Inventory Control

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Inventory Control
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Inventory Control
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Inventory Control is everywhere.

• Fuel for the Car
• Milk to Drink
• Milk to Sell
• MotherBoards to Assemble Computers
• Production with Setups

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Some youtube videos

• http//es.youtube.com/watch?vqkZQxXJuqKo
• http//es.youtube.com/watch?v_VrBKF6SUCA

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Why we do store?

• Unplanned shocks (labor strikes, natural
  disasters, surges in demand, etc.)
• To maintain independence of supply chain
• Economies of production
• Improve customer service
• Economies of purchasing
• Transportation savings
• Hedge against future

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Costs Related with Inventory Control

• Inventory deteriorates, becomes obsolete, lost,
  stolen, etc.
• Order processing
• Shipping
• Handling
• Carrying Costs
• Capital (opportunity) costs
• Inventory risk costs
• Space costs
• Inventory service costs
• Out-of- Stock Costs
• Lost sales cost
• Back-order cost
• Complacency

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Nature of Inventory Adding Value through
Inventory

• Speed
• location of inventory has gigantic effect on
  speed
• Cost
• direct purchasing, delivery, manufacturing
• indirect holding, stockout.
• Quality
• inventory can be a buffer against poor quality
  conversely, low inventory levels may force high
  quality
• Flexibility
• location, level of anticipatory inventory both
  have effects

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Nature of InventoryFunctional Roles of Inventory

• Transit
• Buffer
• Seasonal
• Decoupling
• Speculative
• Lot Sizing or Cycle
• Mistakes
• Promotional

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Logistics Costs
Categoría de Coste Costes Totales sobre Ventas Costes Logísticos
Transporte 636 5,4 (5.9) 62,7
Almacenamiento 82 0,7 (0.8) 8,1
Costes de Inventarios 250 2,1 (3) 24,6
Administración 47 0,4 (0.4) 4,6
Total 1015 8,6 (10.1) 100
Source 16th Annual State of Logistics Report,
2004
(Entre parentesis los datos del 2001)
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http//www.loanational.org/documents/cscmp/17th_An
nual_State_of_Logistics_Report.pdf
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Sectores diferentes tienen diferentes perfiles de
coste

• Pero además la logística además también impacta
  en
• Otros costes en la Cadena de suministro como los
  de fabricación materia prima o gestión de
  clientes.
• La cantidad de capital en el negocio.
• Y una elevada proporción del riesgo global del
  negocio.

Costes Logísticos como Porcentaje de ventas
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Aerospacial
Automovil
Maquinaría
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ComidaBebida
Electronica
Sanidad
Químicas
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Gas y Petrol
Distribución
Banca
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Source ILT, McKinsey, LCP Consulting analysis
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Visión general
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(No Transcript)
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Which are the main factors
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Main Factors defining an Inventory Policy

• Demand
• Average Forecasted Demand
• Error on Forecasted Demand
• Setup
• Cost
• Time
• Storage
• Cost
• Capacity
• Expiration
• Time
• Lead Time
• Lead Time (LT)
• Basic Period
• Period of Forecasting
• Horizon
• Finite and Infinite Horizon
• Finite or Infinite Production Rate

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EOQ Formula
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Why to do it with Formulae what has always been
done by head?

• Reduce Cost
• Number of Different units
• Time to do Added Value tasks
• Computer Aid Management

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Assumptions to derive the EOQ formula

• Production is Instantaneous.
• Delivery is inmediate
• Demand is deterministic
• Demand is constant over time
• A production run incurs a fixed setup cost
• Products can be analyzed individually

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Inventory Order Cycle
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EOQ Cost Model
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EOQ Cost Model
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EOQ Cost Model (cont.)
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EOQ Example
Cc 0.75 per yard Co 150 D 10,000 yards
Orders per year D/Qopt 10,000/2,000 5
orders/year
Order cycle time 311 days/(D/Qopt) 311/5
62.2 store days
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Required Data to generate a Policy

• Time
• Forecast Period
• Horizon
• Lead Time
• Demand for a given Period (average and Standard
  Deviation)
• Demand during Horizon
• Cost
• holding Cost ( per unit per year) KCu
• Unit Cost ( per unit)
• Setup Cost S ()
• Total Cost Holding Cost Setup Cost
• Service Level (max of runouts that we are
  willing to afford)

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Policies
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Reorder Point if stockltROP then Buy(Q)

• ROPLevel of inventory at which a new order is
  placed
• ROP Maximun demand that we want to serve during
  Lead Time
• Average Demand during Lead Time
• Standard deviation of demand
• Safety Stock (ss)
• Q Quantity that minimizes Total Cost

R dLss where d demand rate per period L
lead time
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Safety Stocks. Basic Concepts

• Safety stock
• buffer added to on hand inventory during lead
  time
• Stockout
• an inventory shortage
• Service level
• probability that the inventory available during
  lead time will meet demand

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Variable Demand with a Reorder Point
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Reorder Point with a Safety Stock
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Reorder Point With Variable Demand
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Reorder Point for a Service Level
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Reorder Point for Variable Demand
The carpet store wants a reorder point with a 95
service level and a 5 stockout probability
For a 95 service level, z 1.65
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Periodic Review Policies if time then
Buy(OUL-Stock)

• OUL Max Demand we cover during next Review
  Period Lead Time
• Time Review Period that minimizes Total Cost
• Economic Order Period (T)
• Power of Two Policies

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Order Quantity for a Periodic Inventory System
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Fixed-Period Model with Variable Demand
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Problem

• A toy manufacturer uses aproximately 32000
  silicon chips annually. The Chips are used at a
  steady rate during the 240 days a year that the
  plant operates. Annual holding cost is 60 cents
  per chip and ordering cost is 24. A year has 288
  days.
• How muchh should we order each time?
• How many times per year are we to order?
• What is the length of an order cycle.
• What is the total cost?
• If the supplier has a lead time of 20 days?
• Which is the reorder point?
• Should do we have a safety stock? To prevent what?

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Problem

• Determine optimal number to orderD 1,000
  unitsS 10 per orderH .50 per unit per
  year
• The pack has 150 units each
• Management underestimated demand by 50
• C 5/unitThere is a discount of 5 per unit if
  you buy more than 500 units

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Problem

• A company substitutes in a regular way a
  component of a given machine to ensure quality
  parameters of the product. Machine works during
  the whole year and needs 40 parts per week. The
  component supplier offers a price of 10 per
  unit for orders with less than 300 units, and a
  price of 9.70 per unit for bigger orders. The
  cost of setting each order is stimated on 25 ,
  and the holding cost is of 0.26 / / year.
• How many units should you request each time?
• If the supplier wants you to make orders bigger
  than 500 units which is maximum unit price that
  should stablish for orders bigger than 500 units?

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Karbonicas JuPe

• Karbonicas JuPe is a company bottling drinks
  where you work. To simplify we are to consider
  only one product. Our company has a warehouse
  where store product just manufactured and from
  where we serve the three logistics platforms that
  our client holds. The logistics platforms are
  cross-dock warehouses, where storing products has
  a high cost, and from where there associated
  retail stores are served.
• The lead time at the manufacturing side for
  Karbonicas JuPe is 7 days (i.e. it takes one week
  from we have been asked to produce until the
  product is ready at the warehouse. Each of the
  logistics platforms faces a demand (measured in
  pallets) that might be approximated by a normal
  distribution. (Data can be found at Table I).
• Each logistic platform knows the demand and the
  stock levels of each associated retail store. It
  takes two (2) days since the platform asks for
  products until the product reaches each retail
  store through the logistic platform. The
  inventory system is Reorder Point at each
  echelon. (i.e. the platforms work with ROP logic
  to the central warehouse of Karbonicas JuPe, and
  the central warehouse works with ROP to the
  manufacturing facility). The relation between the
  logistic platform and the retail stores is not
  considere in this problem.
• You are considering the posibility of eliminate
  the central warehouse echelon. To do that the
  three logistics platforms should agree a joint
  review period (considering all the costs) with a
  power-of-two policy. The factory consolidates the
  three orders (that have been done simultaneously)
  and will bottle them together. From the factory
  docks and without passing through the central
  warehouse the product will be sent directly to
  each logistic platform.
• Key questions are how much does it cost now, how
  much will it cost the new system.

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Karbonicas JuPe (ctnd)

• Data