MANAGING INVENTORY FLOWS IN THE

SUPPLY CHAIN

Week 6

AGENDA• INTRODUCTION

• INVENTORY IN THE FIRM– Rationale

– Costs

– Classifying

– Visibility

– Measuring Effectiveness

AGENDA• TBC

• SUMMARY AND CONCLUSIONS

INTRODUCTION• Importance

– Cost

– ROA

– Customer Service

INTRODUCTION• In the Economy

– Declining as Percent of GDP

– Transportation Gains have Helped

AGENDA• INVENTORY IN THE FIRM

– Rationale

– Costs

– Classifying

– Visibility

– Measuring Effectiveness

INVENTORY IN THE FIRM• Rationale

– Batching Economies/Cycle• Sources

– Procurement– Transportation– Acquisition

• Trade-offs– Cost or Rate Per Unit

– Inventory Carrying Cost$

INVENTORY IN THE FIRM• Rationale

– Uncertainty/Safety• Sources

– Demand– Supply – Forecast

• Trade-offs– Information

– Inventory Carrying Cost$

INVENTORY IN THE FIRM• Rationale

– Time/In-Transit and WIP• Sources

– Pipeline– Time

• Trade-offs– Rate or Cost Per unit

– Inventory Carrying Cost$

INVENTORY IN THE FIRM• Rationale

– Other• Seasonal

• Anticipatory

INVENTORY IN THE FIRM• Costs

– Carrying• Capital

– Hurdle Rate– Weighted Average Cost of Capital

• Storage– Handling– Rent– Utilities

INVENTORY IN THE FIRM• Costs

– Carrying• Service

– Tax– Insurance– Protective

• Risk– Shrinkage– Shelf-life– Obsolescence

INVENTORY IN THE FIRM• Costs

– Ordering/Setup• Fixed in Total

• Variable With Respect to Number of Orders

INVENTORY IN THE FIRM• Costs

– Carrying versus Ordering: Trade-off

INVENTORY IN THE FIRM• Costs

– Stock-out• Carrying to Meet Uncertainty

• Lost Sales– Trade Down– Backorder– Lost Sale– Lost Customer– Lost Line

INVENTORY IN THE FIRM• Costs

– In-Transit (Pipeline)• Adjust

– Obsolescence– Service– Store

• Trade-off– Time– Rate

INVENTORY IN THE FIRM

• Classifying– ABC

• Small Numbers, Big Significance

• Large Numbers, Little Significance

– Critical Value• B and C Items

• Complementary to Sale and, or Use of A Items

INVENTORY IN THE FIRM

• Visibility– Dimensions

• Where in Time

• Where in Space

• Where is State of Being

INVENTORY IN THE FIRM

• Visibility– Requires

• Tracking, Tracing, Expediting

• Performance Reports by Stage

• Service Failures– Reports– Notices

INVENTORY IN THE FIRM

• Visibility– Benefits

• Customer Service

• COGS

• Turnover

• Vendor Relations

• Cash Flow

INVENTORY IN THE FIRM

• Measuring Effectiveness– Customer Satisfaction

– Expediting

– Inventory Turnover

– Percent of Sales

INVENTORY DECISION MAKING

Chapter 7

AGENDA• INTRODUCTION• PRINCIPAL APPROACHES

– Fixed Order Quantity (Certainty)– Fixed Order Quantity (Uncertainty)– Fixed Order Interval– In-Transit– Warehouse/WIP– Other Approaches

INTRODUCTION• Major Cost Categories

– Carrying• Cycle

• Safety

• In-Transit

– Ordering

– Stockout

INTRODUCTION• Two Questions

– How Much to Order?

– When to Order?

INTRODUCTION• Doing More with Less

– Order Processing Systems

– LIS

– Transportation

– Inventory Control

INTRODUCTION• Key Differences

– Nature of Demand• Dependent

• Independent

INTRODUCTION• Key Differences

– Push versus Pull• Proactive versus Reactive

• Pull for Independent

• Push for Dependent

• Most Systems are Hybrid

– Individual Node versus System

AGENDA• PRINCIPAL APPROACHES

– Fixed Order Quantity (Certainty)

– Fixed Order Quantity (Uncertainty)

– Fixed Order Interval

– In-Transit

– Warehouse/WIP

– Other Approaches

PRINCIPAL APPROACHES• Fixed Order Quantity (Certainty)

– Cycle• Covers

– Mean– Average – Expected

PRINCIPAL APPROACHES• Fixed Order Quantity (Certainty)

– Cycle• 05 Order Size

– EOQ– Cycle– Transportation Minimum– Vendor Minimum

PRINCIPAL APPROACHES• Fixed Order Quantity (Certainty)

– EOQ

PRINCIPAL APPROACHES• Fixed Order Quantity (Certainty)

– EOQ

cost annual totalTAC

annumper percercentcost carryingW

unitper valueV

cost on)(transacti orderingA

quantityorder Q

demand annualR

Let

PRINCIPAL APPROACHES• Fixed Order Quantity (Certainty)

– EOQ

VW

RAQ

and

Q

RAQVWTAC

Then

2

2

1

PRINCIPAL APPROACHES

• Fixed Order Quantity (Uncertainty)– Variability

• Demand• Time• Order Processing• Damage

– Safety Stock - Constant Safety Net

PRINCIPAL APPROACHES• Fixed Order Quantity (Uncertainty)

– Uncertainty of Demand

excessfor year per cost carrying expected

yearper cost stockout expected

cycleper cost stockout expected

out stockedunit per dollarsin cost stockout

unitsin shorts expected

unitsin excess expected

eVW

Q

RG

gkG

k

g

e

Let

PRINCIPAL APPROACHES• Fixed Order Quantity (Uncertainty)

– Uncertainty of Demand

VW

GARQ

and

Q

RGeVW

Q

RAQVWTAC

Then

)(2

2

1

PRINCIPAL APPROACHES

• Fixed Order Quantity (Uncertainty)– Uncertainty of Demand and Lead Time

• Probabilistic– Random– Normal– Known Properties

PRINCIPAL APPROACHES• Fixed Order Quantity (Uncertainty)

– Uncertainty of Demand and Lead Time

period during demand ofdeviation standard

period during demandmean

length timelead ofdeviation standard

length timeleadmean

timelead during demand ofdeviation standard

timelead during demandmean

R

LT

LT

R

X

X

Let

PRINCIPAL APPROACHES• Fixed Order Quantity (Uncertainty)

– Uncertainty of Demand and Lead Time

222 )()(

)(

LTRLT

LT

RX

and

XRX

Then

PRINCIPAL APPROACHES

• Fixed Order Interval– A.K.A.

• Fixed Review

• Fixed Period

PRINCIPAL APPROACHES

• Fixed Order Interval– Decisions

• Fixed Interval

• Variable Quantity

• A, B, or C Items?

• CVA?

PRINCIPAL APPROACHES

• Managing In-Transit

doortodoor metransit ti

demand annual

t

R

Let

PRINCIPAL APPROACHES

• Managing In-Transit

VWtR

VWRt

365

365TransitInon Cost Carying

PRINCIPAL APPROACHES

• Managing Days in Warehouse/WIP

sein warehouspent time

demand annual

w

R

Let

PRINCIPAL APPROACHES

• Managing Days in Warehouse/WIP

VWwR

VWRw

365

365on WIPCost Carying

PRINCIPAL APPROACHES

• Other Approaches– JIT/Pull/Independent

– MRP/Push/Dependent

– Hybrid• Push and Pull

• Increasingly the Norm

SUMMARY AND CONCLUSIONS