OMSAN LOJİSTİK

To allow for: To allow for:

• Errors in Demand ForecastingErrors in Demand Forecasting

• Mistakes in PlanningMistakes in Planning

• Record InaccuraciesRecord Inaccuracies

• Quality, Workforce, Machine problemsQuality, Workforce, Machine problems

• Optimum buying & production quantitiesOptimum buying & production quantities

• Smooth production cycles using seasonal stockSmooth production cycles using seasonal stock

• Maintaining High Customer ServiceMaintaining High Customer Service

Inventory is a Financial Investment

Inventory is a Financial Investment

$115 billion

Better management of inventories can make a big difference

Three types of costs often affect most inventory decisions

• Cost of Having (Holding or carrying

cost)

• Cost of Not Having (Shortage cost)

• Cost of Getting (Ordering cost)

Basic Trade-Offs

COST

Ordering or Setup

Holding or Carrying

Shortage or Backorder

Inventory Level

High Low

HOLDING OR CARRYING COSTSHOLDING OR CARRYING COSTS* Capital Cost (Opportunity Cost of $ tied up) Liquidity Risk* Storage, Handling, Insurance* Obsolescence* Deterioration, Decay, Theft, Shrinkage• Taxes• ….

SHORTAGE OR BACKORDER COSTSSHORTAGE OR BACKORDER COSTS* Lost Sales* Customer Ill Will* Information and Follow up Costs* Expediting* Production Down Time

ORDERING OR SETUP COSTSORDERING OR SETUP COSTS* Paperwork for order* Equipment Setup• Sample testing• Receiving and handling

Inventory Costs

Page 8

IP&M Performance Measures

• ICC: Inventory Carrying Cost

• GIT: Global Inventory Turnover

• FTFR: First-Time-Fill-Rate

• FFR: Final Fill Rate

• FAC: Forecast Accuracy

ICC

GIT

FTFRFFR

FAC

0

1

2

3

4

5

Page 9

Optimal Customer Service Levels

$-

$500

$1,000

$1,500

$2,000

$2,500

$3,000

50.0

00%

60.0

00%

65.0

00%

70.0

00%

75.0

00%

80.0

00%

85.0

00%

90.0

00%

92.5

00%

95.0

00%

97.0

00%

98.0

00%

99.0

00%

99.5

00%

99.7

00%

99.9

50%

Customer Service Level Measured as Fill Rate

Inventory Carrying Cost

Lost Sales Cost

Total Policy Cost

Page 10

Inventory Levels

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

50.0

00%

60.0

00%

65.0

00%

70.0

00%

75.0

00%

80.0

00%

85.0

00%

90.0

00%

92.5

00%

95.0

00%

97.0

00%

98.0

00%

99.0

00%

99.5

00%

99.7

00%

99.9

50%

Customer Service Level Measured as Unit Fill Rate

Avera

ge I

nven

tory

Valu

e

0

1

2

3

4

5

6

Inven

tory

Tu

rns

PF

PI

SS

AIL

AIV

Inventory Turns

Fill Rate Optimizers

1. HOW MUCH to order?Balance the costs associated with ordering frequency

2. WHEN to order? When there is enough to cover demand during lead time

1. HOW MUCH to order?Balance the costs associated with ordering frequency

2. WHEN to order? When there is enough to cover demand during lead time

Basic Issues

order

Shipment

1. How Much to order?

Balance holding cost

with ordering cost

“The EOQ Approach”

Let’s take the simplest case

• Known & constant demand

• Instantaneous receipt of orders

• No quantity discounts

TimeTime

Units in Inventory

Ord

er

Quanti

ty

Average Inventory= Order Quantity/2

Order QuantityOrder Quantity

Annual CostAnnual Cost

Holding CostHolding Cost

Total Cost CurveTotal Cost Curve

Order (Setup) CostOrder (Setup) Cost

Optimal Optimal Order Quantity (Q*)Order Quantity (Q*)

EOQ Model

H

SDEOQ

2H

SDEOQ

2

D = Demand (units/time period)S = Cost per order ($) H = Holding cost ($/unit/time period)

(= C*i)

Economic Order Quantity

Demand = 1000 units per year

Ordering Cost = 100 $/order

Unit Cost = $50

Inventory holding cost = 40 %

(or $ 0.4 per $ in Inventory /year)

Order Lead Time = 2 weeks

(assume 50 weeks per year)

An Example

What is the EOQ for this coffee maker?What is the ROP?

What if …• Interest rates go up?• Order processing is automated?• Warehouse costs drop?• Product is cost-reduced?• Minimum order quantity imposed?• Variability of demand increases?

H

SDEOQ

2H

SDEOQ

2

And a quick review of basic relationships

When? Is there enough on hand to cover the demand during lead time?

Units in stock

Time

How often should we tolerate shortage during lead time?[Conversely, what “service level” is acceptable?]

Arrival ofNext Order

Safety

Stock

Reorder Point

Lead Time

?

Shortage!

?

Each level of safety stock implies a different “service level” during the lead time

Safety

Stock

Reorder Point

Lead Time

Units in stock

Time

Distribution of demand during lead time(DDLT)

Probability of shortage during lead time[ =(1- Service Level”) ]

Safety

Stock

Reorder Point

Lead Time

Units in stock

Time

More clearly

AverageDDLT

P(Stockout)

SS

ServiceLevel

Demand distribution during lead time

Balance Shortage Cost [Cu]

with Holding Cost [Co]

P (DDLT > ROP) * Cu = P (DDLT< ROP) * Co

(1-Service Level) * Cu = Service Level * Co

Service Level = Cu / (Co + Cu)

This ratio is also called “Critical Fractile”

Expected cost of having too few = Expected cost of having too many

What is the appropriate service level?

© 1995 Corel Corp.

• Demand normally distributed with an average of 350 units per month and a standard deviation of 10 units.

• Lead time = one month

• Service level = 95%* (*1.65 )

An ExampleER Kits for Hospital

What is the ROP?How much of it is the Safety Stock?

XX

= 350= 350

Service Level = 95%Service Level = 95%

P(Stockout) = 5%P(Stockout) = 5%

FrequencyFrequency

xx = ?= ?

= 10= 10

Safety Stock = Safety Stock = xx - -

ROP for ER Kits

So, how do we determine Reorder Point?

1. Determine desired service level during the lead time(For example, use the Critical Fractile formula)

2. If DDLT is normally distributed, find the z which corresponds to the service level

3. Safety stock = (z) (standard deviation of DDLT)

4. Reorder Point = Safety Stock + Average DDLT

Higher service levels require very high safety stocks

Higher service levels require very high safety stocks

0.8

1.3

1.8

2.3

2.8

3.3

80% 85% 90% 95% 100%Service Level

Safe

ty S

tock

Focus on Cost Optimization

Economic Order Quantity (EOQ)Economic Shipment Load (TL,…)

Good inventory management “optimizes” the relevant costs

And utilizes frequent and up-to-date information

Focus on Cost Optimization

Economic Order Quantity (EOQ)Economic Shipment Load (TL,…)

Focus on Exchange of Information

Materials Requirement Planning (MRP)…Enterprise Resource Planning (ERP)

But most important,good inventory management is about

dealing with uncertainty and variability

Focus on Cost Optimization

Economic Order Quantity (EOQ)Economic Shipment Load (TL,…)

Focus on Flexible & Rapid Response

Just -in-Time (JIT)Mass Customized Production

Focus on Exchange of Information

Materials Requirement Planning (MRP)…Enterprise Resource Planning (ERP)