Business operating management

Yuzhi Zhao

chapter11.pptx

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Managing Inventories in Supply Chains

COLLIER/EVANS

Operations + Supply Chain Management

LEARNING OUTCOMES, Part 1

Explain the importance of inventory, types of inventories, and key decisions and costs

Describe the major characteristics that impact inventory decisions

Describe how to conduct an ABC inventory analysis

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LEARNING OUTCOMES, Part 2

Explain how a fixed-order-quantity inventory system operates and how to use the economic order quantity (EOQ) and safety stock models

Explain how a fixed-period inventory system operates

Describe how to apply the single-period inventory model

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Inventory Management

LO 11-1

Involves planning, coordinating, Monitoring and controlling

Acquisition, storage, handling, movement, distribution, and possible sale of raw materials

Component parts and subassemblies

Supplies and tools

Replacement parts

Other assets that are needed to meet customer wants and needs

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Types of Inventory, Part 1

LO 11-1

Raw materials, component parts, subassemblies, and supplies

Inputs to manufacturing and service-delivery processes

Work-in-process (WIP) inventory

Partially finished products in various stages of completion that are awaiting further processing

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Types of Inventory, Part 2

LO 11-1

Finished-goods inventory

Completed products ready for distribution or sale to customers

Safety stock inventory

Additional amount of inventory kept over and above the average amount required to meet demand

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Exhibit 11.1

Role of Inventory in the Value Chain

LO 11-1

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Managing Inventories in Global Supply Chains, Part 1

LO 11-1

Requires good technology, processes, and information technology (IT) support

Purchasing must focus on:

Global sourcing and total system cost

Ensuring quality, delivery performance, and technical support

Seeking new suppliers and products and evaluating their potential to the company

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Managing Inventories in Global Supply Chains, Part 2

LO 11-1

Environmentally preferable purchasing (EPP) or green purchasing

Affirmative selection and acquisition of products and services that effectively minimize negative environmental impacts over their life cycle of:

Manufacturing

Transportation

Use

Recycling or disposal

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Categories of Inventory Costs

LO 11-1

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Inventory Characteristics, Part 1

LO 11-2

Each item is assigned a unique identifier, called a stock-keeping unit (SKU)

Stock-keeping unit (SKU): Single item or asset stored at a particular location

Nature of demand

Independent demand

Demand for an SKU that is unrelated to the demand for other SKUs and needs to be forecasted

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Inventory Characteristics, Part 2

LO 11-2

Dependent demand

Directly related to the demand of other SKUs and can be calculated without needing to be forecasted

Static demand is stable in nature

Dynamic demand varies over time

Storage planning approaches

Analyzing inventory for single or multiple periods

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Inventory Characteristics, Part 3

LO 11-2

Lead time

Time between placement of an order and its receipt

Stockouts

Inability to satisfy the demand for an item

Backorder: Occurs when a customer is willing to wait for an item

Lost sale: Occurs when the customer is unwilling to wait and purchases the item elsewhere

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ABC Inventory Analysis

LO 11-3

Categorizes SKUs into groups according to their total annual dollar usage

A items - Account for a large dollar value but a relatively small percentage of total items

C items - Account for a small dollar value but a large percentage of total items

B items - Items between A and C

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Fixed-Quantity System (FQS)

LO 11-4

Deals with a fixed order quantity or lot size

Same quantity is ordered every time, and it does not have to be economically determined

Managed using:

Inventory position (IP)

On-hand quantity (OH) plus any orders placed that have not arrived (scheduled receipts, SR), minus any backorders (BO)

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Managing Fixed-Quantity Inventory Systems

LO 11-4

When IP falls at or below a certain value (reorder point), a new order is placed

Reorder point (r): Value of the inventory position that triggers a new order

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Exhibit 11.5

Summary of Fixed-Quantity System (FQS)

LO 11-4

Exhibit 11.5 Summary of Fixed-Quantity System (FQS)

Managerial Decisions	Order Quantity (Q) and Reorder Point (r)
Ordering decision rule	A new order is triggered whenever the inventory position for the item drops to or past the reorder point. The size of each order is Q units.
Key characteristics	The order quantity Q is always fixed. The time between orders (TBO) is constant when the demand rate is stable. The TBO can vary when demand is variable.

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Exhibit 11.6

Fixed-Quantity System (FQS) under Stable Demand

LO 11-4

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Exhibit 11.7

Fixed-Quantity System (FQS) with Highly Variable Demand

LO 11-4

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Economic Order Quantity (EOQ) Model, Part 1

LO 11-4

Classic economic model that minimizes the total cost

Total cost is the sum of the inventory-holding cost and the ordering cost

Assumptions

Only a single item (SKU) is considered

Entire order quantity (Q) arrives in the inventory at one time

Deals with only order/setup and inventory-holding costs

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Economic Order Quantity (EOQ) Model, Part 2

LO 11-4

No stockouts are allowed

Demand for an item is constant and continuous over time

Lead time is constant

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Economic Order Quantity (EOQ) Model, Part 3

LO 11-4

Cycle inventory (order or lot size inventory)

Results from purchasing or producing in larger lots than are needed for immediate consumption or sale

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Exhibit 11.8

Cycle Inventory Pattern for the EOQ Model

LO 11-4

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Economic Order Quantity (EOQ) Model, Part 4

LO 11-4

Annual holding cost per unit (Ch)

Where

I - Annual inventory-holding charge expressed as a percent of unit cost

C - Unit cost of the inventory item or SKU

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Economic Order Quantity (EOQ) Model, Part 5

LO 11-4

Where

D - Annual demand for the product

Q - Number of items ordered

C0 - Cost of placing one order

Total annual cost (TC)

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Economic Order Quantity (EOQ) Model, Part 6

LO 11-4

Economic order quantity (Q*)

Minimizes the total annual cost

Reorder point (r)

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Avoiding Stockouts in a Fixed-Order-Quantity System, Part 1

LO 11-4

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Avoiding Stockouts in a Fixed-Order-Quantity System, Part 2

LO 11-4

Reorder point (r) is determined

Where

L - Average demand during the lead time

L - Standard deviation of demand during the lead time

z - Number of standard deviations necessary to achieve the acceptable service level

zL - Amount of safety stock

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Avoiding Stockouts in a Fixed-Order-Quantity System, Part 3

LO 11-4

Suppose that and t are the mean and standard deviation of demand for some time interval (t), then

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Fixed-Period System (FPS), Part 1

LO 11-5

Inventory position is checked only at fixed intervals of time, T, rather than on a continuous basis

Known as periodic review system

Principal decisions

Time interval between reviews (T)

Replenishment level (M)

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Fixed-Period System (FPS), Part 2

Optimal policy is established using the EOQ model that provides the best economic time interval under model assumptions

Where

Q* - Economic order quantity

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Fixed-Period System (FPS), Part 3

Optimal replenishment level without safety stock

Where

d - Average demand per time period

L - Lead time in the same time units

M - Demand during the lead time plus review period

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Exhibit 11.11

Summary of Fixed-Period Inventory Systems

LO 11-5

Exhibit 11.11 Summary of Fixed-Period Inventory Systems

Managerial Decisions	Review Period (T) and Replenishment Level (M)
Ordering decision rule	Place a new order every T periods, where the order quantity at time t is Qt= M - IPt , and IPt is the inventory position at the time of review, t.
Key characteristics	The review period, T, is constant, and placing an order is time-triggered. The order quantity, Qf varies at each review period. M is chosen to include the demand during the review period and lead time, plus any safety stock. Stockouts can occur when demand is stochastic and can be addressed by adding safety stock to the expected demand during time T+ L.

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Single-Period Inventory Model, Part 1

LO 11-6

Used in situations involving seasonal or perishable items that cannot be carried in inventory and sold in the future

Known as newsvendor problem

Solved using marginal economic analysis

Compares the cost or loss of ordering one additional item with the cost or loss of not ordering one additional item

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Single-Period Inventory Model, Part 2

LO 11-6

Costs are defined as

cs - Cost per item of overestimating demand

cu - Cost per item of underestimating demand

Optimal order quantity is the quantity of Q* that satisfies

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KEY TERMS, Part 1

Inventory

Inventory management

Raw materials, component parts, subassemblies, and supplies

Work-in-process (WIP) inventory

Finished-goods inventory

Safety stock inventory

Environmentally preferable purchasing (EPP) (or green purchasing)

Ordering costs or setup costs

Inventory-holding costs (or inventory-carrying costs)

Shortage costs (or stockout costs)

Unit cost

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KEY TERMS, Part 2

Stock-keeping unit (SKU)

Independent demand

Dependent demand

Static demand

Dynamic demand

Lead time

Stockout

Backorder

Lost sale

Fixed-quantity system (FQS)

Inventory position (IP)

Reorder point

Economic order quantity (EOQ)

Cycle inventory (order or lot size inventory)

Safety stock

Service level

Fixed-period system (FPS)

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SUMMARY

Inventory is an asset held for future use or sale

Economic order quantity (EOQ) model minimizes the total cost

In a fixed-period system (FPS), inventory position is checked only at fixed intervals of time, T

Single-period models are used in situations involving items that cannot be carried in inventory and sold in future periods

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