Introduction to operations and supply chain management 3e bozarth chapter 11

Managing Inventory throughout
the Supply Chain
Chapter 11


Chapter Objectives
Be able to:
Describe the various roles of inventory, including the different types of inventory and
inventory drivers.
Distinguish between independent demand and dependent demand inventory.
Calculate the restocking level for a periodic review system.
Calculate the economic order quantity (EOQ) and reorder point (ROP) for a continuous
review system.
Determine the best order quantity when volume discounts are available.
Calculate the target service level and target stocking point for a single-period inventory
system.
Describe how inventory decisions affect other areas of the supply chain. In particular,
describe the bullwhip effect, inventory positioning issues, and the impacts of
transportation, packaging, and material handling considerations.

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Inventory Management
 Inventory – Those stocks or items used to
support production (raw materials and workin-process items), supporting activities
(maintenance, repair, and operating supplies)
and customer service (finished goods and
spare parts).

© 2010 APICS Dictionary

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Inventory Types





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Cycle stock
Safety stock
Anticipation inventory
Hedge inventory
Transportation inventory
Smoothing inventory

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Types of Inventory
 Cycle stock – Components or products that are
received in bulk by a downstream partner, gradually

used up, and then replenished again in bulk by an
upstream partner.
 Safety stock – Extra inventory that a company holds
to protect itself against uncertainties in either
demand or replenishment time.

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Types of Inventory
 Anticipation inventory – Inventory that is held in
anticipation of customer demand.
 Hedge inventory – A form of inventory buildup to
buffer against some event that may not happen.
© 2010 APICS Dictionary

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Types of Inventory
 Transportation inventory – Inventory that is moving
from one link in the supply chain to another.
 Smoothing inventory – Inventory that is used to
smooth out differences between upstream
production levels and downstream demand.

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Inventory Drivers
 Inventory drivers – Business conditions that
force companies to hold inventory.

Table 11.2

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Independent vs. Dependent
Demand Inventory
 Independent demand inventory – Inventory
items whose demand levels are beyond a
company’s complete control.
 Dependent demand inventory – Inventory
items whose demand levels are tied directly
to a company’s planned production of
another item.
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Independent vs. Dependent
Demand Inventory
 Example:
 Independent demand:
• Kitchen table – Need 500 tables five weeks from now

 Dependent demand:
• Kitchen table legs – Need 4 per table or 2,000 legs
• Calculation of dependent demand (Chapter 12)

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Inventory Control Systems
 Periodic Review System – An inventory system that
is used to manage independent demand inventory
where the inventory level for an item is checked at
regular intervals and restocked to some
predetermined level.
 Continuous Review System – An inventory system
used to manage independent demand inventory
where the inventory level for an item is constantly
monitored and when the reorder point is reached,
an order is released.
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Periodic Review System
Calculating the order quantity (Q)
Q = R-I
where
R = restocking level
I = inventory level at the time of review.

Figure 11.6
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Periodic Review System
Calculating the restocking level (R)

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Calculating Service Level
 Service Level – A term used to indicate the amount
of demand to be met under conditions of demand
and supply uncertainty.
 Assumes that the demand during the reorder
period and the order lead time is normally
distributed.

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Continuous Review System
 Key features:
 Inventory levels are monitored constantly, and a
replenishment order is issued only when the reorder point
is reached.
 The size of a replenishment order is typically based on the
trade-off between holding costs and ordering costs.
 The reorder point is based on both demand and supply
considerations, as well as on how much safety stock
managers want to hold.

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Continuous Review System
 Assumptions:
 Constant demand and lead time
 Holding and Ordering cost known and fixed
 Price of each unit is fixed.

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Continuous Review System
When the demand rate and lead time are constant:
Reorder point = demand x lead time
R = dL

Figure 11.7
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Economic Order Quantity
 Economic Order Quantity (EOQ) – The order
quantity that minimizes annual holding and
ordering costs for an item.
 Holding costs (H)– The cost to hold a single unit in
inventory for a year.
 Ordering costs (S) – The cost of placing an order regardless
of the order quantity.

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Total Yearly Inventory Costs
Total holding and ordering costs for the year
= Total yearly holding cost + Total yearly ordering cost =

Yearly holding cost = average inventory x holding cost
Yearly ordering cost = number of orders per year x fixed ordering cost

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Comparing Ordering Costs to EOQ

Figure 11.9

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Example 11.2
Annual demand (D) = 4,000
Annual holding cost (H) = $15
Ordering cost (S) = $50/order
Order quantity (Q) = 1,000 fans

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Example 11.2

Calculate the EOQ and use that value as the order
quantity to see if the cost is lower and calculate the
total yearly inventory cost.

Cost Savings:
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Reorder Points and Safety Stock
 When demand rate (d) and lead time (L) are
constant:
 When demand rate (d) and lead time (L) or
both varies:

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The impact of varying
demand rates and lead time

Figure 11.10

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Causes of Variability
 The variability of demand
 The variability of lead time
 The average length of lead time
 The desired service level

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