Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
CHAPTER 7:
Inventor y
7-2
•
Risk Assessment
•
Inventory carrying cost
•
Inventory management parameters
•
Advanced planning and scheduling
•
Minimizing inventory through commonality
Key concepts for discussion
7-3
•
Inventory functionality and
definitions
•
Inventory carrying cost
•
Planning inventory
•
Managing uncertainty
•
Inventory management
policies
•
Inventory management
practices
Overview of inventory
7-4
Because the customer usually isn’t sitting at the
plant exit!
Why do we have inventories?
Queen Elizabeth research station in Antarctica
7-5
Why hold inventory?
Economies of scale
Purchasing advantages
Transportation advantages
Manufacturing advantages
Balancing supply and demand
Seasonality/Speculative
Maintaining supply sources
Buffering against uncertainty
Uncertainty in demand
Uncertainty in supply
7-6
Factors influencing inventory levels
Average inventory
Number of products
Service level objectives
Supply chain structure
Financial implications of inventory
Companies rely on forecasts (demand/supply) to
assist in determining how much inventory to carry
7-7
Aggregate inventory
7-8
Sources of organizational risk
•
Market Risk
–
Demand based risk
–
Market risk
•
Competitive risk
•
Customer risk
•
Service risk
–
Product
•
Portfolio
•
Development
•
Launch
–
Sales Planning and Forecasting
–
Life-Cycle Risk Management
•
Supply Risk
–
Business strategy
–
Supplier
–
Operations
–
Logistics
–
Inventory
•
Financial Risk
–
Investment
–
Tax
–
Expatriation of funds
7-9
Supply risk
•
Business strategy
–
Outsourcing philosophy
–
Control
–
Information technology
–
Intellectual property
•
Supplier
–
Strategic sourcing
–
Selection
–
Contracting
–
Supplier management
•
Operations
–
Capability
–
Capacity
–
Flexibility
•
Logistics
–
Capacity
–
Availability
–
Security
–
Lead time
•
Inventory
–
Policies
–
Ownership
–
Visibility
–
Obsolescence
–
Financial Planning
7-10
•
Typical measures of exposure to investments in inventory
–
Time duration
–
Depth of commitment
–
Width of commitment
•
Supply chain exposure based on location
–
Manufacturer’s exposure is typically narrow, but deep and of long
duration
–
Wholesaler’s exposure is wider than manufacturers and
somewhat deep
•
Duration is medium
–
Retailer’s exposure is wide, but not very deep
•
Duration is usually short except for specialty retailers
Risks associated with holding inventory
7-11
Functions of inventory
Geographical specialization allows us to specialize
production across different locations
Decoupling allows us to run processes for maximum
economic lot sizes within a single facility
Supply/Demand balancing accommodates the elapsed
time between inventory availability and consumption
Buffering uncertainty accommodates uncertainty related
to
Demand in excess of forecast or
Unexpected delays in delivery (aka safety stock)
7-12
•
Inventory policy is a firm’s
guidelines concerning
–
What to purchase or manufacture
–
When to take action
–
In what quantity should action be
taken
–
Where products should be
located geographically
•
Firm’s policy also includes
decisions about which
inventory management
practices to adopt
Inventory policy
7-13
•
Service level is a performance target
specified by management and defines
inventory performance objectives
•
Common measures of service level include
–
Performance cycle is the elapsed time between
release of a purchase order by the buyer to the
receipt of shipment
–
Case fill rate is the percent of cases ordered that
are shipped as requested
–
Line fill rate is the percent of order lines (items)
that were filled completely
–
Order fill is the percent of customer orders filled
completely
Service level
7-14
•
Inventory includes materials, components, work-in-
process, and finished goods that are stocked in the
company’s logistical system
–
The cycle inventory (base stock) is the portion of
average inventory that results from replenishment
–
Order quantity is the amount ordered for
replenishment
–
Transit inventory represents the amount typically in
transit between facilities or on order but not received
–
Obsolete inventory is stock that is out-of-date or is
not in recent demand
–
Speculative inventory is bought to hedge a currency
exchange or to take advantage of a discount
–
Safety stock is the remainder of inventory in the
logistics system
Inventory definitions
7-15
Average inventory is the typical
amount stocked over time
Average inventory equals the maximum inventory plus the
minimum inventory divided by two
Typically equal to ½ order quantity + safety stock + in-transit stock
Figure 7.1 Inventory Cycle for Typical Product
7-16
•
Policy must decide how much inventory to order at a specified time
–
Reorder point defines when a replenishment order is initiated
•
However, other factors are important like performance cycle
uncertainty, purchasing discounts, and transportation economies
Smaller replenishment order quantities results
in lower average inventory
Figure 7.2 Alternative Order Quantity and Average Inventory
7-17
•
Inventory expense is
–
Annual inventory carrying cost percent times average inventory
value
•
Cost components
–
Cost of capital is specified by senior management
–
Taxes on inventory held in warehouses
–
Insurance is based on estimated risk or loss over time and facility
characteristics
–
Obsolescence results from deterioration of product during
storage
•
E.g. food and pharmaceutical sell-by dates
–
Storage is facility expense related to product holding rather than
product handling
Inventory carrying cost is the expense
associated with maintaining inventory
7-18
Final carrying cost percent used by a
firm is a managerial policy
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Second level
Third level
Fourth level
Fifth level
Table 7.2 Inventory Carrying Cost Components
7-19
•
Order preparation costs
•
Order transportation costs
•
Order receipt processing costs
•
Material handling costs
•
Total cost is driven by inventory planning
decisions which establish when and how much to
order
Inventory ordering cost components
7-20
•
Basic reorder formula if demand and performance are certain
–
R = Reorder point in units
–
D = Average daily demand in units
–
T = Average performance cycle length in days
•
If safety stock is needed to accommodate uncertainty the formula is
–
R = Reorder point in units
–
D = Average daily demand in units
–
T = Average performance cycle length in days
–
SS = Safety stock in units
When to order
×= TR D
+ SS×= TR D
7-21
•
Economic order quantity
is the amount that
balances the cost of
ordering with the cost of
maintaining average
inventory
–
Assumes demand and
costs are relatively stable
for the year
–
Does not consider impact of
joint ordering of multiple
products
How much to order
Figure 7.4 Economic Order Quantity
7-22
Standard mathematical solution for EOQ
7-23
Example EOQ solution using Table 7.3
•
Total ordering cost is $152 = (2400/300 x $19.00)
•
Inventory carrying cost is $150 = [300/2 x (5 x 0.20)]
7-24
•
All demand is satisfied
•
Rate of demand is continuous, constant and know
•
Replenishment performance cycle time is constant and
known
•
Constant price of product that is independent of order
quantity or time
•
An infinite planning horizon exists
•
No interaction between multiple items of inventory
•
No inventory is in transit
•
No limit is placed on capital availability
Simple EOQ model assumptions
7-25
•
EOQ is found at the point where annualized order
placement cost and inventory carrying cost are
equal
•
Average base inventory equal one-half order
quantity
•
Value of the inventory unit, all other things being
equal, will have a direct relationship with
replenishment order frequency
–
Higher value products will be ordered more frequently
Relationships useful for guiding inventory
planning