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Managing Facilitating Goods FactoryWholesalerDistributorRetailerCustomer Replenishment order Replenishment order Replenishment order Customer order Production.

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Presentation on theme: "Managing Facilitating Goods FactoryWholesalerDistributorRetailerCustomer Replenishment order Replenishment order Replenishment order Customer order Production."— Presentation transcript:

1 Managing Facilitating Goods FactoryWholesalerDistributorRetailerCustomer Replenishment order Replenishment order Replenishment order Customer order Production Delay Wholesaler Inventory Shipping Delay Shipping Delay Distributor Inventory Retailer Inventory Item Withdrawn

2 Learning Objectives Discuss the role of information technology in managing inventories. Describe the functions and costs of an inventory system. Determine the order quantity. Determine the reorder point and safety stock for inventory systems with uncertain demand. Design a continuous or periodic review inventory-control system. Conduct an ABC analysis of inventory items. Determine the order quantity for the single-period inventory case. Describe the rationale behind the retail discounting model.

3 Role of Inventory in Services Decoupling inventories Seasonal inventories Speculative inventories Cyclical inventories In-transit inventories Safety stocks

4 Considerations in Inventory Systems Type of customer demand Planning time horizon Replenishment lead time Constraints and relevant costs

5 Relevant Inventory Costs Ordering costs Receiving and inspections costs Holding or carrying costs Shortage costs

6 Inventory Management Questions What should be the order quantity (Q)? When should an order be placed, called a reorder point (ROP)? How much safety stock (SS) should be maintained?

7 Inventory Models Economic Order Quantity (EOQ) Special Inventory Models With Quantity Discounts Planned Shortages Demand Uncertainty - Safety Stocks Inventory Control Systems Continuous-Review (Q,r) Periodic-Review (order-up-to) Single Period Inventory Model

8 Inventory Levels For EOQ Model 0 Units on Hand Q Q D Time

9 Annual Costs For EOQ Model

10 EOQ Formula Notation D = demand in units per year H = holding cost in dollars/unit/year S = cost of placing an order in dollars Q = order quantity in units Total Annual Cost for Purchase Lots EOQ

11 Annual Costs for Quantity Discount Model , C = $20.00C = $19.50C = $18.75 Order quantity, Q Annual Cost, $

12 Inventory Levels For Planned Shortages Model Q Q-K 0 -K T1T2 TIME T

13 Formulas for Special Models Quantity Discount Total Cost Model Model with Planned Shortages

14 Values for Q* and K* as A Function of Backorder Cost B Q* K* Inventory Levels undefined Q*

15 Demand During Lead Time Example = u=3 ROP s s Four Days Lead Time Demand During Lead time

16 Safety Stock (SS) Demand During Lead Time (LT) has Normal Distribution with - - SS with r% service level Reorder Point

17 Continuous Review System (Q,r) Average lead time usage, d L Reorder point, ROP Safety stock, SS Inventory on hand Order quantity, EOQ EOQ d1d1 d 2 d3d3 Amount used during first lead time First lead time, LT 1 Order 1 placed LT 2 LT 3 Order 2 placed Order 3 placed Shipment 1 received Shipment 2 receivedShipment 3 received Time

18 Periodic Review System (order-up-to) RP Review period First order quantity, Q1 d1d1 Q2Q2 Q3Q3 d2d2 d3d3 Target inventory level, TIL Amount used during first lead time Safety stock, SS First lead time, LT 1 LT 2 LT 3 Order 1 placed Order 2 placed Order 3 placed Shipment 1 received Shipment 2 received Shipment 3 received Time Inventory on Hand

19 Inventory Control Systems Continuous Review System Periodic Review System

20 ABC Classification of Inventory Items AB C

21 Inventory Items Listed in Descending Order of Dollar Volume Monthly Percent of Unit cost Sales Dollar Dollar Percent of Inventory Item ($) (units) Volume ($) Volume SKUs Class Computers , A Entertainment center ,000 Television sets ,000 Refrigerators , B Monitors ,000 Stereos ,000 Cameras ,000 Software , C Computer disks ,000 CDs ,000 Totals 305,

22 Single Period Inventory Model Newsvendor Problem Example D = newspapers demanded p(D) = probability of demand Q = newspapers stocked P = selling price of newspaper, $10 C = cost of newspaper, $4 S = salvage value of newspaper, $2 C u = unit contribution: P-C = $6 C o = unit loss: C-S = $2

23 Single Period Inventory Model Expected Value Analysis Stock Q p(D) D Expected Profit $31.54 $34.43 $35.77 $35.99 $35.33

24 Single Period Inventory Model Incremental Analysis E (revenue on last sale) E (loss on last sale) P ( revenue) (unit revenue) P (loss) (unit loss) (Critical Fractile) where: C u = unit contribution from newspaper sale ( opportunity cost of underestimating demand) C o = unit loss from not selling newspaper (cost of overestimating demand) D = demand Q = newspaper stocked

25 Critical fractile for the newsvendor problem P(DQ) (C u applies ) 0.722

26 Retail Discounting Model S = current selling price D = discount price P = profit margin on cost (% markup as decimal) Y = average number of years to sell entire stock of “dogs” at current price (total years to clear stock divided by 2) N = inventory turns (number of times stock turns in one year) Loss per item = Gain from revenue S – D = D(PNY)

27 Topics for Discussion Discuss the functions of inventory for different organizations in the supply chain. How would one find values for inventory costs? How can information technology create a competitive advantage through inventory management? How valid are the assumptions for the EOQ model? How is a service level determined for inventory items? What inventory model would apply to service capacity such as seats on an aircraft?

28 Interactive Exercise The class engages in an estimation of the cost of a 12-ounce serving of Coke in various situations (e.g., supermarket, convenience store, fast-food restaurant, sit-down restaurant, and ballpark). What explains the differences?


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