Presentation on theme: "Bus 301: Business Logistics"— Presentation transcript:
1 Bus 301: Business Logistics Inventory Strategies-Overview
2 Drivers of Supply Chain Performance (we have seen how this can impact) Facilities (Manufacturing Strategies)places where inventory is stored, assembled, or fabricated (outsourcing issues)production sites and storage sites (where manufactured)Inventory (Inventory Strategies)raw materials, WIP, finished goods within a supply chain (where located)inventory policies (push vs pull strategies)Transportationmoving inventory from point to point in a supply chain (inconsistent delivery times)combinations of transportation modes and routes (best routing)Information Technologydata and analysis regarding inventory, transportation, facilities throughout the supply chain (replace inventory with information)potentially the biggest driver of supply chain performance
3 Internal Supply Chain Management (ISCM) That leads to the next element…… Manufacturing (Part I)Inventory Strategies (Part II)Forecasting (Part III)Information Technology (Part IV)Strategic Planningplan resource availability in SCNtype, location, and markets to serveplans under uncertain future environmentsDemand Planningforecasts and demand planning – promotions & marketing plansSupply Planningsupply plans based on SP and DPfactory planning and inventory planningOrder Fulfillmentexecution of meeting demand w/ supplylink demand w/ supply sourcetransportation and warehousing applicationsServicespare partsscheduling service calls
4 Inventory: Role in the Supply Chain (GSW Hot Dogs and Match Game) Inventory exists because of a mismatch between supply and demandSource of cost and influence on responsivenessImpact on material flow time (time elapsed between when material enters the supply chain to when it exits the supply chain)
5 Examples of DisastersCisco’s Inventory Disaster: Lack of demand and inventory visibility as market slows leads to $2.2 billion inventory write-off and stock price cut in halfNike’s Planning System Perplexity: New planning system causes inventory and order woes, blamed for $100 revenue miss as stock loses 20%
6 We Have Seen The Functions of Inventory As Helping…. Meet anticipated demandSmooth production requirementsDecouple components of the production-distribution systemProtect against stock-outsTake advantage of order cyclesHedge against price increases & leverage quantity discounts
7 Inventory IssuesOperations, finance, and marketing have interest in inventories.Poor inventory management hampers operations, diminishes customer satisfaction, and increases operating costs.A typical firm probably has tied in inventories about30 percent of its current assets90 percent of its working capital (Current Assets – Current Liabilities)Both Understocking and Overstocking are undesirable;Understocking; lost sales, dissatisfied customers, production lost.Overstocking; tied up funds, physical holding cost, obsolescence.
8 Questions About of Inventory Control Inventory management has a trade-off decision between level of Customer Service and Inventory Cost.How do we measure Customer Satisfaction? Number and quantities of sales lost, back orders, customer complains.How do we measure Inventory Costs?Inventory turns (the ratio of the annual cost of goods sold to average investment in inventories),Days of inventory on hand (days of sales that can be supplied from existing inventories).
9 Inventory Turns Per Year IndustryUpper QuartileMedianLower QuartileDairy34.419.39.2Electronic Components22.214.171.124Computers126.96.36.199Publishing2.41.3Consumer Electronics188.8.131.52Appliances8.05.03.8Industrial Chemical10.36.64.4
10 Types of Inventories That We Have Seen In Our Examples… Raw materials & purchased partsWork-in-progressFinished-goods inventoriesReplacement parts, tools, & suppliesGoods-in-transit to warehouses or customers (Pipeline Inventory)
12 This Means Balancing Cost and Service By A Firm’s Being… More responsive in their order processingAble to manage volumes of SC informationCapable with limited transportation resourcesAble to position inventory correctly
13 Supply Chain Inventory Costs Material Costs - average price paid per unit. Influenced by volume discounts which which make it amenable to economies of scale.Fixed Ordering Costs - costs that are not influenced by the lot size. Costs include:Buyer Time- the incremental cost of buyer placing an extra order.Transportation- fixed cost of transportation. LTL pricing has a fixed and variable cost.Receiving cost- fixed part of the cost of receiving e.g. administrative costs, purchase order matching, updating records etc.Buyer Time- the presence of excess buyer time capacity should result in no added cost. Electronic ordering reduces this cost
14 Supply Chain Inventory Costs Holding Costs- often a percentage of per unit cost of product.Cost of capital- opportunity cost of capital. Commonly, the weighted average cost of capital (WACC) is used to calculate this.Obsolescence - perishables, microprocessors, non-perishablesHandling and Storage costsDamage, security, taxes, insurance
15 Two Basic Questions Raised By Inventory Decisions How much inventory should be ordered?When should inventory be order?
16 A Side Not for Marketing Impact of Quantity Discounts If pricing decisions are made independently by the stages of the supply chain, the supply chain profit will be sub-optimal.In the case of commodity products where the market determines the prices, manufacturers can avail of lot size-based discounts to coordinate activities in the supply chain and reduce the supply chain costs..Increasing lot sizes, however result in higher cycle inventory
18 We Need To Answer These Two Questions For Our Jello Products? How much inventory should be ordered?When should inventory be order?
19 In Your Teams….Determine how much demand for of each SKU of Jello that we will need to consider over the next year…for the Chicagoland Area (1) How much to order? (2) When to order? Base Your Forecast on the Classroom Population As A Base for forecasting!
20 How Should We Get Started? Market Survey of Demand_____________________________________
22 Summary Of Role of Inventory in the Supply Chain Notes:
23 What Made This Exercise Hard? Demand Uncertain or Certain?Demand Variable or Stable?No Costs of Holding?No Order Processing Costs?Customer Service Level?No Historical Data?Dependant or Independent Demand?
24 Here IS your Challenge… Evaluate all the forecasts handed out in class tonight from the perspective of the balance of cost versus service. This means that you will be describing why the others are not suitable for the organization. What would be the pitfalls if the wrong one was chosen? After the evaluation process then describe which one would you chose and why?
25 Some Basic Methods to Answer These Questions Fixed Quantity Model (EOQ)Fixed Interval Model (Game)Zero Based ModelMRP, DRP and ERP Systems (next week)
26 Factors Which Differentiate Inventory Models Dependent Vs Independent DemandPush Vs Pull StrategiesSystem wide Vs Single Facilities Models
27 Independent demand is uncertain. Dependent demand is certain. Independent and Dependent DemandIndependent DemandADependent DemandB(3)C(2)D(5)E(1)D(12)F(2)Independent demand is uncertain. Dependent demand is certain.
28 Profile of Inventory Level Over Time The Inventory CycleProfile of Inventory Level Over TimeQUsagerateQuantityon handReorderpointTimeReceiveorderPlaceorderReceiveorderPlaceorderReceiveorderLead time
29 The Fixed Quantity Model Order a fixed quantity when reordering takes place (EOQ)Amount order is based on; product costs, demand information, carrying costs and order costsAutomatically reorder (fixed amount) when reach number of units
30 Simple EOQ Assumptions Constant DemandConstant and Consistent Lead TimesSatisfaction of All DemandConstant Price of Goods and MaterialsNo Inventory In TransitOne Item In InventoryInfinite Planning HorizonNo Limitation On Capital
32 The Basic Inventory Model Annual demand for a product is 9600D = 9600Annual carrying cost per unit of product is 16$H = 16Ordering cost per order is 75S = 75How much should we order each time to minimize our total costHow many times should we orderWhat is the length of an order cycle (working days 288/year)
33 Remember….The Inventory Cycle? Profile of Inventory Level Over Time QUsagerateQuantityon handReorderpointTimeReceiveorderPlaceorderReceiveorderPlaceorderReceiveorderLead time
34 Two Questions to Answer in Planning Safety Inventory What is the appropriate level of safety inventory to carry?What actions can be taken to improve product availability while reducing safety inventory?
35 Determining the Appropriate Level of Safety Inventory Measuring demand uncertaintyMeasuring product availabilityReplenishment policiesEvaluating cycle service level and fill rateEvaluating safety level given desired cycle service level or fill rateImpact of required product availability and uncertainty on safety inventory
36 Determining the Appropriate Level of Demand Uncertainty Appropriate level of safety inventory determined by:supply or demand uncertaintydesired level of product availabilityHigher levels of uncertainty require higher levels of safety inventory given a particular desired level of product availabilityHigher levels of desired product availability require higher levels of safety inventory given a particular level of uncertainty
37 Fixed Interval Model Also know as fixed review period or fixed period Unlike EOQ does not required strict observationUsually low value items order in large quantitiesAlso, when sales replenish inventory or when product are ordered daily
38 Profile of Inventory Level Over Time The Inventory CycleProfile of Inventory Level Over TimeQUsagerateQuantityon handReorderpointTimeReceiveorderPlaceorderReceiveorderPlaceorderReceiveorderLead time
40 Push/Pull View of Supply Chains Procurement,Customer OrderManufacturing andCycleReplenishment cyclesPUSH PROCESSESPULL PROCESSESIn this view processes are divided based on their timing relative to the timing of a customer order. Define push and pull processes.They key difference is the uncertainty during the two phases.Give examples at Amazon and Borders to illustrate the two viewsCustomerOrder Arrives
41 Push/Pull View of Supply Chain Processes Supply chain processes fall into one of two categories depending on the timing of their execution relative to customer demandPull: execution is initiated in response to a customer order (reactive)Push: execution is initiated in anticipation of customer orders (speculative)Push/pull boundary separates push processes from pull processes
42 Push/Pull View of Supply Chain Processes Useful in considering strategic decisions relating to supply chain design – more global view of how supply chain processes relate to customer ordersCan combine the push/pull and cycle viewsThe relative proportion of push and pull processes can have an impact on supply chain performance
43 General Assumptions of Time Based Inventory Approaches Continuous Replenishment (CRP) InventoryFlow Through DistributionPipeline Logistics OrganizationConsistent Performance Measures
44 Basic Elements Of A Quick Response Environment Shorter General Times For ActivitiesReal Time Information By SKUSeamless Logistics OrganizationPartnership RelationshipsReduced Lot Size and Quicker Change OverCommitment To Total Quality Management
45 Key Issues In Time Based Inventory Approaches Appropriate of available toolsAvailable Point of Sale InformationUse of Inventory SegmentationUse of Cross Dock OperationsForward Thinking Corporate Culture
47 What are some key Inventory Issues in these supply chains? DellToyotaMcMaster CarrAmazonPeapodDell has three production sites worldwide and builds to order. Compaq does both. Consider some decisions involved - where to locate facilities? How to size them? Where is the push/pull boundary? What modes of transport to use? How much inventory to carry? In what form? Where to source from?
48 Summary Of Role of Inventory in the Supply Chain Notes: