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Inventory Stock of items held to meet future demand

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1 Inventory Stock of items held to meet future demand
Inventory management answers two questions How much to order When to order

2 The Supply Chain Customer Supplier Manufacturer Distributor
Inventory Distributor Manufacturer Customer Market research data scheduling information Engineering and design data Order flow and cash flow Ideas and design to satisfy end customer Material flow Credit flow This slide might be used to make the point about the various “flows” - material, information, money.

3 Reasons To Hold Inventory
Meet unexpected demand Smooth seasonal or cyclical demand Meet variations in customer demand Take advantage of price and quantity discounts Hedge against price increases Minimize impact of supply chain disruptions

4 Two Types Of Demand Dependent Independent
Demand for items depends on the number of final units that will be produced (usually well known) Material Requirement Planning Independent Demand for items is determined by external customers (usually forecasted) Economic Order Quantity (EOQ) models

5 Push/Pull View of Supply Chains
Procurement, Customer Order Manufacturing and Cycle Replenishment cycles PUSH PROCESSES PULL PROCESSES In 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 views Customer Order Arrives

6 Approaches to Inventory Management
Just-in-case inventory (overstocking) Carry large inventories to ensure high customer service level (expensive!) Just-in-time inventory (understocking) Carry minimal inventory levels to control costs in exchange for risk of more stockouts

7 Inventory Costs Carrying Cost Ordering Cost Shortage Cost
cost of holding an item in inventory Ordering Cost cost of replenishing inventory Shortage Cost temporary or permanent loss of sales when demand cannot be met

8 Inventory Control Systems
Fixed-order-quantity system (Continuous) constant amount ordered when inventory declines to predetermined level Fixed-time-period system (Periodic) order placed for variable amount after fixed passage of time

9 Strategies for Managing Inventories in the Supply-Chain
Reduce uncertainty in supply chain Postponement Drop shipping Vendor managed inventories Radio frequency identification tags Collaborative forecasting and planning Every day low pricing strategies Electronic Data Interchange (EDI) Ask students to consider the conditions under which each of these options might be appropriate.

10 Brainstorm strategies to manage inventories for…..
Laptops at Dell Best Buy 350 GB Internal Hard Drives at Paul Newman’s Ranch Salad dressing at Ralphs 7-Eleven McDonalds

11 Deterministic Economic Order Quantity Model Assumptions
Demand is constant throughout the planning period at D items per period. Ordering cost is $Co per order. Holding cost is $CC per item in inventory per period. Purchase cost per unit is constant (no quantity discount). Delivery time (lead time) is constant. Planned shortages are not permitted.

12 The (Q,r) Policy Q is the order quantity which specifies the number of units to order for an item when it is time to replenish the inventory r is the reorder point, the inventory position at which an order should be placed the inventory position is the amount of inventory on hand plus the amount of inventory on order

13 The Inventory Order Cycle
Demand rate Order qty, Q Inventory Level Reorder point, R Lead time Lead time Time Order Placed Order Received Order Placed Order Received

14 EOQ Cost Model CC = $0.75 per yard CO = $150 D = 10,000 yards
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 = COD/Q + CCQ/2 Class Exercise Example: CC = $0.75 per yard CO = $150 D = 10,000 yards

15 EOQ Model Cost Curves Slope = 0 Annual cost ($) Total Cost Minimum
Carrying Cost = CcQ/2 Ordering Cost = CoD/Q Optimal order Qopt Order Quantity, Q

16 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 = COD/Q + CCQ/2

17 EOQ Example CC = $0.75 per yard CO = $150 D = 10,000 yards

18 When to Order Reorder Point -level of inventory at which to place a new order R = dL where d = demand rate per period L = lead time

19 Reorder Point Example Demand = 10,000 yds/year
Store open 311 days/year Daily demand = 10,000 / 311 = yds/day Lead time = L = 10 days R = dL = (32.154)(10) = yds

20 Safety Stocks Safety stock Stockout Service level
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

21 Reorder Point With A Safety Stock
Inventory level Q Reorder point, R Safety stock LT LT Time

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