Inventory Decision Making - PowerPoint PPT Presentation

Loading...

PPT – Inventory Decision Making PowerPoint presentation | free to download - id: 5c59f1-NzQ2M



Loading


The Adobe Flash plugin is needed to view this content

Get the plugin now

View by Category
About This Presentation
Title:

Inventory Decision Making

Description:

Chapter 7: Inventory Decision Making Learning Objectives - After reading this chapter, you should be able to do the following: Understand the fundamental differences ... – PowerPoint PPT presentation

Number of Views:70
Avg rating:3.0/5.0
Slides: 84
Provided by: JohnPatri67
Learn more at: http://lewstoops.com
Category:

less

Write a Comment
User Comments (0)
Transcript and Presenter's Notes

Title: Inventory Decision Making


1
Chapter 7
  • Inventory Decision Making

2
Learning Objectives - After reading this
chapter, you should be able to do the following
  • Understand the fundamental differences among
    approaches to managing inventory.
  • Appreciate the rationale and logic behind the
    Economic Order Quantity (EOQ) approach to
    inventory decision making, and be able to solve
    some problems of a relatively straightforward
    nature.
  • Understand alternative approaches to managing
    inventory --- JIT, MRP, and DRP.

3
Learning Objectives
  • Realize how variability in demand and order cycle
    length affects inventory decision making.
  • Know how inventory will vary as the number of
    stocking points decreases or increases.
  • Recognize the contemporary interest in and
    relevance of time-based approaches to inventory
    management.

4
Learning Objectives
  • Make needed adjustments to the basic EOQ approach
    to respond to several special types of
    applications.

5
Fundamental Approaches to Managing Inventory
  • Basic issues are simplehow much to order and
    when to order.
  • Additional issues arewhere to store inventory
    and what items to order.
  • Traditionally, conflicts were usually presentas
    customer service levels increased, investment in
    inventory also increased.
  • Recent emphasis is on increasing customer service
    and reducing inventory investment.

6
Fundamental Approaches to Managing Inventory
  • Four factors might permit this apparent paradox,
    that is, the firm can achieve higher levels of
    customer service without actually increasing
    inventory
  • More responsive order processing
  • Ability to strategically manage logistics data
  • More capable and reliable transportation
  • Improvements in the location of inventory

7
Figure 7-1 Relationship between
Inventory and Customer Service Level
8
Key Differences among Approaches to Managing
Inventory
  • Dependent versus Independent Demand
  • Dependent demand is directly related to the
    demand for another product.
  • Independent demand is unrelated to the demand for
    another product.
  • For many manufacturing processes, demand is
    dependent.
  • For many end-use items, demand is independent.

9
Key Differences among Approaches to Managing
Inventory
  • Of the inventory management processes in this
    chapter, JIT, MRP and MRPII are generally
    associated with items having dependent demand.
  • Alternatively, DRP and the EOQ models are
    generally associated with items exhibiting
    independent demand.

10
Key Differences among Approaches to Managing
Inventory
  • Pull versus Push
  • Pull approach is a reactive system, relying on
    customer demand to pull product through a
    logistics system. MacDonalds is an example.
  • Push approach is a proactive system, and uses
    inventory replenishment to anticipate future
    demand. Catering businesses are examples of push
    systems.

11
Key Differences among Approaches to Managing
Inventory
  • Pull versus Push
  • Pull systems respond quickly to sudden or abrupt
    changes in demand, involve one-way
    communications, and apply more to independent
    demand situations.
  • Push systems use an orderly and disciplined
    master plan for inventory management, and apply
    more to dependent demand situations.

12
On the Line American Cancer Society
  • ACS constructed a world class automated order
    fulfillment center in Atlanta.
  • Order cycle time was reduced to five business
    days.
  • Centralized storage reduced waste and
    obsolescence of educational materials.
  • Centralized shipment reduced freight rates.
  • The new center saved 8 million in the first year
    alone.

13
Fixed Order Quantity Approach (Condition of
Certainty) Inventory Cycles
  • In this example, each cycle starts
  • with 4,000 units
  • Demand is constant at the rate
    of 800 units per day.
  • When inventory falls below 1,500 units, an order
    is placed for an additional 4,000 units.
  • After 5 days the inventory is completely used.
  • Just as the 4,000th unit is sold, the next order
    of 4,000 units arrives and a new cycle begins.

14
Figure 7-2 Fixed Order Quantity Model
under the Condition of Certainty
15
Fixed Order Quantity Approach (Condition of
Certainty) Simple EOQ Model
  • Simple EOQ Model Assumptions
  • Continuous, constant, known and infinite rate of
    demand on one item of inventory.
  • A constant and known replenishment time.
  • Satisfaction of all demand.
  • Constant cost, independent of order quantity or
    time.
  • No inventory in transit costs.
  • No limits on capital availability.

16
Fixed Order Quantity Approach (Condition of
Certainty) Simple EOQ Model
  • Simple EOQ Model Variables
  • R annual rate of demand
  • Q quantity ordered (lot size in units)
  • A order or setup cost
  • V value or cost of one unit in dollars
  • W carrying cost per dollar value in percent
  • S VW annual storage cost in /unit per year
  • t time in days
  • TAC total annual costs in dollars per year

17
Figure 7-3 Inventory Carrying Cost
18
Figure 7-4 Order or Setup Cost
19
Figure 7-5 Inventory Costs
20
Fixed Order Quantity Approach (Condition of
Certainty) Simple EOQ Model
  • TAC QVW AR or TAC QS AR
  • 2 Q 2 Q
  • First term is the average carrying cost
  • Second term is order or setup costs per year

21
Figure 7-6 Sawtooth Model
22
Fixed Order Quantity Approach (Condition of
Certainty) Simple EOQ Model
  • TAC QVW AR or TAC QS AR
  • 2 Q 2 Q
  • Solving for Q gives the following expressions
  • Q v 2 RA or Q v 2RA or Q v 2RA
  • VW or S VW S

23
Fixed Order Quantity Approach (Condition of
Certainty) Simple EOQ Model
  • Where R 3600 units V 100 W 25
    S (or VW) 25 A 200 per order
  • Q v 2 RA or Q v 2RA or Q
    v 2RA
  • VW or S VW
    S
  • v 23600200 v 23600200
  • 10025 25
  • Q 240 units Q 240 units

24
Figure 7-7 Sawtooth Models
25
Table 7-1 Total Costs for Various EOQ
Amounts
26
Figure 7-8 Graphical Representation of the EOQ
Example
27
Fixed Order Quantity Approach (Condition of
Certainty)
  • Summary and Evaluation of the
    Fixed Order Quantity Approach
  • EOQ is a popular inventory model.
  • EOQ doesnt handle multiple locations as well as
    a single location.
  • EOQ doesnt do well when demand is not constant.
  • Minor adjustments can be made to the basic model.
  • Newer techniques will ultimately take the place
    of EOQ.

28
Fixed Order Quantity Approach (Condition of
Uncertainty)
  • Uncertainty is a more normal condition.
  • Demand is often affected by exogenous
    factors---weather, forgetfulness, etc.
  • Lead times often vary regardless of carrier
    intentions.
  • Examine out Figure 7-9.
  • Note the variability in lead times and demand.

29
Figure 7-9 Fixed Order Quantity Model
under Conditions of Uncertainty
30
Fixed Order Quantity Approach (Condition of
Uncertainty)
  • Reorder Point A Special Note
  • With uncertainty of demand, the reorder point
    becomes the average daily demand during lead time
    plus the safety stock.
  • Examine Figure 7-9 again.

31
Fixed Order Quantity Approach (Condition of
Uncertainty)
  • Uncertainty of Demand Affects Simple EOQ Model
    Assumptions
  • a constant and known replenishment time.
  • constant cost/price, independent of order
    quantity or time.
  • no inventory in transit costs.
  • one item and no interaction among
    the inventory items.
  • infinite planning horizon.
  • no limit on capital availability.

32
Table 7-2 Probability Distribution of Demand
during Lead Time
Demand Probability
100 units 0.01
110 0.06
120 0.24
130 0.38
140 0.24
150 0.06
160 0.01
33
Table 7-3 Possible Units of Inventory Short or
in Excess during Lead Time with Various Reorder
Points
Actual Demand Reorder Points Reorder Points Reorder Points Reorder Points Reorder Points Reorder Points Reorder Points
Actual Demand 100 110 120 130 140 150 160
100 0 10 20 30 40 50 60
110 -10 0 10 20 30 40 50
120 -20 -10 0 10 20 30 40
130 -30 -20 -10 0 10 20 30
140 -40 -30 -20 -10 0 10 20
150 -50 -40 -30 -20 -10 0 10
160 -60 -50 -40 -30 -20 -10 0
34
Table 7-3 Possible Units of Inventory Short or
in Excess during Lead Time with Various Reorder
Points
Actual Demand Proba-bility Reorder Points Reorder Points Reorder Points Reorder Points Reorder Points Reorder Points Reorder Points
Actual Demand Proba-bility 100 110 120 130 140 150 160
100 0.01 0.0 0.1 0.2 0.3 0.4 0.5 0.6
110 0.06 -0.6 0 0.6 1.2 1.8 2.4 3.0
120 0.24 -4.8 -2.4 0 2.4 4.8 7.2 9.6
130 0.38 -11.4 -7.6 -3.8 0 3.8 7.6 11.4
140 0.24 -9.6 -7.2 -4.8 -2.4 0 2.4 4.8
150 0.06 -3.0 -2.4 -1.8 -1.2 -0.6 0 0.6
160 0.01 -0.6 -0.5 -0.4 -0.3 -0.2 -0.1 0
35
Table 7-4 Calculation of Lowest-Cost Reorder Point Table 7-4 Calculation of Lowest-Cost Reorder Point Table 7-4 Calculation of Lowest-Cost Reorder Point Table 7-4 Calculation of Lowest-Cost Reorder Point Table 7-4 Calculation of Lowest-Cost Reorder Point Table 7-4 Calculation of Lowest-Cost Reorder Point Table 7-4 Calculation of Lowest-Cost Reorder Point Table 7-4 Calculation of Lowest-Cost Reorder Point
Dmnd 100 110 120 130 140 150 160
(e) 0.0 0.1 0.8 3.9 10.8 20.1 30.0
(VW) 0 2.50 20 97.50 270 502.50 750
(g) 30 20.1 10.8 3.9 0.8 0.1 0.0
Ggw 300 201 108 39 8 1 0
GR/Q 4500 3015 1620 585 120 15 0
TAC 4500 3018 1640 682.50 390 517.50 750
36
Fixed Order Quantity Approach (Condition of
Certainty) Expanded EOQ Model
  • Where R 3600 units V 100 W 25
    A 200 per order G 8
  • Q v 2 R(A G)
  • VW
  • v 2 3600 (200 8)
  • 100 25
  • Q approximately 242 units

37
Fixed Order Quantity Approach (Condition of
Certainty) Expanded EOQ Model
  • Where R 3600 units V 100 W 25
    A 200 per order G 8 Q
    242 e 10.8
  • TAC QVW AR eVW GR
  • 2 Q Q
  • TAC (24210025) (2003600)
    (10.810025) (83600)
  • 2
    242 242
  • TAC 3025 2975
    270 119
  • TAC 6389 (New value for TAC when
    uncertainty introduced)

38
Fixed Order Quantity Approach (Condition of
Uncertainty) Conclusions
  • Following costs will rise to cover the
    uncertainty
  • Stockout costs.
  • Inventory carrying costs of safety stock
  • Results may or may not be significant.
  • In text example, TAC rose 389 or approximately
    6.5.
  • The greater the dispersion of the probability
    distribution, the greater the cost disparity.

39
Figure 7-10 Area under the Normal Curve
40
Table 7-5 Reorder Point Alternatives and
Stockout Possibilities
41
Fixed Order Interval Approach
  • A second basic approach
  • Involves ordering at fixed intervals and varying
    Q depending upon the remaining stock at the time
    the order is placed.
  • Less monitoring than the basic model
  • Examine Figure 7-11.
  • Amount ordered over each five weeks in the
    example varies each week.

42
Figure 7-11 Fixed Order Interval Model
(with Safety Stock)
43
Summary and Evaluation of EOQ Approaches to
Inventory Management
  • Four basic inventory models
  • Fixed quantity/fixed interval
  • Fixed quantity/irregular interval
  • Irregular quantity/fixed interval
  • Irregular quantity/irregular interval
  • Where demand and lead time are known, basic EOQ
    or fixed order interval model best.
  • If demand or lead time varies, then safety stock
    model should be used

44
Summary and Evaluation of EOQ Approaches to
Inventory Management
  • Relationship to ABC analysis
  • A items suited to a fixed quantity/irregular
    interval approach.
  • C items best suited to a irregular
    quantity/fixed interval approach.
  • Importance of trade-offs
  • Familiarity with EOQ approaches assists the
    manager in trade-offs inherent in inventory
    management.

45
Summary and Evaluation of EOQ Approaches to
Inventory Management
  • New concepts
  • JIT, MRP, MRPII, DRP, QR, and ECR also take into
    account a knowledge and understanding of
    applicable logistics trade-offs.
  • Number of DCs
  • The issue of inventory at multiple locations in a
    logistics network raises some interesting
    questions concerning the number of DCs, the SKUs
    at each, and their strategic positioning.

46
Additional Approaches to Inventory Management
  • Three approaches to inventory management that
    have special relevance to supply chain
    management
  • JIT (Just in Time)
  • MRP (Materials Requirements Planning)
  • DRP (Distribution Resource Planning)

47
Time-Based Approaches to Replenishment Logistics
JIT
  • Definition and Components of JIT Systems -
    designed to manage lead times and eliminate
    waste.
  • Kanban - refers to the informative signboards on
    carts in a Toyota system of delivering parts to
    the production line. Each signboard details the
    exact quantities and necessary time of
    replenishment.
  • JIT operations - Kanban cards and light warning
    system communicate possible production
    interruptions.
  • Fundamental concepts - JIT can substantially
    reduce inventory and related costs.

48
Time-Based Approaches to Replenishment Logistics
JIT
  • Definition and Components of JIT Systems -
    designed to manage lead times and eliminate
    waste.
  • Goal is zero inventory, and zero defects.
  • Similarity to the two-bin system - one bin fills
    demand for part, the other is used when the first
    is empty.
  • Reduces lead times through requiring small and
    frequent replenishment.

49
Time-Based Approaches to Replenishment Logistics
JIT
  • JIT is a widely used and effective strategy for
    managing the movement of parts, materials,
    semi-finished products from points of supply to
    production facilities.
  • Product should arrive exactly when a firm needs
    it, with no tolerance for early or late
    deliveries.
  • JIT systems place a high priority on short,
    consistent lead times.

50
JIT versus EOQ Approaches to Inventory Management
  • Six major differences
  • First, JIT attempts to eliminate excess
    inventories for both buyer and seller.
  • Second, JIT systems involve short production runs
    with frequent changeovers.
  • Third, JIT minimizes waiting lines by delivering
    goods when and where needed.

51
JIT versus EOQ Approaches to Inventory Management
  • Fourth, JIT uses short, consistent lead times to
    satisfy inventory needs in a timely manner.
  • Fifth, JIT relies on high-quality incoming
    products and on exceptionally high-quality
    inbound logistics operations.
  • Sixth, JIT requires a strong, mutual commitment
    between buyer and seller, emphasizing quality and
    win-win outcomes for both partners.

52
Table 7-6 EOQ versus JIT Attitudes and Behaviors
53
Time-Based Approaches to Replenishment Logistics
JIT
  • JIT versus Traditional Inventory Management
  • Reduces excess inventories
  • Shorter, more frequent production runs
  • Minimize waiting lines by delivering materials
    when and where needed
  • Short, consistent lead times through proximate
    location
  • Quality stressed throughout supply chain
  • Win-win relationships necessary to a healthy
    supply chain

54
Time-Based Approaches to Replenishment Logistics
JIT
  • Examples of JIT Successes
  • Apple Computers increase in IT from 10 weeks to
    2 weeks resulted in 18-month 20 million payback
    on plant.
  • GM increased production by 100, but inventories
    increased by only 6.
  • Norfolk Southern mini-train hauls direct from one
    GM plant to another without switching delays.
  • Ryder handles all inbound logistics for Saturn.

55
Figure 7-12The Orderly Pickup Concept
56
Time-Based Approaches to Replenishment Logistics
MRP
  • A Materials Requirements Planning (MRP) system
    consists of a set of logically related
    procedures, decision rules, and records designed
    to translate a master production schedule into
    time-phased net inventory requirements for each
    component item needed to implement this schedule.
  • MRPs re-plan net requirements based on changes in
    schedule, demand, etc.

57
Time-Based Approaches to Replenishment Logistics
MRP
  • Goals of an MRP
  • Ensure the availability of materials, components,
    and products for planned production.
  • Maintain lowest possible inventory
    level.
  • Plan manufacturing activities, delivery
    schedules, and purchasing activities.

58
Time-Based Approaches to Replenishment Logistics
MRP
  • Key elements of an MRP
  • Master production schedule
  • Bill of materials file
  • Inventory status file
  • MRP program
  • Outputs and reports

59
Figure 7-13 An MRP System
60
Figure 7-14 Relationship of Parts to Finished
Product MRP Egg Timer Example
61
Table 7-7 Inventory Status File MRP Egg Timer
Example
Product Gross Req. Inventory Net Req. Lead Time
Egg Timers 1 0 1 1
Ends 2 0 2 5
Supports 3 2 1 1
Bulbs 1 0 1 1
Sand 1 0 1 4
62
Figure 7-15 Master Schedule MRP Egg Timer
Example
63
Time-Based Approaches to Replenishment Logistics
MRP
  • Principal advantages of MRP
  • Maintain reasonable safety stock.
  • Minimize or eliminate inventories.
  • Identification of process problems.
  • Production schedules based on actual demand.
  • Coordination of materials ordering.
  • Most suitable for batch or intermittent
    production schedules.

64
Time-Based Approaches to Replenishment Logistics
MRP
  • Principal shortcomings of MRP
  • Computer intensive.
  • Difficult to make changes once operating.
  • Ordering and transportation costs may rise.
  • Not usually as sensitive to short-term
    fluctuations in demand.
  • Frequently become quite complex.
  • May not work exactly as intended.

65
Time-Based Approaches to Replenishment Logistics
Distribution Resource Planning
  • MRP sets a master production schedule and
    explodes into gross and net requirements.
  • DRP starts with customer demand and works
    backwards toward establishing a realistic
    system-wide plan for ordering the necessary
    finished products.
  • Then DRP works to develop a time-phased plan for
    distributing product from plants and warehouses
    to the consumer.

66
Time-Based Approaches to Replenishment Logistics
Distribution Resource Planning
  • DRP develops a projection for each SKU and
    requires17
  • Forecast of demand for each SKU.
  • Current inventory level for each SKU.
  • Target safety stock.
  • Recommended replenishment quantity.
  • Lead time for replenishment.

67
Table 7-8 DRP Table for Chicken Noodle Soup
Columbus Distribution CenterDistribution Resource Planning Columbus Distribution CenterDistribution Resource Planning Columbus Distribution CenterDistribution Resource Planning Columbus Distribution CenterDistribution Resource Planning Columbus Distribution CenterDistribution Resource Planning Columbus Distribution CenterDistribution Resource Planning Columbus Distribution CenterDistribution Resource Planning Columbus Distribution CenterDistribution Resource Planning Columbus Distribution CenterDistribution Resource Planning Columbus Distribution CenterDistribution Resource Planning Columbus Distribution CenterDistribution Resource Planning Columbus Distribution CenterDistribution Resource Planning Columbus Distribution CenterDistribution Resource Planning
Month January January January January January February February February February February March March
Week 1 1 2 3 4 5 6 7 8 8 9 9
CN Soup Current BOH4314 Q3800 SS1956 LT1 Current BOH4314 Q3800 SS1956 LT1 Current BOH4314 Q3800 SS1956 LT1 Current BOH4314 Q3800 SS1956 LT1 Current BOH4314 Q3800 SS1956 LT1 Current BOH4314 Q3800 SS1956 LT1 Current BOH4314 Q3800 SS1956 LT1 Current BOH4314 Q3800 SS1956 LT1 Current BOH4314 Q3800 SS1956 LT1 Current BOH4314 Q3800 SS1956 LT1 Current BOH4314 Q3800 SS1956 LT1 Current BOH4314 Q3800 SS1956 LT1
Forecast 974 974 974 974 974 989 1002 1002 1002 1002 1002 1061
Schedule Receipt 0 0 0 3800 0 0 0 3800 3800 0 0 0
BOH-End 3340 2366 2366 5192 4218 3229 2227 5025 5025 4023 4023 2962
Planned Order 0 3800 3800 0 0 0 3800 0 0 0 0 3800
68
Figure 7-16 Combining DRP Tables
69
Inventory at Multiple Locations The Square Root
Law (SQL)
  • Used to reduce inventory at multiple locations.
  • As locations increase, inventory also increases,
    but not in the same ratio as the growth in
    facilities.
  • The square root law (SRL) states that total
    safety stock can be approximated by multiplying
    the total inventory by the square root of the
    number of future facilities divided by the
    current number of facilities.

70
Inventory at Multiple Locations The Square Root
Law
  • X2 (X1) v(n2/n1)
  • Where
  • n1 number of existing facilities
  • n2 number of future facilities
  • X1 total inventory in existing facilities
  • X2 total inventory in future facilities

71
Square Root Law Example
  • Current distribution 40,000 units
  • Eight facilities shrinking to two
  • Using the square root law
  • X2 (40,000) v(2/8)
  • X2 20,000 units

72
Table 7-9 Example Impacts of Square Root Law on
Logistics Inventories
Warehouses vn Total Av Inv Change
1 1.0000 3,885 ---
2 1.4142 5,494 141
3 1.7321 6,729 173
4 2.0000 7,770 200
5 2.2361 8,687 224
10 3.1623 12,285 316
15 3.8730 15,047 387
20 4.4721 17,374 447
23 4.7958 18,632 480
25 5.0000 19,425 500
73
Figure 7-17 Four Directions for
Replenishment Logistics
74
Time-Based Approaches to Replenishment Logistics
Quick Response (QR)
  • Structure of QR
  • Shorter, compressed time horizons.
  • Real-time information available by SKU.
  • Seamless, integrated logistics networks with
    rapid transportation, cross-docking and effective
    store receipt and distribution systems.

75
Time-Based Approaches to Replenishment Logistics
Quick Response (QR)
  • Structure of QR
  • Partnership relationships present among supply
    chain members.
  • Redesign of manufacturing processes to reduce lot
    sizes, changeover times and enhanced flexibility.
  • Commitment to TQM.

76
Figure 7-18Basic Elements of Quick Response (QR)
77
Time-Based Approaches to Replenishment Logistics
Efficient Consumer Response (ECR)
  • Structure of ECR
  • Grocery industry estimates U.S. savings at
    approximately 30 billion.
  • Ultimate goal is a responsive, consumer-driven
    system in which distributors and suppliers work
    together as business allies to maximize consumer
    satisfaction and minimize cost. Accurate
    information and high-quality products flow
    through a paperless system between manufacturing
    and check-out counter with minimum degradation or
    interruption

78
Figure 7-19 Efficient Consumer Response Broad
Operating Capabilities Tailored to Each Unique
Partner
79
Chapter 7 Summary and Review Questions
  • Students should review their knowledge of the
    chapter by checking out the Summary and Study
    Questions for Chapter 7.
  • This is the last slide for Chapter 7

80
Figure A7-1 Sawtooth Model Modified for
Inventory in Transit
81
Figure A7-2 EOQ Costs Considering Volume
Transportation Rate
82
Table 7A-1 Annual Savings, Annual Cost, and Net
Savings by Various Quantities Using Incentive
Rates
83
Figure A7-3 Net Savings Function for Incentive
Rate
About PowerShow.com