Bonus Project Logitics Inventory Management

8/14/2019 Bonus Project Logitics Inventory Management

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InventoryInventory

ManagementManagement

Prepared by:Prepared by:

Sarissunova MeruyertSarissunova Meruyert

Shiganbayeva AselShiganbayeva Asel


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What is Inventory?What is Inventory?

Stock of items kept to meet future demand

Inventory managementInventory management is the planning andis the planning and

controlling of inventories in order to meet thecontrolling of inventories in order to meet the

competitive priorities of the organization.competitive priorities of the organization. Purpose of inventory management

how many units to order

when to order


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Types of StockTypes of Stock

Raw materialsRaw materials the materials, parts and components the materials, parts and componentsthat have been delivered to an organisation, but arethat have been delivered to an organisation, but are

not yet being usednot yet being used

Work-in-processWork-in-process materials that have started, but materials that have started, but

not yet finished their journey through thenot yet finished their journey through theorganisations operationsorganisations operations

Finished goodsFinished goods goods that have finished the goods that have finished the

process and are waiting to be shipped out to customersprocess and are waiting to be shipped out to customers

Raw

Materials

Works

in

Process

Finished

Goods


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Inventory Classifications

Cycle stock,Cycle stock,or base stockor base stock

inventory that isinventory that is

needed to satisfyneeded to satisfy

normal demandnormal demandduring the courseduring the course

of an order cycleof an order cycle..

SafetySafety sstocktockor buffer stockor buffer stock

inventory that isinventory that is

held in additionheld in addition

to cycle stockto cycle stock

to guard againstto guard againstuncertainty inuncertainty in

demand or leaddemand or lead

timetime..

Pipeline stockPipeline stockor in-transit stockor in-transit stock

inventory that is eninventory that is en

route betweenroute between

various nodesvarious nodes

(fixed facilities(fixed facilitiessuch as plant,such as plant,

warehouse or store)warehouse or store)

in a logistics systemin a logistics system

Spe

culative stocSpeculative stocinventory thatinventory that

is held for severalis held for several

reasons, includingreasons, including

seasonal demand,seasonal demand,

projectedprojectedprice increase,price increase,

and potentialand potential

shortage of product.shortage of product.


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Inventory-Related Costs

Inventory Carrying(Holding) Costs

Stockout Costs


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Inventory Carrying CostInventory Carrying Cost

(ICC)(ICC) A cost associated with holding inventory.A cost associated with holding inventory.

Are expressed in percentage termsAre expressed in percentage terms

Example:Example:Product Value= $100Product Value= $100

ICC=18%ICC=18%

Relevant Annual Inventory Expense= ICC*Relevant Annual Inventory Expense= ICC*PVPV == $18$18


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Inventory Carrying CostInventory Carrying Cost

(ICC)(ICC) Inventory shrinkageInventory shrinkage (more items are recorded entering(more items are recorded entering

than leaving warehousing facilities)than leaving warehousing facilities) Inventory obsolescenceInventory obsolescence (products lose value through(products lose value through

time);time);

Storage costsStorage costs costs of occupying space in a costs of occupying space in astoreroom;storeroom;

Insurance and taxesInsurance and taxes - more taxes are paid and- more taxes are paid andinsurance costs are higher if end-of-the-yearinsurance costs are higher if end-of-the-year

inventories are high. ;inventories are high. ; Opportunity cost of money investedOpportunity cost of money invested cost of cost of

taking a position in the wrong materials;taking a position in the wrong materials; Cost of employing staffCost of employing staff receiving, storing, receiving, storing,

retrieving and moving inventory.retrieving and moving inventory.


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Stockout CostsStockout Costs

The costs of not having sufficient inventory.The costs of not having sufficient inventory. Involve an understanding of a customers reaction to aInvolve an understanding of a customers reaction to a

company being out of stock when a customer wants to buycompany being out of stock when a customer wants to buyan item.an item.

Customers reactions:Customers reactions:

1. Ill be back1. Ill be back

2. Call me when it is in2. Call me when it is in

3. The customer buy a substitute3. The customer buy a substitute

4. The customer goes to a competitor only for this purchase4. The customer goes to a competitor only for this purchase

5. The customer goes to a competitor for this and all future5. The customer goes to a competitor for this and all futuresales.sales.


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When to Order? (OrderWhen to Order? (Order

Timing)Timing) Fixed order quantity systemFixed order quantity system time interval time interval

fluctuates, order size is constant.fluctuates, order size is constant.

Example:Example: a store always orders 200 cases of soft drinks.a store always orders 200 cases of soft drinks.

1-st order - January 3, 2-nd order January 6,1-st order - January 3, 2-nd order January 6,

3-rd order January 11.3-rd order January 11. Fixed order interval systemFixed order interval system time interval is time interval is

constant, order size fluctuates.constant, order size fluctuates.

Example:Example: a man goes grocery shopping every Sunday.a man goes grocery shopping every Sunday.AlthoughAlthough

the time interval constant at 7 days, thethe time interval constant at 7 days, the

shopping listshopping list

(inventory rewuirments) differs from week to week.(inventory rewuirments) differs from week to week.


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Reorder (trigger) PointReorder (trigger) Point

When demand is certainWhen demand is certain

Quantity to which inventory is allowed toQuantity to which inventory is allowed to

drop before replenishment order is made.drop before replenishment order is made.

Reorder point = Daily Demand x Replenishment Cycle

ROP= DD x RC

Example: Assume that the average daily demand is 50 unitsper day for a component. Assume also that the timerequired to place and receive an order is 4 days. Whatis the reorder point?

Reorder point = 4 x 50 = 200 units

Thus, an order should be placed when inventory drops to 200 units.


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Reorder (trigger) PointReorder (trigger) Point

When demand is uncertainWhen demand is uncertain

Reorder point=(Daily Demand x ReplenishmentCycle)+Safety Stock

ROP = (DD x RC) + SS

Example: Continuing with the previousexample, suppose the

company decides to hold 50 unit ofsafety stock.

Reorder point = (4 x 50) + 50 = 250 units

Thus, an order should be placed when inventory drops to250 units.

hi l iG hi l R i


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Graphical RepresentationGraphical Representation

ofof

Reorder Point SystemReorder Point SystemDemandDemand

raterate

TimeTimeLeadLeadtimetime

LeadLeadtimetime

OrderOrderplacedplaced

OrderOrderplacedplaced

OrderOrderreceiptreceipt

OrderOrderreceiptreceipt

InventoryLevel

Inventor

yLevel

Reorder point,Reorder point, RR

Order quantity,Order quantity, QQ

00

h dH M h t R d ?


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How Much to Reorder?How Much to Reorder?

Economic Order QuantityEconomic Order Quantity

(EOQ)(EOQ)Optimal order quantity that will minimizetotal inventory

costs.

Total Costs

Total Carrying Cost

EOQ* Order Size (Q)

$Costs

Total Ordering Cost


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(EOQ) in $(EOQ) in $

Example:Example: Suppose that $1,000 of a particular item isSuppose that $1,000 of a particular item isused each year,used each year,

the order costs are $25 per order submitted,the order costs are $25 per order submitted,

and inventoryand inventory

carrying costs are 20%.carrying costs are 20%.EOQEOQ= 2 x 1000 x 25/ 0.20 = 250,000 == 2 x 1000 x 25/ 0.20 = 250,000 = $500$500 orderorder

sizesize

=Qeoq2AB

C=

2(Annual Usage)(Administrative cost)

Annual Carrying Cost

E i O d Q iE i O d Q tit


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(EOQ)(EOQ)

in unitsin units=Qeoq 2DBIC

=2(Annual Demand)(Administrative cost)

Inv.$ Value x Annual Carrying Cost

Example:Example: Suppose that $1,000 of a particular item is used eachSuppose that $1,000 of a particular item is used eachyear, theyear, the

product has a cost of $5 per unit, the order costs areproduct has a cost of $5 per unit, the order costs are

$25 per order$25 per order

submitted, and inventory carrying costs are 20%.submitted, and inventory carrying costs are 20%.

Annual Demand in units = $1,000/$5 = 200 unitsAnnual Demand in units = $1,000/$5 = 200 unitsEOQEOQ= 2 x 200 x 25/ 0.20 x 5 = 10,000 = 100 units= 2 x 200 x 25/ 0.20 x 5 = 10,000 = 100 units


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8

180

60

1

120

105 7

A D

H

S A F E T Y S T O C K

Time, days

Unit

s

Inventory Flow DiagramInventory Flow DiagramGraphically depicts the demand for andreplenishment of inventory.

EOQ=120 units

Safet Stock = 60 units

Average Demand perday=30

Replenishment Cycle=2 days


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Safety StockSafety Stock

Can prevent 2 problems:Can prevent 2 problems:

- an increased rate of demand;- an increased rate of demand;

- longer-than-normal replenishment- longer-than-normal replenishment

C t A hC t A h


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Contemporary ApproachesContemporary Approaches

to Managing Inventoryto Managing Inventory

ABC ANALYSISABC ANALYSIS

Sales volume in $Sales volume in $ Sales volume in unitsSales volume in units

Based on the 80/20 rule 80% of sales come from 20%of products.

Inventories are not of equal value to a

firm and should not be managedin thesame way.

Determinants of ABC status:

The fastest-selling items

Item profitability

Item importance

! Note: 4 classification to ABC Analysis D, dogs or dead inventory(inventory with no demand)


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ABC AnalysisABC Analysis

Class AClass A 5 15 % of units5 15 % of units

70 80 % of value70 80 % of value

Class BClass B 30 % of units30 % of units 15 % of value15 % of value

Class CClass C 50 60 % of units50 60 % of units

5 10 % of value5 10 % of value


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Just-in-Time (JIT)Just-in-Time (JIT)

ApproachApproach With just in time (JIT) inventory, TheWith just in time (JIT) inventory, The

exact amount of items arriveexact amount of items arrive at theat the

moment they are neededmoment they are needed, Not a, Not a

minute before OR not a minute afterminute before OR not a minute afterJIT considerations:JIT considerations: Views inventory as a wasteViews inventory as a waste Improved product quality from suppliersImproved product quality from suppliers

Low (no) safety costsLow (no) safety costs


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Inventory TrackingInventory Tracking

Bar codes are substituted by RFID chips;Bar codes are substituted by RFID chips;

Radio-frequency identification (RFID) chipsRadio-frequency identification (RFID) chips able to transmit data through packaging.able to transmit data through packaging. Early adopter of RFID is Wal-Mart.Early adopter of RFID is Wal-Mart.

RFID drawbacks: Cost of tags;

Cost of equipmentto read the tags.

RFID benefits: Increase in sales;

Reduction instockouts.


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Factors Affecting InventoryFactors Affecting Inventory

ManagementManagement1.1. Complementary ProductsComplementary Products

- Inventories that can be used together.Inventories that can be used together.

e.g. : razor blades and razors.e.g. : razor blades and razors.

- Intensify pressures on retailers concernedIntensify pressures on retailers concernedwith inventory maintenance.with inventory maintenance.

- So many complementary items exist forSo many complementary items exist forcooking meat and fish that youll never becooking meat and fish that youll never be

able to display them in the same section (ofable to display them in the same section (ofthe store).the store).


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3.3. DealsDeals

- Manufacturer may offer retailers aManufacturer may offer retailers a

deal that involves a combination ofdeal that involves a combination of

desirable and less-desirable items.desirable and less-desirable items.

- Carload sale and truckload sale Carload sale and truckload sale

retailer has purchased an entireretailer has purchased an entire

railcar load of a product and wishesrailcar load of a product and wishesto pass the quantity savings on to itsto pass the quantity savings on to its

customerscustomers




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4.4. Defining Stock-Keeping Units (SKUs, line items)Defining Stock-Keeping Units (SKUs, line items)

- A type of individual item for which separateA type of individual item for which separaterecords are maintained.records are maintained.

- The inventory manager must designate theThe inventory manager must designate thequantity or minimum lot size with which thequantity or minimum lot size with which theinventory records will deal.inventory records will deal.

- The definition of an SKU may vary depending onThe definition of an SKU may vary depending ona partys position in the SC.a partys position in the SC.

e.g. retailer records as canse.g. retailer records as cans

warehouse records as pallet loadswarehouse records as pallet loads




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5.5. Substitute ProductsSubstitute Products- Products that are able to fill the sameProducts that are able to fill the same

need or want as another productneed or want as another product

- Two-way substitutions: brand A isTwo-way substitutions: brand A issubstitution for brand B brand Bsubstitution for brand B brand Bis substitution for brand A.is substitution for brand A.

- One-way substitution: a bolt 7/16 inchOne-way substitution: a bolt 7/16 inchin diameter could be used in place ofin diameter could be used in place ofbolt inch in diameter, but thebolt inch in diameter, but thereverse may not hold.reverse may not hold.




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6.6. Informal Arrangements Outside theInformal Arrangements Outside the

Distribution ChannelDistribution Channel

- All dealers of a specific brand of automobileAll dealers of a specific brand of automobile

in a particular area to have easy access toin a particular area to have easy access todata about the new car inventories in thatdata about the new car inventories in that

area. If one dealer has a ready buyer for aarea. If one dealer has a ready buyer for a

specific model of auto that it does not havespecific model of auto that it does not have

in stock , the dealer can check the inventoryin stock , the dealer can check the inventorylist to see if any other area dealers have thelist to see if any other area dealers have the

desired car in stock.desired car in stock.




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End of Chapter 9End of Chapter 9

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Bonus Project Logitics Inventory Management