Post on 04-Apr-2018
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Inventory Management in
Supply Chain
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Importance of Inventory
Management in the Supply Chain
Resource availability (such as that of finance and space)has forced management to consider how best to lower the
levels of inventory within the supply chain management
systems in order to maintain margins
The realization by many companies that a greater return- on-
investment (ROI) can be obtained by developing the corebusiness, and that investment in working capital items, such
as inventory and debtors, returns far less in comparison to other
initiatives.
The developments IT front provides a potential tool to
reduce the inventory. Inventory and information can be
traded. The better the information lower is the need for
inventory. Information systems such as POS (point of
sales), ERP (Enterprise Resource Planning systems) can
significantly reduce the inventory.
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Why inventory?
Leverage economies of scale by producing in largevolumes (typically unit costs are lowest when product is a
manufactured in long production run at constant quantities).
Exploit economies of scale in purchase and transportation
based on the notion that both product procurement and
transportation costs will be reduced if lot sizes are large. Inventory provides hedges against price changes:
Especially In India, observe the tendency to hoard
commodities in anticipation of price rise just before the
budget (in the months of Jan/Feb, just before the financial
budget). This suggests that volume purchases will
minimize the impact of suppliers price increases.
Inventory protects against demand and lead-time
uncertainties.
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Inventory
Type of demand Characteristics Inventory policy
Constant or
uniform demand
Predictable high flow rates Minimum stock. Direct
deliveries from suppliers.
Wavy pattern Slow moving flow rates, Highcritically. Perishable, Peaks
are relative predictable
Minimize Inventory holding,building them only during peak
demand period. Direct delivery
from supplier where possible.
Sudden Upshot:
Type (a)
High criticality, Low value,
Long lead-time, Small
physical size.
Hold high level of stock
thereby allowing safety stock
for delivery lead-time anddemand fluctuations.
Sudden Upshot:
Type (b)
Low criticality, High value, Bulky
physical characteristics, Demand
Peaks are relatively predictable.
Minimize stockholding, building
them only during peak demand
period. Direct delivery from
supplier where possible.
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Selective Inventory Control:
Pareto Analysis or ABC analysis
Pareto analysis (sometimes referred to as the 80/20 rule andas ABC analysis) is a method of Pareto analysis (sometimes
referred to as the 80/20 rule and as ABC analysis) is a
method of classifying items, events, or activities according
to their relative importance.
It is frequently used in inventory management where it is
used to classify stock items into groups based on the
total annual expenditure for, or total stockholding cost of,
each item. Companies often concentrate on the high
value/important items.
ABC analysis is used to prioritize the items.
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Pareto (ABC) Analysis
Vital few/ Trivial many!
10 20 30 40 50 60 70 80 90 100
Percentage of items
Pe
rcentageofdo
llarvalue
100
90
80
70
60
50
40
30
20
10
0
Class C
Class A
Class B
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Inventory Costs
Purchase or
Production
Cost of item
Holding
Costs
Ordering or
Setup
Cost
Stock out
Cost
Total Inventory Cost
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Inventory Decisions: How
and When
How many units should be ordered
when an order is placed?
When should the order be placed?
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Continuous Review (Q System)
On-handinventory
Time
Orderreceived
Orderreceived
Q Q
OH OH
Orderplaced
Orderplaced
IP IP
TBO
L
TBO
L
TBO
L
R
Orderreceived
Q
OH
Orderplaced
IP
Orderreceived
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Uncertain Demand
Time
On-handinven
tory
Orderreceived
Q
OH
Orderplaced
Orderplaced
Orderreceived
IP IP
R
TBO1 TBO2 TBO3
L1 L2 L3
Q
Orderplaced
Q
Orderreceived
Orderreceived
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Periodic Review Systems
(P System)
Time
On-handin
ventory
IP1
IP3
IP2
Orderreceived
Orderreceived
IP IP
OH OH
Orderplaced
Orderplaced
Q1Q2
Q3
L L L
P P
Protection interval
TOrderreceived
IP
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EOQ Model
EOQ - Economic Order Quantity Model
Assumptions
- Delivery is immediate
- There is no time lag between purchasing and
availability - lead time is zero
- Demand is deterministic
- Demand is constant over a period of time
- We know how much will be demanded and when the
demand will occur
- There are no space/budget constraints
- No interaction of items
- A lot of items can be broken down into identifiable,
individual items.