Inventory Management

Presenter Name

Inventory Management

1.Explain what is inventory, their types and disadvantages

2.Explain how volume decisions are made

3.Explain how timing decisions are made

4.Understand ABC analysis

Liz wants to buy a new iPod Nano 8 GB pink colour from Argos.

She:

1. Browses website for product

2. Checks price and stock by inputting catalogue number (900/7712) and full post code (NW15LS)

3. Purchases the product

Inventory Management: Argos

Argos Website: http://www.argos.co.uk

Inventory Management: M&S

M&S Website: http://www.marksandspencer.com

John wants to buy a new suit from M&S.

He:

1. Browses website for product

2. Checks for suit size (plus trousers) availability and quantity

3. Adds items to basket

4. Fills-in payment and delivery details

Inventory Management: NHS blood stock

NHS blood stock website: http://www.blood.co.uk/StockGraph/stocklevelstandard.aspx

Stock level on 08 February 2010 Total stock

Note: these figures don't include what's being held in hospital blood banks up and down the country.

Inventory, also called ‘stock’ , is the stored

accumulation of transformed resources in a

process

•usually applies to material resources

•but may also be used for inventories of

information;

• inventories of customers (or customers of

customers) are usually called queues.’

What is Inventory?What is Inventory?

Inventory is created to compensate for the differences in timing between supply and demand

Input process

Inventory

Output process

Rate of supply from input process

Rate of demand from output process

3

InventoryIf

an opera

tion can

matc

h supply and

demand ra

tes, it

can

reduce it

s invento

ry

levels!

Reasons for Holding InventoryReasons for Holding Inventory

• Maintain customer service levels for volatile demand

• Hedges against price and exchange rate fluctuations

• Protects against delivery lead-time variability

• Buffer against unreliable supply sources

• Buffer against seasonal demand and supply

• Maintain supply of scarce supply

• Provide cover for emergencies

Supply and demand mismatches lead Supply and demand mismatches lead to different types of inventoryto different types of inventory

Anticipation inventory (seasonal inventory)Inventory that is accumulated to cope with expectedexpected future demand or

interruptions in supply (canning/freezing of seasonal foods).

Buffer inventory (safety inventory)Inventory that compensates for unexpectedunexpected fluctuations in supply and

demand (retailing).

Cycle inventoryInventory that occurs when one stage in a process cannot supply all

the items it produces simultaneously; build up inventory of one item while it processes the others; batch productionbatch production (bread making).

Pipeline inventory (WIP)Inventory that exists because material cannot be transported

instantaneously (retailing ‘in-transit’ stock‘in-transit’ stock; also sometimes called ‘mobile warehouse’).

Time

Inve

nto

ry le

vel

Steady and predictable demand (D) Slope = demand rate (D)

Cycle inventory = Q2

Orderquantity

= Q

Unilever purchases chemicals to make liquid detergent. The production line is running at a fixed speed.

Q2

Cycle InventoryCycle Inventory

Data:

Apple makes monthly shipments of iPod Nano to Argos in average lot sizes of 1000 units (Q).

Cycle inventory

= Q/2

= 1000/2 = 500 units

Estimating inventory levelsEstimating inventory levels

Let’s estimate the cycle inventory for iPod Nano at Argos

e.g. Automotive parts distributor

e.g. Local retail store

Single-stage inventory system

Suppliers Suppliers

Stock* Sales operation

Central depot

Distribution Local distribution

point

Sales operation

Multi-stageinventory system

Single-stage and two-stage inventory systems

* Stocks can be raw materials /components or ‘work-in-progress’ waiting to be processed further

Position of InventoryPosition of Inventory

1.Ties up working capitalworking capital;

2.Risks damagedamage, , lossloss, , deteriorationdeterioration, or , or obsolescenceobsolescence;

3.Raises overhead costsoverhead costs due to administrative,

holding, handling, insurance and transportation

costs;

4.Raises quality costsquality costs.

Disadvantage of Holding InventoryDisadvantage of Holding Inventory

1.Explain what is inventory, their types and disadvantages

2.Explain how volume decisions are made

3.Explain how timing decisions are made

4.Understand ABC analysis

Outline of LectureOutline of Lecture

How much to order?How much to order?

Source: www.fotosearch.com

Stock-holding costs = warehouse and all associated storage costs; obsolescence risk cost; management and stock control; insurance; security staff and security systems

Ordering costs = Number of orders x cost per order

Total inventory costs = Ordering costs + Holding costs

The Order Quantity DecisionThe Order Quantity Decision

Simplified inventory profile : charting the variation in inventory level

Time

per period DQ

Replenishment orders with instantaneous deliveries at a rate of

QD

Inve

nto

ry le

vel

Steady and predictable demand (D) Slope = demand rate (D)

=Cycle inventory

Q2

Orderquantity

= Q

Time interval between deliveries =

Two alternative inventory plans with different order quantities (Q)

Time

Inve

nto

ry le

vel Plan A

Q = 400

Demand (D) = 1000 items per year

Cycle inventory for plan A = 200

0.1 yr 0.4 yr

400

100

Cycle inventory for plan B = 50

Plan BQ = 100

Shorter time intervals between deliveries and more replenishment orders

400

350

300

250

200

150

100

50

40035030025020015010050Order quantity

Co

sts

Economic order quantity (EOQ)

Total costs

Holding costs

Order costs

EOQ = the quantity of items to order that supposedly minimises the total cost of inventory management; the ‘optimum order quantity’

Economic Order QuantityEconomic Order Quantity

If the true costs of stock holdingthe true costs of stock holding are taken into account,and if the cost of orderingthe cost of ordering (or changeover) is reduced,the economic order quantity (EOQ) is much smaller

Original holding costs

Original total costs

Revised holding costs

Order quantity

Co

st s

Original EOQ

Revised EOQ

Revised order costs

Revised total costs

Original order costs

Traditionally Stock Holding Cost was Under-estimated

1.Explain what is inventory, their types and disadvantages

2.Explain how volume decisions are made

3.Explain how timing decisions are made

4.Understand ABC analysis

Outline of LectureOutline of Lecture

Ordering too early

Ordering too late

When to order?Ordering too early – If new stock arrives

before the old stock has run out, the surplus raises the overall stock level for the whole period of the next cycle.

Ordering too late – Shortage occurs.

The Order Timing DecisionThe Order Timing Decision

The re-order point and re-order level (1)

400

300

200

100Inve

nto

ry le

vel

00 1 2 3 4 5 6 7 8

Re-order level

Re-order point

Time

Demand (D) = 100 items per week

Order lead time

Order quantity (Q) = 400

Orders may not arrive instantaneouslynot arrive instantaneously while demand may not be steady as earlier shown. As lags may occur, it helps to understand the re-order point and re-order-level.

Re-order pointThe point in timepoint in time at which more items are ordered,

usually calculated to ensure that inventory does not run out before the next batch of inventory arrives.

Re-order levelThe level of inventorylevel of inventory at which more items are

ordered, usually calculated to ensure that inventory does not run out before the next batch of inventory arrives.

The re-order point and re-order level (2)

S

Safety stock(s) helps to avoid stock-outs when demand and/or order lead times are uncertain

Inve

nto

ry le

vel

Q

Timet1 t2

d1

d2

Re-order level (ROL)

Distribution of lead-time

usage

?

Lead-time usage - the amount of inventory that will be used between ordering replenishment and the inventory arriving, usually described by a probability distribution to account for uncertainty in demand and lead time.

Re-order points

Two-bin system

The ‘two-bin’ and ‘three-bin’ systems

Bin 2Bin 1

Items being used

Re-order level + safety inventory

Three-bin system

Bin 2 Bin 3Bin 1

Items being used

Re-order level inventory

Safety inventory

Re-ordering system that involves storing the re-order point quantity plus the safety inventory quantity in the 2nd bin and using parts from the 1st bin. When the 1st bin empties, that is the signal to order the next re-order quantity. Sometimes the safety inventory is stored in a 3rd bin.

1.Explain what is inventory, their types and disadvantages

2.Explain how volume decisions are made

3.Explain how timing decisions are made

4.Understand ABC analysis

Outline of LectureOutline of Lecture

The Pareto Law (80-20 rule)The Pareto Law (80-20 rule)

Vilfredo Federico Damaso Pareto (July 15, 1848 – August 19, 1923), or Fritz Wilfried Pareto, was an Italian sociologist, economist, and philosopher. He introduced the concept of Pareto efficiency and helped develop the field of microeconomics.

A general law found to operate in many situations that indicates that 20% of something causes 20% of something causes 80% of something else80% of something else, often used in inventory management (20% of products produce 80% of sales value) and improvement activities (20% of types of problems produce 80% of disruption).

Class A items – the 20% or so of high-usage value items which account for around 80% of the total usage value

Class B items – the next 30% or so of medium-usage value items which account for around 10% of the total usage value

Class C items – the remaining 50% or so of low-usage value items which account for around the last 10% of the total usage value

An approach to inventory control that classes inventory by its classes inventory by its usage valueusage value and varies the approach to managing it accordingly.

ABC Inventory ControlABC Inventory Control

Inventory Reduction PrinciplesInventory Reduction PrinciplesPool inventorySafety stock can be lowered if demand for inventory can be combined. This

includes • inventory centralisationinventory centralisation where demand from different locations is combined, • postponementpostponement where product differentiation is delayed, and• commonalitycommonality where common components is used.

Reduce lead timeTransit inventory can be lowered with reduced lead times, but this will rely on

improving the accuracy of forecasts

Reduce variationSafety stock can also be lowered if variation of lead time, variation of demand-

supply, variation of quality are reduced

Just-in-time inventoryPhilosophy and technique that seeks to remove inventory holdings; small lot

production

Measuring InventoryMeasuring InventorySumming up the total value provides give an

absolute measurement. However, in industrial practice a relative measurement, inventory inventory turnoverturnover, is often used.

Inventory is also measured by the amount of timeamount of time it would last. For example, four weeks.

inventory of valuetotal

revenue turnover Inventory

AlternativesAlternatives

Vendor Managed Inventory (VMI):

• A supplier company takes over the stock control problem.

• Ensures stock is available.

• May charge per product sold.

1.What is inventory, their types and disadvantages

2. How volume decisions are made

3. How timing decisions are made

4. ABC analysis

SummarySummary

Further readingFurther reading

Hollins, B., and Shinkins, S. (2006) Managing Service Operations – Design and Implementation, Sage. (See Chapter 10 – Global Supply Chain Management; and Chapter 12 – Managing Capacity and Variations in Demand)

Slack, N., Chambers, S., and Johnston, R. (2007) Operations Management, FT Prentice Hall. (See Chapter 12 – Inventory Planning and Control)

Mangan, J., Lalwani, C., and Butcher, T. (2008) Global Logistics and Supply Chain Management, John Wiley & Sons. (See Chapter 6 – Inventory Management)