2. Definitions
Inventory-A physical resource that a firm
holds in stock with the intent of selling it or
transforming it into a more valuable state.
Inventory System- A set of policies and
controls that monitors levels of inventory and
determines what levels should be maintained,
when stock should be replenished, and how
large orders should be
3. Inventory
Def. - A physical resource that a firm holds in
stock with the intent of selling it or
transforming it into a more valuable state.
Raw Materials
Works-in-Process
Finished Goods
Maintenance, Repair and Operating (MRO)
4. Expensive Stuff
The average carrying cost of inventory
across all mfg.. in the U.S. is 30-35% of
its value.
What does that mean?
Savings from reduced inventory result
in increased profit.
5. Zero Inventory?
Reducing amounts of raw materials and
purchased parts and subassemblies by
having suppliers deliver them directly.
Reducing the amount of works-in process
by using just-in-time production.
Reducing the amount of finished goods by
shipping to markets as soon as possible.
6. Inventory Positions in the
Supply Chain
Raw Works
Materials Finished Finished
in Goods Goods
Process in Field
7. Reasons for Inventories
Improve customer service
Economies of purchasing
Economies of production
Transportation savings
Hedge against future
Unplanned shocks (labor strikes, natural
disasters, surges in demand, etc.)
To maintain independence of supply chain
9. Nature of Inventory: Adding
Value through Inventory
Quality - inventory can be a “buffer” against poor
quality; conversely, low inventory levels may force
high quality
Speed - location of inventory has gigantic effect on
speed
Flexibility - location, level of anticipatory inventory
both have effects
Cost - direct: purchasing, delivery, manufacturing
indirect: holding, stockout.
HR systems may promote this-3 year postings
10. Nature of Inventory:
Functional Roles of Inventory
Transit
Buffer
Seasonal
Decoupling
Speculative
Lot Sizing or Cycle
Mistakes
11. Design of Inventory Mgmt.
Systems: Macro Issues
Need for Finished Goods Inventories
Need to satisfy internal or external customers?
Can someone else in the value chain carry the
inventory?
Ownership of Inventories
Specific Contents of Inventories
Locations of Inventories
Tracking
12. How to Measure Inventory
The Dilemma: closely monitor and control
inventories to keep them as low as possible
while providing acceptable customer service.
Average Aggregate Inventory Value:
how much of the company’s total assets
are invested in inventory?
Ford:6.825 billion
Sears: 4.039 billion
19. Independent Demand
Independent demand items are
finished products or parts that are
shipped as end items to customers.
Forecasting plays a critical role
Due to uncertainty- extra units must
be carried in inventory
20. Dependent Demand
Dependent demand items are raw
materials, component parts, or
subassemblies that are used to produce
a finished product.
MRP systems---next week
21. Design of Inventory Mgmt.
Systems: Micro Issues
Order Quantity
Economic Order Quantity
Order Timing
Reorder Point
22. Objectives of Inventory
Control
1) Maximize the level of customer
service by avoiding understocking.
2) Promote efficiency in production and
purchasing by minimizing the cost of
providing an adequate level of customer
service.
23. Balance in Inventory Levels
When should the company replenish its
inventory, or when should the company
place an order or manufacture a new
lot?
How much should the company order or
produce?
Next: Economic Order Quantity
24. Models for Inventory Management:
EOQ
EOQ minimizes the sum of holding and setup
costs
Q = 2DCo/Ch
D = annual demand
Co = ordering/setup costs
Ch = cost of holding one unit of inventory
25. Seatide
EOQ = 2DCo/Ch
D = annual demand = 6,000
Co = ordering/setup costs = $60
Ch = cost of holding one unit of inventory
$3.00 x 24% = .72
720,000
2 x 6,000 x 60 .72 1,000
.72
27. Reorder Point
Quantity to which inventory is allowed to drop
before replenishment order is made
Need to order EOQ at the Reorder Point:
ROP = D X LT
D = Demand rate per period
LT = lead time in periods
28. Sawtooth Model
level of inventory average
inventory
units
Q
t time
29. Q - System Inventory
Control
based on reorder point - When
inventory is depleted to ROP, order
replenishment of quantity EOQ.
30. Order Quantities
when demand is smooth and
continuous, can operate response-
based system by determining
best quantity to replenish periodic demand
(EOQ)
frequency of replenishment (ROP)
Reorder Point
31. Planning for Uncertainty
changing lead times
changing demand
Uncertainty creeps in:
Plug in safety stock
Safety stock - allows manager to
determine the probability of stock levels
- based on desired customer service
levels
33. Models for Inventory Management:
Quantity Discount
Basically EOQ with quantity discounts
To solve:
1. Write out the total cost equation
2. Solve EOQ at highest price and no discounts
3. If Qmin falls in a range with a lower price,
recalculate EOQ assuming holding cost for that
range. Call this Q2.
4. Evaluate the total cost equation at Q2 at the next
highest price break point.
OR Use a spreadsheet
34. P-System
Periodic Review Method
an alternative to ROP/Q-system control is
periodic review method
Q-system - each stock item reordered at
different times - complex, no economies of
scope or common prod./transport runs
P-system - inventory levels for multiple stock
items reviewed at same time - can be
reordered together
higher carrying costs - not optimum, but
more practical
35. Using P-System
audit inventory level at interval (T)
quantity to place on order is difference
between max. quantity (M) and amount
on hand at time of review
management task - set optimal T and M
to balance stock availability and cost
In ABC analysis, which items would use
P-system???
36. Types of Inventory Systems
By Degree of Control required
often use grouping method, such as ABC
37. Classifying Inventory Items
ABC Classification (Pareto Principle)
A Items: very tight control, complete and
accurate records, frequent review
B Items: less tightly controlled, good
records, regular review
C Items: simplest controls possible, minimal
records, large inventories, periodic review
and reorder
39. Planning Supply Chain Activities
Anticipatory - allocate supply to each
warehouse based on the forecast
Response-based - replenish inventory
with order sizes based on specific
needs of each warehouse
40. Anticipatory Inventory
Control
determine requirements by forecasting
demand for the next production run or
purchase
establish current on-hand quantities
add appropriate safety stock based on
desired stock availability levels and
uncertainty demand levels
determine how much new production or
purchase needed (total needed - on-hand)
41. Response-Based System
replenishment, production, or purchases of
stock are made only when it has been
signaled that there is a need for product
downstream
requires shorter order cycle time, often more
frequent, lower volume orders
determine stock requirements to meet only
most immediate planning period (usually
about 3 weeks)
42. Service Level Achieved
•Item fill rate (IFR): the probability of filling
an order for 1 item from current stock
expected number of units out of stock/year
1-
total annual demand
•Weighted Average Fill Rate (WAFR): multiply
IFR for each stock item on an order weighted
by the ordering frequency for the item