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DERIVED INVENTORY OBJECTIVESDERIVED INVENTORY OBJECTIVES
• Organizational ObjectivesOrganizational Objectives
profitprofitreturn on investmentreturn on investmentmarket sharemarket sharecustomer satisfactioncustomer satisfactionproductivityproductivity
• Inventory System Objectives1. Provide customer service2. Support plant efficiency3. Minimize inventory investment
• Performance Measurement external (balance sheet, income statement)
Reports internal (stock levels, usage, stockouts)
DERIVED INVENTORY STRATEGIESDERIVED INVENTORY STRATEGIES
OrganizationalObjectives
OrganizationalStrategies
OperationsStrategies
InventoryStrategies
MarketingStrategies
FinanceStrategies
BALANCING INVENTORY OBJECTIVESBALANCING INVENTORY OBJECTIVES
MaximizeCustomer
Service
OperatingEfficiency
MinimizeInventory
Investment
INVENTORY SYSTEM REQUIREMENTSINVENTORY SYSTEM REQUIREMENTS
• Ensure sufficient goods/materials are availableEnsure sufficient goods/materials are available
• Identify excess and fast/slow moving itemsIdentify excess and fast/slow moving items
• Provide accurate, concise, and timely reports to Provide accurate, concise, and timely reports to
management management
• Perform the above at low costPerform the above at low cost
INVENTORY SYSTEM CONSIDERATIONSINVENTORY SYSTEM CONSIDERATIONS
1.1. Development of demand forecasts and treatment of forecast Development of demand forecasts and treatment of forecast
errorserrors
2.2. Selection of inventory models (EOQ, EPQ, EOI, MRP, and Selection of inventory models (EOQ, EPQ, EOI, MRP, and
SOQ)SOQ)
3.3. Measurement of inventory costs (order, holding, stockout) Measurement of inventory costs (order, holding, stockout)
4.4. Methods to record and account for items Methods to record and account for items
5.5. Methods for receipt, handling, storage, and issue of items Methods for receipt, handling, storage, and issue of items
6.6. Information procedures to report exceptions Information procedures to report exceptions
ORGANIZATIONAL OBJECTIVE CATEGORIESORGANIZATIONAL OBJECTIVE CATEGORIES
• Service to Owners / InvestorsService to Owners / Investors
• Service to CustomersService to Customers
• Service to SocietyService to Society
TYPICAL ORGANIZATIONAL OBJECTIVESTYPICAL ORGANIZATIONAL OBJECTIVES
• GrowthGrowth
• Market ShareMarket Share
• Profit MaximizationProfit Maximization
• Product LeadershipProduct Leadership
• Return on InvestmentReturn on Investment
• Social ResponsibilitySocial Responsibility
• Customer SatisfactionCustomer Satisfaction
• SurvivalSurvival
INVENTORY CONTROL SYSTEMSINVENTORY CONTROL SYSTEMS
• PerpetualPerpetual
• Two BinTwo Bin
• PeriodicPeriodic
• Optional ReplenishmentOptional Replenishment
• Distribution Requirements PlanningDistribution Requirements Planning
• Material Requirements PlanningMaterial Requirements Planning
• Just-in-TimeJust-in-Time
• Theory of ConstraintsTheory of Constraints
DEMAND-BASED INVENTORY SYSTEMSDEMAND-BASED INVENTORY SYSTEMS
Demand
Independent(Continuous)
Dependent(Discrete)
Fixed OrderSize System
Fixed OrderInterval System
EOQ/B; EPQ/B EOI/E
Time-PhasedOrder Point
(TPOP) System
Derived OrderQuantity System
Perpetual
System
Two-Bin
System
Periodic
System
OptionalReplenishment
System
DistributionRequirements
Planning (DRP)System
SingleOrder
QuantitySystem
MaterialRequirements
Planning (MRP)System
Just-In-Time
System
PERPETUAL INVENTORY SYSTEMPERPETUAL INVENTORY SYSTEM
SAFETY STOCK0
B
A
C
D E F G H I
TIME
INV
EN
TO
RY
L
EV
EL
1. Variable Demand (slope)2. Fixed reorder point B3. Fixed reorder quantity AC4. Fixed lead time DE = FG= HI5. Variable time between orders DF FH
PERPETUAL SYSTEM ADVANTAGESPERPETUAL SYSTEM ADVANTAGES
• Efficient, meaningful order sizeEfficient, meaningful order size
• Safety stock need for lead time onlySafety stock need for lead time only
• Relatively insensitive to forecast and parameter errorsRelatively insensitive to forecast and parameter errors
• Less attention on slow moving itemsLess attention on slow moving items
PERPETUAL SYSTEM DISADVANTAGESPERPETUAL SYSTEM DISADVANTAGES
• Clerks may set order quantitiesClerks may set order quantities
• Lot sizes, reorder points, & safety stocks must be revisedLot sizes, reorder points, & safety stocks must be revised
• Delays in posting transactionsDelays in posting transactions
• Errors and mistakes in transactionsErrors and mistakes in transactions
• High freight and transportation chargesHigh freight and transportation charges
• Fewer chances for dollar value discounts Fewer chances for dollar value discounts
PERIODIC INVENTORY SYSTEMPERIODIC INVENTORY SYSTEM1. Variable demand (slope)2. Fixed review period FH =HJ3. Variable reorder points C = B = D4. Variable reorder quantities E-C E-B E-D5. Variable lead time FG HI JK6. Safety stock = OB(Reorder quantity = E - inventory level at review period
SAFETY STOCK0
B
C
F G H I J K
TIME
INV
EN
TO
RY
L
EV
EL
E
D
PERIODIC SYSTEM ADVANTAGESPERIODIC SYSTEM ADVANTAGES
• Fewer orders are placedFewer orders are placed
• Purchase discounts more likelyPurchase discounts more likely
• Lower shipping and freight costsLower shipping and freight costs
OPTIONAL REPLENISHMENT INVENTORY SYSTEMOPTIONAL REPLENISHMENT INVENTORY SYSTEM
1. Variable demand (slope)2. Fixed review period = FG =GJ = IJ = JL = LM = MN3. Reorder points = D or lower4. Variable reorder quantity = E-C E-B 5. Fixed lead time = GH = JK = NP6. Safety stock = OA
0
A
C
F G H I J KTIME
INV
EN
TO
RY
L
EV
EL
E
D
B
P QNL M
TRILEVEL DISTRIBUTION NETWORKTRILEVEL DISTRIBUTION NETWORK
LDC101
LDC102
LDC103
LDC104
RDC100
LDC201
LDC202
LDC203
RDC200
LDC301
LDC302
LDC305
LDC305
RDC300
MDC
MDC = master (central) distribution centerRDC = regional distribution centerLDC = local distribution center
TYPICAL ABC INVENTORY ANALYSISTYPICAL ABC INVENTORY ANALYSIS
0
20
40
60
80
100
120
0 20 40 60 80 100
CBA
PE
RC
EN
T O
F T
OT
AL
DO
LL
AR
US
AG
E
PERCENT OF TOTAL ITEMS
A = HIGH VALUE ITEMSB = MEDIUM VALUE ITEMSC = LOW VALUE ITEMS
TYPICAL ABC INVENTORY ANALYSISTYPICAL ABC INVENTORY ANALYSIS
40
20
0
20
40
60
80
60
A
BCP
ER
CE
NT
OF
D
OL
LA
R V
AL
UE
PE
RC
EN
T O
F
ITE
MS
RELATIVE ANALYSIS OF ABC RELATIVE ANALYSIS OF ABC CLASSIFICATIONSCLASSIFICATIONS
Item Degree of
Control
Type of Records Lot Sizes Frequency of
Review
Size of Safety
Stocks
A Tight Accurate / Complete Low Continuous Small
B Moderate Good Medium Occasional Moderate
C Loose Simple Large Infrequent Large
ABC EXCEPTIONSABC EXCEPTIONS
1. Difficult Procurement Items1. Difficult Procurement Items
2. Short Shelf Life2. Short Shelf Life
3. Large Storage Space Requirements3. Large Storage Space Requirements
4. Item’s Operational Criticality4. Item’s Operational Criticality
5. Likelihood of Theft5. Likelihood of Theft
6. Difficult Forecast Items6. Difficult Forecast Items
INVENTORY CONTROL SYSTEMINVENTORY CONTROL SYSTEM
ReorderPoint
EOQ EPQ EOI SOQ
DRP
TPOP
MRP
MPS JIT TOC
END ITEM FORECASTS
FORECASTING MODELS
INVENTORY DECISION RULES
ITEM ORDERSINVENTORY
STATUS DATA
SUPPLIERS1. External2. Internal
RECEIPT
MarketResearch Sales Orders Opinions
INVENTORY
Transfer
INVENTORY SYSTEM IMPROVEMENTINVENTORY SYSTEM IMPROVEMENT 1. Standardize Stock Items1. Standardize Stock Items 16. Simplify Product Structures16. Simplify Product Structures 2. Reduce Lead Times 17. Multishift operations2. Reduce Lead Times 17. Multishift operations 3. Reduce Cycle Times 18. Continuous Improvement3. Reduce Cycle Times 18. Continuous Improvement 4. Use Fewer Suppliers4. Use Fewer Suppliers 5. Inform Suppliers of Expected Demand5. Inform Suppliers of Expected Demand 6. Contract for Minimum Annual Purchases 6. Contract for Minimum Annual Purchases 7. Buy on Consignment7. Buy on Consignment 8. Consider Transportation Costs 8. Consider Transportation Costs 9. Order Economical Quantities9. Order Economical Quantities10. Control Access to Storage Areas10. Control Access to Storage Areas11. Obtain Better Forecasts11. Obtain Better Forecasts12. Dispose of Excess Stock12. Dispose of Excess Stock13. Improve Record Accuracy (cycle count)13. Improve Record Accuracy (cycle count)14. Improve Capacity Planning14. Improve Capacity Planning15. Minimize Setup Times15. Minimize Setup Times
INACCURATE INVENTORY RECORDSINACCURATE INVENTORY RECORDS
• Too much of wrong stuffToo much of wrong stuff
• Not enough of right stuffNot enough of right stuff
• Unawareness of obsolete materialUnawareness of obsolete material
• High shrinkage rateHigh shrinkage rate
• Low turnover rateLow turnover rate
• Excessive expediting / stagingExcessive expediting / staging
• Ineffective schedulingIneffective scheduling
DISTRIBUTION AND MANUFACTURING INTEGRATION DISTRIBUTION AND MANUFACTURING INTEGRATION
MASTERPRODUCTIONSCHEDULE
ProductionPlan
CDC
RDC LDC
LDCLDC
EndItem
Component
Component Component
Component Component
DistributionRequirements
ProductionEfficiency
DRP MRP
LARGE INVENTORY SYNDROMELARGE INVENTORY SYNDROME
Functional Problem
inaccurate forecasts
absenteeism
substandard quality
equipment breakdowns
large setup items
scheduling problems
Classic Response
increase finished goods inventory
maintain buffer inventory
maintain buffer inventory
maintain work-in-process queues
run larger lot size
maintain buffer inventory
AGGREGATE INVENTORY MEASUREMENTAGGREGATE INVENTORY MEASUREMENT
Aggregate Inventory ValueAggregate Inventory Value
Ratio of Aggregate Inventory Value to Annual SalesRatio of Aggregate Inventory Value to Annual Sales
Days of SupplyDays of Supply
Inventory TurnoverInventory Turnover
AGGREGATE INVENTORY PROFILEAGGREGATE INVENTORY PROFILE
Supplies
Raw Materials
In-Process Goods
Finished Goods
Outputs
Inputs
Total Inventory
Level
RAW MATERIALS / SUPPLIES INVENTORY PROFILERAW MATERIALS / SUPPLIES INVENTORY PROFILE
Excess StockSurplus / Idle Stock
Working Stock
Safety Stock
Outputs
Inputs
Nonproductive
Productive
FINISHED GOODS INVENTORY PROFILEFINISHED GOODS INVENTORY PROFILE
Surplus Stock
Working Stock
Safety Stock
Outputs
Inputs
Nonproductive
Productive
Seasonal Stock(anticipation)
Excess Stock
IN-PROCESS INVENTORY PROFILEIN-PROCESS INVENTORY PROFILE
Unreleased Orders
Orders in Transit
Orders in Temporary Storage
Orders Waiting to be Worked
Orders Being Inspected
Orders Being Worked
Backlog
Nonproductive
Productive
In-ProcessInventory
Outputs
Inputs
Finished Goods
CLASSIC INVENTORY PROBLEMSCLASSIC INVENTORY PROBLEMS
Ever - increasing storage space needsEver - increasing storage space needs
Slow-moving materialsSlow-moving materials
Disposition of scrap, obsolete, & surplus materialsDisposition of scrap, obsolete, & surplus materials
Transaction recording errorsTransaction recording errors
Misplaced materialsMisplaced materials
THE INVENTORY FUNCTIONTHE INVENTORY FUNCTION
Mgt. policiesWorking capital
SpacePlant capacity
INVENTORY PLANNING
AND CONTROL
PurchaseOrder / Set-up
HoldingStockout
OPERATIONS PLANNINGForecastsDemand ratesProduction ratesStock-on-handBackordersLead timesProduct structures
REPEAT ORDER SYSTEMS1. Perpetual2. Two-Bin3. Periodic4. Optional Replenishment5. MRP6. Just-in-Time7. DRP8. TOC
SINGLE ORDER SYSTEMS
DECISION RULES1. What to order?2. When to order?3. How much?4. From whom?
INPUTS
CONSTRAINTS
COSTS
OUTUTS
MAJOR INVENTORY SYSTEM PROBLEMSMAJOR INVENTORY SYSTEM PROBLEMS
1. No goals and objectives1. No goals and objectives
2. No strategies2. No strategies
3. Weak formal inventory system3. Weak formal inventory system
4. Inaccurate forecasts4. Inaccurate forecasts
5. Inaccurate records5. Inaccurate records
AGGREGATE SYSTEM ELEMENTSAGGREGATE SYSTEM ELEMENTS
1.1. Determination or delineation of organizational goals Determination or delineation of organizational goals
2.2. Assessment of the significance of materials management to organizational goals Assessment of the significance of materials management to organizational goals
3.3. Determination of aggregate material needs Determination of aggregate material needs
4.4. Design of appropriate material control models Design of appropriate material control models
5.5. Design of forecasting models Design of forecasting models
6.6. Measurement and collection of model parameter inputs Measurement and collection of model parameter inputs
7.7. Model testing and implementation Model testing and implementation
8.8. Variable reporting and model redesign Variable reporting and model redesign
9.9. Operationalization of the materials management system Operationalization of the materials management system
