Inventory Control

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Inventory Control

• The Logistics of Risk
• or

When a Refrigerator isnt!
2
What is Porters value chain? (King Phumpiu)

• A firms internal structure made up of primary
  support activities.
• Primary - inbound logistics, operations,
  outbound, marketing, sales and service.
• Support procurement, technology development, HR
  management, accounting general management.

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Inventory Risk Objectives

• Explain why inventory management is referred to
  as the logistics of risk. (too much or too
  little!)
• Give examples of how logistics provides/creates
  form, time and place utility.
• Define economic order quantity (EOQ), cycle,
  in-transit, safety and dead stocks.
• Calculate and illustrate average total (with and
  without safety stocks) and pipeline inventory as
  well as EOQ.
• List components of Inventory carrying costs.
• Differentiate perpetual and periodic reviews.
• Calculate order point for a perpetual and
  periodic review.

4
Good Inventory Management

• Inventory decisions which incorporate the
• The right _______
• The right ________
• At the right __________
• _______________

5
When is a refrigerator not a refrigerator?

• When it is in Cincinnati but it is wanted in
  Lexington.
• When it is in the crate in the backroom as the
  potential buyer is shopping
• __________________
• When it is white rather than the desired mauve.
• When it is 10 ft3 rather than the desired size.
• _________________
• When it is manufactured in December but demanded
  in July
• ___________________________________

6
The Nature of Inventory

• Inventory Shortages (stock outs) cause
• _________________,
• Extended shut downs of
• _________________________
• ________________________
• ________________________

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The Nature of Inventory (cont.)

• Excess inventory causes
• ____________________________
• Opportunity cost of capital (interest on
  investment)
• ____________________________
• ____________________________
• ____________________________
• ____________________________
• ____________________________

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Back to the basics

• Well forget about stock outs and overstocking
  for a minute!
• Enter the saw toothed world of the perfect
  inventory kingdom!
• Calculate and illustrate average inventory (w/
  w/o safety stocks- risk again!).

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Average Inventory

• Graphic
• Algebraic I OQ/2 where I average inventory
  and OQ is order quantity.
• _____________________________
• ____________________________

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Determine Order Quantity

• Two major influences
• ____________________________
• The more product we order each time the
• ____________________________
• The more we order each time the
• ____________________________
• ____________________________

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Example

• Each Item is valued at 600
• ICC is 25 of that or 150
• Transaction Cost or OC is 100
• We move 4 units per week (208/year)
• We could order from 1 unit every 2 days
  (4/week)or 208 units for the year.

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Inventory Carrying Cost -

• ICC (OQ x V x R)/2
• OQOder Quantity, Vprice RICC rate
• Or (you try)
• ____________________________
• ____________________________
• Or
• ____________________________

13
Order Cost -

• Total OC OC x S/OQ
• Where S yearly sales
• At 10 units / order what is OC?
• ____________________________
• Or
• ____________________________

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Calculate the Total Cost

• What is TC ?
• ____________________________
• TC ____________________________
• TC ____________________________
• TC ____________________________
• TC total cost
• OQquantity ordered/order
• V average unit value of product
• Rannual inventory carry charge as a
• OCordering cost or cost per order
• S Annual sales

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Calculate from the example

• 2 orders per year
• ICC ____________________________
• OC ____________________________
• TC ____________________________
• 104 orders per year
• ICC ____________________________
• OC ____________________________
• TC ____________________________

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Economic Order Quantity

• TC (OQ x V x R)/2 (OC x S)/OQ
• Solve by taking the
• ____________________________
• ____________________________
• ____________________________
• ____________________________
• ____________________________
• ____________________________

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Another EOQ example

• OC351/order
• S 1000 units/year
• V13/ Unit
• R 15
• EOQ SQRT(2OCS)/(VR) or
• EOQ SQRT 2(OCS)/(VR)
• NOW CALCULATE EOQ !
• ____________________________
• ____________________________

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Does an EOQ of 600 units make sense?

• ICC Ave Inv RV
• ____________________________
• ____________________________
• ____________________________
• OC 351 per order
• ____________________________
• ____________________________

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Cycle stocks

• Are those items
• ____________________________
• They meet the
• ____________________________
• assuming we can predict demand replenishment
  times.
• Now back to reality!

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In-Transit stocks

• Items
• ____________________________
• They are not available for sale but are
• ____________________________
• Sometimes called
• ____________________________
• Do I want to receive supplies f.o.b. destination
  or f.o.b. origin?
• Can this be substantial? Lets look.

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Average Pipeline Inventory

• Shipping time is 30 days,
• The order cycle is 5 days,
• A shipment is 100 units
• What is the average pipeline inventory?
• A shipment begins on days, 0, 5, 10, 15, 20, 25
  30, . .
• They arrive on days 30, 35, 40,
• FORMULA TO CALCULATE SHIPMENTS IS St/OC
• 30/5 shipments in transit
• 100 units per shipment 600 units of transit
  inventory at 3,000 per item 1,800,000

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Average Pipeline Inventory

• Shipping time is 10 days,
• The order cycle is 2 days,
• A shipment is 300 units
• What is the average pipeline inventory?
• You calculate in transit inventory
• A shipment begins on days, 0, 2, 4, 6, 8, 10, .
  .
• They arrive on days 10, 20, 30,
• ____________________________
• ____________________________

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Safety Stocks

• Demand may exceed what we expect so
• ____________________________
• Product may be in
  transit
• ____________________________

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Dead Stocks

• An SKU that
• ____________________________

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Uncertainty

• Demand varies
• ____________________________
• Order cycle times are
• ____________________________
• Communication time
• ____________________________
• Transportation times are
• ____________________________
• So, we have a new trade-off.

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ICC versus Stock Out Costs!

• Safety stock
• ____________________________
• ____________________________
• per year (too many OCs w/ lumpy demand can hurt)
• Demand probability varies during an order cycle.
• ____________________________
• various order cycle times.
• Gross savings
• ____________________________
• Back-Order costs
• ____________________________
• ____________________________
• ____________________________
• ____________________________

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When to order Order Point (OP)

• OP
• ____________________________
• D demand 100/week
• Lt lead time 6 weeks
• SS 250 therefore
• OP
• ____________________________
• When inventory hits
• ____________________________

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When to order Order Point (OP) - Perpetual

• OP DLt SS
• D demand 100/week
• Lt lead time 6 weeks
• SS 250 therefore
• ____________________________
• When inventory hits what do we order?
• ____________________________

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Perpetual Periodic Reviews

• Perpetual assumes an accurate accounting of
• ____________________________
• An alternate approach is the periodic review
  where
• ____________________________
• ____________________________
• OP
• ____________________________
• or the old example becomes what?
• ____________________________

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OP Perpetual v Periodic without SS D
100/week, Lt 6 weeks, P 4 weeks

• Perpetual OP calculation
• OP DLt , what does OP equal?
• ____________________________
• Periodic Calculation
• Checking every 4 weeks. periodic OP is ?
• ____________________________
• ____________________________

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Now lets break this down Perpetual a little more
and w/o SS

• Perpetual OP calculation
• OP DLt
• ____________________________
• If the Lt was 1 week what would or order point
  be? What if it were 2? 3? 4? 5? 6?
• Now adding the safety stock back in we get
• ____________________________

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OP Perpetual v Periodic D 100/week, Lt 6
weeks, SS 250, P 4 weeks

• Perpetual OP calculation
• OP DLt SS, what is OP
• ____________________________
• Periodic Calculation
• Checking every 4 weeks, what is OP?
• ____________________________
• ____________________________

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Compare OP for Perpetual v. Periodic Monitoring

• Perpetual OP DLt SS
• Periodic OP D (Lt P/2) SS
• Why are we adding something?
• In the 4 week span there is a chance that
• ____________________________
• ____________________________
• ____________________________

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A Practice Problem D 80/week, Lt 2 weeks, SS
10, P 2 weeks

• Perpetual OP DLt SS
• Periodic OP D (Lt P/2) SS
• You do the math
• ____________________________
• ____________________________

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Components of Inventory Carrying Cost

• ____________________________
• ____________________________
• ____________________________
• ____________________________
• ____________________________
• ____________________________
• ____________________________

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Remember, Good Inventory Management is

• Inventory decisions which incorporate the
• The right quantity
• The right item
• At the right place
• time
• What follows is a real world example of a
  technology innovation that is aimed at improving
  a whole series of the supply chain or a supply
  change management epiphany

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RFIDs (radio frequency identification is an
added example, LH-L 9-16-03)

• Radio Frequency Identification Tags
• ____________________________
• introduced by Wal-Mart, Gillette PG in
  September of 03.
• RFIDs do not have to be passed under laser
  readers.
• They are like speed passes at toll booths or id
  tags to trace beef from farm to fork

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RFIDs (an added example - continued)

• Chips are embedded in shipping crates to track
  products from factory to warehouse.
• Ensures there is
• ____________________________
• ____________________________
• It is currently cost prohibitive to track
  individual products, but !

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RFIDs (an added example - continued)

• Privacy is an issue. Truckers in CA went on
  strike about being tracked.
• Consultancies have developed to help suppliers
  meet Wal-Marts ( others) demands for
  assistance.

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RFIDs (an added example - continued)

• The technology got a kick start in the summer of
  03 when _________told its top 100 suppliers to
  deliver RFID products by 1-1-05! (Wal-Mart has
  700M of sales / day on 02!)

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RFIDs (an added example - continued)

• PG other suppliers are worried that if
  _____________ dont emerge theyll have to build
  a new system for each customer.
• But, if standards do emerge they may have to
  _______________________ _______________ just to
  plug into systems of customers they share.

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RFIDs (an added example - continued)

• With logistical cost estimated to be 5 cents on
  every dollar of goods sold, this one innovation
  could save ______________________
• Cost to suppliers could be as much as
• _____________________________