Inventory Mgt - Class

7/29/2019 Inventory Mgt - Class

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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.

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