1. Supply Chain Logistics Management
Chapter 10: Inventory Management

2. Focusing on Inventory Sales = $100,000 Average inventory = $50,000
Range of inventory ($30, ,000)
Annual turns = 2.00
Days of supply = 180
Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper
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3. “Peeling the Inventory Onion”
Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper
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4. 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
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5. 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.

6. 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.

7. 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.

8. 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.

9. 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.

10. 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.

11. 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.

12. 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.

13. 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.

14. 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.

15. C =  10 * 2.542 + 52 * 2.002 C = 12.83 (rounded to 13)
Combined Uncertainty
C = LT * DD2 + DD2 * LT2
C =  10 * * 2.002
C = (rounded to 13)
Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper
Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

16. Table of Normal Loss Integral
Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper
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17. 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
Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper
Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

18. 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
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19. Impact of Changes in Uncertainty Level
Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper
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20. Impact of Order Quantity on Safety Stock
Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper
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21. 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.

22. Distribution Resource Planning
Example
Benefits and risks
Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper
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23. 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.

24. Stratified Product Positioning
Fine-line (ABC) analysis
Stratified management guidelines
Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper
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25. Product Classification Analysis (ABC)
Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper
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26. Sample Integrated Strategy
Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper
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27. 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.