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

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Presentation on theme: "Inventory Stock of items held to meet future demand Inventory management answers two questions How much to order When to order."— Presentation transcript:

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

3 The Supply Chain Supplier Inventory Distributor Inventory 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

4 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

5 Two Types Of Demand Dependent 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

6 Push/Pull View of Supply Chains Procurement, Manufacturing and Replenishment cycles Customer Order Cycle Customer Order Arrives PUSH PROCESSESPULL PROCESSES

7 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

8 Inventory Costs Carrying 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

9 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

10 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)

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

12 Demand is constant throughout the planning period at D items per period. Ordering cost is $C o per order. Holding cost is $C C 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. Deterministic Economic Order Quantity Model Assumptions

13 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

14 The Inventory Order Cycle Demand rate 0Time Lead time Lead time Order Placed Order Placed Order Received Order Received Inventory Level Reorder point, R Order qty, Q

15 EOQ Cost Model C O - cost of placing order D - annual demand C C - annual per-unit carrying costQ - order quantity Annual ordering cost = C O D/QAnnual carrying cost = C C Q/2 Total cost = C O D/Q + C C Q/2 Class Exercise Example: C C = $0.75 per yard C O = $150 D = 10,000 yards

16 EOQ Model Cost Curves Slope = 0 Total Cost Ordering Cost = C o D/Q Order Quantity, Q Annual cost ($) Minimum total cost Optimal order Q opt Carrying Cost = C c Q/2

17 EOQ Cost Model C O - cost of placing order D - annual demand C C - annual per-unit carrying costQ - order quantity Annual ordering cost = C O D/QAnnual carrying cost = C C Q/2 Total cost = C O D/Q + C C Q/2

18 EOQ Example C C = $0.75 per yard C O = $150 D = 10,000 yards

19 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

20 Reorder Point Example Demand = 10,000 yds/year Store open 311 days/year Daily demand = 10,000 / 311 = 32.154 yds/day Lead time = L = 10 days R = dL = (32.154)(10) = 321.54 yds

21 Safety Stocks Safety stock 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

22 Reorder Point With A Safety Stock Reorder point, R Q 0 Inventory level LT Time Safety stock


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