discounts to coordinate activities in the supply chain and reduce the supply chain costs..Increasing lot sizes, however result in higher cycle inventory

It Is Always Jello Time!

“

We Need To Answer These Two Questions For Our Jello Products?

How much inventory should be ordered?When should inventory be order?

In Your Teams….

Determine how much demand for of each SKU of Jello that we will need to consider over the next year…for the Chicagoland Area

(1) How much to order? (2) When to order?

Base Your Forecast on the Classroom Population As A Base for forecasting!

How Should We Get Started?

1) Market Survey of Demand2) _____________________________________3) _____________________________________4) _____________________________________5) _____________________________________

Did You Get Your Order In On Time?

Summary Of Role of Inventory in the Supply Chain

Improve Matching of Supplyand Demand

Improved Forecasting

Reduce Material Flow Time

Reduce Waiting Time

Reduce Buffer Inventory

Economies of ScaleSupply / Demand

VariabilitySeasonal

Variability

Cycle Inventory Safety InventoryFigure Error! No text of

Seasonal Inventory

What Made This Exercise Hard?

Demand Uncertain or Certain?Demand Variable or Stable? No Costs of Holding?No Order Processing Costs?Customer Service Level?No Historical Data?Dependant or Independent Demand?

Here IS your Challenge…

Evaluate all the forecasts handed out in class tonight from the perspective of the balance of cost versus service. This means that you will be describing why the others are not suitable for the organization. What would be the pitfalls if the wrong one was chosen? After the evaluation process then describe which one would you chose and why?

Some Basic Methods to Answer These Questions

Fixed Quantity Model (EOQ)Fixed Interval Model (Game)Zero Based ModelMRP, DRP and ERP Systems (next week)

Factors Which Differentiate Inventory Models

Dependent Vs Independent DemandPush Vs Pull StrategiesSystem wide Vs Single Facilities Models

Independent Demand

A

B(3) C(2)

D(5) E(1) D(12) F(2)

Dependent Demand

Independent demand is uncertain. Dependent demand is certain.

Independent and Dependent Demand

The Inventory CycleProfile of Inventory Level Over Time

Quantityon hand

Q

Receive order

Placeorder

Receive order

Placeorder

Receive order

Lead time

Reorderpoint

Usage rate

Time

The Fixed Quantity Model

Order a fixed quantity when reordering takes place (EOQ)Amount order is based on; product costs, demand information, carrying costs and order costsAutomatically reorder (fixed amount) when reach number of units

Simple EOQ Assumptions

Constant DemandConstant and Consistent Lead TimesSatisfaction of All DemandConstant Price of Goods and Materials

No Inventory In TransitOne Item In InventoryInfinite Planning HorizonNo Limitation On Capital

THE EOQ

Q = 2DS

H =

2(Annual Demand)(Order or Setup Cost)

Annual Holding CostOPT

The Basic Inventory Model

Annual demand for a product is 9600D = 9600Annual carrying cost per unit of product is

16$H = 16Ordering cost per order is 75 S = 75a) How much should we order each time to

minimize our total costb) How many times should we orderc) What is the length of an order cycle

(working days 288/year)

Profile of Inventory Level Over Time

Quantityon hand

Q

Receive order

Placeorder

Receive order

Placeorder

Receive order

Lead time

Reorderpoint

Usage rate

Time

Remember….The Inventory Cycle?

Two Questions to Answer in Planning Safety Inventory

What is the appropriate level of safety inventory to carry?What actions can be taken to improve product availability while reducing safety inventory?

Determining the AppropriateLevel of Safety Inventory

Measuring demand uncertaintyMeasuring product availabilityReplenishment policiesEvaluating cycle service level and fill rateEvaluating safety level given desired cycle service level or fill rateImpact of required product availability and uncertainty on safety inventory

Determining the AppropriateLevel of Demand Uncertainty

Appropriate level of safety inventory determined by:– supply or demand uncertainty– desired level of product availability

Higher levels of uncertainty require higher levels of safety inventory given a particular desired level of product availabilityHigher levels of desired product availability require higher levels of safety inventory given a particular level of uncertainty

Fixed Interval Model

Also know as fixed review period or fixed periodUnlike EOQ does not required strict observationUsually low value items order in large quantitiesAlso, when sales replenish inventory or when product are ordered daily

Profile of Inventory Level Over Time

Quantityon hand

Q

Receive order

Placeorder

Receive order

Placeorder

Receive order

Lead time

Reorderpoint

Usage rate

Time

The Inventory Cycle

Pull Models of Inventory

ECRJIT I and IIQR

Push/Pull View of Supply ChainsProcurement,Manufacturing andReplenishment cycles

Customer OrderCycle

CustomerOrder Arrives

PUSH PROCESSES PULL PROCESSES

Push/Pull View of Supply Chain Processes

Supply chain processes fall into one of two categories depending on the timing of their execution relative to customer demandPull: execution is initiated in response to a customer order (reactive)Push: execution is initiated in anticipation of customer orders (speculative)Push/pull boundary separates push processes from pull processes

Push/Pull View of Supply Chain Processes

Useful in considering strategic decisions relating to supply chain design – more global view of how supply chain processes relate to customer ordersCan combine the push/pull and cycle viewsThe relative proportion of push and pull processes can have an impact on supply chain performance

General Assumptions of Time Based Inventory Approaches

Continuous Replenishment (CRP) InventoryFlow Through DistributionPipeline Logistics OrganizationConsistent Performance Measures

Basic Elements Of A Quick Response Environment

Shorter General Times For ActivitiesReal Time Information By SKUSeamless Logistics Organization

Partnership RelationshipsReduced Lot Size and Quicker Change OverCommitment To Total Quality Management

Key Issues In Time Based Inventory Approaches

Appropriate of available toolsAvailable Point of Sale InformationUse of Inventory SegmentationUse of Cross Dock OperationsForward Thinking Corporate Culture

Benefits of QR?

Help me out here!

What are some key Inventory Issues in these supply chains?

DellToyotaMcMaster CarrAmazonPeapod

Summary Of Role of Inventory in the Supply Chain

Improve Matching of Supplyand Demand

Improved Forecasting

Reduce Material Flow Time

Reduce Waiting Time

Reduce Buffer Inventory

Economies of ScaleSupply / Demand

VariabilitySeasonal

Variability

Cycle Inventory Safety InventoryFigure Error! No text of

Seasonal Inventory