Presentation on theme: "Inventory Stock of items held to meet future demand"— Presentation transcript:
1 Inventory Stock of items held to meet future demand Inventory management answers two questionsHow much to orderWhen to order
2 The Supply Chain Customer Supplier Manufacturer Distributor InventoryDistributorManufacturerCustomerMarket research datascheduling informationEngineering and design dataOrder flow and cash flowIdeas and design to satisfy end customerMaterial flowCredit flowThis slide might be used to make the point about the various “flows” - material, information, money.
3 Reasons To Hold Inventory Meet unexpected demandSmooth seasonal or cyclical demandMeet variations in customer demandTake advantage of price and quantity discountsHedge against price increasesMinimize 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 PlanningIndependentDemand for items is determined by external customers (usually forecasted)Economic Order Quantity (EOQ) models
5 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
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 inventoryOrdering Costcost of replenishing inventoryShortage Costtemporary 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 levelFixed-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 chainPostponementDrop shippingVendor managed inventoriesRadio frequency identification tagsCollaborative forecasting and planningEvery day low pricing strategiesElectronic 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 atDellBest Buy350 GB Internal Hard Drives atPaul Newman’s Ranch Salad dressing atRalphs7-ElevenMcDonalds
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) PolicyQ is the order quantity which specifies the number of units to order for an item when it is time to replenish the inventoryr is the reorder point, the inventory position at which an order should be placedthe inventory position is the amount of inventory on hand plus the amount of inventory on order
13 The Inventory Order Cycle DemandrateOrder qty, QInventory LevelReorder point, RLeadtimeLeadtimeTimeOrderPlacedOrderReceivedOrderPlacedOrderReceived
14 EOQ Cost Model CC = $0.75 per yard CO = $150 D = 10,000 yards CO - cost of placing order D - annual demandCC - annual per-unit carrying cost Q - order quantityAnnual ordering cost = COD/Q Annual carrying cost = CCQ/2Total cost = COD/Q + CCQ/2Class Exercise Example:CC = $0.75 per yard CO = $150 D = 10,000 yards
16 EOQ Cost Model CO - cost of placing order D - annual demand CC - annual per-unit carrying cost Q - order quantityAnnual ordering cost = COD/Q Annual carrying cost = CCQ/2Total cost = COD/Q + CCQ/2
17 EOQ ExampleCC = $0.75 per yard CO = $150 D = 10,000 yards
18 When to OrderReorder Point -level of inventory at which to place a new orderR = dLwhered = demand rate per periodL = lead time
19 Reorder Point Example Demand = 10,000 yds/year Store open 311 days/yearDaily demand = 10,000 / 311 = yds/dayLead time = L = 10 daysR = dL = (32.154)(10) = yds
20 Safety Stocks Safety stock Stockout Service level buffer added to on hand inventory during lead timeStockoutan inventory shortageService levelprobability that the inventory available during lead time will meet demand
21 Reorder Point With A Safety Stock Inventory levelQReorderpoint, RSafety stockLTLTTime