9 -managing_inventory
DESCRIPTION
operation management chapter 9TRANSCRIPT
Alex Hill and Terry Hill
Managing inventoryAlex Hill and Terry Hill
Learning objectives
• Explain the ROLES of different types of inventory
• Identify the TYPES of inventory used in different delivery systems
• Understand the LEVEL of inventory to hold:- What ITEMS to hold- How MUCH to hold- How much and when to ORDER
• Understand how a company should to best MANAGE its inventory
• Understand how to analyse and REDUCE inventory
Lecture outline
• INTRODUCTION
• What is INVENTORY?
• Models and approaches for MANAGING inventory
• Inventory ANALYSIS and REDUCTION
• Critical REFLECTIONS
• SUMMARY
© Alex Hill and Terry Hill© Alex Hill and Terry Hill
WITHIN A DELIVERY SYSTEM
What is inventory?
•INPUTS into system- Raw materials- Components•WORK-IN-PROGRESS within the
system- Part-finished services and products•FINISHED goods- Waiting to be delivered to
customers
What is inventory?
UNCOUPLESphases of a delivery
systemso they can workINDEPENDENTLY
of each other
The role of inventory
> KEY IDEA
The underlying PURPOSE of inventory is to UNCOUPLE the various steps of the delivery system to enable them to work independently of each other
What is inventory?The role of inventory
What is inventory?Types of inventory
•PROCESS inventory- Used in systems delivering
services and products to customers
•SUPPORT inventory- E.g. maintenance and office
supplies
> KEY IDEA
There are three CATEGORIES of PROCESS inventory:• Raw materials and/or components• Work-in-progress• Finished goods
What is inventory?Functions of inventory
Process stage
Inventory type
InputsRaw
materials
Operations process
Work-in-progress
OutputsFinished goods
What is inventory?Functions of inventory
Process stage
Inventory type
Function
Process-related Support
InputsRaw
materials
Inputs into the delivery system used to provide the service or product. Include raw materials, services and components
Supplies that are not central to the services or products being provided. Include maintenance and office supplies
Operations process
Work-in-progress
Partly completed items in the delivery system waiting to go to the next stage. Such as food waiting to be cooked
OutputsFinished goods
Outputs of the delivery system waiting to be sold. include items in a retail store, baked bread and pastries in a bakery
What is inventory?Functions of inventory
What is inventory?Functions of inventory
What is inventory?Functions of inventory
What is inventory?Functions of inventory
To support a BUSINESS decision
CORPORATE OPERATIONSTo enable services and
products to be DELIVERED in line with
customer REQUIREMENTS
What is inventory?Functions of inventory
•Usually 20-25% total value•Functions include:- Sales supporting CUSTOMER
AGREEMENTS- Sales supporting service or product
LAUNCH- Purchasing BULK BUYING
CORPORATE
> KEY IDEACORPORATE inventory typically accounts for 20-25% of the total value of inventory
What is inventory?Functions of inventory
OPERATIONS•Usually 80-75% total value•Functions include:- DECOUPLING so stages can work
independently- CYCLE to reduce number of set ups- PIPELINE in the delivery system- CAPACITY-RELATED to meet demand in a
different time period- BUFFER against demand or capacity
fluctuations
> KEY IDEA
The five FUNCTIONS ofOPERATIONS inventory are:• Decoupling• Cycle• Pipeline• Capacity-related• Buffer
What is inventory?Functions of inventory
What is inventory?Functions of inventory
What is inventory?Functions of inventory
Car assemblyMail room Blue letter
Managing inventoryTypes, categories and functions
The Hudsucker Proxy(1994)
Gung Ho(1986)
The Hudsucker Proxy(1994)
Film clip Mail room
FilmTitleDirector (year)
The Hudsucker ProxyCoen and Coen (1994)
ClipStartFinish
00:13:0400:16:16
What clip showsThe mail room operation within a large organisation
Key learning objective
The types, categories and functions of inventory used in a repeat high volume service delivery system
Managing inventoryTypes, categories and functions
Managing inventoryTypes, categories and functions
Film clip Car assembly
FilmTitleDirector (year)
Gung HoRon Howard (1986)
ClipStartFinish
01:33:1301:34:31
What clip shows Cars being manufactured on a production line
Key learning objective
The types, categories and functions of inventory used in a line manufacturing process
Film clip Blue letter
FilmTitleDirector (year)
The Hudsucker ProxyCoen and Coen (1994)
ClipStartFinish
00:16:1700:19:29
What clip showsA special ‘Blue Letter’ being delivered to the CEO of the organisation
Key learning objective
The types, categories and functions of inventory used in a repeat low volume service delivery system
Managing inventoryTypes, categories and functions
Low VOLUME High
Hig
hV
AR
IETY
Low
Process type
Managing inventory
Managing inventory
Inventory Mail roomCar
assemblyBlue letter
Type
Category
Advantages
Disadvantages
Types, categories and functions
Process type
Managing inventory
Inventory Mail roomCar
assemblyBlue letter
Type
Category
Advantages
Disadvantages
Managing inventory
•Raw materials•Work-in progress
•Decoupling•Capacity-related
•High utilisation
•Finished goods
•Capacity-related•Buffer
•Cash tied up•Long process
lead-time
•High utilisation•Short delivery
lead-time•Meet demand
fluctuations
•Cash tied up•Holding cost
•None
•None
•Short process lead-time
•Lower utilisation
Types, categories and functions
Models and approaches for managing inventory
•PARETO analysis•ECONOMIC order quantity•Determining the RE-ORDER level and
point
Background issues and approaches
Models and approaches for managing inventoryPareto analysis
> KEY IDEA
The PARETO principle (or 80/20 rule) highlights that:• 20% of ITEMS typically account for• 80% of the total VALUE of inventory
Models and approaches for managing inventoryEconomic order quantity
Models and approaches for managing inventoryDetermining the re-order level and point
Models and approaches for managing inventoryDetermining the re-order level and point
Models and approaches for managing inventoryDetermining the re-order level and point
Models and approaches for managing inventoryDetermining the re-order level and point
CASE 9.1 ROLE OF INVENTORY
CASE 9.1
Question
Answer
Retail outlet
Household items
• MAKE-TO-STOCK items:- Made ahead of demand to meet sales- Used for inexpensive items- Reduces supply lead-time• MAKE-TO-ORDER items:- Made on receipt of customer order- Used for items with lower demand- Results in longer lead-time
• Meet immediate CUSTOMER REQUIREMENTS
• Display PRODUCT RANGE• Encourage IMPULSE customer purchases
ROLE OF INVENTORY
Inventory analysis and reduction
•CATEGORISE inventory by cause:- CORPORATE - e.g. sales,
purchasing- OPERATIONS - decoupling, cycle,
pipeline, capacity-related, buffer
Challenge and change RULES and PROCEDURES
that create inventory
REDUCE INVENTORY
DETERMINE CAUSE
> KEY IDEA
CAUSAL analysis determines why inventory EXISTSThese insights can be used to reduce it
CASE 9.2 REDUCING INVENTORY
CASE 9.2
Question
Answer
Corporate inventory
Operations inventory
• CAUSAL analysis:- Holding MORE than 3 weeks sales- Caused by FALL in sales- Now reduced RISK of running out of stock• Inventory REDUCED by:- Changing RULES within the computer
system
REDUCING INVENTORY
• CAUSAL analysis:- High level of WIP- Caused by BOTTLENECK in process• Inventory REDUCED by:- Removing capacity CONSTRAINT
Shoe factory
Analysis and reduction
Managing inventory
The Efficiency Expert (aka Spotswood)
(1992)
Analysis and reduction
Managing inventory
•What kind of ORGANISATION is presented?
•What type of ISSUES result?•How would you IMPROVE the
business?
Film clip Shoe factory (before change)
FilmTitleDirector (year)
The Efficiency Expert (aka Spotswood)Joffe (1992)
ClipStartFinish
00:03:3100:13:35
What clip showsA management consultant arriving at a shoe factory and being shown around
Key learning objective
The causes of inventory within a businessThe problems that result from holding this inventoryIdentifying ways to reduce inventory
Managing inventoryAnalysis and reduction
Managing inventory
Question Answer
TYPE of organisation
Resulting ISSUES
How to IMPROVE
• TRADITIONAL• PRODUCTION-led
• Poor LAYOUT• High INVENTORY• High WASTE
• Involve EVERYONE• Identify and eliminate
WASTE• CONTINUOUSLY improve
Analysis and reduction
Analysis and reduction
Managing inventory
•What APPROACH has been taken to improve the business?
•What are the BENEFITS of this approach?
•What are the ISSUES with this approach?
Film clip Shoe factory (after change)
FilmTitleDirector (year)
The Efficiency Expert (aka Spotswood)Joffe (1992)
ClipStartFinish
00:27:4300:30:54
What clip showsThe changes that have been made in the business at the request of the management consultant
Key learning objective
The issues associated with certain approaches to improving businesses and trying to reduce inventory
Managing inventoryAnalysis and reduction
Managing inventory
Question Answer
Improvement APPROACH
BENEFITS of approach
ISSUES with approach
• Reduced MOVEMENT• Reduced NON-PRODUCTIVE time• Increased EFFICIENCY
• INDIVIDUAL decision• NO INVOLVEMENT of employees• NO EXPLANATION of why change required
• RESISTANCE to change• NO UNDERSTANDING of need for change• Changes are not SUSTAINABLE
Analysis and reduction
Critical reflections• Inventory is a significant ASSET in most
organisations- Ties up a significant amount of CASH- Managing it is a key operations and business TASK
• Inventory results from a complex set of DECISIONS
- Made both by OPERATIONS - And other business FUNCTIONS
• Key STRATEGIC decision is working what to hold and how much to hold
- To support MARKETS - And meet BUSINESS requirements
• Regular CAUSAL ANALYSIS is required- To MINIMISE inventory levels
Summary
• INVENTORY is- A LARGE asset that is- DIFFICULT to manage and control
• Holding inventory RESULTS in- ADVANTAGES - e.g. improved market support - DISADVANTAGES - e.g. ties up cash and incurs
costs
• TYPES of inventory- Raw material, work-in-progress, finished goods
• CAUSES of inventory- CORPORATE - e.g. sales and purchasing- OPERATIONS - decoupling, cycle, pipeline,
capacity-related, buffer
© Alex Hill and Terry Hill© Alex Hill and Terry Hill
Revision questions
1 The level of inventory in an organisation reflects:a) The rate of supply
b) The rate of demand
c) Both a) and b)
Revision questions
1 The level of inventory in an organisation reflects:a) The rate of supply
b) The rate of demand
c) Both a) and b)
Revision questions
2 The underlying purpose of inventory is to:
a) Uncouple the various phases of a service delivery system or manufacturing process
b) Provide overall support for a service delivery system or manufacturing process
c) Neither a) or b)
Revision questions
2 The underlying purpose of inventory is to:
a) Uncouple the various phases of a service delivery system or manufacturing process
b) Provide overall support for a service delivery system or manufacturing process
c) Neither a) or b)
Revision questions
3 The Pareto principle is used to:
a) Reduce inventory
b) Indicate areas of high value inventory where the most effort in managing inventory should be concentrated
c) Calculate economic order quantities
Revision questions
3 The Pareto principle is used to:
a) Reduce inventory
b) Indicate areas of high value inventory where the most effort in managing inventory should be concentrated
c) Calculate economic order quantities
Revision questions
4 If a company decided to hold additional inventory to safeguard the business from uncertainty of supply, this inventory would be classed as:a) Pipeline inventory
b) Corporate inventory
c) Consignment stock
Revision questions
4 If a company decided to hold additional inventory to safeguard the business from uncertainty of supply, this inventory would be classed as:a) Pipeline inventory
b) Corporate inventory
c) Consignment stock
Revision questions
5 Special services and products are usually:
a) Made-to-order
b) Assembled-to-order
c) Made-to-stock
Revision questions
5 Special services and products are usually:
a) Made-to-order
b) Assembled-to-order
c) Made-to-stock
Revision questions
6 Inventory is reduced by:
a) Redesigning services and products
b) Redesigning delivery systems and manufacturing processes
c) Challenging and changing the rules and procedures that created it
Revision questions
6 Inventory is reduced by:
a) Redesigning services and products
b) Redesigning delivery systems and manufacturing processes
c) Challenging and changing the rules and procedures that created it
CASE FOR TUTORIAL
DELL