Supply Chain Logistics Management Chapter 10: Inventory Management

Focusing on Inventory Sales = $100,000 Average inventory = $50,000 Range of inventory ($30,000 - 70,000) Annual turns = 2.00 Days of supply = 180 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” 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%) 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 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 Where to stock? When to order? How much to order? Control Accountability Accuracy 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 2 months Average Inventory 1.5 months 1.5 months 1.0 months Safety Stock 2 1 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 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 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 2 months Average Inventory 1.5 months 1.5 months 1.0 months Safety Stock 2 1 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 Demand Lead time Forecast f(k) * C Service Level (SL)  OQ Replenishment cycle Transport mode 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 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 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 = 2.00 Demand DD = 5 DD = 2.54 = Average LTD (Lead time demand) = LT * DD = 50 Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

C =  10 * 2.542 + 52 * 2.002 C = 12.83 (rounded to 13) Combined Uncertainty C = LT * DD2 + DD2 * LT2 C =  10 * 2.542 + 52 * 2.002 C = 12.83 (rounded to 13) 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 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) = (1.0 - .99) * (300/13) = 0.2308 f(k) = 0.2308 ==> k =0.4 SS = k * C = 0.4 * 13 = 5.2 units (Round to 6) ROP = DD * LT + SS = 50 + 6 = 56 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 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 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 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 Total Inventory Average Inventory Safety Stock Cycle Stock Stocking Locations 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 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 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 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 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) Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

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