MANAGING INVENTORY FLOWS IN THE SUPPLY CHAIN Week 6

AGENDA INTRODUCTION INVENTORY IN THE FIRM –Rationale –Costs –Classifying –Visibility –Measuring Effectiveness

AGENDA TBC SUMMARY AND CONCLUSIONS

INTRODUCTION Importance –Cost –ROA –Customer Service

INTRODUCTION In the Economy –Declining as Percent of GDP –Transportation Gains have Helped

AGENDA INVENTORY IN THE FIRM –Rationale –Costs –Classifying –Visibility –Measuring Effectiveness

INVENTORY IN THE FIRM Rationale –Batching Economies/Cycle Sources –Procurement –Transportation –Acquisition Trade-offs –Cost or Rate Per Unit –Inventory Carrying Cost $

INVENTORY IN THE FIRM Rationale –Uncertainty/Safety Sources –Demand –Supply –Forecast Trade-offs –Information –Inventory Carrying Cost $

INVENTORY IN THE FIRM Rationale –Time/In-Transit and WIP Sources –Pipeline –Time Trade-offs –Rate or Cost Per unit –Inventory Carrying Cost $

INVENTORY IN THE FIRM Rationale –Other Seasonal Anticipatory

INVENTORY IN THE FIRM Costs –Carrying Capital –Hurdle Rate –Weighted Average Cost of Capital Storage –Handling –Rent –Utilities

INVENTORY IN THE FIRM Costs –Carrying Service –Tax –Insurance –Protective Risk –Shrinkage –Shelf-life –Obsolescence

INVENTORY IN THE FIRM Costs –Ordering/Setup Fixed in Total Variable With Respect to Number of Orders

INVENTORY IN THE FIRM Costs –Carrying versus Ordering: Trade-off

INVENTORY IN THE FIRM Costs –Stock-out Carrying to Meet Uncertainty Lost Sales –Trade Down –Backorder –Lost Sale –Lost Customer –Lost Line

INVENTORY IN THE FIRM Costs –In-Transit (Pipeline) Adjust –Obsolescence –Service –Store Trade-off –Time –Rate

INVENTORY IN THE FIRM Classifying –ABC Small Numbers, Big Significance Large Numbers, Little Significance –Critical Value B and C Items Complementary to Sale and, or Use of A Items

INVENTORY IN THE FIRM Visibility –Dimensions Where in Time Where in Space Where is State of Being

INVENTORY IN THE FIRM Visibility –Requires Tracking, Tracing, Expediting Performance Reports by Stage Service Failures –Reports –Notices

INVENTORY IN THE FIRM Visibility –Benefits Customer Service COGS Turnover Vendor Relations Cash Flow

INVENTORY IN THE FIRM Measuring Effectiveness –Customer Satisfaction –Expediting –Inventory Turnover –Percent of Sales

INVENTORY DECISION MAKING Chapter 7

AGENDA INTRODUCTION PRINCIPAL APPROACHES –Fixed Order Quantity (Certainty) –Fixed Order Quantity (Uncertainty) –Fixed Order Interval –In-Transit –Warehouse/WIP –Other Approaches

INTRODUCTION Major Cost Categories –Carrying Cycle Safety In-Transit –Ordering –Stockout

INTRODUCTION Two Questions –How Much to Order? –When to Order?

INTRODUCTION Doing More with Less –Order Processing Systems –LIS –Transportation –Inventory Control

INTRODUCTION Key Differences –Nature of Demand Dependent Independent

INTRODUCTION Key Differences –Push versus Pull Proactive versus Reactive Pull for Independent Push for Dependent Most Systems are Hybrid –Individual Node versus System

AGENDA PRINCIPAL APPROACHES –Fixed Order Quantity (Certainty) –Fixed Order Quantity (Uncertainty) –Fixed Order Interval –In-Transit –Warehouse/WIP –Other Approaches

PRINCIPAL APPROACHES Fixed Order Quantity (Certainty) –Cycle Covers –Mean –Average –Expected

PRINCIPAL APPROACHES Fixed Order Quantity (Certainty) –Cycle 05 Order Size –EOQ –Cycle –Transportation Minimum –Vendor Minimum

PRINCIPAL APPROACHES Fixed Order Quantity (Certainty) –EOQ

PRINCIPAL APPROACHES Fixed Order Quantity (Certainty) –EOQ

PRINCIPAL APPROACHES Fixed Order Quantity (Certainty) –EOQ

PRINCIPAL APPROACHES Fixed Order Quantity (Uncertainty) –Variability Demand Time Order Processing Damage –Safety Stock - Constant Safety Net

PRINCIPAL APPROACHES Fixed Order Quantity (Uncertainty) –Uncertainty of Demand

PRINCIPAL APPROACHES Fixed Order Quantity (Uncertainty) –Uncertainty of Demand

PRINCIPAL APPROACHES Fixed Order Quantity (Uncertainty) –Uncertainty of Demand and Lead Time Probabilistic –Random –Normal –Known Properties

PRINCIPAL APPROACHES Fixed Order Quantity (Uncertainty) –Uncertainty of Demand and Lead Time

PRINCIPAL APPROACHES Fixed Order Quantity (Uncertainty) –Uncertainty of Demand and Lead Time

PRINCIPAL APPROACHES Fixed Order Interval –A.K.A. Fixed Review Fixed Period

PRINCIPAL APPROACHES Fixed Order Interval –Decisions Fixed Interval Variable Quantity A, B, or C Items? CVA?

PRINCIPAL APPROACHES Managing In-Transit

PRINCIPAL APPROACHES Managing In-Transit

PRINCIPAL APPROACHES Managing Days in Warehouse/WIP

PRINCIPAL APPROACHES Managing Days in Warehouse/WIP

PRINCIPAL APPROACHES Other Approaches –JIT/Pull/Independent –MRP/Push/Dependent –Hybrid Push and Pull Increasingly the Norm

SUMMARY AND CONCLUSIONS