OMSAN LOJİSTİK

Fundamentals and Terminology of Inventory Planning and

ManagementInventory Planning and

Management

Latin America Logistics Center

Logistics Management Series -

Introduction

• Inventory, Logistics, and Business

• Best Practices in Inventory Planning and Management

• Fundamentals of Inventory Planning and Management

Logistics and Inventory

Customer Service

Inventory

SupplyTransportation

Warehousing

Logistics Master Plan

WAREHOUSING

LOGISTICS

CUSTOMER

RESPONSE

INVE

NTO

RYM

AN

AG

EMEN

T

MANUFACTURING &PROCUREMENT

TRA

NSP

OR

TATI

ON

Customer Service

Inventory Master Plan

Fill RateForecastingEOQReplenishmentPositioning

Inventory

Inventory Management Dilemmas

What should it be the Fill Rate?

What is the optimum Inventory Turnover?

Inventory Management Dilemmas

• The highest Fill Rate that satisfies ROA ?

• The level of Fill Rate that Customer want?

• The optimum between inventory carrying costs and cost of lost sales?

• The right combination between optimums and industry benckmarks?

Inventory Management Performance Gaps

Order Quantities

Location

Information Systems

Organization

Key Performance Indicators

Forecasting

Fill Rate

Control Policy

0

1

2

3

4

5Company A

Best Practice

Inventory Management

Inventory is an Inventory is an ASSETASSET to:to:

* Hide Forecasting errors* Hide Forecasting errors

* Hide Planning errors* Hide Planning errors

* Hide Registry errors* Hide Registry errors

* Hide Quality faults* Hide Quality faults

* Allow optimum production batches* Allow optimum production batches

* Keep high customer service* Keep high customer service

The Value Chain

Key Questions

* WHEN TO ORDER?

* HOW MUCH EACH ORDER?

* HOW OFTEN WE WANT TO EVALUATE??

Inventory Costs

HOLDING COST HOLDING COST

* Opportunity Costs Cash Flow Risk* Handling* Insurance* Obsolescence* Damages, Theft, Merma* Taxes

BACKORDER COSTSBACKORDER COSTS

* Lost Sales* Customer Ill Will* Information Costs* Expediting* Loss of Production

SETUPCOSTSSETUPCOSTS

* Cost to place an order* Machine Setup* Sampling Cost

Basic Trade-Offs

COST

Order or Setup

Holding

Backorders

Inventory Level

High Low

Controls

InventoryInventoryControlControlPolicyPolicy

Fill Rate EOQ

DemandForecasting

Inventory Planning Algorithms

Inventories in the American EconomyLogistics Costs Definition

% of Category % of TotalInventory Carrying Cost

Interest 69$ 22.2% 8.7%Taxes, Obsolescence, Insurance, and Depreciation 175$ 56.3% 22.0%Warehousing 67$ 21.5% 8.4%

Carrying Cost 311$ 100.0% 39.0%

Transportation CostsTruck - Intercity 230$ 51.0% 28.9%Truck - Local 132$ 29.3% 16.6%Railroads 35$ 7.8% 4.4%International Water 15$ 3.3% 1.9%Domestic Water 7$ 1.6% 0.9%Oil Pipelines 8$ 1.8% 1.0%International Air 5$ 1.1% 0.6%Domestic Air 14$ 3.1% 1.8%Forwarders 5$ 1.1% 0.6%

Transportation Costs 451$ 100.0% 56.6%

Shipper Related Cost 4$ 0.5%

Logistics Administration Costs 31$ 3.9%

TOTAL Costs 797$ 100.0%

Inventories in the American EconomyLogistics Costs USA vs. GNP

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

196

0

196

5

197

0

197

5

197

9

198

0

198

1

198

2

198

3

198

4

198

5

198

6

198

7

198

8

198

9

199

0

199

1

199

2

199

3

199

4

199

5

199

6

%Inventory Carrying Cost vs. GNP

%Transportation Cost vs. GNP

%Physical Distribution vs. GNP

199

7

199

8

199

9

200

0

200

1

200

2

200

3

Inventories in the American EconomyTransportation vs. Inventories

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

55.0%

60.0%

65.0%

70.0%

1960

1965

1970

1975

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Inventory Carrying Cost vs. Total Physical Distribution Cost

Transportation Cost vs. Total Physical Distribution Cost

Inventories in the American EconomyReplacing Inventory by Transportation

Transportation to Inventory Carrying Cost Ratio

1.00

1.20

1.40

1.60

1.80

2.00

2.20

2.40

1960

1965

1970

1975

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Transportation to Inventory Carrying Cost Ratio

Notation

• Push vs. Pull• Types of Orders• Types of Inventories• Levels of Inventories• Backorders • Parameters Planning• Financial Notation• Demand Notation• Decision-making Variables

Push vs. PullPush• Sell what has been

produced.• Keeping the plant

operating is Critical: cigarettes , dog food, chocolates, electric appliances ...

Pull• Produce what has been

sold.

Types of Orders• Customer Orders

• Purchase Orders

• Back Orders

• Re-Ordering

Types of Inventory

• Service Inventory

• In-Transit Inventory

• Safety Stock

• Contingency Inventory

• Efficient Process Inventory

• Efficient Purchasing Inventory

Types of Inventories Inventory Role

• Stabilization Inventory

• Anticipation Inventory

• Reserve Inventory

• In-Consignment Inventory

Types of InventoriesInventory Status

• Raw Materials Inventory

• Parts Inventory

• Work in Process (WIP)

• Finished Goods Inventory

• In-Transit Inventory

• Backorders

Types of Inventory - Roles

Inventory Levels

• On-hand stock (On-Hand) (OHS) = number of units available in shelfs

• Net Stock = OHS - BO On-hand stock less backorders

• Inventory Position = On-hand stock + ordered units + in-transit units - backorders

Stock-outs

Time

Inve

ntor

y

ReplenishmentOrder

QuantityQ

StockoutCondition

Backorders vs. Lost Sales

• BackorderingAny order not delivered but not lost. Common in low competitive markets

• Lost SalesNon-attended sales for not having stock on-hand

• Substitution

Replacement of a product in stock-out with another

Lost Sales

• Product Type

• Demand Characterisitics

• Substitutes

• Costs of stock-outs

• Competitiveness of the Market

• Subjective but Quantifiable

Inventory Planning Parameters

• SP = Sales Price

• UIV = Unit Inventory Value

• ICR = Inventory Carrying Rate

• POC = Purchasing Order Costs

• SUC = Set-Up Costs

• SF = Scarcity Factor

Inventory Carrying Rate

Handling &Warehousing

22%

Opportunity22%

Taxes,

Obsolescence, InsuranceDamages

56%

Purchase Order Cost (POC)

• Communications• Administration• Financial Costs of the Payment Strategy• Information Systems• Staff• Equipment• Office Supplies• Banking Costs• Documentation, Customs, etc.

Set-Up Cost (SUC)

• Changes of SKU in the Production Program

• Labour

• Waiting Time

• Cleaning - Decontamination

• Waste

• Damages in Test Batches

Financial Notation

• AIV = Average Inventory Value

• ICR = Inventory Carrying Rate

• ICC = Inventory Carrying Cost

• LSC = Lost Sales Cost

• TPC = Total Policy Cost

• TIC = Total Inventory Cost

Nivel de Inventario Promedio (Average Inventory Levels)

Ave

rag

e In

ven

tory

Lev

el (

AIL

)

Number or repositions

The Average Inventory Level exponentially decreases with reference to the number of repositions

AIL(I) = Σ (Inventory Level) Number of Observations

AIV = Σi {AIL(I)*UIV(I)}

ICC = AIV * ICR

Inventory Levels• On-Hand Inventory (OHS)

• Net Stock (NS)NS = OHS - BO

• Net Inventory Position (NIP)NIP = OHS + On-Order - BO - CI

• Safety Stock (SS)

?

Lost Sales Cost

• LSC = AD * (1-UFR) * USP * SF

• AD = Annual Demand

• UFR = Unit Fill Rate

• USP = Unit Sales Price

• SF = Scarcity Factor

Demand Notation

• L = Lead Time

• AD = Annual Demand

• LD = Lead Time Demand

• FAD = Forecasting Annual Demand

• FLD = Forecasting Lead Time Delivery

• SDFLD = Standard Deviation of Forecasting Lead Time Delivery

Safety Stock (SS)

LeadtimeLeadtimeLeadtime

SAFETY STOCK

Time

Inve

ntor

y

ReplenishmentOrder

QuantityQ

Lower thanExpected Demand

AverageDemand Higher than

Expected Demand

StockoutCondition

Re-Order Point

Time

Inve

ntor

y

ReplenishmentOrder

QuantityQ

ReorderPoint(ROP)

What Fill Rate?

$-

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

50.0

0%

60.0

0%

65.0

0%

70.0

0%

75.0

0%

80.0

0%

85.0

0%

90.0

0%

92.5

0%

95.0

0%

97.0

0%

98.0

0%

99.0

0%

99.5

0%

99.7

0%

99.9

5%

Fill Rate

$s

Inventory Carrying Cost

Lost Sales Cost

Total Policy Cost

Demand Probability

LeadtimeLeadtimeLeadtime

Time

Inve

nto

ry

ReplenishmentOrder

QuantityQ

Lower thanExpected Demand

AverageDemand

Higher thanExpected Demand

StockoutCondition

Replenishment Quantity

Time

Inve

ntor

y

ReplenishmentOrder

QuantityQ

Lead Time (LT)

LeadtimeLeadtimeLeadtime

Time

Inve

ntor

y

ReplenishmentOrder

QuantityQ

Demand in Lead Time (LTD)

LeadtimeLeadtimeLeadtime

LEAD TIME DEMAND

SAFETY STOCK

Time

Inve

ntor

y

ReorderPoint

(ROP)

Variance in the Lead TimeShort Delivery times is Good.

Consistent Delivery times is Better!

LeadtimeLeadtimeLeadtime

LEAD TIME DEMAND

SAFETY STOCK

Time

Inve

ntor

y

ReorderPoint

(ROP)

Lead TimeVariability

Decisions...

• What is the Optimum Fill Rate?• What will be the Demand?• When do I have to Order?• How much do I have to Order?• How much of Safety Stock?• How much of Service Stock?• How often do I have to check my Inventory

Policy?• Where do I have to locate my inventory within

the network?

Inventory Master Plan