INVENTORY MANAGEMENT – PART I Ms. Biba S. Kavass

1. INVENTORY MANAGEMENT – PART IMs. Biba S. Kavass

2. Where would you rather go look for a new car? • A dealership with only 2 cars for a dealership with a 100 cars • Why did you choose the one you did? • What advantages does the bigger dealer have? • What additional costs might the bigger dealer have?

3. Definition of Inventory Those stocks or items used to support production (raw materials and work-in-process items), supporting activities (maintenance, repair, and operating supplies), and customer service (finished goods and spare parts). Inventory is one of the most expensive assets of many companies, representing as much as 50% of total invested capital.

4. Inventory Management Process of buying and storing materials and products while controlling costs for ordering, shipping, handling, and storage.

5. Inventory Control Systems • Perpetual – method of counting that shows the inventory on hand at all times • Periodic - taking a physical count of merchandise at regular periods, such as weekly or monthly

6. When Jeff Bezos opened his revolutionary business in 1995, Amazon.com was intended to be a “virtual” retailer—no inventory, no warehouses, no overhead—just a bunch of computers taking orders for books and authorizing others to fill them. Things clearly didn’t work out that way. Now, Amazon stocks millions of items of inventory, amid hundreds of thousands of bins on shelves in over 150 warehouses around the world. Additionally, Amazon’s software is so good that Amazon sells its order taking, processing, and billing expertise to others. It is estimated that 200 million items are now available via the Amazon Web site. Bezos expects the customer experience at Amazon to be one that yields the lowest price, the fastest delivery, and an error-free order fulfillment process so no other contact with Amazon is necessary. Exchanges and returns are very expensive. Managing this massive inventory precisely is the key for Amazon to be the world-class leader in warehouse automation and management. The time to receive, process, and position the stock in storage and to then accurately “pull” and package an order requires a labor investment of less than 3 minutes. And 70% of these orders are multiproduct orders. This underlines the high benchmark that Amazon has achieved. This is world-class performance. When you place an order with Amazon.com, you are doing business with a company that obtains competitive advantage through inventory management.

7. So, How Does Amazon Do It? https://www.youtube.com/watch?time_continue=5&v=Y-lBvI6u_hw

8. Reading: How Amazon is Changing Supply Chain Management Amazon.com has changed the face of retail through its use of bold supply chain strategies and its deployment of innovative technologies. In this article, we explore some of the ways that Amazon has shaped its supply chain, leaving competitors scrambling to catch up.

9. Functions of Inventory • To provide a selection of goods for anticipated customer demand • To maintain a smooth, and uninterrupted, production process • To take advantage of quantity discounts , because purchases in larger quantities may reduce the cost of goods or their delivery • To hedge against upward price changes

10. Types of Inventory • Raw Material - materials that have been purchased but not processed • Work-in-Process - products or components that are no longer raw materials but have yet to become finished product • MRO – Maintenance/Repair/Operating Supplies – necessary to keep machinery and processes productive • Finished Goods – completed product waiting shipment ACTIVITY: Using just one product, provide an example for type of inventory listed above.

11. Inventory Accuracy at Milton Bradley Games with the incorrect number of parts and pieces can result in some very unhappy customers. It is also time consuming and expensive to supply the extra parts or to have toys or games returned. When shortages are found during the assembly stage, the entire production run is stopped until the problem is corrected. Counting parts by hand or machine is not always accurate. As a result, Milton Bradley now weighs pieces and completed games to determine if the correct number of parts have been included. If the weight is not exact, there is a problem that is resolved before shipment. Using highly accurate digital scales, Milton Bradley is now able to get the right parts in the right game at the right time. Without this simple innovation, the company’s most sophisticated production schedule would be meaningless. Sources: Forbes (February 7, 2011); and The Wall Street Journal (April 15, 1999). Milton Bradley, a division of Hasbro, Inc., has been manufacturing toys for 150 years. Founded by Milton Bradley in 1860, the company started by making a lithograph of Abraham Lincoln. Using his printing skills, Bradley developed games, including The Game of Life, Chutes and Ladders, Candy Land, Scrabble, and Lite Brite. Today, the company produces hundreds of games, requiring billions of plastic parts. Once Milton Bradley has determined the optimal quantities for each production run, it must make them and assemble them as a part of the proper game. Some games require literally hundreds of plastic parts, including spinners, hotels, people, animals, cars, and so on. According to Gary Brennan, director of manufacturing, getting the right number of pieces to the right toys and production lines is the most important issue for the credibility of the company. Some orders can require 20,000 or more perfectly assembled games delivered to their warehouses in a matter of days.

12. Material Flow Cycle Cycle Time – time it takes for a product to be made QUESTION: How does reducing cycle time reduce inventory?

13. Cycle Counting A continuing reconciliation of inventory with inventory records Uses ABC Analysis: A – counted frequently (maybe once a month) B – counted less frequently (maybe once a quarter) C – counted maybe every 6 months

14. Cycle Counting Example

15. Cycle Counting Practice • In the Cole’s Truck example, Cole’s reclassifies some B and C items so there are now 1,500 B items and 3,000 C items. How does this change the cycle count? • A company has 10,000 items in its inventory. It has setup the following cycles: A – 3,000 items counted each month B – 3,000 items counted each quarter C – 4,000 items counted every six months What is your cycle count per day?

16. Losses in Inventory • Inventory in transit or idle in a warehouse • Shrinkage – inventory that is unaccounted for between receipt and time of sale – damage, theft, etc. • Pilfering – inventory theft

17. STOCK HANDLING Process to handle the receipt of raw material, parts, or merchandise.

18. Activity: Stock Handling and Inventory Control Directions: (Assignment is worth 50 points) • Create the document below in MS Excel • Use a formula to calculate “Ending” for each stock number • Use a formula to calculate “Amount to Order” for each stock number • Use a formula to calculate “Total Amount to Order” for all stock numbers • Print out your document and turn in

19. Receiving Merchandise • Facilities – depends on size of business • Back room • Warehouse • Distribution Center • Receiving Records – information recorded by businesses about the goods they receive

20. Activity: Complete a Receiving Record Complete a Receiving Record using the following information: • Date: today’s date • Purchase Order: #1234 • Received from: AgriCenter International, 7777 Walnut Grove Road | Memphis, TN | 38120 • Via: Swift Transport • Freight Bill #: 56789 • Items: 200 crates of strawberries • Item # A4567 • Weight – 10 pounds each crate • Received By: Your Name • Remarks/Notes: Must be kept refrigerated

21. Checking Merchandise • Blind Check – requires receiver to write description of merchandise, count quantities received, and list on dummy invoice – used to move merchandise quickly to sales floor • Direct Check – merchandise checked against actual invoice • Spot Check – random check of one carton in a shipment – often used in supermarkets • Quality Check – to inspect workmanship of received merchandise – usually done for furniture, paintings, etc.

22. Marking Merchandise • UPC – optical barcode reader or scanner • RFID – Radio Frequency Identification • QR (Quick Response) Code • AR – Augmented Reality -blending of interactive digital elements – like dazzling visual overlays, buzzy haptic feedback, or other sensory projections – into our real-world environments.

23. Universal Product Codes (UPC)

24. RFID Radio Frequency Identification: Refers to technologies that use wireless communication between an object (or tag) and interrogating device (or reader) to automatically track and identify objects. https://www.youtube.com/watch?v=PQVhqdZhueM

26. QR Codes Quick Response codes, or QR codes, are becoming more popular both in and out of warehouses and storage facilities. QR codes originated in Japan and are used to take information about an item or business and put it into a cell phone or hand-held scanner. QR codes first were developed to track parts in the manufacturing process of vehicles. Once the code is read by a cell phone or scanner, it gives more details about a business or item, shows a URL for even more information, provides coupons, and more.

27. Advantages of QR Codes • Organizations use QR codes to track more than names and prices of products; they include information including serial numbers, part numbers, lots and dates, and other data. • Turn to QR codes when their barcode systems run out of capacity because the components they use exceed the maximum number of items they can encode in a standard barcode. • Inventory management professionals also choose QR codes because they typically are more easily read by cell phones and do not require bulky hand-held scanners to read them. 

28. QR Code Examples

29. Project: Create Your Own QR Code https://www.qrcode-monkey.com/ • Decide the purpose of your QR Code • Are you going to link your code to a: • URL – Website Address • Text Message • Phone Number • Email • Social Media – Facebook, Twitter, or YouTube • Go to the QRCodeMonkey website and create your QR Code – make sure to DOWNLOAD YOUR PNG TO YOUR DESKTOP FOLDER and email to kavasschs@gmail.com

30. AR and Blippar Today’s consumers care more than ever about the origins of the food they eat. Who grew it? Where did it come from? Was it sourced ethically and sustainably? Consumers in France can now use augmented reality to learn about the origins of their basmati rice. By using the Blippar app to scan the back of a packet of Mars’ Uncle Ben’s basmati rice, available in all grocery stores in France, they can discover how their rice made the journey from farm to fork and learn about the sustainability commitments made by the farmers who grew it. Users are presented with an infographic that showcases Mars' commitment to producing sustainable rice, as well as recipe ideas and links to complementary products. https://www.youtube.com/watch?time_continue=49&v=uyP3YX_MAQ4

31. CASE STUDY: A Supply Chain Makeover for Sephora: How the Beauty Retailer Reduced Inventory Levels, While Improving Customer Service What is important to retailers? The obvious answer is the customer. The not so obvious answer is getting the right merchandise (planning and assortment), to the right store (allocation), with the right quantity (allocation), at the right time (supply chain effectiveness) and at the best-managed cost (supply chain efficiency). This was Sephora’s goal when the $2+ billion-a-year omni-channel, specialty beauty retailer engaged enVista. The retailer wanted to know how to improve in-store service and sales, while maintaining or reducing total inventory working capital. Sephora engaged enVista’s retail supply chain consultants to evaluate their supply chain from source to consumption, improve customer service and manage total supply chain costs. • ASSIGNMENT • Provide a 2-paragraph overview of the company, its’ products, and its’ customer base (https://www.sephora.com/about-us) • Answer the following: • The Challenge • The Solution • The Results

32. Managing Inventory – Factors to Consider • Lead Time • Stock Needs • Associated Costs

33. https://www.youtube.com/watch?v=rnbH59n5qWE

34. Lead Time • Total time it takes from placing an order until it is received • Lead time could be days, weeks, or longer, depending on the product and vendor • Product may need to be made or assembled • Vendor may not have enough of the product in stock when the order is placed

35. Stock Needs • Stockout – running out of stock • Reorder Point – point at which business orders more of a product before inventory gets too low – WHEN TO ORDER • Buffer or Safety Stock – additional stock kept above the minimum amount required to meet forecasted sales • Anticipation Stock – necessary extra of stock of products that sell more in certain seasons

36. Costs Associated with Inventory Holding/Carrying Costs - cost to keep or carry inventory in stock Examples – storage, insurance Ordering Costs - includes costs of supplies, forms, order processing, purchasing, and clerical support Setup Costs - cost to prepare a machine or process for manufacturing an order - includes time and labor to clean and change tools or holders

37. Reorder Point (ROP) ROP = Demand Per Day x Lead Time for New Orders ROP = d x L d (demand per day) = Annual Demand # of Working Days in a year ROP with Safety Stock = Expected demand during lead time + Safety Stock

38. ROP Example An Apple store had a demand (D) for 8,000 iPhones per year. The firm operates a 250-day working year. On average, delivery of an order takes 3 working days, but has been known to take as long as 4 days. The store wants to calculate the reorder point without a safety stock and then with a one-day safety stock. Step 1: Calculate daily demand d = 8,000/250 = 32 units per day Step 2: Calculate ROP without Safety Stock ROP = 32 units per day x 3 days lead time = 96 units Step 3: Calculate ROP with Safety Stock ROP with Safety = 96 units + 32 units (1 day’s demand) = 128 units CONCLUSION: When iPhone inventory stock drops to 96 units, an order should be placed. If using safety stock, an order should be placed when inventory drops to 128 units.

39. Activity: Reorder Point Calculations Worksheet • Complete the problems on the worksheet. • Assignment is worth 50 points.

40. Bullwhip Effect Occurs as orders are relayed from retailers, to distributors, to wholesalers, to manufacturers, with fluctuations increasing at each step in the sequence. The “bullwhip” fluctuations in the supply chain increase the costs associated with inventory, transportation, shipping, and receiving, while decreasing customer service and profitability. EFFECTS SUPPLIERS THE MOST

41. Example – Bullwhip Effect A retailer  typically keeps 100 six-packs of one soda brand in stock. If it normally sells 20 six-packs a day, it would order that replacement amount from the distributor. But one day, the retailer sells 70 six-packs and assumes customers will start buying more product and responds by ordering 100 six-packs to meet this higher forecasted demand. The distributor may then respond by ordering double, or 200 six-packs, from the manufacturer to ensure they do not run out. The manufacturer then produces 250 six-packs to be on the safe side. In the end, the increased demand has been amplified up the supply chain from to 100 six-packs at the customer level to 250 at the manufacturer.

42. RFID and the Bullwhip Effect

43. Activity: Bullwhip Effect Directions: Working together with a partner, discuss the following chart and then provide an actual example for each cause and each remedy. Assignment is worth 24 points. Source: Operations Management Sustainability and Supply Chain Management (12th Edition 2016 ) Jay Heizer

44. Tradeoffs Between Transportation and Inventory Costs Expensive transportation is generally fast transportation (airplane) Inexpensive transportation is generally slow (train or truck) When unit inventory value is high – keep small inventory and use fast transportation When unit inventory value is low – stock large inventory and use inexpensive slow transportation QUESTION: How can reducing inventory incur higher transportation costs? How can you determine the trade-off costs between transportation and inventory?

45. Transportation Mode Analysis To examine the tradeoff between transportation and inventory costs, one can evaluate holding costs vs. shipping options. A shipment of new connectors for semiconductors needs to go from San Jose to Singapore for assembly. The value of the connectors is $1,750 and the holding cost is 40% per year. One airfreight carrier can ship the connectors 1 day faster than its competitor, at an extra cost of $20.00 Which carrier should be selected? • Solution: • Determine daily holding cost • (Annual Holding Cost x Product Value)/365 • = (.40 x $1,750)/365 = $1.92 • Compare daily holding cost with cost of faster shipment • $20.00 > $1.92 so use less costly carrier • Saves = ($20.00 - $1.92) = $18.08 NOW YOU TRY: If the holding cost is 100% per year, what is your decision?

46. Practice: Transportation Mode Analysis A French car company ships 120,000 cars annually to the United Kingdom. The current method of shipment uses ferries to cross the English Channel and averages 10 days. The firm is considering shipping by rail through the Channel instead. That transport method would average approximately 2 days. Shipping through the Channel costs $80.00 more per vehicle. The firm has a holding cost of $25 per year. The average value of each car shipped is $20,000. Which transportation method should be selected?

47. Question What factors besides holding costs can justify use of a more expensive mode of transportation? • ___________ 2. __________ 3. ___________ 4. __________

48. Economic Order Quantity (EOQ) Ideal order quantity a company should purchase for its inventory given a set cost of production, demand rate and other variables.

49. Practice: EOQ Problem