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Inventory Management
2
Definition of inventory control
Inventory control is the activity and methods of keeping the right level of inventory .
Three questions:– What should I keep on stock?– How much to order?– When to order?
What is the right level?What is the right level?
Safety Stock
Time
ReorderPoint
Order Quantity
Finished productComponents
Supply Production Distribution
VP Supply Chain
VP Purchasing VP Operations VP Sales
Inventory finished products and its traditional conflicts
• Long runs – minimize changeovers
• High service level
• Safety stocks
• High inventory turns
• Maximum flexibility
Intermezzo: How much inventory do you need?
suppliersupplier customercustomer
How much inventory do you need ?
• □ nothing• □ a little bit• □ enough
4 days leadtime4 days
leadtime
You
Wants a delivery in
1 week
Wants a delivery in
1 week??
© 2009 APICS CONFIDENTIAL AND PROPRIETARY
6 5
Reasons for Carrying Inventory
The only good reason for carrying inventory beyond current needs is if it costs less to carry it than not.Inventory allows the company to operate with different production rates and batch sizes throughout the supply, production, and distribution system.Inventory decouples . . .Demand from SupplyCustomer demand from Finished goodsFinished goods from Component availabilityOutput of one operation from Output of prec. operationMaterials to begin production from Suppliers of materials
© 2009 APICS CONFIDENTIAL AND PROPRIETARY
6 6
Functions of Inventory
• Anticipation inventory• Safety stock• Lot-size inventory• Transportation inventory• Hedge inventory
7
CODP is important in designing the planning methods
1) Customer Order Disconnection Point : how far does a customer order penetrate?
CODP1
CODP2
CODP3
CODP4
KCODP5
FG FG
production distribution
HFparts
supplier customer
installation
assembly to order
production to order
purchase to order
Make to stock
Make to local stock
Planning contro
lled acti
vities
Custo
mer
ord
er co
ntro
lled
activ
ities
8
Inventory in TFC
pallets
pallets
Finished product
Components
Supply Mixing Distribution
tankyard
Bottling
How much inventory in weeks and value in components and finished products?
For what reasons we need inventory in this supply chain?
Explore TFC
Inventory management
Balancing act of• Service level offering to the market• Production reliability
– Capacity– Availability of components
• Safety stock and production frequencies
Obsolescence
Damage
Pilferage
Insurance
Deterioration
Inventory carrying Costs
Risk CostsStorage Costs
CapitalCosts
Opportunity Cost
Space
Personnel
Equipment
Cos of inventory versus out of stock
Out of stock costs– Cost of backorders– Expediting costs– Cost of complaints– Revenue loss– Loss of customers– Idle time at your
customer
Inventory costs– Capital– Storage– Risk
Estimate the inventory carrying costs for a finished product
Explore TFC
12
The optimum safety stock is the stock where the stock costs and shortages are equal
cost
s/year
safety stock
costs of shortages
stock costs
total
optimumsafety stock
13
100% 94%98% 96% 92%service level
The optimum service level is the service level with an optimum safety stock
optimum safety stock
optimum service level
safe
ty s
tock
costsmin.
Service level curve
14
What is the right servicelevel?
servicelevel
€
coststevenuresult
loss
profitloss
0
100%optimum
In most cases this is a management decision In most cases this is a management decision
Optimal inventory is the desired service level against minimal costs
Service level
Cost
s
Optimum
100% 0
Target%
Target level
Excersise
Service level
Cost
s
Optimum
Today
100% 0
Target%
Target level
- How to get this curve lower?
Service level
Bonus policy
Order deadline
Production reliability
(Past) shelf life
Promotion pressure and horizon
Volatility of demand
Finished goods warehouse
Number of employees
Stock finished product
Service level
Production interval
18
Total costs
How much to order?
Inventory costs
minimum ++Ordering costs
Order quantity
T S
Inventory in time
Safety Stock
Time
ReorderPoint
1-16
Order Quantity
• What is the influence of the ordersize of finished products?• How to decide on the order size?
© 2009 APICS CONFIDENTIAL AND PROPRIETARY
7 20
EOQ: Cost & Quantity Relationships
0
200
400
600
800
1000
1200
1400
1600
0 200 400 600 800 1000 1200
Order Quantity
Co
st in
Do
llars
Ordering Costs
Carrying Costs
Total Cost
EOQ
Source: Arnold et al., Introduction to Materials Management, 6th ed.Reprinted by Permission of Pearson Education
Batch sizes Manage Cost Tradeoffs
Inventory Carrying Costs Ordering Costs
Managing tradeoffs by balancing ordering costs and inventory carrying costs
Ordering in small quantities minimizes
inventory carryingcosts
But ordering in small quantities requires more
orders and increases order
costs
22
-5%
0%
5%
10%
15%
20%
25%
-50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50%
The sensitivity of EOQ is limited
EOQ
% deviation from EOQ
% d
evia
tion f
rom
min
cost
TCQ /TCEOQ
TC = total costIs this all? • Available production capacity?• Customer value?
23
Ordering cost
• Administration– Cost of supplier mgt and selsection– Cost of order preparation– Cost of invoicing and paiment
• Physical.:– Cost of receiving and QC– Cost of change over
• Other.:– Transportation cost– ..
OQ
Time
OQ
Order quantity
What is the influence of orderquantity on servicelevel?
25
Total Cost
Wjem to order
Inventory cost
Minimuml ++Cost of
out of stock
Safetystock
T S
26
Exercise: Safety stock
• For item X the following applies:– Average consumption 100
pc/mth– Delivery time 1 month– Present stock 200 pc– Service level-target 98 %
Question: • When do you order?
27
Exercise : Safety stock
0
100
200
300
400
500
600
1 2 3 4 5 6 7 8 9 10 11 120
100
200
300
400
500
600
1 2 3 4 5 6 7 8 9 10 11 12
0
100
200
300
400
500
600
1 2 3 4 5 6 7 8 9 10 11 12
0
100
200
300
400
500
600
1 2 3 4 5 6 7 8 9 10 11 12
0
100
200
300
400
500
600
1 2 3 4 5 6 7 8 9 10 11 12
0
100
200
300
400
500
600
1 2 3 4 5 6 7 8 9 10 11 12
28
Exercise: Safety stock
• For item X the following applies:– Average consumption 100
pc/mth– Delivery time 1 month– Present stock 200 pc– Service level-target 98 %
Question: • When do you order?
No idea!
Order Point System
© 2010 APICS CONFIDENTIAL AND PROPRIETARY
2 29
Source: Adapted from CPIM Inventory Management Certification Review Course (APICS 1998).
BB
C C
AA
Quantityin
inventory
Reorderpoint
Time
LT LT
Demand during lead time (DDLT)
Replenishment
Safetystock
How to decide on safety stocks?
• Service level
• Production order quantity
• Demand uncertainty
• Supply uncertainty
31
In analytically determining the safety stock, the starting point is variation in demand
dem
an
d
frequencytime
μ
µ = estimated demand
Optimal inventory is the desired service level against minimal costs
Service level
Cost
s
Optimum
Today
100% 0
Target%
Target level
Are you on the curve?How to assess?
Differentation of servicelevel based on uncertainty and value
low high
low 99%? 95%?
high 95%? 90%?
revenue
uncertainty
Intermezzo: How much inventory do you need?
How much inventory do you need on both points ?
• nothing• a little bit• enough
suppliersupplier customercustomer
2 weeks leadtime2 weeks leadtime
FP
1 day leadtime
1 day leadtime
RM
Fixed period of 3 weeks
Fixed period of 3 weeks
????
Something to think about
• Where do you prefer to have the highest service levels? Finished productComponents
Supply Production Distribution
• Is 95% component service level ok?• Is 100% component service level ok?
Inventory of components
Safety StockTime
ReorderPoint
Order Quantity
What makes inventory management of components different from finished products?• service level and demand• supply• product
Something to think about (cont)
# = 2 # = 3 # = 4
90% 81% 73% 66%
95% 90% 86% 81%
98% 96% 94% 92%
Number of components
Com
pone
nt a
vaila
bilit
y
Obsolete management
Obsoletes
Production interval
Shelf life agreement
s
Customer agreementsStock
Safety stock
Shelf life %Agreement vs realisation
Shelflife is 20 weeks
Shelf life agreement= 70% Internal shelflife
85%
obsolete
Shelflife realisation= 85%
