Supply Chain Logistics Management

Chapter 10: Inventory Management

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Focusing on Inventory

• Sales = $100,000

• Average inventory = $50,000

• Range of inventory ($30,000 - 70,000)

• Annual turns = 2.00

• Days of supply = 180

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

“Peeling the Inventory Onion”

Inv. Comp. Inventory Days Rationale

Cycle 20,000 72 Cycle time range of $40,000

In Transit 5,000 18 Transit delay

Obsolescence/ Damage

10,000 36 Obsolete and damaged goods

Speculative 5,000 18 Forward buy for discount

Safety stock 10,000 36 To meet service rqmnts.

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Product Positioning Decision Factors

• Accurate assessment of inventory value

• Assignment of responsibility for inventory carrying costs– Opportunity cost (15%)– Taxes and insurance(1%)– Pilferage and obsolescence (1%)– Storage (2%)

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Perspectives on Product Positioning

• Provide for uncertainty - Inventory management

• Reduce demand uncertainty

• Reduce cycle uncertainty

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Provide for UncertaintyInventory Management

• Manage– Where to stock?– When to order?– How much to order?

• Control– Accountability– Accuracy

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Inventory Cycle for Typical Product

Average Inventory1.5 months

1.5 months

Safety Stock1.0

months

1 2

2 months

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Elements Influencing Average Inventory

• Average = OQ/2 + SS + IT

• Where:– Average = average inventory level– OQ = average replenishment order quantity– SS = average safety stock level– IT = average in-transit inventory

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Reorder Point and Safety StockWhen to order

• ROP = LT * DD + SS

• Where:– ROP = reorder point– LT = replenishment lead time– DD = average daily demand– SS = safety stock

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Inventory Cycle for Typical Product

Average Inventory1.5 months

1.5 months

Safety Stock1.0

months

1 2

2 months

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Factors Influencing Safety Stock Requirements

Service Level (SL)

f(k) * C

OQ

Demand

Lead time

Forecast

Replenishment cycle

Transport mode

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Determining Safety Stock

• f(k) = (1 - SL) * (OQ/C)

• Where:– f(k) = Normal loss integral for safety factor k– SL = desired service level in percent unit fill

rate– OQ = order quantity

– C = standard deviation of lead time demand

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Example Safety Stock Calculation

• Key parameters– SL = 99 percent availability

– DD = 5 units/day, DD = 2.54

– LT = 10 days, LT = 2

– OQ = 300 units

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Combining Demand and Lead Time Uncertainty

Lead Time

LT = 10

LT = 2.00

+

Demand

DD = 5

DD = 2.54

Average LTD (Lead time demand) = LT * DD = 50

=

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Combined Uncertainty

C = LT * DD2 + DD2 * LT

2

C

= 10 * 2.542 + 52 * 2.002

C = 12.83 (rounded to 13)

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Table of Normal Loss Integral

k f(k) k f(k) k f(k)0.0 0.3989 0.7 0.1428 1.4 0.0366

0.1 0.3509 0.8 0.1202 1.5 0.0293

0.2 0.3068 0.9 0.1004 1.6 0.0232

0.3 0.2667 1.0 0.0833 1.7 0.0142

0.4 0.2304 1.1 0.0686 1.8 0.0110

0.5 0.1977 1.2 0.0561 1.9 0.0084

0.6 0.1686 1.3 0.0455 2.0 0.0074

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Calculating Safety Stock k factor

f(k) = (1 - SL) * (OQ/C)f(k) = (1.0 - .99) * (300/13) = 0.2308f(k) = 0.2308 ==> k =0.4

SS = k * C

= 0.4 * 13 = 5.2 units (Round to 6)ROP = DD * LT + SS = 50 + 6 = 56

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Inventory Management PolicyAllowing for Uncertainty

• When inventory-on-hand plus on-order is less than or equal to 56, order 300

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Impact of Changes in Uncertainty Level

Demand Leadtime1 12.83 12.83

1.5 15.66 17.012 18.92 21.55

2.5 22.43 26.263 26.09 31.06

0

5

10

15

20

25

30

35

1 1.5 2 2.5 3

Multiples of Standard Deviation

Co

mb

ine

d S

tan

da

rd D

ev

iati

on

Demand

Leadtime

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Impact of Order Quantity on Safety Stock

OrderQuantity

k SafetyStock

AverageInventory

300 0.40 5.2 155

200 0.65 8.4 108

100 1.05 13.6 64

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Graphical Illustration of Locational Impact of Inventory

Cycle Stock

Safety Stock

Total Inventory

Average Inventory

Stocking Locations

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Distribution Resource Planning

• Example

• Benefits and risks

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Distribution Resource PlanningBenefits and Risks

• Benefits– Reduced freight and

inventory

– Improved coordination with marketing

– Decreased space requirements

– Enhanced budgeting capability

• Risks– Requires good

forecasting accuracy

– Requires change to planning mentality

– Subject to system “nervousness” with changing forecasts

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Stratified Product Positioning

• Fine-line (ABC) analysis

• Stratified management guidelines

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Product Classification Analysis (ABC)

ProductNumber

Sales (000) Percent ofSales

CumulatoveSales Percent

CumulatirveProducts

Percent

Category

1 45,000 30.0 30.0 5 A2 35,000 23.3 53.3 10 A3 25,000 16.7 70.0 15 A4 15,000 10.0 80.0 20 A5 8,000 5.3 85.3 25 B6 5,000 3.3 88.7 30 B7 4,000 2.7 91.3 35 B8 3,000 2.0 93.3 40 B9 2,000 1.3 94.7 45 B10 1,000 0.7 95.3 50 B11 1,000 0.7 96.0 55 C12 1,000 0.7 96.7 60 C

20 250 0.2 100.00 100 C

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Sample Integrated Strategy

SKUCategory

ServiceObjective

Forecast ReviewPeriod

InventoryMgt

StockingPolicy

PromotionalA

100% CFAR Daily DRP Scheduled

A 99% Top down Daily DRP Full line

B 98% Bottom upTime series

Weekly DRP Selectlocations

C 90% Bottom upTime Series

Weekly ROP Centralized

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Conclusions

• Allow for uncertainty– Inventory management and control

• Reduce demand uncertainty– Forecasting– DRP– Simplification– Demand management– Postponement

• Reduce cycle uncertainty– Exert more control over cycle times– Supply chain management– Variable assignment