balance score card

Inventory Control&

Balanced Score Cardfor Store Operations

To Integrate the food distribution system by integrating the procurement and distribution system

Inventory & inventory system

• Inventory is the set of items that an organization holds for later use by the organization. An inventory system is a set of policies that monitors and controls inventory. It determines how much of each item should be kept, when low items should be replenished, and how many items should be ordered or made when replenishment is needed.

Basic types of inventory

• independent demand,

• dependent demand, and

• supplies.

Independent Demand

• Independent demand items are those items that we sell to customers.

• Dependent demand items are those items whose demand is determined by other items. Demand for a car translates into demand for four tires, one engine, one transmission, and so on. The items used in the production of that car (the independent demand item) are the dependent demand items.

• Supplies are items such as copier paper, cleaning materials, and pens that are not used directly in the production of independent demand items

WHY INVENTORIES ARE NEEDED

• To maintain independence of operations• To meet variations in demand• To allow production schedule flexibility• To provide a safeguard for variations in raw

materials deliveries• To take advantage of economic purchase

order size

INVENTORY COSTS YOU

• Holding or carrying costs• Ordering costs• Shortage and/or wrong inventory costs

• INVENTORY MODELS– Independent versus Dependent Demand– Holding, Ordering, and Setup Costs

• INVENTORY MODELS FOR INDEPENDENT DEMAND– Basic Economic Order Quantity (EOQ) Model– Minimizing Costs– Reorder Points– Production Order Quantity Model– Quantity Discount Models

CAN YOU ….Identify or Define:– Record accuracy– Cycle counting– Independent and dependent demand– Holding, Ordering, and Setup Costs

Describe or Explain:– The functions of inventory and basic

inventory models

• Stock of materials• Stored capacity• Examples

What is Inventory?

The Functions of Inventory

• To provide a stock of goods that will provide a “selection” for customers

• To take advantage of quantity discounts• To hedge against inflation and upward price

changes

Types of Inventory

• Raw material• Work-in-progress• Maintenance/repair/operating supply• Finished goods

• Higher costs– Item cost (if purchased)– Ordering (or setup) cost

• Costs of forms, clerks’ wages etc.

– Holding (or carrying) cost• Building lease, insurance, taxes etc.

• Difficult to control• Hides production problems

Disadvantages of Inventory

• Physically counting a sample of total inventory on a regular basis

Cycle Counting

Advantages of Cycle Counting

• Eliminates annual inventory adjustments• Provides trained personnel to audit the

accuracy of inventory• Allows the cause of errors to be identified

and remedial action to be taken• Maintains accurate inventory records

Techniques for Controlling Service Inventory Include:

• Good personnel selection, training, and discipline

• Tight control of incoming shipments• Effective control of all goods leaving the

facility

Independent versus Dependent Demand

• Independent demand - demand for item is independent of demand for any other item

• Dependent demand - demand for item is dependent upon the demand for some other item

Inventory Costs

• Holding costs - associated with holding or “carrying” inventory over time

• Ordering costs - associated with costs of placing order and receiving goods

• Setup costs - cost to prepare a machine or process for manufacturing an order

Holding (Carrying) Costs• Obsolescence• Insurance• Extra staffing• Interest• Pilferage• Damage• Warehousing• Etc.

Ordering Costs

• Supplies• Forms• Order processing• Clerical support• Etc.

Setup Costs

• Clean-up costs• Re-tooling costs• Adjustment costs• Etc.

• Fixed order-quantity models– Economic order quantity– Production order quantity– Quantity discount

• Probabilistic models

• Fixed order-period models

Inventory Models

• Known and constant demand• Known and constant lead time• Instantaneous receipt of material• No quantity discounts• Only order (setup) cost and holding cost• No stockouts

EOQ Assumptions

Inventory Usage Over Time

Time

Inve

ntor

y Le

vel

AverageInventory

(Q*/2)

0

Minimum inventory

Order quantity = Q (maximum inventory level)

Usage Rate

EOQ ModelHow Much to Order?

Order quantity

Annual Cost

Holding Cost CurveTotal Cost Curve

Order (Setup) Cost Curve

Optimal Order Quantity (Q*)

Minimum total cost

• More units must be stored if more are ordered

Purchase OrderDescription Qty.Microwave 1

Order quantity

Purchase OrderDescription Qty.Microwave 1000

Order quantity

Why Holding Costs Increase

Deriving an EOQ

1. Develop an expression for setup or ordering costs

2. Develop an expression for holding cost3. Set setup cost equal to holding cost4. Solve the resulting equation for the best

order quantity

EOQ ModelWhen To Order

Reorder Point (ROP)

Time

Inventory Level

AverageInventory

(Q*/2)

Lead Time

Optimal Order

Quantity(Q*)

Optimal Order Quantity

Expected Number of Orders

Expected Time Between Orders Working Days /Year

Working Days /Year

= = × ×

= =

= =

=

= ×

Q*D SH

ND

Q*

TN

dD

ROP d L

2

D = Demand per yearS = Setup (order) cost per orderH = Holding (carrying) cost d = Demand per dayL = Lead time in days

EOQ Model Equations

The Reorder Point (ROP) CurveQ*

ROP (Units)

Slope = units/day = d

Lead time = LTime (days)

Inve

ntor

y le

vel (

units

)

• Answers how much to order and when to order

• Allows partial receipt of material– Other EOQ assumptions apply

• Suited for production environment– Material produced, used immediately– Provides production lot size

• Lower holding cost than EOQ model

Production Order Quantity Model

• Answers how much to order & when to order

• Allows quantity discounts– Reduced price when item is purchased in

larger quantities– Other EOQ assumptions apply

• Trade-off is between lower price & increased holding cost

Quantity Discount Model

• Answer how much & when to order • Allow demand to vary

– Follows normal distribution– Other EOQ assumptions apply

• Consider service level & safety stock– Service level = 1 - Probability of stockout– Higher service level means more safety stock

• More safety stock means higher ROP

Probabilistic Models

Probabilistic ModelsWhen to Order?

Reorder Point (ROP)

Optimal Order

Quantity X

Safety Stock (SS)

Time

Inventory Level

Lead Time

SSROP

Service Level P(Stockout)

Place order

Receive order

Frequency

• Answers how much to order• Orders placed at fixed intervals– Inventory brought up to target amount– Amount ordered varies

• No continuous inventory count– Possibility of stockout between intervals

• Useful when vendors visit routinely– Example: P&G representative calls every 2

weeks

Fixed Period Model

The Balanced Scorecard

The scorecard measures an organization’sperformance from four perspectives:

1. Financial

2. Customer

3. Internal business processes

4. Learning and growth

Perspectives of Performance

1. Financial

2. Customer

3. Internal business process

4. Learning and growth

Aligning the BalancedScorecard to Strategy

Different strategies call for different scorecards.

What are some of the financialperspective measures?

Operating income

Revenue growth

Cost reduction is some areas

Return on investment

Aligning the BalancedScorecard to Strategy

What are some of the customerperspective measures?

Market share

Customer satisfaction

Customer retention percentage

Time taken to fulfill customers requests

Aligning the BalancedScorecard to Strategy

What are some of the internal businessperspective measures?

Innovation Process:

Manufacturing capabilities

Number of new products or services

New product development time

Number of new patents

Aligning the BalancedScorecard to Strategy

Operations Process:

Yield

Defect rates

Time taken to deliver product to customers

Percentage of on-time delivery

Setup time

Manufacturing downtime

Aligning the BalancedScorecard to Strategy

Post-sales service:

Time taken to replace or repairdefective products

Hours of customer training forusing the product

Aligning the BalancedScorecard to Strategy

What are some of the learning and growthperspective measures?

Employee education and skill level

Employee satisfaction scores

Employee turnover rates

Information system availability

Percentage of processes with advanced controls

Pitfalls When Implementinga Balanced Scorecard

What pitfalls should be avoided whenimplementing a balanced scorecard?

1. Don’t assume the cause-and-effectlinkages to be precise.

2. Don’t seek improvements acrossall measures all the time.

3. Don’t use only objective measureson the scorecard.

Pitfalls When Implementinga Balanced Scorecard

4. Don’t fail to consider both costs and benefitsof initiatives such as spending on informationtechnology and research and development.

5. Don’t ignore nonfinancial measures whenevaluating managers and employees.

6. Don’t use too many measures.

Financial perspective – includes measures such as operating income, return on capital employed and economic value addedCustomer perspective – includes measures such as customer satisfaction, customer retention and market share in target segmentsBusiness process perspective – includes measures such as cost, throughput and quality. These are for business processes such as procurement, production and order fulfillment.Learning & growth perspective – includes measures such as employee satisfaction, employee retention, skill sets, etc.

Objectives – major objectives to be achieved for example , profitable growthMeasures – the observable parameters that will be used to measure progress towards reaching the objective. For example, the objective of profitable growth might be measured by growth in net marginTargets – the specific target values for the measures, for example, +2% growth in net marginInitiatives – action programs to be initiated in order to meet the objective

Theses can be organized for each perspective in a table as below:

Objectives Measures Targets Initiatives

Financial

Customer

Process

Learning