Professional Documents
Culture Documents
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.
Raw Works
Materials Finished Finished
in Goods Goods
Process in Field
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
Inventory and Value
Remember this?
Quality
Speed
Flexibility
Cost
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
Nature of Inventory:
Functional Roles of
Inventory
Transit
Buffer
Seasonal
Decoupling
Speculative
Lot Sizing or Cycle
Mistakes
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
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
Inventory Measures
Weeks of Supply
Ford: 3.51 weeks
Sears: 9.2 weeks
Inventory Turnover (Turns)
Ford: 14.8 turns
Sears: 5.7 turns
GM: 8 turns
Toyota: 35 turns
Reasons Against Inventory
Non-value added costs
Opportunity cost
Complacency
Inventory deteriorates, becomes
obsolete, lost, stolen, etc.
Inventory Costs
Procurement costs
Carrying costs
Out-of-stock costs
Procurement Costs
Order processing
Shipping
Handling
Purchasing cost: c(x)= $100 +
$5x
Mfg. cost: c(x)=$1,000 +
$10x
Carrying Costs
Capital (opportunity) costs
Inventory risk costs
Space costs
Inventory service costs
Out-of-Stock Costs
Lost sales cost
Back-order cost
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
Does ABC Classification
Make Sense for an
Assembler?
i.e. – Gateway Computers
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
Dependent Demand
Dependent demand items are
raw materials, component parts, or
subassemblies that are used to
produce a finished product.
MRP systems---next week
Design of Inventory Mgmt.
Systems: Micro Issues
Order Quantity
Economic Order Quantity
Order Timing
Reorder Point
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.
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
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
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
2 x 6,000 x 60
720,000
.72 .72 1,000
Marginal Analysis
Holding
Costs
Ordering
Costs
Units
Reorder Point
Quantity to which inventory is allowed to
drop before replenishment order is made
ROP = D X LT
D = Demand rate per period
LT = lead time in periods
Sawtooth Model
level of inventory
average
inventory
units
Q
t time
Q - System Inventory
Control
based on reorder point - When
inventory is depleted to ROP, order
replenishment of quantity EOQ.
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
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
Inventory Model Under
Uncertainty
reorder Qm
point
safety stock
time
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
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
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???
Types of Inventory
Systems
By Degree of Control required
often use grouping method, such as
ABC
Planning Supply Chain
Activities
Anticipatory - allocate supply to each
warehouse based on the forecast