inventory policy decisions deepa

8/7/2019 Inventory Policy Decisions Deepa

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What quantity you need ?

How much is your budget ?

Why you should not buy all in large quantity ?

How much is your transport cost per order ?

How many times you can go and get ?

What is Inventory ?


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Inventory Policy Decisionsy Inventory are stocks or ite s used

to support production (raaterials and WIP), support

activities ( aintenance, repair, andoperatin supplies) and custo erservice (finishes oods and spareparts).

y The fact is inventory is oth avalua le resource and a potentialsource of aste

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Why InventoryThere are three asic reasons for keepin an inventory:

y

Ti ey Uncertainty

y Econo ies of scale


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Reasons ToReasons To NOTNOT Hold InventoryHold Inventoryy Carryin cost

y Valua le factory space

y O solescence

y Da a e

y

Pilfera e


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Inventory Hides Problems

Poor

Quality

UnreliableSupplier

MachineBreakdown

InefficientLayout

BadDesign

Lengthy

Setups

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To Expose Problems:

Reduce Inventory Levels

PoorQuality

UnreliableSupplier

a inerea o n

Ineffi ientLayout

aDesign

Lengt ySetups

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Remove Sources of Problems and

Repeat the Process

PoorQuality

UnreliableSupplier

a inerea o n

Ineffi ientLayout

aDesign

Lengt ySetups

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Types of Inventoryy Cycle stock

y Safety stock ( uffer inventory)

y

Anticipation inventoryy Others

y ed e inventories

y Transportation inventory (pipeline)

y

S oothin inventories

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Cycle Stocky Cycle stock refers to co ponents or products that are

received in ulk y a do nstrea partner, raduallyused up, and then replenished a ain in ulk y the

upstrea partner

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Safety Stocky Extra inventory that

co panies hold to

protect the selvesa ainst uncertainties

y De and

y replenish ent ti e

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Safety Stocks enable organizations to satisfy customer

demand in the event of these possibilities:

y Supplier ay deliver their product late or not at all

y The arehouse ay e on strike

y

Anu er of ite s at the arehouse ay e of poorquality and replace ents are still on order

y Aco petitor ay e sold out on a product, hich isincreasin the de and for your products

y

Rando de and (in reality, rando events occur)y Machinery Breakdo n

y Unexpected increase in de and

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Anticipation Inventoryy Inventory that is held in anticipation of custo er

de and.

y price increase, a seasonal increase in de and, or evenan i pendin la or strike.

y at allo een,Christ as, or the ack-to-schoolseason


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Hedge Inventoryy Inventory uildup to uffer a ainst so e event that

ay not happen.

yHed e inventory plannin involves speculation relatedto potential la or strikes, price increases, unsettledovern ents, and events that could severely i pair

co panies strate ic initiatives.

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Transportation Inventoryy Inventory that is ovin fro one link in the supply chain

to the another

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Aggregate Control of Inventoriesy InventoryTurnover Ratio

y ABCClassification

y Risk Poolin

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Two Classic Systems for Independent

Demand Items

yPeriodic revie syste s

yContinuous (perpetual) revie syste s

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Periodic Review System(Orders at regular intervals)

Inventorylevel

Time2 4 6

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Determining the restocking

level

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=

avera e de and durin the

reorder period plus thereplenish ent lead ti e (if thereis a delay ettin ne productsin).

SS

= safety stock. This is a cushionof inventory held to iti ate theuncertainties of forecasts andlead ti es.Hi her safety stock levels increasethe likelihood that oods areavaila le, ut also drive upinventory levels and costs


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Continuous Review System(Orderswhen inventory drops to R)

L-T

Q

R

How is the reorderpoint ROP established?

Inventorylevel

Time

lead time to geta new order in

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Comparison of Periodic and Continuous

Review Systems

PeriodicReviewy Fixed order intervals

y Variable order sizes

y Convenient to administer

y Orders may be combined

y

Inventory position onlyrequired at review

Continuous Reviewy Varying order intervals

y Fixed order sizes (Q)

y Allows individual review

frequencies

y Possible quantity discounts

y Lower, less-expensive safety

stocks

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What is the Best Order Size Q?Determined by:

y Inventory related costs

y Order preparation costs and setup costsy Inventory carryin costs

y Shorta e and custo er service costs

y Other considerations

y Out of pocket or opportunity cost?

y Fixed, varia le, or so e ix of the t o?


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EOQy D = annual de and of the product

y S = Fixed cost incurred per order

y C = cost per unity h = Holdin cost per year as a fraction of product cost


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Holding Cost$

Q

Holding cost increasesasQ increases . . .

(Q/2)H

H = h X CH = h X C


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Ordering Costs$

Q

Ordering costs per year

decrease as Q increases(why?)

(Q/2)H

(D/Q)S


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No of orders per year = D/QNo of orders per year = D/Q

The purchasing manager makes alot size decision to minimize the

total cost the store incurs.????

y Annual aterial cost

y Annual Order cost

y Annual holdin cost

Annual material cost = DCAnnual material cost = DC

Annual order cost = (D/Q)SAnnual order cost = (D/Q)S

Annual holding cost = ( Q/2) h CAnnual holding cost = ( Q/2) h C


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Total Annual CostAnnual material cost =DCAnnual material cost =DC

Annual order cost = (D/Q)SAnnual order cost = (D/Q)S

Annual holding cost = ( Q/2) h CAnnual holding cost = ( Q/2) h C


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Total Annual Costs and EOQ

0

500

1000

1500

2000

10 50 90 130

170

210

250

290

330

370

410

Order Quantity Q

InventoryCost($

)

Hol ing Cos O e ing Cos To al Cos

EOQ at minimum total cost


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Economic Order Quantity (EOQ) Modely Cost Mini izin Q

y Assu ptions:

Unifor and kno n de and rate

Fixed ite cost

Fixed orderin cost

Constant lead ti e H

DSQEOQ

2*!!


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Aggregate Control of Inventoriesy InventoryTurnover Ratio

y ABCClassification

y Risk Poolin


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Inventory Turnover Ratio

y Measures the nu er of ti es, on avera e, the inventory issold durin the period.Its purpose is to easure the

liquidity of the inventory.

y Inventory turnover ratio = Cost of oods sold / Avera einventory


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STOCK/INVENTORYTURNOVERRATIO

y (Average Inventory/Sales) x 365 for days

y (Average Inventory/Sales) x 52 for weeks

y (Average Inventory/Sales) x 12 for months

Average Inventory or Stocks = (Opening Stock + Closing Stock)-----------------------------------------

2y This ratio indicates the nu er of ti es the inventory is

rotated durin the relevant accountin period


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ABCClassification Method

IDEA

Co panies have thousands of ite s to track

Methods like EOQ only justifia le for osti portant ite s.


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What is the Best Order Size Q?Determined by:

y Inventory related costs

y Order preparation costs and setup costsy Inventory carryin costs

y Shorta e and custo er service costs

y Other considerations

y Out of pocket or opportunity cost?y Fixed, varia le, or so e ix of the t o?

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ABC Method1. Deter ine annual $ usa e for each ite2. Rank the ite s accordin to their annual $ usa e

3. Let:

Top 20% A ite s rou hly 80% of total $

Middle 30% B ite s rou hly 15% of total $

Botto 50% C ite rou hly 5% of total $

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ABCAnalysis Exa l

Total $Usage= $98,500

Item Cost Deman $ Usage

A1 $46 200 $9,200

B2 $40 10 $400

C3 $5 6680 $33,400

D4 $81 100 $8,100

E5 $22 50 $1,100

F6 $6 100 $600

G7 $176 250 $44,000H8 $6 150 $900

I9 $10 10 $100

J10 $14 50 $700

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Ranking y Annual $ Usag

Itl tiv % f t l

l

G7 $44,000 $44,000 44.67% A

3 $33,400 $77,400 78.58% AA1 $9,200 $86,600 87.92% B

D4 $8,100 $94,700 96.14% B

E5 $1,100 $95,800 97.26% B

H8 $900 $96,700 98.17%

J10 $700 $97,400 98.88%

F6 $600 $98,000 99.49%

B2 $400 $98,400 99.90%

I9 $100 $98,500 100.00%

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Market Two

Risk Poolingy Consider these t o syste s:

Supplier

Warehouse One

Warehouse Two

Market One

Market Two

Supplier Warehouse

Market One

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Risk Poolingy For the sa e service level, hich syste ill

require ore inventory? Why?

y For the sa e total inventory level, hich systeill have etter service? Why?

y What are the factors that affect these ans ers?

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Risk Poolingy De and varia ility is reduced if one a re ates

de and across locations.

y

More likely that hi h de and fro one custo er ille offset y lo de and fro another.

y Reduction in varia ility allo s a decrease in safetystock and therefore reduces avera e inventory.

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Virtual Inventory (Cross Filling)y Rarely are planned inventory levels so hi h

to uarantee that custo er de and can efilled i ediately fro availa le stock.

y On avera e, a planned percenta e oforders cannot e filled fro their pri arysource ithout experiencin a ackorderor a lost sale.

y To counter stock outs, co panies illfrequently cross fill, or transship, theunfilled de and fro a co para lesecondary inventory location.

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T

ypes of Pull Systems1. Top-Up Syste

2. Si nal Kan an

3. 2-Bin Kan an4. 3-Bin Kan an

5. Multi-Card Kan an

Si ple ut poor inventory control

Co plex ut excellent inventory control

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Top- p Pull Systemy Material is delivered at a set period, and any aterial

that as consu ed durin this period is replenished.

y Ideal for s all, lo -cost parts here hi h inventorycontrol is not essential

y E.g. Nuts, olts, ashers, etc.

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Top- p Pull SystemExample

Every month, the hardware supplier comes into thefacility and fills up all of the hardware containers (nuts,bolts, screws, etc.). Each container is marked with a lineto indicate how much to fill it. The inventory is equal tothe average monthly consumption (cycle stock), plus abuffer to handle peak production periods (buffer stock),and an allowance for up to 2 days incase the supplier is

late delivering.

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2-Bin Kanban Pull Systemy Material is stored in 2 containers of a set quantity. Every

period, a aterial handler takes a ay e pty containers andreturns the the next period.

y Ideal for processes that consu e any parts, especially ifeach part has a different rate of consu ption

y E.g.Asse ly processes

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2-Bin Kanban Pull SystemExample

The material handler checks the assembly process everyhour. As each container is emptied, it is placed in aspecific location. The material handler retrieves theseempty containers and spends the rest of the hourreplenishing them. They then return the replenishedcontainers to the assembly process and collect anycontainers that are now empty.

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Multi-Card Kanban Pull Systemy Cards are used to signify a set a ount of aterial. When

that aterial is consu ed, the card is returned to thesupplier to indicate that ore inventory is required.

y The supplier places returned cards on a oard and usesthe to deter ine hich product to uild next.

y

Ideal for processes that have an intervaly E.g.Machining processes or Suppliers ( here the

interval = delivery frequency)

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Multi-Card Kanban Pull SystemExample

At the end of each day, the Team leader collects thekanban sheets from the boxes of material that theassembly process opened. They fax these sheets to thesupplier and shreds them. The supplier receives the faxedsheets and places them on a board. When this product isthe highest on the board, the supplier will changeover. Aseach box is completed, the sheet is placed on it, and it is

sent to shipping for delivery.

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2-Bin Kanban Pull SystemAdvantages:y Excellent control of inventoryy Mini izes the a ount of inventory required

Disadvantages:y Requires signals to e sent repeatedlyy Is ore sensitive to changes in data than the other syste s

(needs to e kept up to date)y Requires delivery of aterial al ost every period

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Supermarket Pull Systems

supermarket

Custo erProcess

SupplierProcess

pro u tionanban

it ra npro u t

it ra alanban

replenis epro u t

Purpose: Pro i e pro u tion instru tion to upstreampro esses t at annot be lin e in flo .

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Thank u

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