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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 - PowerPoint PPT Presentation
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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
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