bus 301: business logistics inventory strategies-overview
TRANSCRIPT
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Bus 301: Business Logistics
Inventory Strategies-Overview
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Drivers of Supply Chain Performance(we have seen how this can impact)
Facilities (Manufacturing Strategies)– places where inventory is stored, assembled, or fabricated (outsourcing issues)– production sites and storage sites (where manufactured)
Inventory (Inventory Strategies)– raw materials, WIP, finished goods within a supply chain (where located)– inventory policies (push vs pull strategies)
Transportation – moving inventory from point to point in a supply chain (inconsistent delivery times)– combinations of transportation modes and routes (best routing)
Information Technology– data and analysis regarding inventory, transportation, facilities throughout the supply
chain (replace inventory with information)– potentially the biggest driver of supply chain performance
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Internal Supply Chain Management (ISCM)That leads to the next element……
Manufacturing (Part I)
Inventory Strategies (Part II)
Forecasting (Part III)Information Technology (Part IV)
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Inventory: Role in the Supply Chain (GSW Hot Dogs and Match Game)
Inventory exists because of a mismatch between supply and demandSource of cost and influence on responsivenessImpact on material flow time (time elapsed between when material enters the supply chain to when it exits the supply chain)
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Examples of Disasters
Cisco’s Inventory Disaster: Lack of demand and inventory visibility as market slows leads to $2.2 billion inventory write-off and stock price cut in half Nike’s Planning System Perplexity: New planning system causes inventory and order woes, blamed for $100 revenue miss as stock loses 20%
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We Have Seen The Functions of Inventory As Helping….
Meet anticipated demand
Smooth production requirements
Decouple components of the production-distribution system
Protect against stock-outs
Take advantage of order cycles
Hedge against price increases & leverage quantity discounts
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Operations, finance, and marketing have interest in inventories.
Poor inventory management hampers operations, diminishes customer satisfaction, and increases operating costs.
A typical firm probably has tied in inventories about – 30 percent of its current assets
– 90 percent of its working capital (Current Assets – Current Liabilities)
Both Understocking and Overstocking are undesirable;
Understocking; lost sales, dissatisfied customers, production lost.
Overstocking; tied up funds, physical holding cost, obsolescence.
Inventory Issues
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Inventory management has a trade-off decision between level of Customer Service and Inventory Cost.
How do we measure Customer Satisfaction? Number and quantities of sales lost, back orders, customer complains.
How do we measure Inventory Costs?
– Inventory turns (the ratio of the annual cost of goods sold to average investment in inventories),
– Days of inventory on hand (days of sales that can be supplied from existing inventories).
Questions About of Inventory Control
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Industry Upper Quartile Median Lower Quartile
Dairy 34.4 19.3 9.2
Electronic Components 9.8 5.7 3.7
Computers 9.4 5.3 3.5
Publishing 9.8 2.4 1.3
Consumer Electronics 6.2 3.4 2.3
Appliances 8.0 5.0 3.8
Industrial Chemical 10.3 6.6 4.4
Inventory Turns Per Year
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Types of Inventories That We Have Seen In Our Examples…
Raw materials & purchased parts
Work-in-progress
Finished-goods inventories
Replacement parts, tools, & supplies
Goods-in-transit to warehouses or customers (Pipeline Inventory)
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Automobile Firm
Assembly Plant DealershipEngine Plant
Output Inventory
Finished engines
Automobile
-
In-Prcess Inventory
Unfinished engines
Unfinished Automobile
Automobile
Process
Engine plant
Assembly plant
Dealership (sales)
Input Inventory
Castings
Finished engines, chassis, etc
Automobile
Automobile Firm
Assembly Plant DealershipEngine Plant
Output Inventory
Finished engines
Automobile
-
In-Prcess Inventory
Unfinished engines
Unfinished Automobile
Automobile
Process
Engine plant
Assembly plant
Dealership (sales)
Input Inventory
Castings
Finished engines, chassis, etc
Automobile
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This Means Balancing Cost and Service By A Firm’s Being…
More responsive in their order processingAble to manage volumes of SC informationCapable with limited transportation resourcesAble to position inventory correctly
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Supply Chain Inventory Costs
Material Costs - average price paid per unit. Influenced by volume discounts which which make it amenable to economies of scale.Fixed Ordering Costs - costs that are not influenced by the lot size. Costs include:– Buyer Time- the incremental cost of buyer placing an extra
order.– Transportation- fixed cost of transportation. LTL pricing has a
fixed and variable cost.– Receiving cost- fixed part of the cost of receiving e.g.
administrative costs, purchase order matching, updating records etc.
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Supply Chain Inventory Costs
Holding Costs- often a percentage of per unit cost of product.– Cost of capital- opportunity cost of capital. Commonly, the
weighted average cost of capital (WACC) is used to calculate this.
– Obsolescence - perishables, microprocessors, non-perishables
– Handling and Storage costs– Damage, security, taxes, insurance
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Two Basic Questions Raised By Inventory Decisions
How much inventory should be ordered?When should inventory be order?
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A Side Not for Marketing Impact of Quantity Discounts
If pricing decisions are made independently by the stages of the supply chain, the supply chain profit will be sub-optimal.In the case of commodity products where the market determines the prices, manufacturers can avail of lot size-based discounts to coordinate activities in the supply chain and reduce the supply chain costs..Increasing lot sizes, however result in higher cycle inventory
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It Is Always Jello Time!
“
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We Need To Answer These Two Questions For Our Jello Products?
How much inventory should be ordered?When should inventory be order?
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In Your Teams….
Determine how much demand for of each SKU of Jello that we will need to consider over the next year…for the Chicagoland Area
(1) How much to order? (2) When to order?
Base Your Forecast on the Classroom Population As A Base for forecasting!
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How Should We Get Started?
1) Market Survey of Demand2) _____________________________________3) _____________________________________4) _____________________________________5) _____________________________________
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Did You Get Your Order In On Time?
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Summary Of Role of Inventory in the Supply Chain
Improve Matching of Supplyand Demand
Improved Forecasting
Reduce Material Flow Time
Reduce Waiting Time
Reduce Buffer Inventory
Economies of ScaleSupply / Demand
VariabilitySeasonal
Variability
Cycle Inventory Safety InventoryFigure Error! No text of
Seasonal Inventory
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What Made This Exercise Hard?
Demand Uncertain or Certain?Demand Variable or Stable? No Costs of Holding?No Order Processing Costs?Customer Service Level?No Historical Data?Dependant or Independent Demand?
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Here IS your Challenge…
Evaluate all the forecasts handed out in class tonight from the perspective of the balance of cost versus service. This means that you will be describing why the others are not suitable for the organization. What would be the pitfalls if the wrong one was chosen? After the evaluation process then describe which one would you chose and why?
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Some Basic Methods to Answer These Questions
Fixed Quantity Model (EOQ)Fixed Interval Model (Game)Zero Based ModelMRP, DRP and ERP Systems (next week)
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Factors Which Differentiate Inventory Models
Dependent Vs Independent DemandPush Vs Pull StrategiesSystem wide Vs Single Facilities Models
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Independent Demand
A
B(3) C(2)
D(5) E(1) D(12) F(2)
Dependent Demand
Independent demand is uncertain. Dependent demand is certain.
Independent and Dependent Demand
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The Inventory CycleProfile of Inventory Level Over Time
Quantityon hand
Q
Receive order
Placeorder
Receive order
Placeorder
Receive order
Lead time
Reorderpoint
Usage rate
Time
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The Fixed Quantity Model
Order a fixed quantity when reordering takes place (EOQ)Amount order is based on; product costs, demand information, carrying costs and order costsAutomatically reorder (fixed amount) when reach number of units
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Simple EOQ Assumptions
Constant DemandConstant and Consistent Lead TimesSatisfaction of All DemandConstant Price of Goods and Materials
No Inventory In TransitOne Item In InventoryInfinite Planning HorizonNo Limitation On Capital
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THE EOQ
Q = 2DS
H =
2(Annual Demand)(Order or Setup Cost)
Annual Holding CostOPT
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The Basic Inventory Model
Annual demand for a product is 9600D = 9600Annual carrying cost per unit of product is
16$H = 16Ordering cost per order is 75 S = 75a) How much should we order each time to
minimize our total costb) How many times should we orderc) What is the length of an order cycle
(working days 288/year)
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Profile of Inventory Level Over Time
Quantityon hand
Q
Receive order
Placeorder
Receive order
Placeorder
Receive order
Lead time
Reorderpoint
Usage rate
Time
Remember….The Inventory Cycle?
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Two Questions to Answer in Planning Safety Inventory
What is the appropriate level of safety inventory to carry?What actions can be taken to improve product availability while reducing safety inventory?
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Determining the AppropriateLevel of Safety Inventory
Measuring demand uncertaintyMeasuring product availabilityReplenishment policiesEvaluating cycle service level and fill rateEvaluating safety level given desired cycle service level or fill rateImpact of required product availability and uncertainty on safety inventory
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Determining the AppropriateLevel of Demand Uncertainty
Appropriate level of safety inventory determined by:– supply or demand uncertainty– desired level of product availability
Higher levels of uncertainty require higher levels of safety inventory given a particular desired level of product availabilityHigher levels of desired product availability require higher levels of safety inventory given a particular level of uncertainty
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Fixed Interval Model
Also know as fixed review period or fixed periodUnlike EOQ does not required strict observationUsually low value items order in large quantitiesAlso, when sales replenish inventory or when product are ordered daily
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Profile of Inventory Level Over Time
Quantityon hand
Q
Receive order
Placeorder
Receive order
Placeorder
Receive order
Lead time
Reorderpoint
Usage rate
Time
The Inventory Cycle
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Pull Models of Inventory
ECRJIT I and IIQR
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Push/Pull View of Supply ChainsProcurement,Manufacturing andReplenishment cycles
Customer OrderCycle
CustomerOrder Arrives
PUSH PROCESSES PULL PROCESSES
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Push/Pull View of Supply Chain Processes
Supply chain processes fall into one of two categories depending on the timing of their execution relative to customer demandPull: execution is initiated in response to a customer order (reactive)Push: execution is initiated in anticipation of customer orders (speculative)Push/pull boundary separates push processes from pull processes
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Push/Pull View of Supply Chain Processes
Useful in considering strategic decisions relating to supply chain design – more global view of how supply chain processes relate to customer ordersCan combine the push/pull and cycle viewsThe relative proportion of push and pull processes can have an impact on supply chain performance
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General Assumptions of Time Based Inventory Approaches
Continuous Replenishment (CRP) InventoryFlow Through DistributionPipeline Logistics OrganizationConsistent Performance Measures
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Basic Elements Of A Quick Response Environment
Shorter General Times For ActivitiesReal Time Information By SKUSeamless Logistics Organization
Partnership RelationshipsReduced Lot Size and Quicker Change OverCommitment To Total Quality Management
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Key Issues In Time Based Inventory Approaches
Appropriate of available toolsAvailable Point of Sale InformationUse of Inventory SegmentationUse of Cross Dock OperationsForward Thinking Corporate Culture
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Benefits of QR?
Help me out here!
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What are some key Inventory Issues in these supply chains?
DellToyotaMcMaster CarrAmazonPeapod
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Summary Of Role of Inventory in the Supply Chain
Improve Matching of Supplyand Demand
Improved Forecasting
Reduce Material Flow Time
Reduce Waiting Time
Reduce Buffer Inventory
Economies of ScaleSupply / Demand
VariabilitySeasonal
Variability
Cycle Inventory Safety InventoryFigure Error! No text of
Seasonal Inventory