Bus 301: Business Logistics

1. Bus 301: Business Logistics Inventory Strategies-Overview

2. Drivers of Supply Chain Performance(we have seen how this can impact) • Facilities (Manufacturing Strategies) • places where inventory is stored, assembled, or fabricated (outsourcing issues) • production sites and storage sites (where manufactured) • Inventory (Inventory Strategies) • raw materials, WIP, finished goods within a supply chain (where located) • inventory policies (push vs pull strategies) • Transportation • moving inventory from point to point in a supply chain (inconsistent delivery times) • combinations of transportation modes and routes (best routing) • Information Technology • data and analysis regarding inventory, transportation, facilities throughout the supply chain (replace inventory with information) • potentially the biggest driver of supply chain performance

3. Internal Supply Chain Management (ISCM)That leads to the next element…… • Manufacturing (Part I) • Inventory Strategies (Part II) • Forecasting (Part III) • Information Technology (Part IV)

4. Inventory: Role in the Supply Chain(GSW Hot Dogs and Match Game) • Inventory exists because of a mismatch between supply and demand • Source of cost and influence on responsiveness • Impact on material flow time (time elapsed between when material enters the supply chain to when it exits the supply chain)

5. Examples of Disasters • Cisco’s Inventory Disaster: Lack of demand and inventory visibility as market slows leads to $2.2 billion inventory write-off and stock price cut in half • Nike’s Planning System Perplexity: New planning system causes inventory and order woes, blamed for $100 revenue miss as stock loses 20%

6. Meet anticipated demand Smooth production requirements Decouple components of the production-distribution system Protect against stock-outs Take advantage of order cycles Hedge against price increases & leverage quantity discounts We Have Seen The Functions of Inventory As Helping….

7. Inventory Issues • Operations, finance, and marketing have interest in inventories. • Poor inventory management hampers operations, diminishes customer satisfaction, and increases operating costs. • A typical firm probably has tied in inventories about • 30 percent of its current assets • 90 percent of its working capital (Current Assets – Current Liabilities) • Both Understocking and Overstocking are undesirable; • Understocking; lost sales, dissatisfied customers, production lost. • Overstocking; tied up funds, physical holding cost, obsolescence.

8. Questions About of Inventory Control • Inventory management has a trade-off decision between level of Customer Service and Inventory Cost. • How do we measure Customer Satisfaction? Number and quantities of sales lost, back orders, customer complains. • How do we measure Inventory Costs? • Inventory turns (the ratio of the annual cost of goods sold to average investment in inventories), • Days of inventory on hand (days of sales that can be supplied from existing inventories).

9. Inventory Turns Per Year

10. Types of Inventories That We Have Seen In Our Examples… • Raw materials & purchased parts • Work-in-progress • Finished-goods inventories • Replacement parts, tools, & supplies • Goods-in-transit to warehouses or customers (Pipeline Inventory)

12. This Means Balancing Cost and Service By A Firm’s Being… • More responsive in their order processing • Able to manage volumes of SC information • Capable with limited transportation resources • Able to position inventory correctly

13. Supply Chain Inventory Costs • Material Costs - average price paid per unit. Influenced by volume discounts which which make it amenable to economies of scale. • Fixed Ordering Costs - costs that are not influenced by the lot size. Costs include: • Buyer Time- the incremental cost of buyer placing an extra order. • Transportation- fixed cost of transportation. LTL pricing has a fixed and variable cost. • Receiving cost- fixed part of the cost of receiving e.g. administrative costs, purchase order matching, updating records etc.

14. Supply Chain Inventory Costs • Holding Costs- often a percentage of per unit cost of product. • Cost of capital- opportunity cost of capital. Commonly, the weighted average cost of capital (WACC) is used to calculate this. • Obsolescence - perishables, microprocessors, non-perishables • Handling and Storage costs • Damage, security, taxes, insurance

15. Two Basic Questions Raised By Inventory Decisions • How much inventory should be ordered? • When should inventory be order?

16. A Side Not for Marketing Impact of Quantity Discounts • If pricing decisions are made independently by the stages of the supply chain, the supply chain profit will be sub-optimal. • In the case of commodity products where the market determines the prices, manufacturers can avail of lot size-based discounts to coordinate activities in the supply chain and reduce the supply chain costs. • .Increasing lot sizes, however result in higher cycle inventory

17. It Is Always Jello Time! “

18. We Need To Answer These Two Questions For Our Jello Products? • How much inventory should be ordered? • When should inventory be order?

19. In Your Teams…. • Determine how much demand for of each SKU of Jello that we will need to consider over the next year…for the Chicagoland Area(1) How much to order? (2) When to order? Base Your Forecast on the Classroom Population As A Base for forecasting!

20. How Should We Get Started? • Market Survey of Demand • _____________________________________ • _____________________________________ • _____________________________________ • _____________________________________

21. Did You Get Your Order In On Time?

22. Summary Of Role of Inventory in the Supply Chain

23. What Made This Exercise Hard? • Demand Uncertain or Certain? • Demand Variable or Stable? • No Costs of Holding? • No Order Processing Costs? • Customer Service Level? • No Historical Data? • Dependant or Independent Demand?

24. Here IS your Challenge… Evaluate all the forecasts handed out in class tonight from the perspective of the balance of cost versus service. This means that you will be describing why the others are not suitable for the organization. What would be the pitfalls if the wrong one was chosen? After the evaluation process then describe which one would you chose and why?

25. Some Basic Methods to Answer These Questions • Fixed Quantity Model (EOQ) • Fixed Interval Model (Game) • Zero Based Model • MRP, DRP and ERP Systems (next week)

26. Factors Which Differentiate Inventory Models • Dependent Vs Independent Demand • Push Vs Pull Strategies • System wide Vs Single Facilities Models

27. Independent and Dependent Demand Independent Demand A Dependent Demand C(2) B(3) D(5) E(1) D(12) F(2) Independent demand is uncertain. Dependent demand is certain.

28. The Inventory Cycle Profile of Inventory Level Over Time Q Usage rate Quantity on hand Reorder point Time Place order Place order Receive order Receive order Receive order Lead time

29. The Fixed Quantity Model • Order a fixed quantity when reordering takes place (EOQ) • Amount order is based on; product costs, demand information, carrying costs and order costs • Automatically reorder (fixed amount) when reach number of units

30. Constant Demand Constant and Consistent Lead Times Satisfaction of All Demand Constant Price of Goods and Materials No Inventory In Transit One Item In Inventory Infinite Planning Horizon No Limitation On Capital Simple EOQ Assumptions

31. THE EOQ

32. The Basic Inventory Model Annual demand for a product is 9600 D = 9600 Annual carrying cost per unit of product is 16$ H = 16 Ordering cost per order is 75 S = 75 • How much should we order each time to minimize our total cost • How many times should we order • What is the length of an order cycle (working days 288/year)

33. Remember….The Inventory Cycle? Profile of Inventory Level Over Time Q Usage rate Quantity on hand Reorder point Time Place order Place order Receive order Receive order Receive order Lead time

34. Two Questions to Answer in Planning Safety Inventory • What is the appropriate level of safety inventory to carry? • What actions can be taken to improve product availability while reducing safety inventory?

35. Determining the AppropriateLevel of Safety Inventory • Measuring demand uncertainty • Measuring product availability • Replenishment policies • Evaluating cycle service level and fill rate • Evaluating safety level given desired cycle service level or fill rate • Impact of required product availability and uncertainty on safety inventory

36. Determining the AppropriateLevel of Demand Uncertainty • Appropriate level of safety inventory determined by: • supply or demand uncertainty • desired level of product availability • Higher levels of uncertainty require higher levels of safety inventory given a particular desired level of product availability • Higher levels of desired product availability require higher levels of safety inventory given a particular level of uncertainty

37. Fixed Interval Model • Also know as fixed review period or fixed period • Unlike EOQ does not required strict observation • Usually low value items order in large quantities • Also, when sales replenish inventory or when product are ordered daily

38. The Inventory Cycle Profile of Inventory Level Over Time Q Usage rate Quantity on hand Reorder point Time Place order Place order Receive order Receive order Receive order Lead time

39. Pull Models of Inventory • ECR • JIT I and II • QR

40. Push/Pull View of Supply Chains Procurement, Customer Order Manufacturing and Cycle Replenishment cycles PUSH PROCESSES PULL PROCESSES Customer Order Arrives

41. Push/Pull View of Supply Chain Processes • Supply chain processes fall into one of two categories depending on the timing of their execution relative to customer demand • Pull: execution is initiated in response to a customer order (reactive) • Push: execution is initiated in anticipation of customer orders (speculative) • Push/pull boundary separates push processes from pull processes

42. Push/Pull View of Supply Chain Processes • Useful in considering strategic decisions relating to supply chain design – more global view of how supply chain processes relate to customer orders • Can combine the push/pull and cycle views • The relative proportion of push and pull processes can have an impact on supply chain performance

43. General Assumptions of Time Based Inventory Approaches • Continuous Replenishment (CRP) Inventory • Flow Through Distribution • Pipeline Logistics Organization • Consistent Performance Measures

44. Shorter General Times For Activities Real Time Information By SKU Seamless Logistics Organization Partnership Relationships Reduced Lot Size and Quicker Change Over Commitment To Total Quality Management Basic Elements Of A Quick Response Environment

45. Key Issues In Time Based Inventory Approaches • Appropriate of available tools • Available Point of Sale Information • Use of Inventory Segmentation • Use of Cross Dock Operations • Forward Thinking Corporate Culture

46. Benefits of QR? Help me out here!

47. What are some key Inventory Issues in these supply chains? • Dell • Toyota • McMaster Carr • Amazon • Peapod

48. Summary Of Role of Inventory in the Supply Chain