Chapter 8 - Inventory Management
two major souces of uncertainty
1. demand - we don't expect sales = forecast 2. performance cycle - we don't expect logical execution at a constant rate
80/20 rule
80% of comapny's sales comes from 20% of its products; indicates the primary focus should be on 20% of products that generate the 80% of sales
how to calculate ROP under conditions of uncertainty
= (avg. daily demand (*) units times the length of the plenishment cycle) + Safety stock
reorder point formula
= avg. daily demand (DD) (*) units times the length of the replenishment cycle (RC)
formula for lead time demand
=length of the lead time in days (*) avg daily demand
inventory turnover formula
COGS / avg inventory
inbound supply chain inventory coordination
JIT - just in time, SMI - supplier managed inventory
outbound supply chain inventory coordination
QR - quick response, CR - continuous replenishment, ECR - effecifient consumer response, VMI - vendor managed inventory, CFR - collaborative planning, forecasting, and replenishment
low inventory turnover indicates
a company is taking longer to sell its inventory
dead stock
a product for which there is no sale during a 12-month period, inventory that has lost normal value
inventory turnover gives insights about
an organization's competitiveness and effeciciency
which industries is JIT ordering appropriate?
automobiles or computer manufacturing, where components have high valvue and high rates of obsolescence
limitations of the EOQ
basic form doesn't account for quantity discounts, does not consider the interactions between items, does not account for minimum order quantities, doesn't factor in transportation discounts, not appropriate for items with unstable demand
conflicting objectives of high inventory levels
better customer service, lower costs per unit purchased, made, and trasported
ordering costs
costs associated with ordering inventory; such as order costs and setup costs
inventory carrying costs
costs of holding an inventory such as: interest on investment, insurance, deterioration
economic order quantity (EOQ)
deals with calculating the proper order size with respect to costs of caryying the inventory and costs of ordering the inventory; determinds the point at which the sum of the carrying costs and ordering costs are minimize, or the point at which carrying costs = ordering costs
service parts logistics
designing a network of facilities to stock service parts, deciding upon inventory ordering policies, stocking the required parts, and the transporting parts from stocking facilities to customers
avg inventory equation
economic order quanitity / 2
stockout costs
estimating costs / penalties for a stockout; involve understanding of a customer's reaction to a company being out of stock when a customer wants to buy an item
lean manufacturing
focuses on the elimination of waster and the increase of speed and flow
inventory reduction strategies
forecasting, inventory centralization, postponement, supple chain inventory coordination
an increase in the number of orders leads to
higher order costs and lower carrying costs (respond in opposite ways to the number of orders or the size of orders)
when is lead time demand not appropriate?
in settings with relatively steady demand
what items are best ordered through EOQ?
inexpenisve items that have low rate of obsolescence
complementary products
inventories that can be used or distributed together example: razor blades and razors
speculative stock
inventory acquired to hedge against future price and availability changes inventory held for: seasonal demand, projected price increases, potential shortage of product
fixed order interval system
inventory is replenished on a constant, set schedule and is always ordered at a specific time; quantity ordered varies depending on forecast sales beofre the next order date
fixed order quantity system
inventory is replenished with a set quantity every time it is ordered; the time intervals between orders may vary
in-transit stock
inventory that is en route between various fixed facilities in a logistics system such as a plant, warehouse, or store, "rolling stock"
safety stock
inventory that is held in addition to cycle stock to guard against uncertainty in demand or lead time, never expected to be used
psychic stock
inventory that stimulates demand in the sense that customer puchases are stimulated by inventory that they can see
cycle stock
inventory that's needed to satisfy normal demand during the course of the order cycle
principle of postponement
labeling, packaging, assembly, manufacturing, intra vs inter - organizational
reorder (trigger) point
level of inventory at which a replenishment order is placed
high inventory turnover indicates
low levels of inventory - can increase chance of product stockouts
higher inventory levels results in
lower chances of a stockout (hence lower stockout costs)
conflicting objectives of low inventory levels
lower holding costs, easier and more accurate control of inventory, focus on quality execution
inventory shrinkage
more items are recorded entering than leaving warehouse facilities; caused by damages, loss, or theft
components of inventory carrying cost
obsolescence costs, inventory shrinkage, storage costs, handling costs, insurance costs, taxes, interest costs
lead time demand ordering strategy
order enough product to cover our demand over the upcoming lead time
substitute products
products that can fill the same need or want as another product
ABC analysis of inventory
recognizes that inventoryies are not of equal value to a firm and that as a result all inventories should not be managed the same way
obsolescence
refer to the fact that products lose value through time
JIT approach
seeks to minimize inventory by reducing safety stock, as well as by having the required amount of materials arrive at the production location at the exact time they are needed
vendor-managed inventory (VMI)
size and timing of replenishment orders into a retailer's system are the manufacturer's responsibility
seasonal stock
speculative stock held in anticipation of peak demand
Inventory
stocks of goods and materials that are maintained for many purposes - most common being to satisfy normal demand patterns
inventory turnover
the number of times that inventory is solf in a one-year period
setup costs
those necessary to modify production processes to make the products necessary to satisfy particular orders
lead time
time that elapses when you place an order until that order is received
when is JIT ordering not the most cost effective strategy?
when ordering costs are high, as occurs when fuel prices increase
when is it most appropriate to use lead time demand?
when utilizing a forecasting system, and thus the order quantity continually changes based on the projected demand
under a fixed order quantity system, what will happen to the reorder point if sales start to increase?
will be reached more quickly and a new order will automatically be placed