Supply chain chapter 7
D/Q=
#of orders placed per year
Inventory
-can be expensive -may account for more than 10% of total revenue of total assets -managers have to reduce inventory levels -it is important for manufacturers and service organizations -excessive inventory is a sign of a poor inventory management
Continuous Review Inventory Systems
-is required to make sure that orders are initiated when physical inventories reach their reorder points -in practice can be difficult and very expensive to implement -(s,Q) continues review policy -orders the same Quality when physical inventory reaches the reorder point s. This policy works properly only if the Q demanded is one unit at a time -(s,S) continues review policy - when current inventory reaches or falls below the reorder point s, sufficient units are ordered to bring the inventory up to a pre-determined level S.
Statistical reorder Point with probabilistic demand and constant lead time
-probability of stockout is alpha -alpha depends on the Z table, example if Z-97.5% then alpha is 2.5% -ROP=the average demand during the order's delivery lead time plus the desired safety stock (Z*alpha)
setup costs
costs are related to machine setups. Order cost and setup cost are used interchangeably
MPR {100 ... {500 ...
dash}-dependable tires}
The EOQ model seeks to
determine an optimal order quantity, where the sum of the annual order cost & the annual inventory holding cost is minimized.
order costs
direct variable costs for making an order. In mfg,
Direct costs
directly traceable to unit produced (e.g., labor, materials)
How much to order
see phone pic
Periodic Review Inventory System
-where physical inventory is reviewed at regular intervals, such as weekly or monthly -however, more safety stock would be required for the periodic review system to buffer the added variation due to the longer review period -(nQ, s, R) - if at the time of inventory review, physical inventory is = or less that the reorder point s, the quality nQ is ordered to bring the inventory up to the level between s and (s+Q) -(S,R) - at each review time, a sufficient quantity is ordered to bring the inventory up to a pre-determined max inventory level S -(s,S,R) - if at the time of inventory review, the physical inventory is = or less than the reorder point s, a sufficient quantity is ordered to bring the inventory level up to the max. inventory level S.
Finding Optimal Order Quantity
1) EOQ starts with low price ex. 4 =root of 2*annual demand*order cost/annual holding rate*lowest price such as 4 2)TAIC=APC+APC+AOC=(annual req. *unit cost)+(EOQ/2)+(holding rate*unit cost)+(annual Req./EOQ)*Setup cost
Inventory models
1) Economic Order Quantity Model 2) Economic Manufacturing Quantity Model
2 major RFID standards
1) Electronic product code (UPS barcodes) 2) 18000 standards of the ISO (walmart used it)
Reorder point using probabilistic demand and constant delivery lead times
1) Find Z value 2) Zvalue*demand during the lead time 3) Rop= average demand during lead time+2nd step
Reorder point using standard deviation and constant lead times
1) Find z value 2) Standard deviation during the lead time =standard deviation for daily demand * root of lead time 3) Safety stock =Z value*standard deviation for daily demand * root of lead time 4) ROP=(average daily demand*lead time)+safety stock
How Radio frequency identification automates the supply chain
1) Materials management 2) Manufacturing 3) Distribution Center 4) Retail Store
Assumptions of EOQ model
1) The demand is known and constant 2) Order lead time is known and constant 3) Replenishment is instantaneous 4) Price is constant 5) The holding cost is known and constant 6) Order cost is known and constant 7) Stockouts are not allowed
Inventory management
1) What items to order? 2) How much to order? EOQ answers this question 3) When to place an order?
Reordering point using constant demand and probabilistic lead time
1) Z-value 2) Required safety stock=(daily demand*z-value*standard deviation lead time 3) ROP=(daily demand*mean lead time) + safety stock
Components of a radio frequency identification system
1) the tag 2) the reader 3) communication network 4) RFID software
Time between orders
360/12
Inventory Turnover Ratio
=Cost of Revenue/Average Inventory
EMQ
=root of (2*annual demand*setup cost/annual holding rate*total cost)*(production rate/Production rate-daily demand)
The total annual inventory cost
=the annual purchase cost+The annual holding cost+the annual order cost
Number of orders placed per year
=the annual requirements / EOQ
Formula for annual holding cost
AHC=(EOQ/2)*holding rate 8*unit cost
Average inventory
Q/2
Total cost
Q/2*H Annual holding cost
Reorder point
ROP -is the lowest inventor level at which a new order must be placed to avoid a stockout
Statistical reorder point with constant demand and probabilistic lead time
Safety stock is daily demand *Zalpha ROP=(daily demand * average lead time in days) +(daily demand *Zalpha)
Independent Demand
The demand for final products & has a demand pattern affected by trends, seasonal patterns, & general market conditions
UPS
Universal Product Code
B items
account for the other about 40% of total items & 15% of total inventory cost
Dependent Demand
Describes the internal demand for parts based on the demand of the final product in which the parts are used. Subassemblies, components, & raw materials are examples of dependent demand items.
ABC Inventory Control System
Determines which inventories should be counted & managed more closely than others
Formula for EOQ
EOQ=root of 2*annual requirements*setup cost/holding rate*unit cost
Inventory Investment
Firms should diligently measure inventory investment to ensure that it does not adversely affect competitiveness.
Inventory management models
Generally classified as dependent demand and independent demand models
Variable costs
vary with output level (e.g., materials)
A items
are given the highest priority with larger safety stocks. A items account for approximately 20% of the total items & about 80% of the total inventory cost
Indirect costs
cannot be traced directly to the unit produced (e.g., overhead: marketing, security, utilities, etc.)
C items
have the lowest value and hence lowest priority. They account for the remaining 40% of total items & 5% of total inventory cost
Service level
in stock probability is 1-alpha and referred to the service level
holding or carrying costs
incurred for holding inventory in storage
Fixed costs
independent of the output quantity (e.g, buildings, equipment, & plant security)
Order cost
is the direct variable cost associated with placing an order. Sometimes called setup cost.
Demand is usually unpredictable because it is
random therefor it is hard to predict inventory as well
EOQ=
see slides
Uncertain demand or lead time raises the possibility of ...
stockout that requiring safety stock to be held to safeguard against variations in demand or lead time
Four broad categories of inventories
-Raw materials- unprocessed purchase inputs. -Work-in-process (WIP)- partially processed materials not yet ready for sales. -Finished goods- products ready for shipment. -Maintenance, repair & operating (MRO)- materials used in production (e.g., cleaners & brooms).
Radio Frequency Identification (RFID)
-Successor to the barcode for tracking individual unit of goods -RFID does not require direct line of sight to read a tag and information on the tag is updatable -used in libraries, animals tracking, passport identification and etc
Active tags
-battery -has own power source
Passive tags
-read only -write ones -rewrite
Inventory Managemtn
-what to order -how much to order -when to order
Reorder point using probabilistic demand and delivery lead time
1) Z-value 2) safety stock=z-value*root(standard deviation of lead time*(average daily demand SQUARE)+standart deviation SQUARE*average lead time 3) ROP=average daily demand*average lead time+safety stock
80/20 or Pareto rule
80% of the objective can be achieved by doing 20% of the tasks, but the remaining 20% of the objective will rake up 80% of the tasks
ROP
=(annual requirements/360 days) *order lean time
Holding cost
Cost is the cost incurred for holding inventory in storage. Sometimes called carrying cost.
S
Holding cost
Safety stock
(or buffer) -an appropriate amount of inventory
The primary functions of inventory are to
-Buffer from uncertainty in the marketplace & -Decouple dependencies in the supply chain (e.g., safety stock)
The Economic Order Quantity (EOQ) Model
A quantitative decision model based on the trade-off between annual inventory holding costs & annual order costs
Formula for annual order cost
AOC=(annual requirements/EOQ)*setup cost
Formula for annual purchase cost
APC=annual requirements*unit cost
Firms Measures include:
Absolute value of inventory (found on balance sheet) Inventory turnover or turnover ratio- how many times inventory "turns" in an accounting period. More is better because its faster!
R
Annual demand
D/Q*S
Annual ordering cost
Gauses
Bell-shaped sigma-is standard deviation