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Inventory Management. 2 Definition of inventory control Inventory control is the activity and methods of keeping the right level of inventory. Three questions:

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Presentation on theme: "Inventory Management. 2 Definition of inventory control Inventory control is the activity and methods of keeping the right level of inventory. Three questions:"— Presentation transcript:

1 Inventory Management

2 2 Definition of inventory control Inventory control is the activity and methods of keeping the right level of inventory. Three questions: –What should I keep on stock? –How much to order? –When to order? What is the right level? Safety Stock Time Reorder Point Order Quantity

3 Finished productComponents SupplyProductionDistribution VP Supply Chain VP PurchasingVP OperationsVP Sales Inventory finished products and its traditional conflicts Long runs – minimize changeovers High service level Safety stocks High inventory turns Maximum flexibility

4 Intermezzo: How much inventory do you need? supplier customer How much inventory do you need ? □ nothing □ a little bit □ enough 4 days leadtime You Wants a delivery in 1 week ? ?

5 © 2009 APICS CONFIDENTIAL AND PROPRIETARY 6  5 Reasons for Carrying Inventory The only good reason for carrying inventory beyond current needs is if it costs less to carry it than not. Inventory allows the company to operate with different production rates and batch sizes throughout the supply, production, and distribution system. Inventory decouples... DemandfromSupply Customer demand fromFinished goods Finished goodsfromComponent availability Output of one operationfromOutput of prec. operation Materials to begin production fromSuppliers of materials

6 © 2009 APICS CONFIDENTIAL AND PROPRIETARY 6  6 Functions of Inventory Anticipation inventory Safety stock Lot-size inventory Transportation inventory Hedge inventory

7 7 CODP is important in designing the planning methods 1)Customer Order Disconnection Point : how far does a customer order penetrate? CODP1 CODP2 CODP3 CODP4 KCODP5 FG productiondistribution HF parts suppliercustomer installation assembly to order production to order purchase to order Make to stock Make to local stock Planning controlled activities Customer order controlled activities

8 8 Inventory in TFC pallets Finished product Components SupplyMixingDistribution tankyard Bottling How much inventory in weeks and value in components and finished products? For what reasons we need inventory in this supply chain? Explore TFC

9 Inventory management Balancing act of Service level offering to the market Production reliability –Capacity –Availability of components Safety stock and production frequencies

10 Obsolescence Damage Pilferage Insurance Deterioration Inventory carrying Costs Risk Costs Storage Costs Capital Costs Opportunity Cost Space Personnel Equipment

11 Cos of inventory versus out of stock Out of stock costs –Cost of backorders –Expediting costs –Cost of complaints –Revenue loss –Loss of customers –Idle time at your customer Inventory costs –Capital –Storage –Risk Estimate the inventory carrying costs for a finished product Explore TFC

12 12 The optimum safety stock is the stock where the stock costs and shortages are equal costs/year safety stock costs of shortages stock costs total optimum safety stock

13 13 100% 94%98% 96%92% service level The optimum service level is the service level with an optimum safety stock optimum safety stock optimum service level safety stock costs min. Service level curve

14 14 What is the right servicelevel? servicelevel € costs tevenu result loss profit loss 0 100% optimum In most cases this is a management decision

15 Optimal inventory is the desired service level against minimal costs Service level Costs Optimum 100% 0 Target% Target level

16 Excersise Service level Costs Optimum Today 100% 0 Target% Target level -How to get this curve lower?

17 Service level Bonus policy Order deadline Production reliability (Past) shelf life Promotion pressure and horizon Volatility of demand Finished goods warehouse Number of employees Stock finished product Service level Production interval

18 18 Total costs How much to order? Inventory costs minimum + + Ordering costs Order quantity TS

19 Inventory in time Safety Stock Time Reorder Point 1-16 Order Quantity What is the influence of the ordersize of finished products? How to decide on the order size?

20 © 2009 APICS CONFIDENTIAL AND PROPRIETARY 7  20 EOQ: Cost & Quantity Relationships Order Quantity Cost in Dollars Ordering Costs Carrying Costs Total Cost EOQ Source: Arnold et al., Introduction to Materials Management, 6 th ed. Reprinted by Permission of Pearson Education

21 Batch sizes Manage Cost Tradeoffs Inventory Carrying CostsOrdering Costs Managing tradeoffs by balancing ordering costs and inventory carrying costs Ordering in small quantities minimizes inventory carrying costs But ordering in small quantities requires more orders and increases order costs

22 22 The sensitivity of EOQ is limited EOQ % deviation from EOQ % deviation from min cost TC Q /TC EOQ TC = total cost Is this all? Available production capacity? Customer value?

23 23 Ordering cost Administration –Cost of supplier mgt and selsection –Cost of order preparation –Cost of invoicing and paiment Physical.: –Cost of receiving and QC –Cost of change over Other.: –Transportation cost –..

24 OQOQ Time OQOQ Order quantity  What is the influence of orderquantity on servicelevel?

25 25 Total Cost Wjem to order Inventory cost Minimuml + + Cost of out of stock Safetystock TS

26 26 Exercise: Safety stock For item X the following applies: –Average consumption 100 pc/mth –Delivery time1 month –Present stock 200 pc –Service level-target 98 % Question: When do you order?

27 27 Exercise : Safety stock

28 28 Exercise: Safety stock For item X the following applies: –Average consumption 100 pc/mth –Delivery time1 month –Present stock 200 pc –Service level-target 98 % Question: When do you order? No idea!

29 Order Point System © 2010 APICS CONFIDENTIAL AND PROPRIETARY 2  29 Source: Adapted from CPIM Inventory Management Certification Review Course (APICS 1998). B B C C A A Quantity in inventory Reorderpoint Time LT Demand during lead time (DDLT) Replenishment Safetystock

30 How to decide on safety stocks? Service level Production order quantity Demand uncertainty Supply uncertainty

31 31 In analytically determining the safety stock, the starting point is variation in demand demand frequency time μ                  µ = estimated demand

32 Optimal inventory is the desired service level against minimal costs Service level Costs Optimum Today 100% 0 Target% Target level Are you on the curve? How to assess?

33 Differentation of servicelevel based on uncertainty and value lowhigh low99%?95%? high95%?90%? revenue uncertainty

34 Intermezzo: How much inventory do you need? How much inventory do you need on both points ? nothing a little bit enough supplier customer 2 weeks leadtime FP 1 day leadtime RM Fixed period of 3 weeks ? ? ? ?

35 Something to think about Where do you prefer to have the highest service levels? Finished product Components SupplyProductionDistribution Is 95% component service level ok? Is 100% component service level ok?

36 Inventory of components Safety Stock Time Reorder Point Order Quantity What makes inventory management of components different from finished products? service level and demand supply product

37 Something to think about (cont) # = 2# = 3# = 4 90%81%73%66% 95%90%86%81% 98%96%94%92% Number of components Component availability

38 Obsolete management Obsoletes Production interval Shelf life agreements Customer agreementsStock Safety stock

39 Shelf life % Agreement vs realisation Shelflife is 20 weeks Shelf life agreement= 70%Internal shelflife 85% obsolete Shelflife realisation= 85%


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