1. INVENTORY IS BAD

2. DIRECT FINANCIAL EFFECTS Pay money to get Place to Store Equipment to move DAMAGE - OBSOLESCENCE INCREASED CYCLE TIME Less flexibility in manufacturing Bullwhip Effect elsewhere LOWER QUALITY ETC. WHY?

3. WHY CARRY INVENTORY? FLUCTUATION INVENTORY - Protect against random changes in demand. ANTICIPATION INVENTORIES - Build in off season to meet peak demand LOT-SIZE INVENTORIES - To take advantage of economies of scale in production and purchasing PIPELINE INVENTORY - Goods in transit between destinations WORK-IN-PROCESS - Buffers to cushion effects of breakdowns and to synchronize work rates Showcase Item You don’t buy unless you don’t see it

4. CONFLICTING DESIRES DEPARTMENT BIAS REASON MARKETING HIGH (FG) Customer Service PURCHASING HIGH (RM) Quantity Discounts Low Freight PRODUCTION HIGH (WIP, RM) Prevent Delays and Idle Capacity LOW (WIP) Cut Cost & Lead-time Improve Response Time & Quality FINANCE LOW Improve ROI Reduce Working Capital Needs

5. TYPES OF INVENTORY RAW MATERIALS COMPONENTS GOODS IN PROCESS FINISHED GOODS SUPPLIES

6. TYPES OF DEMAND INDEPENDENT (of other items) Uniform (flow from faucet) Other Continuous >> DEPENDENT (on other items) or LUMPY > Andres A. Calderon: Coffee is independent Andres A. Calderon: Coffee is independent Andres A. Calderon: if you make cars, you know how many tires you need Andres A. Calderon: if you make cars, you know how many tires you need

7. KEYS TO INVENTORY MANAGEMENT DEMAND FORECAST INVENTORY STATUS ECONOMIC ANALYSIS

8. TWO BASIC DECISIONS WHEN TO REPLENISH? HOW MUCH TO ORDER?

9. BALANCE COSTS CARRYING OR HOLDING COST –You see can of paint, but I see stacks of bills (opportunity cost) –Now suppose you have bread: damage, obsolescence, insurance –Proportional to the amount carried and time carried

10. BALANCE COSTS ORDERING COST –Not proportional to amount ordered, does not include qty discount SHORTAGE OR STOCKOUT COST –profit loss of paint sell and paint brush –customer goes to another store, loss of future business –Difficult to determine

11. BALANCE COSTS COST OF CONTROLLING THE SYSTEM –People counting inventory, check thresholds, order –Automated ordering system

12. ECONOMIC ORDER QUANTITY ASSUMPTIONS Single product with demand independent of other items Known and uniform demand No shortages permitted No lead-time

13. ECONOMIC ORDER QUANTITY MODEL ASSUMPTIONS Funds invested in inventory from order arrival to sale. Costs considered Carrying cost - Depends on amount and time carried. –H=$0.50 / unit per year –Some folks only know the fraction per item cost

14. ECONOMIC ORDER QUANTITY MODEL ASSUMPTIONS Costs considered Ordering cost - Independent of quantity ordered –S=10/order –C=items cost Infinite horizon

15. Model Average cost per year=H(Q/2)+S(D/Q)+CD –(Q/2) carrying –(D/Q) Average number of orders per year –CD Goods

16. COST PER “YEAR” COST = H *(Q/2) + S * (D/Q) + D*C H = i*C H = Carrying cost per unit per year S = Ordering cost D = Demand per year C = Item’s cost per unit Q = Proposed quantity per order I = Carrying cost fraction ECONOMIC ORDER QUANTITY Q = SQRT( 2 * S * D / H)

17. SENSITIVITY Q = Order Quantity Q* Cost Ordering Cost Carrying Cost Total Cost

18. REORDER POINT Order When The Amount On Hand And On Order Falls To ROP = Average Demand During Lead Time + Safety Stock For a normal distribution: ROP = L * d-bar + z * s * Sqrt(L) L = lead time in days D-bar = average daily demand s = standard deviation of daily demand z = number of standard deviations above the mean required to achieve the desired service level.

19. CYCLE SERVICE LEVEL Probability we do not have a stockout during an inventory cycle. Probability that we do not run out between order placement and order arrival. Stockout based on inventory cycles not customers -- the percentage of customer demand satisfied is much higher.