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Slide1
Managing Inventory throughout the Supply Chain
Chapter 11
Slide2
Chapter Objectives
Be able to:
Describe the various roles of inventory, including the different types of inventory and inventory drivers.
Distinguish between independent demand and dependent demand inventory.
Calculate the restocking level for a periodic review system.
Calculate the economic order quantity (EOQ) and reorder point (ROP) for a continuous review system.
Determine the best order quantity when volume discounts are available.
Calculate the target service level and target stocking point for a single-period inventory system.
Describe how inventory decisions affect other areas of the supply chain. In particular, describe the bullwhip effect, inventory positioning issues, and the
impacts
of transportation, packaging, and material handling considerations.
Slide3
Inventory Management
Inventory – Those stocks or items used to support production (raw materials and work-in-process items), supporting activities (maintenance, repair, and operating supplies) and customer service (finished goods and spare parts).
Cycle stock – Components or products that are received in bulk by a downstream partner, gradually used up, and then replenished again in bulk by an upstream partner.
Safety stock – Extra inventory that a company holds to protect itself against uncertainties in either demand or replenishment time.
Slide6
Types of Inventory
Anticipation inventory – Inventory that is held in anticipation of customer demand.Hedge inventory – A form of inventory buildup to buffer against some event that may not happen.
Transportation inventory – Inventory that is moving from one link in the supply chain to another
.
Smoothing inventory – Inventory that is used to smooth out differences between upstream production levels and downstream demand.
Slide8
Inventory Drivers
Inventory drivers – Business conditions that force companies to hold inventory.
Table 11.2
Slide9
Independent vs. Dependent Demand Inventory
Independent demand inventory – Inventory items whose demand levels are beyond a company’s complete control.
Dependent demand inventory – Inventory items whose demand levels are tied directly to a company’s planned production of another item.
Slide10
Independent vs. Dependent Demand Inventory
Example:
Independent demand:
K
itchen table – Need 500 tables five weeks from now
Dependent demand:
Kitchen table legs – Need 4 per table or 2,000 legs
Calculation of dependent demand (Chapter 12)
Slide11
Inventory Control Systems
Periodic Review System – An inventory system that is used to manage independent demand inventory where the inventory level for an item is checked at regular intervals and restocked to some predetermined level.
Continuous Review System – An inventory system used to manage independent demand inventory where the inventory level for an item is constantly monitored and when the reorder point is reached, an order is released.
Slide12
Periodic Review System
Calculating the order quantity (Q)Q = R-Iwhere R = restocking levelI = inventory level at the time of review.
Figure 11.6
Slide13
Periodic Review System
Calculating the restocking level (R)
Slide14
Calculating Service Level
Service Level – A term used to indicate the amount of demand to be met under conditions of demand and supply uncertainty.Assumes that the demand during the reorder period and the order lead time is normally distributed.
Slide15
Continuous Review System
Key features:
Inventory levels are monitored constantly, and a replenishment order is issued only when the reorder point is reached.
The size of a replenishment order is typically based on the trade-off between holding costs and ordering costs.
The reorder point is based on both demand and supply considerations, as well as on how much safety stock managers want to hold.
Slide16
Continuous Review System
Assumptions:
Constant demand and lead time
Holding and Ordering cost known and fixed
Price of each unit is fixed.
Slide17
Continuous Review System
When the demand rate and lead time are constant:
Reorder point = demand x lead timeR = dL
Figure 11.7
Slide18
Economic Order Quantity
Economic Order Quantity (EOQ) – The order quantity that minimizes annual holding and ordering costs for an item.Holding costs (H)– The cost to hold a single unit in inventory for a year.Ordering costs (S) – The cost of placing an order regardless of the order quantity.
Slide19
Total Yearly Inventory Costs
Total holding and ordering costs for the year = Total yearly holding cost + Total yearly ordering cost =Yearly holding cost = average inventory x holding costYearly ordering cost = number of orders per year x fixed ordering cost
Calculate the EOQ and use that value as the order quantity to see if the cost is lower and calculate the total yearly inventory cost.Cost Savings:
Slide23
Reorder Points and Safety Stock
When demand rate (d) and lead time (L) are constant:When demand rate (d) and lead time (L) or both varies:
Slide24
The impact of varying demand rates and lead time
Figure 11.10
Slide25
Causes of Variability
The variability of demand
The variability of lead time
The average length of lead time
The desired service level
Slide26
Safety Stock
Safety stock:= z x standard deviation of demand during the reorder period =
Slide27
Reorder Point
Reorder Point =
Slide28
Example 11.3
Slide29
Example 11.3
Calculate Safety Stock:Calculate Reorder Point:
Slide30
Quantity Discounts
Quantity Discounts – Price reductions for ordering larger quantities.
Slide31
Quantity Discounts
Two-step process:
Calculate the EOQ. If the EOQ represents a quantity that can be purchased for the lowest price, stop – we have found the lowest cost order quantity. Otherwise, go to Step 2.
Compare total holding, ordering, and item costs at the EOQ quantity with total costs at each price break above the EOQ. There is no reason to look at quantities below the EOQ, as these would result in higher holding and ordering costs, as well as higher item costs
.
Slide32
Example 11.4 – Hal’s Magic Shop
Demand (D) = 1,000 masks
Ordering cost (S) = $20Holding cost (H) = $3
Solve for EOQ:
Slide33
Example 11.4 – Hal’s Magic Shop
Because 115 is not eligible for the lowest price, calculate total cost at 115:
Slide34
Example 11.4 – Hal’s Magic Shop
And compare to total cost at next price break or 201.Price is cheaper at the 201 price break.
Slide35
Single-Period Inventory System
When excess inventory cannot be held in the future, firms must weigh the cost of being short against the cost of holding excess units
.
Examples:
Fresh fish, magazines, newspapers, Christmas trees
Slide36
Single-Period Inventory System
Single-period inventory system – A system used when demand occurs in only a single point in time.
Goals:
Determine a target service level (SL
T
) that strikes the best balance between shortage costs and excess costs.
Use the target service level to determine the target stocking point (TS) for the item.
Slide37
Single-Period Inventory System
Target service level – The service level at which the expected cost of a shortage equals the expected cost of having excess units.
Target stocking point – The stocking point at which the expected cost of a shortage equals the expected cost of having excess units.
Slide38
Target Service Level
OR
Slide39
Target Service Level
The target service level (SLT) is the p value at which holds true
Slide40
Target Stocking Point
Slide41
Inventory in the Supply Chain
Bullwhip Effect An extreme change in the supply position upstream in a supply chain generated by a small change in demand downstream in the supply chain. Inventory PositioningCost and value increases and flexibility decreases down the supply chain.Transportation, Packaging, Material HandlingPhysical size and quantity of lot, how it is packaged, material handling equipment needed, and disposal of packaging are all factors in choosing appropriate supplier and distribution process.
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