module 2 chapter 5 inventory)

8/3/2019 Module 2 Chapter 5 Inventory)

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Module 2

Managing Material flow


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Inventory Management5


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Content.

Introduction Type of inventory

Inventory related costs

Managing cycle stock

Managing saftey stock

Managing seasonal stock

Analysing impact of supply chain redesign on the

inventory

Managing inventory for short life cycle products

Multiple item, multiple location inventory

management


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0

1

2

3

4

5

6

7

8

9

10

chemical textile machiner y non metallic mineral transport metal and metal

products

food and beverages

years

in

ve

n

to

ry

tu

rn

ov

e

r

ratio

1991 1996 2001 2006

Sector-wise Inventory

Performance


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Sector-wise Performance on

Inventory Turnover Ratio in India


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Types of Inventory

Cycle Stock : Economies of scale

Safety Stock

Anticipation Stock

Seasonal Stock

Speculative Stock

Pipeline Inventory

Dead stock


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Drivers of Inventory

Type of Inventory Driver ( Logic)

Cycle Stock Economies of Scale

Safety Stock Uncertainty in demand & Supply

Seasonal stock Mismatch between demand and supply rate

Speculation Stock Uncertainty in price of material

Pipeline Stock Lead-time in production/transportation process

Dead Stock Judgmental error/ Change in economic or technological environment


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Inventory Management: Key

Decisions

How much to order?

When to order?

Where to hold inventory? When to review?

Continuous review systems ( Fixed order

quantity) Periodic review systems


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Inventory in Chain

Supply chain consists of series of stock points

connected byprocesses ( conversion processes and

transportation processes) Each stock point has demand process and supply

process

Inventory at stock point : cycle stock, safety stock,

seasonal stock

Inventory within conversion and transportation

processes:

pipeline inventory


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Pipeline Inventory

Inventory within conversion andtransportation processes:

Pipeline Inventory Pipeline Inventory = PLT * D

- PLT = Pipeline Lead-time; D = averagedemand

Illustration :

LT -Shipment by air = 7 days

LT- Shipment by sea = 45 days

Average demand = 100/day


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Inventory Management: Relevant

Cost

Ordering cost/setup cost

Inventory carrying cost

Cost of shortage Lost sales

Backlogging cost

Service level as proxy for cost of shortage

Purchase cost ( value addition cost) of

Item

Not relevant if cost of item is not function of

order quantity (No Quantity discount case)


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Cycle-stock Inventory

Fixed Order Quality Model ( Cont. Review Model)

Q=Order Quantity, Reorderpoint= L*d

Average cycle stock = Q/2


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Optimal Order Quantity Trade-offs


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Inventory Models: Cycle Stock

__________

Q = 2 AD/ i C

A = Ordering Cost /Cost of setup

D = Annual Demand

i = Inventory carry costC = cost of item

Q= Optimum order quantity


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Optimum Order Quantity

DailyDemand =100

Working days in year=300

Ordering cost = 256 Rs.

Cost of item = 30 Rs.

Inventory-carrying cost = 0.2 Rs./Rs./Year

Supplier LT = 15Days

Optimum order Qty. =

_______________________

(2*256*100*300/(30*0.20 ) = 1600

Average cycle stock= 0.5* 1600 = 800

units

Reorderpoint= 15*100 =1500


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Total Cost versus Q

0

5000

10000

15000

0 1000 2000 3000 4000

Q

TotalCo

st

Series1

Optimum order quantity=Q*= 1600


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Q/Q* Q Tc0.5 800 12000

0.75 1200 10000

0.9 1440 9653.333

1 1600 9600

1.1 1760 9643.636

1.25 2000 9840

1.5 2400 104001.75 2800 11142.86

2 3200 12000

Sensitivity Analysis


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Safety Stock

R= reorderpoint


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Safety Stock

Distribution ofDemand During Lead Tim


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Ordering Policy in Case of

Demand and Supply Uncertainty

Order quantity = Q* = Optimum order

quantity

Reorderpoint= D * L + K WLead Time Demand

K = Safety factor

Safety stock= K WLead Time Demand


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Impact of Safety Factor on

Service Level

Safety factor (K) Service level

0 0.500

0.5 0.690

1.0 0.841

1.5 0.933

2.0 0.977

2.5 0.9943.0 0.998


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Impact of Service Level On Safety Stoc


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Safety Stock: Demand Uncertainty

Only

S.S = K WLead Time Demand

______

WLead Time Demand = LWD2

D = average Demand ,WD = S.D. ofDemand ,

L = Lead-time, K = Safety Factor


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Safety Stock : Demand and

Supply Uncertainty

S.S = K WLead Time Demand

____________

WLead Time Demand = LWD2 + D2 WL2

D = average Demand ,WD = S.D. ofDemand ,

L = Average Lead-time, WL = S.D. ofLead-time

K = Safety Factor


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Inventory Profile at Stock Point:

Cycle Stock + Safety Stock

Inventory

Time

Average

Inventory

Cycle Inventory

SafetyInventory


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Basic Demand and Lead-time Data

Demand Data

d1 d2 d3 d4 d5 d6 d7 d 8 d 9 d10Demand 115 95 150 125 28 90 93 115 93 96

Lead-time data

L1 L2 L3 L4 L5 L6 L7 L 8 L 9 L10

Lead-

time

12 15 4 21 18 11 12 18 19 20


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Inventory Management

Cycle and Safety Stock

DailyDemand: Mean = 100 , SD = 30

Ordering cost = 256 Rs.

Cost of item = 30 Rs.

Inventory-carrying cost = 0.2 Rs./Rs./Year

SupplierPerformanceMean = 15Days , SD = 5

Service Level = 98%


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Average

Demand

Standard

deviation

of demand

Average

lead-

time

Standard

deviation

of lead-

time

Safety

stock

- units

Safety

stock in

days of

inventory

Remark

100 30 15 5 1026 10.3 Base case

100 30 15 0 232 2.3 No supplyuncertainty,

100 0 15 5 1000 10 No demand

uncertainty

100 15 15 5 1006 10 Reduce demand

uncertainty

100 30 15 2.5 526 5.3 Reduce supply

uncertainty100 30 7.5 5 1003 10 Reduction in

lead-time

Impact ofChange in Demand and

Supply Parameters


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Managing Seasonal Stock

Capacity versus inventory tradeoff in

seasonal demand//supply situation

Two basic approaches in aggregate

planning ( Sales and operations

Planning)

Chase Option : Produce as per demand Level Option:

Mix apparoches


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Q1 Q2 Q3 Q4

Demand 8000 8000 8000 12000

Level option

Production 9000 9000 9000 9000

Hiring Cost 0 0 0 0

Inv. C. Cst 3000 6000 9000 0

Chase option

Production 8000 8000 8000 12000

Hiring Cost 0 0 0 48000

Inv. C. Cst 0 0 0 0

Illustration: Managing Seasonal

Stock

Cost: level option= 18,000 Chase option= 48000


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Centralized Versus Decentralized

Systems

Inventory

Safety Stock

Cycle stock Service Level

Overhead Costs

CustomerLead Time Transportation Cost


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Centralized Versus Decentralized

Systems: Illustration

Demand distribution at each region ( 16 regions)

DailyDemand: Mean = 100 , SD = 30

Ordering cost = 256 Rs.Cost of item = 30 Rs.

InventoryCarrying cost = 0.2 Rs./Rs./Year

Plant Lead time:= 15Days ( No supply Uncertainty)

Transportation:

Decentralized- Rs. 1per unit

Centralized case: - 10% higher


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Decentralise

d system 16stock points

Centralised

system 1stock point

Cycle

stock/stock

point = Q*/2

800 3200

Safety Stockper stock

point

232 928

Total Inv. in

units for the

system

(232+800) v16

= 16512

928+3200

= 4128

Total Inv.carrying cost

16512 v 6= 99072

4128 v 6= 24768

Incremental

Transportatio

n cost

300v100v16v0.1=48,000


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Centralization

Physical centralization

Decentralized inventory & centralization

of information

Specialization at each stock point

Mix ofCentralization & decentralization


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Impact of Inventory Pooling

Centralization of inventory

Product substitution

Component commonality

Postponement


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Inventory for Short life-cycle

Products: Single Period Model

Balancing cost of under-stocking versus cost of

overstocking

CU = Cost of under-stockingCO= Cost of overstocking

Optimum service level = (CU *100/ (CU + CO)

Optimum Order size= Mean demand

+ K * Std. Dev. Demand

K= optimum service level


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Optimum Order for a New Music

CD

CDpurchase price = Rs. 200

CD sales price = Rs. 300

CD sales price after first weeks = Rs. 62.Demand: Average 100 and Standard Deviation 30

- What is optimum order quantity

- If manufacturer offers buyback scheme , would your

decision change?- Cost of administering return- Rs. 53


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Selective Inventory Control

techniques

ABC classification

FSN Classification

VEDClassification


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Class Percentage of items Percentage of Total

sales Value

A 5-15 55-75

B 20-30 20-30

C 55-75 5-15

ABCClassification


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ABCClassification: Kurlon

Case

40


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Improving Inventory TurnsType of Inventory Driver ( Logic) Improvement focus

Cycle Stock Economies of Scale Reduce ordering/setup cost

Safety Stock Uncertainty in demand & Supply Reduce demand & supply

uncertainty & Reduce LT, supply

chain redeisgn

Seasonal stock Mismatch between demand and supply

rate

Reduce Seasonality in demand,

Create flexible capacity

Speculation Stock Uncertainty in price of material Risk management

Pipeline Stock Lead-time in production/transportation

process

Reduce Lead Time

Dead Stock Judgmental error/ Change in economic

or technological environment

Anticipate changes in demand

structure


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Summary

Indian firms find that a significant amount ofmoney is locked up in the inventory.

Organizations should use the concept of

zero-based inventoryplanning to improvetheirperformance on the inventory front.

The decision maker controls inventory by

deciding two critical questions: How much to

order and When to order

Based on the demand characteristics, supply

characteristics, cost structure and desired

service level firm can decide optimum level


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Backup Slides


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INVENTORY TURNOVER RATIO for

MANUFACTURING INDUSTRY

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

199

0

199

1

199

2

199

3

199

4

199

5

199

6

1997

199

8

199

9

2000

2001

2002

2003

2004

2005

2006

YEAR

inventory

tu

rnoverratio


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Inventory Turns in US economy

Year Manufacturer Wholesaler Retailer

20018.57 8.89 7.95

19917.50 8.89 8.28

http://www.bea.gov/national/nipaweb/NIPA_Underlying/SelectTable.asp?Benchmar

k=P#S0


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Inventory Turnover performance

in US Retail *

Study looked at 311publicly listed retailers foryears1987-2000

Overall trend in inventory turns is downward slopping

during 1987-2000

time trend is negative for176 firms

time trend is positive for135 firms

* Guar, Fisher & Ananth Raman- Management Science.February,2005 51(2) 181-194


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EOQ Model: Quantity Discount

Case

Minimize Total Cost : Annual purchase cost ( D *c) +

Annual ordering cost+ Annual Inv. Carrying cost

- Calculate optimal Q* for each price category- Determine optimal feasible Q for each price category

- Compare total cost across all the price categories


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module 2 chapter 5 inventory)

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