Presentation on theme: "Managing Inventory throughout the Supply Chain"— Presentation transcript:
1 Managing Inventory throughout the Supply Chain Chapter 11
2 Chapter Objectives Be able to: Describe the various roles of inventory, including the different types of inventory and inventory drivers.Distinguish between independent demand and dependent demand inventory.Calculate the restocking level for a periodic review system.Calculate the economic order quantity (EOQ) and reorder point (ROP) for a continuous review system.Determine the best order quantity when volume discounts are available.Calculate the target service level and target stocking point for a single-period inventory system.Describe how inventory decisions affect other areas of the supply chain. In particular, describe the bullwhip effect, inventory positioning issues, and the impacts of transportation, packaging, and material handling considerations.
5 Types of InventoryCycle stock – Components or products that are received in bulk by a downstream partner, gradually used up, and then replenished again in bulk by an upstream partner.Safety stock – Extra inventory that a company holds to protect itself against uncertainties in either demand or replenishment time.
7 Types of InventoryTransportation inventory – Inventory that is moving from one link in the supply chain to another.Smoothing inventory – Inventory that is used to smooth out differences between upstream production levels and downstream demand.
8 Inventory DriversInventory drivers – Business conditions that force companies to hold inventory.Table 11.2
9 Independent vs. Dependent Demand Inventory Independent demand inventory – Inventory items whose demand levels are beyond a company’s complete control.Dependent demand inventory – Inventory items whose demand levels are tied directly to a company’s planned production of another item.
10 Independent vs. Dependent Demand Inventory Example:Independent demand:Kitchen table – Need 500 tables five weeks from nowDependent demand:Kitchen table legs – Need 4 per table or 2,000 legsCalculation of dependent demand (Chapter 12)
11 Inventory Control Systems Periodic Review System – An inventory system that is used to manage independent demand inventory where the inventory level for an item is checked at regular intervals and restocked to some predetermined level.Continuous Review System – An inventory system used to manage independent demand inventory where the inventory level for an item is constantly monitored and when the reorder point is reached, an order is released.
12 Periodic Review System Calculating the order quantity (Q)Q = R-IwhereR = restocking levelI = inventory level at the time of review.Figure 11.6
13 Periodic Review System Calculating the restocking level (R)
14 Calculating Service Level Service Level – A term used to indicate the amount of demand to be met under conditions of demand and supply uncertainty.Assumes that the demand during the reorder period and the order lead time is normally distributed.
15 Continuous Review System Key features:Inventory levels are monitored constantly, and a replenishment order is issued only when the reorder point is reached.The size of a replenishment order is typically based on the trade-off between holding costs and ordering costs.The reorder point is based on both demand and supply considerations, as well as on how much safety stock managers want to hold.
16 Continuous Review System Assumptions:Constant demand and lead timeHolding and Ordering cost known and fixedPrice of each unit is fixed.
17 Continuous Review System When the demand rate and lead time are constant:Reorder point = demand x lead timeR = dLFigure 11.7
18 Economic Order Quantity Economic Order Quantity (EOQ) – The order quantity that minimizes annual holding and ordering costs for an item.Holding costs (H)– The cost to hold a single unit in inventory for a year.Ordering costs (S) – The cost of placing an order regardless of the order quantity.
19 Total Yearly Inventory Costs Total holding and ordering costs for the year= Total yearly holding cost + Total yearly ordering cost =Yearly holding cost = average inventory x holding costYearly ordering cost = number of orders per year x fixed ordering cost
31 Quantity Discounts Two-step process: Calculate the EOQ. If the EOQ represents a quantity that can be purchased for the lowest price, stop – we have found the lowest cost order quantity. Otherwise, go to Step 2.Compare total holding, ordering, and item costs at the EOQ quantity with total costs at each price break above the EOQ. There is no reason to look at quantities below the EOQ, as these would result in higher holding and ordering costs, as well as higher item costs.
32 Example 11.4 – Hal’s Magic Shop Demand (D) = 1,000 masksOrdering cost (S) = $20Holding cost (H) = $3Solve for EOQ:
33 Example 11.4 – Hal’s Magic Shop Because 115 is not eligible for the lowest price, calculate total cost at 115:
34 Example 11.4 – Hal’s Magic Shop And compare to total cost at next price break or 201.Price is cheaper at the 201 price break.
35 Single-Period Inventory System When excess inventory cannot be held in the future, firms must weigh the cost of being short against the cost of holding excess units.Examples:Fresh fish, magazines, newspapers, Christmas trees
36 Single-Period Inventory System Single-period inventory system – A system used when demand occurs in only a single point in time.Goals:Determine a target service level (SLT) that strikes the best balance between shortage costs and excess costs.Use the target service level to determine the target stocking point (TS) for the item.
37 Single-Period Inventory System Target service level – The service level at which the expected cost of a shortage equals the expected cost of having excess units.Target stocking point – The stocking point at which the expected cost of a shortage equals the expected cost of having excess units.
42 Demand vs. Order Size The Bullwhip Effect Figure 11.12
43 Managing Inventory Case Study Northcutt Bikes: The Service Department
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