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Supply Chain Logistics Management Chapter 10: Inventory Management.

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Presentation on theme: "Supply Chain Logistics Management Chapter 10: Inventory Management."— Presentation transcript:

1 Supply Chain Logistics Management Chapter 10: Inventory Management

2 Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Focusing on Inventory Sales = $100,000 Average inventory = $50,000 Range of inventory ($30, ,000) Annual turns = 2.00 Days of supply = 180

3 Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved. “Peeling the Inventory Onion”

4 Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Product Positioning Decision Factors Accurate assessment of inventory value Assignment of responsibility for inventory carrying costs –Opportunity cost (15%) –Taxes and insurance(1%) –Pilferage and obsolescence (1%) –Storage (2%)

5 Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Perspectives on Product Positioning Provide for uncertainty - Inventory management Reduce demand uncertainty Reduce cycle uncertainty

6 Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Provide for Uncertainty Inventory Management Manage –Where to stock? –When to order? –How much to order? Control –Accountability –Accuracy

7 Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Inventory Cycle for Typical Product Average Inventory 1.5 months Safety Stock 1.0 months months

8 Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Elements Influencing Average Inventory Average = OQ/2 + SS + IT Where: –Average = average inventory level –OQ = average replenishment order quantity –SS = average safety stock level –IT = average in-transit inventory

9 Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Reorder Point and Safety Stock When to order ROP = LT * DD + SS Where: –ROP = reorder point –LT = replenishment lead time –DD = average daily demand –SS = safety stock

10 Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Inventory Cycle for Typical Product Average Inventory 1.5 months Safety Stock 1.0 months months

11 Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Factors Influencing Safety Stock Requirements Service Level (SL)  f(k) *  C OQ Demand Lead time Forecast Replenishment cycle Transport mode

12 Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Determining Safety Stock f(k) = (1 - SL) * (OQ/  C ) Where: –f(k) = Normal loss integral for safety factor k –SL = desired service level in percent unit fill rate –OQ = order quantity –  C = standard deviation of lead time demand

13 Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Example Safety Stock Calculation Key parameters –SL = 99 percent availability –DD = 5 units/day,  DD = 2.54 –LT = 10 days,  LT = 2 –OQ = 300 units

14 Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Combining Demand and Lead Time Uncertainty Lead Time LT = 10  LT = Demand DD = 5  DD = 2.54 Average LTD (Lead time demand) = LT * DD = 50 =

15 Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Combined Uncertainty  C =  LT *  DD 2 + DD 2 *  LT 2  C =  10 * *  C = (rounded to 13)

16 Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Table of Normal Loss Integral

17 Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Calculating Safety Stock k factor f(k) = (1 - SL) * (OQ/  C ) f(k) = ( ) * (300/13) = f(k) = ==> k =0.4 SS = k *  C = 0.4 * 13 = 5.2 units (Round to 6) ROP = DD * LT + SS = = 56

18 Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Inventory Management Policy Allowing for Uncertainty When inventory-on-hand plus on-order is less than or equal to 56, order 300

19 Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Impact of Changes in Uncertainty Level

20 Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Impact of Order Quantity on Safety Stock

21 Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Graphical Illustration of Locational Impact of Inventory Cycle Stock Safety Stock Total Inventory Average Inventory Stocking Locations

22 Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Distribution Resource Planning Example Benefits and risks

23 Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Distribution Resource Planning Benefits and Risks Benefits –Reduced freight and inventory –Improved coordination with marketing –Decreased space requirements –Enhanced budgeting capability Risks –Requires good forecasting accuracy –Requires change to planning mentality –Subject to system “nervousness” with changing forecasts

24 Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Stratified Product Positioning Fine-line (ABC) analysis Stratified management guidelines

25 Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Product Classification Analysis (ABC)

26 Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Sample Integrated Strategy

27 Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Conclusions Allow for uncertainty –Inventory management and control Reduce demand uncertainty –Forecasting –DRP –Simplification –Demand management –Postponement Reduce cycle uncertainty –Exert more control over cycle times –Supply chain management –Variable assignment


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