Inventory management in supply chain

ADM – eSupply Chain Management

Morvarid Kardan , Sara Mohammadi, Sonia Peri

Dr. Mohamed Baymout

Inventory Management

Winter 2014

Outline

• What is inventory • Myths in inventory management • Reasons for having inventory • Rolls of Inventory in SCM• Types of Demands • Benefits/Drawbacks• Methods for inventories• Inventory Techniques

Supplier Manufacturing Distributer Retailer

Customer•Inventories

•Raw Materials •Work in Progress •Finished Goods

•Goods in Transit

•Finished Goods

SCM/Inventories

Traditional Supply Chain Management(SCM)

G.Trites, J.Boritz, “e-business strategies, a Canadian perspective for a networked world” ,Pearson-Prentice Hall, 2009

What is Inventory?

Raw Materials Component parts Work-in-Process

Finished Products

Planning Directing

Controlling

Myths in Inventory Management

The “SALES” data that we have in our company records, is all we need for inventory management”

“The more expensive a software system is, the better it will help us control our inventory“

“We keep all of our sales histories by month, and this data is all we need to make good forecasts for inventory planning”

Reasons for Inventories

o Improve Customer Serviceo Economies of purchasingo Economies of Productiono Transportation Savingso Hedge against futureo Unplanned shocks(labor strikes, natural

disasters, surges in demand, etc)o To maintain independence in supply chain

Goal

Role of Inventory in Supply Chain

Supply ChainUnderstocking : Demand exceeds amount available

- Lost margin and future sales

Overstocking : Amount available exceeds demand- Liquidation, Obsolescence, Holding

Matching Supply and Demand

Types of DemandD

epen

dent

Independent

• Demand for items used to produce final products.

• Demand for items used by

external customers.

Benefits of Inventory Management

Improve customer service

Reduce inventory investment

Increase the profitability of business

Increase productivity

Inventory is insurance

Drawbacks of Keeping Inventory

• Inventory is expensive • Items deterioration • Products obsolescence

Inventory Management Techniques

Stock Review

Just In Time

ABC Analysis

EOQ Model

Methods For Supervising Inventory

• Manual Count Method• Periodic Methods• Perpetual Methods• LIFO and FIFO Methods (Valuation Method)

Pros and ConsMethods Pros Cons

Manual Count Method Identifying and removing broken items

Time consuming

Periodic Method Less upfront costs Outdated inventory information

Perpetual Method The most up to date information

A lot of data need to be uploaded

LIFO Ideal for heavy products and producer of homogenous products

Not ideal for products that have expiration dates

FIFO Ideal for products that have expiration dates and products with relatively short demand cycles

Not suitable approach during the inflation period

Inventory control Techniques

A

B

C

A: very importantB: importantC: marginally important

< Always better control (ABC) classification >

High Low

Annu

al $

Val

ue o

f Ite

ms

Percentage of Items Low

Inventory Control Techniques<The EOQ Model>

Assumptions

Constant Demand Rate

Known Costs

Outright orders

No Allowed Stock-out

Two Types of Cost

– Costs of storage space (E.g. warehouse depreciation) – Security– Insurance– Forgone interest on working capital tied up in inventory– Deterioration, theft, spoilage, or obsolescence

– Clerical costs of preparing purchase orders – Some spent finding suppliers and expediting orders– Transportation costs– Receiving costs (E.g. unloading and inspection)

Holding Cost:

Ordering Cost:

Development of EOQ Model

• (a.) Develop a COST EQUATION (MODEL) QUANTITIVELY and QUANTITIVELY

• TC = Holding cost + Setup Cost + DC

• (b.) Minimize the total cost equation (model) • (c.) Find REORDER QUANTITY

D = annual demand in units

C = cost of an individual item

Lead time

Time

Inve

ntor

y Co

ntro

l

0

Minimum Inventory

Order Quantity [maximum inventory level]

Q

Usage Rate

Average inventory on hand Q/2

Inventory Usage Over Time

Annu

al C

ost

Total Cost of Holding and Setup (order)

Holding Cost

Setup (order) Cost

Order Quantity Optimal Order Quantity (Q*)

Min

imum

to

tal c

ost

Minimizing Cost

Inventory control Techniques<The EOQ Model>

Q = Number of pieces per order Q* = Optimal number of pieces per order (EOQ)

D = Annual demand in units for the inventory item

S = Setup or ordering cost for each order H = Holding or carrying cost per unit per year

Annual Holding Cost = (Number of orders placed per-year)*(Setup or order cost per order)

= { Average inventory level } { Holding cost per unit per year }

= {Q/2 } ( H )

Annual Setup Cost = (Number of orders placed per-year)*(Setup or order cost per order)

= { Annual demand / Number of units in each order } { Setup or order cost per order }

= { D/Q } ( S )

Inventory control Techniques< The EOQ Model >

Q = Number of pieces per order Q* = Optimal number of pieces per order (EOQ)

D = Annual demand in units for the inventory item

S = Setup or ordering cost for each order H = Holding or carrying cost per unit per year

Optimal order quantity is found when annual setup cost equals annual holding cost

{Q/2 } ( H ) = = { D/Q } ( S )

Q* = √2DS/H

< The EOQ Model > Q = Number of pieces per order

Q* = Optimal number of pieces per order (EOQ)

D = Annual demand in units for the inventory item

S = Setup or ordering cost for each order

H = Holding or carrying cost per unit per year

Unreliable Vendors

Scrap Capacity

Imbalances

Work in process inventory level(hides problems)

Lowering Inventory /Reduces Waste

Unreliable Vendors Scrap

Capacity Imbalances

Work in process inventory level

Unreliable Vendors Scrap

Capacity Imbalances

Work in process inventory level

Reducing inventory reveals problems so they

can be solved.

Excessive inventory mask the problems

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Videohttp://www.youtube.com/watch?v=1d0O8MAMyAM

“One of the great responsibilities that I have is to manage my assets wisely, so that they create value.”

Alice Walton

Thank You!