Bus 301: Business Logistics

1
Bus 301 Business Logistics

• Inventory Strategies-Overview

2
Drivers of Supply Chain Performance(we have seen
how this can impact)

• Facilities (Manufacturing Strategies)
• places where inventory is stored, assembled, or
  fabricated (outsourcing issues)
• production sites and storage sites (where
  manufactured)
• Inventory (Inventory Strategies)
• raw materials, WIP, finished goods within a
  supply chain (where located)
• inventory policies (push vs pull strategies)
• Transportation
• moving inventory from point to point in a supply
  chain (inconsistent delivery times)
• combinations of transportation modes and routes
  (best routing)
• Information Technology
• data and analysis regarding inventory,
  transportation, facilities throughout the supply
  chain (replace inventory with information)
• potentially the biggest driver of supply chain
  performance

3
Internal Supply Chain Management (ISCM)That
leads to the next element

• Manufacturing (Part I)
• Inventory Strategies (Part II)
• Forecasting (Part III)
• Information Technology (Part IV)

4
Inventory Role in the Supply Chain (GSW Hot
Dogs and Match Game)

• Inventory exists because of a mismatch between
  supply and demand
• Source of cost and influence on responsiveness
• Impact on material flow time (time elapsed
  between when material enters the supply chain to
  when it exits the supply chain)

5
Examples of Disasters

• Ciscos Inventory Disaster Lack of demand and
  inventory visibility as market slows leads to
  2.2 billion inventory write-off and stock price
  cut in half
• Nikes Planning System Perplexity New planning
  system causes inventory and order woes, blamed
  for 100 revenue miss as stock loses 20

6
We Have Seen The Functions of Inventory As
Helping.

• Meet anticipated demand
• Smooth production requirements
• Decouple components of the production-distribution
  system

• Protect against stock-outs
• Take advantage of order cycles
• Hedge against price increases leverage quantity
  discounts

7
Inventory Issues

• Operations, finance, and marketing have interest
  in inventories.
• Poor inventory management hampers operations,
  diminishes customer satisfaction, and increases
  operating costs.
• A typical firm probably has tied in inventories
  about
• 30 percent of its current assets
• 90 percent of its working capital (Current Assets
  Current Liabilities)
• Both Understocking and Overstocking are
  undesirable
• Understocking lost sales, dissatisfied
  customers, production lost.
• Overstocking tied up funds, physical holding
  cost, obsolescence.

8
Questions About of Inventory Control

• Inventory management has a trade-off decision
  between level of Customer Service and Inventory
  Cost.
• How do we measure Customer Satisfaction? Number
  and quantities of sales lost, back orders,
  customer complains.
• How do we measure Inventory Costs?
• Inventory turns (the ratio of the annual cost of
  goods sold to average investment in inventories),
  
• Days of inventory on hand (days of sales that can
  be supplied from existing inventories).

9
Inventory Turns Per Year
Industry Upper Quartile Median Lower Quartile
Dairy 34.4 19.3 9.2
Electronic Components 9.8 5.7 3.7
Computers 9.4 5.3 3.5
Publishing 9.8 2.4 1.3
Consumer Electronics 6.2 3.4 2.3
Appliances 8.0 5.0 3.8
Industrial Chemical 10.3 6.6 4.4
10
Types of Inventories That We Have Seen In Our
Examples

• Raw materials purchased parts
• Work-in-progress
• Finished-goods inventories
• Replacement parts, tools, supplies
• Goods-in-transit to warehouses or customers
  (Pipeline Inventory)

11
 
12
This Means Balancing Cost and Service By A
Firms Being

• More responsive in their order processing
• Able to manage volumes of SC information
• Capable with limited transportation resources
• Able to position inventory correctly

13
Supply Chain Inventory Costs

• Material Costs - average price paid per unit.
  Influenced by volume discounts which which make
  it amenable to economies of scale.
• Fixed Ordering Costs - costs that are not
  influenced by the lot size. Costs include
• Buyer Time- the incremental cost of buyer placing
  an extra order.
• Transportation- fixed cost of transportation. LTL
  pricing has a fixed and variable cost.
• Receiving cost- fixed part of the cost of
  receiving e.g. administrative costs, purchase
  order matching, updating records etc.

14
Supply Chain Inventory Costs

• Holding Costs- often a percentage of per unit
  cost of product.
• Cost of capital- opportunity cost of capital.
  Commonly, the weighted average cost of capital
  (WACC) is used to calculate this.
• Obsolescence - perishables, microprocessors,
  non-perishables
• Handling and Storage costs
• Damage, security, taxes, insurance

15
Two Basic Questions Raised By Inventory Decisions

• How much inventory should be ordered?
• When should inventory be order?

16
A Side Not for Marketing Impact of Quantity
Discounts

• If pricing decisions are made independently by
  the stages of the supply chain, the supply chain
  profit will be sub-optimal.
• In the case of commodity products where the
  market determines the prices, manufacturers can
  avail of lot size-based discounts to coordinate
  activities in the supply chain and reduce the
  supply chain costs.
• .Increasing lot sizes, however result in higher
  cycle inventory

17
It Is Always Jello Time!

18
We Need To Answer These Two Questions For Our
Jello Products?

• How much inventory should be ordered?
• When should inventory be order?

19
In Your Teams.

• Determine how much demand for of each SKU of
  Jello that we will need to consider over the next
  yearfor the Chicagoland Area(1) How much to
  order? (2) When to order? Base Your Forecast
  on the Classroom Population As A Base for
  forecasting!

20
How Should We Get Started?

1. Market Survey of Demand
2. _____________________________________
3. _____________________________________
4. _____________________________________
5. _____________________________________

21
Did You Get Your Order In On Time?
22
Summary Of Role of Inventory in the Supply Chain
23
What Made This Exercise Hard?

• Demand Uncertain or Certain?
• Demand Variable or Stable?
• No Costs of Holding?
• No Order Processing Costs?
• Customer Service Level?
• No Historical Data?
• Dependant or Independent Demand?

24
Here IS your Challenge

• Evaluate all the forecasts handed out in class
  tonight from the perspective of the balance of
  cost versus service. This means that you will be
  describing why the others are not suitable for
  the organization. What would be the pitfalls if
  the wrong one was chosen? After the evaluation
  process then describe which one would you chose
  and why?

25
Some Basic Methods to Answer These Questions

• Fixed Quantity Model (EOQ)
• Fixed Interval Model (Game)
• Zero Based Model
• MRP, DRP and ERP Systems (next week)

26
Factors Which Differentiate Inventory Models

• Dependent Vs Independent Demand
• Push Vs Pull Strategies
• System wide Vs Single Facilities Models

27
Independent and Dependent Demand
Independent Demand
A
Dependent Demand
B(3)
C(2)
D(5)
E(1)
D(12)
F(2)
Independent demand is uncertain. Dependent
demand is certain.
28
The Inventory Cycle
Profile of Inventory Level Over Time
Q
Usage rate
Quantity on hand
Reorder point
Time
Place order
Place order
Receive order
Receive order
Receive order
Lead time
29
The Fixed Quantity Model

• Order a fixed quantity when reordering takes
  place (EOQ)
• Amount order is based on product costs, demand
  information, carrying costs and order costs
• Automatically reorder (fixed amount) when reach
  number of units

30
Simple EOQ Assumptions

• Constant Demand
• Constant and Consistent Lead Times
• Satisfaction of All Demand
• Constant Price of Goods and Materials

• No Inventory In Transit
• One Item In Inventory
• Infinite Planning Horizon
• No Limitation On Capital

31
THE EOQ
32
The Basic Inventory Model

• Annual demand for a product is 9600
• D 9600
• Annual carrying cost per unit of product is 16
• H 16
• Ordering cost per order is 75
• S 75
• How much should we order each time to minimize
  our total cost
• How many times should we order
• What is the length of an order cycle (working
  days 288/year)

33
Remember.The Inventory Cycle?
Profile of Inventory Level Over Time
Q
Usage rate
Quantity on hand
Reorder point
Time
Place order
Place order
Receive order
Receive order
Receive order
Lead time
34
Two Questions to Answer in Planning Safety
Inventory

• What is the appropriate level of safety inventory
  to carry?
• What actions can be taken to improve product
  availability while reducing safety inventory?

35
Determining the AppropriateLevel of Safety
Inventory

• Measuring demand uncertainty
• Measuring product availability
• Replenishment policies
• Evaluating cycle service level and fill rate
• Evaluating safety level given desired cycle
  service level or fill rate
• Impact of required product availability and
  uncertainty on safety inventory

36
Determining the AppropriateLevel of Demand
Uncertainty

• Appropriate level of safety inventory determined
  by
• supply or demand uncertainty
• desired level of product availability
• Higher levels of uncertainty require higher
  levels of safety inventory given a particular
  desired level of product availability
• Higher levels of desired product availability
  require higher levels of safety inventory given a
  particular level of uncertainty

37
Fixed Interval Model

• Also know as fixed review period or fixed period
• Unlike EOQ does not required strict observation
• Usually low value items order in large quantities
• Also, when sales replenish inventory or when
  product are ordered daily

38
The Inventory Cycle
Profile of Inventory Level Over Time
Q
Usage rate
Quantity on hand
Reorder point
Time
Place order
Place order
Receive order
Receive order
Receive order
Lead time
39
Pull Models of Inventory

• ECR
• JIT I and II
• QR

40
Push/Pull View of Supply Chains
Procurement,
Customer Order
Manufacturing and
Cycle
Replenishment cycles
PUSH PROCESSES
PULL PROCESSES
Customer
Order Arrives
41
Push/Pull View of Supply Chain Processes

• Supply chain processes fall into one of two
  categories depending on the timing of their
  execution relative to customer demand
• Pull execution is initiated in response to a
  customer order (reactive)
• Push execution is initiated in anticipation of
  customer orders (speculative)
• Push/pull boundary separates push processes from
  pull processes

42
Push/Pull View of Supply Chain Processes

• Useful in considering strategic decisions
  relating to supply chain design more global
  view of how supply chain processes relate to
  customer orders
• Can combine the push/pull and cycle views
• The relative proportion of push and pull
  processes can have an impact on supply chain
  performance

43
General Assumptions of Time Based Inventory
Approaches

• Continuous Replenishment (CRP) Inventory
• Flow Through Distribution
• Pipeline Logistics Organization
• Consistent Performance Measures

44
Basic Elements Of A Quick Response Environment

• Shorter General Times For Activities
• Real Time Information By SKU
• Seamless Logistics Organization

• Partnership Relationships
• Reduced Lot Size and Quicker Change Over
• Commitment To Total Quality Management

45
Key Issues In Time Based Inventory Approaches

• Appropriate of available tools
• Available Point of Sale Information
• Use of Inventory Segmentation
• Use of Cross Dock Operations
• Forward Thinking Corporate Culture

46
Benefits of QR?

• Help me out here!

47
What are some key Inventory Issues in these
supply chains?

• Dell
• Toyota
• McMaster Carr
• Amazon
• Peapod

48
Summary Of Role of Inventory in the Supply Chain