1. Inventory Control

2. Inventory Control

3. Inventory Control is everywhere.
Fuel for the Car
Milk to Drink
Milk to Sell
MotherBoards to Assemble Computers
Production with Setups
Inventory Control is everywhere.
Fuel for the Car
Milk to Drink
Milk to Sell
MotherBoards to Assemble Computers

4. Some youtube videos http://es.youtube.com/watch?v=qkZQxXJuqKo

5. Why we do store?
Unplanned shocks (labor strikes, natural disasters, surges in demand, etc.)
To maintain independence of supply chain
Economies of production
Improve customer service
Economies of purchasing
Transportation savings
Hedge against future
Why we do store?
Unplanned shocks (labor strikes, natural disasters, surges in demand, etc.)
To maintain independence of supply chain
Economies of production
Improve customer service
Economies of purchasing
Transportation savings
Hedge against future

6. Costs Related with Inventory Control
Inventory deteriorates, becomes obsolete, lost, stolen, etc.
Order processing
Shipping
Handling
Carrying Costs
Capital (opportunity) costs
Inventory risk costs
Space costs
Inventory service costs
Out-of- Stock Costs
Lost sales cost
Back-order cost
Complacency
Why should not we store?
Non-value added costs
Opportunity cost
Inventory deteriorates, becomes obsolete, lost, stolen, etc.
Order processing
Shipping
Handling
Carrying Costs
Capital (opportunity) costs
Inventory risk costs
Space costs
Inventory service costs
Out-of- Stock Costs
Lost sales cost
Back-order cost
Complacency

7. Nature of Inventory: Adding Value through Inventory
Speed
location of inventory has gigantic effect on speed
Cost
direct: purchasing, delivery, manufacturing
indirect: holding, stockout.
Quality
inventory can be a “buffer” against poor quality; conversely, low inventory levels may force high quality
Flexibility
location, level of anticipatory inventory both have effects
Nature of Inventory: Adding Value through Inventory
Speed - location of inventory has gigantic effect on speed
Cost - direct: purchasing, delivery, manufacturing
indirect: holding, stockout.
Quality - inventory can be a “buffer” against poor quality; conversely, low inventory levels may force high quality
Flexibility - location, level of anticipatory inventory both have effects

8. Nature of Inventory:Functional Roles of Inventory
Transit
Buffer
Seasonal
Decoupling
Speculative
Lot Sizing or Cycle
Mistakes
Promotional

9. Logistics Costs Categoría de Coste Costes Totales % sobre Ventas
% Costes Logísticos
Transporte
636
5,4%
(5.9%)
62,7%
Almacenamiento 82
0,7%
(0.8%)
8,1%
Costes de Inventarios
250
2,1%
(3%)
24,6%
Administración 47
0,4%
(0.4%)
4,6%
Total
1015
8,6%
(10.1%)
100%
Source: 16th Annual State of Logistics Report, 2004
(Entre parentesis los datos del 2001)

10. http://www. loanational

11. Costes Logísticos como
Sectores diferentes tienen diferentes perfiles de coste
Pero además la logística además también impacta en:
Otros costes en la Cadena de suministro como los de fabricación materia prima o gestión de clientes.
La cantidad de capital en el negocio.
Y una elevada proporción del riesgo global del negocio.
Costes Logísticos como
Porcentaje de ventas
20%
Aerospacial
Maquinaría
Automovil
15%
Comida&Bebida
Electronica
Sanidad
Químicas
10%
Gas y Petrol
Distribución
Banca 5% 0%
Source: ILT, McKinsey, LCP Consulting analysis

12. Visión general

14. Which are the main factors

15. Main Factors defining an Inventory Policy
Demand
Average Forecasted Demand
Error on Forecasted Demand
Setup
Cost
Time
Storage
Capacity
Expiration
Lead Time
Lead Time (LT)
Basic Period
Period of Forecasting
Horizon
Finite and Infinite Horizon
Finite or Infinite Production Rate

16. EOQ Formula

17. Why to do it with Formulae what has always been done by head?
Reduce Cost
Number of Different units
Time to do Added Value tasks
Computer Aid Management
Why to do with Formulae what has always been done by head?
Reduce Cost
Number of Different units
Time to do Added Value tasks

18. Assumptions to derive the EOQ formula
Production is Instantaneous.
Delivery is inmediate
Demand is deterministic
Demand is constant over time
A production run incurs a fixed setup cost
Products can be analyzed individually

19. Inventory Order Cycle Demand rate Time Lead time Order placed
Order receipt
Inventory Level
Reorder point, R
Order quantity, Q

20. EOQ Cost Model Co - cost of placing order D - annual demand
Cc - annual per-unit carrying cost Q - order quantity
Annual ordering cost =
CoD Q
Annual carrying cost =
CcQ 2
Total cost =

21. EOQ Cost Model TC = + CoD Q CcQ 2 = + Q2 Cc TC Q 0 = + C0D Qopt == Q2 Cc
TC Q
0 =
C0D
Qopt =
2CoD
Deriving Qopt
Proving equality of costs at optimal point =
CoD Q
CcQ 2
Q2 =
2CoD Cc
Qopt =

22. EOQ Cost Model (cont.) Annual cost ($) Total Cost Slope = 0 CcQ 2
Order Quantity, Q
Annual cost ($)
Total Cost
Ordering Cost =
CoD Q
Slope = 0
Minimum total cost
Optimal order
Qopt
Carrying Cost =
CcQ 2

23. EOQ Example Cc = $0.75 per yard Co = $150 D = 10,000 yards Qopt = 2CoD
2(150)(10,000)
(0.75)
Qopt = 2,000 yards
TCmin =
CoD Q
CcQ 2
TCmin =
(150)(10,000)
2,000
(0.75)(2,000)
TCmin = $750 + $750 = $1,500
Orders per year = D/Qopt
= 10,000/2,000
= 5 orders/year
Order cycle time = 311 days/(D/Qopt)
= 311/5
= 62.2 store days

24. Required Data to generate a Policy
Time
Forecast Period
Horizon
Lead Time
Demand for a given Period (average and Standard Deviation)
Demand during Horizon
Cost
holding Cost (€ per unit per year) =K·Cu
Unit Cost (€ per unit)
Setup Cost S (€)
Total Cost =Holding Cost + Setup Cost
Service Level (max % of runouts that we are willing to afford)

25. Policies

26. Reorder Point: if stock<ROP then Buy(Q)
ROP=Level of inventory at which a new order is placed
ROP= Maximun demand that we want to serve during Lead Time
Average Demand during Lead Time
Standard deviation of demand
Safety Stock (ss)
Q: Quantity that minimizes Total Cost
R = dL+ss
where
d = demand rate per period
L = lead time

27. Safety Stocks. Basic Concepts
buffer added to on hand inventory during lead time
Stockout
an inventory shortage
Service level
probability that the inventory available during lead time will meet demand

28. Variable Demand with a Reorder Point
point, R Q LT
Time
Inventory level

29. Reorder Point with a Safety Stock
point, R Q LT
Time
Inventory level
Safety Stock

30. Reorder Point With Variable Demand
R = dL + zd L
where
d = average daily demand
L = lead time
d = the standard deviation of daily demand
z = number of standard deviations
corresponding to the service level
probability
zd L = safety stock

31. Reorder Point for a Service Level
Probability of
meeting demand during
lead time = service level
a stockout R
Safety stock dL
Demand
zd L

32. Reorder Point for Variable Demand
The carpet store wants a reorder point with a 95% service level and a 5% stockout probability
d = 30 yards per day
L = 10 days
d = 5 yards per day
For a 95% service level, z = 1.65
R = dL + z d L
= 30(10) + (1.65)(5)( 10)
= yards
Safety stock = z d L
= (1.65)(5)( 10)
= 26.1 yards

33. Periodic Review Policies: if time then Buy(OUL-Stock)
OUL: Max Demand we cover during next Review Period + Lead Time
Time Review Period that minimizes Total Cost
Economic Order Period (T*)
Power of Two Policies

34. Order Quantity for a Periodic Inventory System
Q = d(tb + L) + zd tb + L - I
where
d = average demand rate
tb = the fixed time between orders
L = lead time
sd = standard deviation of demand
zd tb + L = safety stock
I = inventory level

35. Fixed-Period Model with Variable Demand
d = 6 bottles per day
sd = 1.2 bottles
tb = 60 days
L = 5 days
I = 8 bottles
z = 1.65 (for a 95% service level)
Q = d(tb + L) + zd tb + L - I
= (6)(60 + 5) + (1.65)(1.2)
= bottles

36. Problem If the supplier has a lead time of 20 days?
A toy manufacturer uses aproximately silicon chips annually. The Chips are used at a steady rate during the 240 days a year that the plant operates. Annual holding cost is 60 cents per chip and ordering cost is 24$. A year has 288 days.
How muchh should we order each time?
How many times per year are we to order?
What is the length of an order cycle.
What is the total cost?
If the supplier has a lead time of 20 days?
Which is the reorder point?
Should do we have a safety stock? To prevent what?

37. Problem
Determine optimal number to order D = 1,000 units S = $10 per order H = $.50 per unit per year
The pack has 150 units each
Management underestimated demand by 50%
C = $5/unit There is a discount of 5% per unit if you buy more than 500 units

38. Problem
A company substitutes in a regular way a component of a given machine to ensure quality parameters of the product. Machine works during the whole year and needs 40 parts per week. The component supplier offers a price of 10 € per unit for orders with less than 300 units, and a price of 9.70 € per unit for bigger orders. The cost of setting each order is stimated on 25 €, and the holding cost is of 0.26 €/ €/ year.
How many units should you request each time?
If the supplier wants you to make orders bigger than 500 units ¿which is maximum unit price that should stablish for orders bigger than 500 units?

39. Karbonicas JuPe
Karbonicas JuPe is a company bottling drinks where you work. To simplify we are to consider only one product. Our company has a warehouse where store product just manufactured and from where we serve the three logistics platforms that our client holds. The logistics platforms are cross-dock warehouses, where storing products has a high cost, and from where there associated retail stores are served.
The lead time at the manufacturing side for Karbonicas JuPe is 7 days (i.e. it takes one week from we have been asked to produce until the product is ready at the warehouse. Each of the logistics platforms faces a demand (measured in pallets) that might be approximated by a normal distribution. (Data can be found at Table I).
Each logistic platform knows the demand and the stock levels of each associated retail store. It takes two (2) days since the platform asks for products until the product reaches each retail store through the logistic platform. The inventory system is Reorder Point at each echelon. (i.e. the platforms work with ROP logic to the central warehouse of Karbonicas JuPe, and the central warehouse works with ROP to the manufacturing facility). The relation between the logistic platform and the retail stores is not considere in this problem.
You are considering the posibility of eliminate the central warehouse echelon. To do that the three logistics platforms should agree a joint review period (considering all the costs) with a power-of-two policy. The factory consolidates the three orders (that have been done simultaneously) and will bottle them together. From the factory docks and without passing through the central warehouse the product will be sent directly to each logistic platform.
Key questions are: how much does it cost now, how much will it cost the new system.

40. Karbonicas JuPe (ctnd)
Data