logistical managment
DESCRIPTION
TRANSCRIPT
1
1. Inventory and Inventory management2. Lead time3. Reserve stock and safety stock4. Reorder level5. Economic order quantity6. Trade off between total costs of inventory and order quantity7. Customer Service levels 8. Average inventoryvbnovvkhbifyt9. Selective Inventory Control10. Pareto’s rule
2
11. Quadrant technique12. Non-Performing Asset13. ABC analysis14. Vendor managed Inventory15. Inventory Turn Over Ratio16. Review Period
3
What is Inventory?
4
5
A list of items being held in stock
An asset not participating in conversion or not getting sold
Any NPA, considered to be an asset & part of working capital
6
Why do we have inventory?
Due to mindset - reluctance to dispose off
Consequence of redundancy of products
Built-up as a means of customer satisfaction, as a cushion against uncertainties
To overcome disadvantages of poor infrastructure
9 to 12 months of sales in India, a few days in Japan and a month in US/Europe
7
Importance of InventoryDecades of 1980 & 1990 brought inventory in focusWhy? Emergence of Japan as a economic super power in 1980sVisual evidence of success of Japanese systemsFord Motors carried 15 times more WIP inventory than what Toyota did! A benefit Toyota enjoyed over Ford in cost managementImpact on product cost, 5 to 35% of product cost are logistical costs & 35% of logistical costs are inventory costs
8
Effect on product quality & costHas a major impact on product cost - a source of cost and bad qualityProblem to source traceability is lost due to inventoryDefects (problems) are hiddenFacilitates production Protects the conversion process from uncertainties of market Measure of managerial performanceInventory turns, small volume and high turns
9
Signs of poor inventory managementAn increase in back ordersRising inventory investmentsHigh customer turn overIncrease in order cancellationInsufficient storage spaceIncrease in rupee value & number of obsolete products
10
Objectives of Inventory ManagementTo increase corporate profitabilityTo anticipate impact of corporate policies on inventory levels and act proactivelyTo minimize logistical costs while meeting customer service requirementFunctions of Inventory [Rationale for Inventory]Overcomes geographical separationDecoupling internal process – reducing dependence
11
•
Balancing supply and demandBuffers uncertainties of lead time, demand and poor infrastructureActs like a cushion against unusual events like strike or war Technical requirement of batch productionFacilitates price discounts
12
Inventory related costsProcurement Costs - management and staff time, order preparation and dispatch, follow up, transport from vendor, receiving, handling storageCarrying Costs - capital, opportunity, space, tax, security, insurance, spoilage and preservation, obsolescenceOut of stock costs - emergency transport, lost sale, lost customer
13
Types of InventoryLocation inventory-Inventory at a fixed locationIn transit inventory[pipeline inventory]-Being transported and or waiting to be transported Manufacturing inventoryR/M, components, WIP, F/G [Maintenance, repairs and operating supplies] Risk due to commitment of resource to manufacturing is deep and long.
14
Wholesale inventory Stock of large quantities and sold in small quantities to retailersStock of seasonal products, products to satisfy assorted, small and urgent needs of retailersGenerally risk is narrow & deep, when the product line expands risk is wider and deeper.Retailers inventoryVariety of products to satisfy demandRetailers push the inventory backwards to wholesalers and reduce the depth of risk although the risk is wide
15
Average inventoryAverage level of inventory in the organizationR/M, parts, WIP, finished goodsFollowing inventory concepts are used in calculating average inventory1. Cycle inventory: result of replenishment process, also known as base stock or lot size stock, (eoq/2)2. Safety stock Inventory: Stock held to safe guard against variations in lead-time & or consumption3. Transit Inventory: Either moving or awaiting movement
16
Economic order quantityAssumptions of Wilson’s Lot size formula or
Classical EOQ model1. Demand is at a known constant rate and
continuous2. Lead time is known and constant3. Demand is fully satisfied, no shortages are
allowed4. All costs are time invariant5. Quantity discounts are not considered6. Replenishment is instantaneous, there is no
transit inventory
17
7. Process is continuous8. No constraints are imposed on quantities
ordered, storage capacity, budget etc. EOQ derivation All assumptions in tact
EOQ=√2AO/cc*u (annual dd, ordering cost per order, carrying cost per unit, total units)
Limitations of classical EOQ model- major limitations are the assumptions made
If the concept of EOQ is applied without taking into account the limitations, results can be disastrous
18
Adjustments to EOQEOQ model does not consider economics of transportation• Transportation costs are sensitive to weight of consignmentQuantity discount-Quantity discounts can upset the benefit of EOQ if we don’t evaluate the situation from total cost perspective
19
Other EOQ adjustmentsProduction lot size: Mismatch between buyer’s EOQ and supplier’s Economic Batch Quantity. Some adjustment is needed.Multiple items purchase• Combination of products are sourced from a supplier• Quantity discounts and transportation costs of individual items may be different• Individual item as per EOQ may not be feasible with respect to total cost• So adjustment is required to EOQ of various items
20
Limited capital• Significant role of budgetary allocation• Budget has to satisfy the requirement of entire product line• EOQ of various items requires adjustmentPrivate trucking• Getting a full truck (FTL) becomes significant from cost perspective as against EOQStandard package• Available standard package and EOQ
21
Inventory Classification* Ranking of Inventory to facilitate selective management
control* Pareto’s rule: 80-20 rule, separate vital few from trivial
many* ABC Analysis
20%
80%
80%
Trivial many
Vital few
20%
Inventory Items
Inventory Value
22
*An example of ABC analysisLogistics Perspective of selective management controlABC analysis has one chosen parameter like cost or value in focus‘A’ category is priority from the perspective of this particular parameterPrioritization in inventory management has to consider other factors as wellVED Analysis FSN AnalysisHML
23
SDE [Scarce, Difficult to procure, Easy to procure]
SOS [Seasonal Off Seasonal]GOLF [Government, Open market, Local &
Foreign Source]XYZ analysis
Quadrant technique
24
Distinctives High risk, low value items: customized items not expensive but not available easily, single supplier and long lead-time
Criticals High value customized items not available easily
Generics Low value easily available items, standard items
Commodities High value standard items, basic production items, standard packaging items
Stock out
Risk
Value or Profit potential
25
Fundamental approaches to managing inventory
Traditional approach has been deciding when to order?
But challenge of today - to find answers to the questions where to stock the material?, how much?
and when?Modern challenge is high customer satisfaction at
minimum inventory
26
Fixed Order Quantity Approach (condition of certainty)
How much to order & when to order?The order quantity is fixed at EOQ (discussed
already)When to order is decided by Re Order Level
(ROL or ROP) which triggers orderingROL is fixed by calculating lead time
consumptionInventory cycles can be conceptualized by
looking at the figure drawn in the class
27
ROLLEAD TIME
CONSUMPTION
Q
Lead Time
Lead Time
Lead Time
INVENTORY CYCLE TIME
INVENTORY CYCLE TIME
INVENTORY CYCLE TIME
INV
D
Q - MODEL
Q = EOQ = √2AD/hROL = LEAD TIME
CONSUMPTION
28
Salient Features of the above approach 1.Widely used technique2.Requires constant monitoring of stock levels3. Combines the concepts of push & pull4.Limited by the assumptions made• Cost of in-transit inventory• Transportation costs• Stock depletion is at a specific rate ‘D’ during replenishment cycle. • In reality stock depletions can be steep & high
29
Min-Max Approacha modification to EOQ model• Order is released when ROL is reached
• Actual order quantity should be the sum of
EOQ and the difference between ROL and actual
stock on hand at the time ROL occurs.
30
ROLLEAD TIME
CONSUMPTION
Q
Lead Time
Lead Time
Lead Time
INVENTORY CYCLE TIME
INVENTORY CYCLE TIME
INVENTORY CYCLE TIME
INV
D
Q - MODEL
Q = EOQ + (ROL – ACTUAL) = √2AD/h + (ROL – ACTUAL) ROL = LEAD TIME CONSUMPTION
ACTUAL INV LEVEL
31
ROLLEAD TIME
CONSUMPTION
Q
Lead Time
Lead Time
Lead Time
INVENTORY CYCLE TIME
INVENTORY CYCLE TIME
INVENTORY CYCLE TIME
INV
D
SAFETY STOCK 1
Q - MODEL
SAFETY STOCK 2
Fixed Order Quantity Approach (condition of uncertainty)
When demand and lead time vary
32
Fixed Order Interval ApproachDecisions about review period T & SOptional replenishment Approach
Decisions about review period, S and s
33
Lead Time
Lead Time
Lead Time
INVENTORY CYCLE TIME
INVENTORY CYCLE TIME
INVENTORY CYCLE TIME
INV
D
P - MODEL
‘S’ MAX STOCK
I2 INVENTORY LEVEL
I1 INVENTORY LEVEL
‘s’ MIN STOCK
(S – I1) =
34
Some Inventory related definitions1. Inventory policy: • 5W-1H questions about buying and
controlling inventory. What to stock? How much? When? Where? What method? Approach?
• Centralized or decentralized control2. Service levels: performance objectives of
inventory function • Order cycle time: release of a purchase
order & receipt of the shipment at customer’s place
35
• Case fill rate: percentage of cases deliverable against the number of cases customer ordered in one order
• Line fill rate: product lines fully delivered to the product lines ordered is the line fill rate.
• Order fill rate: percentage of orders completely fulfilled to orders received
• Average inventory a. Cycle inventoryb. Safety stock Inventoryc. Transit Inventory also known as Pipe Line
Inventory
36
Inventory Strategy – a long term plan to control inventoryWhat is controlled? Selective management control, quadrant approachWhen do we move inventory? Kanban system in JIT, DRP, MRPWhere and at how many places? Centralized or decentralized? Warehouse location, square root lawWhy? Customer satisfaction at minimum cost
37
How do we manage? Inventory approaches, push methods? pull methods?
How do we measure performance? Inventory turns, fill rates, perfect orders
04/10/23 38
Inventory management methods [Bowersox pages 287……]
• Reactive methods (Pull methods)
• Planning methods (Push methods)
• Other methods (Modern methods)
04/10/23 39
Reactive methods or pull systemsReactive methods or systems respond to
customers pull
• ‘Q’ Model
• ‘P’ Model
• Optional replenishment
• Two bin systemLimitations
• Smooth demand patterns are assumed
• Unlimited production & supply facilities
• Inability to handle multiple facilities
• Needs manual intervention to prevent shortages
04/10/23 40
I 50ROP 50OQ 200D 5
I 80ROP 75OQ 200D 14
I 250ROP 200OQ 400 WHOLESALER A
WHOLESALER B
REACTIVE INVENTORY ENVIRONMENT
DISTRIBUTION CENTER
04/10/23 41
Planning methods [push or proactive methods]
Fair Share Allocation
• Allocate an amount of inventory to a warehouse based on
• The past consumption pattern
• Current stock
• Minimum inventory level at the plant warehouse.
04/10/23 42
Plant warehouseInventory 600 units
Distribution Center 1:
• Inventory 50 units
• Daily use 10 units
Distribution Center 2:• Inventory 100 units
• Daily use 50 units
Distribution Center 3:
• Inventory 75 units
• Daily use 15 units
04/10/23 43
Then a common day’s supply, DS, for distribution center inventories is, A + ∑I
DS = -------------- ∑D
500 + ∑ 50 + 100 + 75DS = --------------------------
∑10+50+15= 9.67days. Now amount of inventory allocated to distribution center 1 is [9.67 – 50/10]X10 = 4.67X10 = 46.7 units, say 47 units. Similarly we can find allocations
for distribution centers 2 & 3
04/10/23 44
Fair share allocation method doesn’t take into account
• Lead times
• EOQ
• Safety stock Other approaches to inventory management Just In Time [Bowersox pages 490………….]
The time based approach - Toyota Motors Company & concept of kanban in 1950
Reduction in WIP quantities tying the inventory closely to the demand from subsequent process or
internal customer
04/10/23 45
Kanban is conceptually a two bin system leading to concept of stockless production
JIT embraced a variety of manufacturing concepts like SMED, group technology,
TPM and quality circles. American disappointment with the attempts
to incorporate Japanese methods lead to other concepts like vendor managed
inventory (JIT II) & DRP
04/10/23 46
QR, CR, AR, response based techniquesQuick response (QR)
On receiving order supplier with the help of EDI [Electronic data interchange] finalizes
the delivery details and communicates them to the customer in advance
This facilitates scheduling labor and other facilities
This reduces inventories as uncertainties are reduced and total cost resulting into
better performance.
04/10/23 47
Continuous Replenishment strategyAlso known as vendor managed inventory
(JIT II)Need for placing an order is eliminated
A supply chain relationship is established that ensures continuous replenishment of stock at customers place by the vendor.
04/10/23 48
There are three basic needs in CR
• Effective communication system to provide key information between customer and
supplier
• Sufficiently large volumes to make transportation viable
• Finally customer should honor the shipment from the supplier for payment
04/10/23 49
Automatic or profile Replenishment (AR)Supplier anticipates the customers’ requirement for making replenishment
The responsibility for inventory management is placed squarely on the
supplierInformation flow between customer &
supplier ensures visibility of
• Inventory
• Customers order positionEffective management to reduce total costs
50
MRP [Materials Requirement Plan]Popular concept in 1960&1970
Consists of a computer system & a manufacturing information system
Does production scheduling and materials planning
MRP systemMRP systems compute
• Net requirements for each inventory item• Time-phase them
• Determine their proper coverage
51
SUB
ASSEMBLY II SUB ASSEMBLY II
SUB ASSEMBLY I
C2 C5 B2 A5 D5C3 D1 D2 D3 D4A1 A2 B1 C1 C4A3 A4
MAJOR ASSEMBLY
52
ObjectivesEnsure the availability of materials (components & products) for planned
production and customer deliveryMaintain the lowest possible inventory level
Plan • Manufacturing activities
• Delivery schedules• And purchasing activities
53
ScopeMRP System covers inbound logistical area
Key elements of MRP systemMaster Production Schedule
Bill of MaterialsInventory Status Files
MRP ProgramOutputs & Reports
Development First phase is called MRP I [Materials
Requirement Planning] Second phase is called MRP II
[Manufacturing Resources Planning]
54
MRP I [soft ware] is restricted to materials resource only
• Attempts to minimize inventories• Maintain adequate materials for production
process.MRP II includes all resources required in
planning and control of production
55
Process of MRP IMRPI starts with, customer’s demand
[independent demand] and explodes the time and need for components based on the
demand for end product
56
Customers orders
inventory transactio
ns
Forecasts
Engineering changes
Inventory status file[finished
items, WIP, planned orders
Master production schedule
[which product to produce, in
what quantity & when]
Bill of materials file
[product structure and
routing] MRP I
SYSTEM
PLANNED SCHEDULES AND VARIOUS OTHER
REPORTS
57
When does it get applied? The process follows an intermittent system
Demand is dependent Purchasing dept., their suppliers and company’s own manufacturing system is flexible enough to handle deliveries on
weekly basisAdvantages of MRP I
1. Improved business results [ROI, profits]2. Improved manufacturing results
3. Better manufacturing control4. Less inventory
58
5. Time phased ordering of materials
6. Less materials obsolescence
7. Higher reliability
8. More responsiveness to market demand
9. Reduced production costs
Disadvantages of MRP I
1. Due to small lot purchases high material acquisition costs and high ordering costs
2. Stock out costs are more as safety stock protection is low
59
3. A limitation of software as adapting to specific situations is difficult. So modification
of the software is necessary
MRP II
MRP I is updated and expanded to include
• Financial, marketing and logistics elements
• Entire set of activities involved in planning and control of production
• It consists of variety of functions like
• Production planning
60
• Resource requirements planning
• Master production scheduling
• Materials requirement planning [MRP I]
• Shop floor control
• Purchasing
61
Orders [production
plan]
Bill of materials
Inventory records
Material requirement planning [MRP]
Capacity requirement planning [CRP]
Realistic?
Execute capacity plans
Execute materials plan
yes
No
62
Benefits of MRP IIInventory reductions of one fourth to one
thirdHigher inventory turn over
Improved consistency in on-time customer delivery
Reduction in purchasing costs due to less urgent purchases
Minimization of workforce overtime
63
DRP is a technique of Distribution Management
DRP concept has evolved in two phases, DRPI (Distribution Requirement Planning) &
DRP II (Distribution Resources Planning) DRP I deals with inventory planning
DRP II covers all resources relevant to distribution
• Warehouse space• Man power levels
• Transport capacity [eg. trucks, rail cars]• Financial flows
64
DRP IApplicable to outbound logistics
Determination of inventory requirement at points of consumption for short spans of time Plan to move inventory in the distribution
channel in response to the above It is a time phased plan, dynamic and
flexible in natureCustomer dependent planning, depends on
the changing market environmentNot organization dependent
65
Coordination responsibility once the finished goods are produced
Planning is realistic as it is closer to real time
Overall inventory levels are low Response time to real time market
requirement is low
66
DRP IIDistribution Resource Planning [DRP II ]is
an extension of DRP IDRP II applies the time phased logic of
DRP I to replenish inventories in multi echelon warehousing systems
DRP II extends DRP I to include the planning of key resources in a distribution system –ware house space, man power
levels, transport capacity [eg. trucks, rail cars] and financial flows
67
As an extension of DRP I, DRP II uses the
needs of distribution to drive the master
schedule, controlling the materials planning DRP PROCESS
Planning tool for DRP is scheduleSchedule for each SKU at each distribution
facility on daily, weekly or monthly basisIntegration of the above schedules and
overall requirement planning for the regional
warehouse and central supply facility
68
Marketing benefits Increased service levels - improved OTD,
reduced Customer ComplaintsEffective new product introduction plans
Ability to anticipate shortagesImproved inventory coordination
Logistics benefitsReduced distribution costsReduced inventory levels
Decreased warehouse space requirement as inventory levels are low
Lesser back orders
69
Improved inventory visibility & co-ord. between manufacturing and logistics
Constraints Needs accurate forecast
Sources of errors in the systemInaccuracy in forecast quantityInaccuracy in forecast location
Inaccuracy in forecast timeVariable performance cycles
System nervousness-frequent rescheduling causing confusion
Uncertainty buffers
70
How does a DRP system work?Consider a distribution net work with three distribution centers catering to the needs of
the marketOne central facility that supplies inventory to
three distribution centersCentral facility is supplied by the production
facility planned as per MRPDRP modifies the MRP to the advantage of
the organization
71
DRP & MRP LINKDISTRIBUTION CENTER ILEAD TIME IS 2 WEEKS, SAFETY STOCK IS 55, ORDER QUANTITY 500
WEEKS
DETAILS 0 1 2 3 4 5 6 7 8
WEEKLY REQ
- 50 50 60 70 80 70 60 50
STOCK 352 302 252 192 122 542 472 412 362
WHEN & HOW MUCH?
500 500
Order to Central Supply Facility
Arrival From Central Supply Facility
72
DISTRIBUTION CENTER IILEAD TIME IS 2 WEEKS, SAFETY STOCK IS 40, ORDER QUANTITY 150
WEEKS
DETAILS 0 1 2 3 4 5 6 7 8
WEEKLY REQ
- 20 25 15 20 30 25 15 30
STOCK 140 120
95
80
60 180 135 145 110
WHEN & HOW MUCH?
150 150
Order to Central Supply Facility
Arrival from Central Supply Facility
73
DISTRIBUTION CENTER III
LEAD TIME IS 2 WEEKS, SAFETY STOCK IS 115, ORDER QUANTITY 800
WEEKS
DETAILS 0 1 2 3 4 5 6 7 8
WEEKLY REQ
- 115 115 120 120 125 125 125 120
STOCK 1020
905 790 670 550 425 300 175 855
WHEN & HOW MUCH?
800 800
Order to Central Supply Facility
Arrival from Central Supply Facility
74
TO MRP SCHEDULE
LEAD TIME IS 3 WEEKS, SAFETY STOCK IS 287, ORDER QUANTITY 2200CENTRAL SUPPLY FACILITY
WEEKSDETAILS
0 1 2 3 4 5 6 7 8
WEEKLY REQ - - - 650 - - 800 - -
STOCK 1250
1250
1250
600 600 600 2000
2000
2000
WHEN & HOW MUCH?
2200
2200
From I & II From III
FROM PRODUCTION
75