Inventory Control and Forecasting Models in Supply Chain Management

1. Chapter 8 Quantity and Inventory

2. Forecasts and Uncertainty

3. The EOQ Model where: R = annual demand S = set-up or order cost per order C = delivered purchase cost K = carrying cost percentage therefore: KC = unit holding cost

4. Economic Order Quantity Model CTmin total cost Annual Cost ($) carrying costs ordering costs EOQ Quantity Ordered

5. Fixed order quantity system Perpetual inventory system Event triggered: Initiates order when stock depleted to a specific level. Reorder point Inventory replaced in fixed amounts Economic order quantities Issues: visual signals, IT applications

6. Fixed Order Quantity System INVENTORY cycle stock ROP ROP = L × d TIME lead time (L)

7. Safety Stock Safety stock is held because of uncertainty in supply and/or demand The trade-off is the cost of stocking out versus the cost of holding inventory Safety stock levels can be calculated using statistical techniques. e.g., Take into account standard deviation of demand

8. Fixed Order Quantity System:Cycle Stock, Safety Stock and Lead Time cycle stock (Q) INVENTORY ROP Safety Stock TIME lead time (L)

9. Fixed time period systems Inventory on-hand counted at specific time intervals and replenished to a desired level Only the passage of time triggers the model

10. Fixed Time Period System:Cycle Stock, Safety Stock and Lead Time INVENTORY Q Safety Stock TIME lead time review period

11. Which system is better? Fixed order quantity system Higher maintenance costs Every transaction logged Inventory controlled precisely Fixed time period Minimal record keeping Higher average inventories to protect against stock-outs Higher stock-out rates Different order quantities for each cycle Ability to batch orders to suppliers

12. Materials Requirement Planning (MRP) Based on a master production schedule, a material requirements planning system: Creates schedules identifying the specific parts and materials required to produce end items Determines exact numbers needed Determines the dates when orders for those materials should be released, based on lead times “Get the right materials to the right place at the right time.”

13. Key Inputs to MRP Master production schedule (when do we need it) Inventory record file (what do we have and what do we need) Bill of material (how does it get made)

14. Four Basic MRP Lot Sizing Rules Lot-for-lot (L4L) Economic order quantity (EOQ) Least total cost (LTC) Least unit cost (LUC)

15. MRP Implications for Supply Accurate records for quantities, lead times, bills of material, and specifications Tight control of inventory Cooperation from suppliers for on-time delivery, proper quantities and batch sizes, exacting quality (zero defects) May need to re-evaluate existing contracts Long-term planning horizon Less “slack” in the system

16. Forms and Functions of Inventory Functions of Inventories Transit or pipeline inventories Cycle inventories Buffer or uncertainty inventories or safety stock Anticipation or certainty inventories Decoupling inventories • Forms of Inventories • Raw materials, purchased parts and packaging • Work-in-progress • Finished goods • MRO items • Resale items

17. Inventory: Types, Functions, Objectives TYPE FUNCTION It takes time to move products (transit time, handling time, delays) Demand pattern does not equal supply pattern (goods produced in lot sizes) Demand pattern varies. Customer service levels must be maintained. Variations in demand relative to productive capacity or significant cost advantages to holding supply in anticipation of demand Distribution and production efficiency gained from independence between stages of production and distribution OBJECTIVE Balance in-transit inventory costs against cost of reducing delays Balance cost of ordering (or setup) and cost of carrying inventory Balance cost of carrying extra inventory against cost of stocking out Balance inventory costs against production costs, transportation costs, purchase discounts, and costs of avoiding price changes Balance efficiency of production - distribution activities against costs Transit or Pipeline Cycle Buffer or Safety Anticipation Decoupling

18. Examples of Inventory Functions

19. Inventory Forms and Functions FUNCTION Transit Cycle Buffer Anticipation Decoupling WHY move speed/distance make/use batch cope with variability smooth peak demand reduce dependence ELIMINATE REASON BY make moves faster/shorter reduce onetime batch costs reduce variability increase volume flexibility coordinate/schedule

20. ABC Classification of Purchases

21. Example of ABC Analysis

22. Purchase Value is a Combination of Price and Quantity

23. ABC Classification of Inventory

24. What is JIT? JIT is characterized by providing the exact quantity needed at the precise moment it is required However, to be able to support JIT firms require certain capabilities short production lead times economical small batch production flexible resources (labor, material and equipment) exacting quality

25. What is JIT? True JIT production systems strive to eliminate waste Waste includes: inefficient set-up procedures, inventories Focus on all aspects of the production system: human resources, supply, technology, and inventories JIT is based on the logic that nothing will be produced until it is needed When a unit is sold, the system pulls a replacement unit from the last position in the system This process continues throughout the system

26. Kanban Kanban means “sign” or “instruction card” in Japanese A number of visual methods can be used Authority to produce come from downstream operations Kanban cards represent the number of containers used in the system Dictates the lot size production levels and inventory

27. JIT Imposed Supplier Activities Frequent deliveries Small lot sizes Exacting quality Long-term relationships/contracts Reduced number of suppliers

28. JIT Implications for Supply Reduction in number of suppliers Reduction in supplier lead time Improvement in supplier quality Improvement in supplier delivery Increased inventory turnover Inventory reduction in total dollars

29. Dimensions of Services Degree of tangibility Direction of the service Production of the service Nature of demand Degree of standardized Skills required