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Chapter 6

Chapter 6. Inventory. Table 6-1 Inventory Functionality. Figure 6-1 Inventory Cycle for Typical Product. Figure 6-2 Inventory Relationship for Constant Sales and Performance Cycle. Figure 6-3 Alternative Order Quantity and Average Inventory. Table 6-2 Inventory Carrying Cost Components.

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Chapter 6

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  1. Chapter 6 Inventory

  2. Table 6-1 Inventory Functionality

  3. Figure 6-1 Inventory Cycle for Typical Product

  4. Figure 6-2 Inventory Relationship for Constant Sales and Performance Cycle

  5. Figure 6-3 Alternative Order Quantity and Average Inventory

  6. Table 6-2 Inventory Carrying Cost Components

  7. Figure 6-4 Economic Order Quantity

  8. Table 6-3 Factors for Determining EOQ

  9. Table 6-4 EOQ Data Requirements for Consideration of Transportation Economies

  10. Table 6-5 Volume Transportation Rate Modified EOQ

  11. Table 6-6 Example of Quantity Discounts

  12. Figure 6-5 Inventory Relationship, Demand Uncertainty, Constant Performance Cycle

  13. Table 6-7 Typical Demand Experienced During Three Replenishment Cycles

  14. Figure 6-6 Historical Analysis of Demand History

  15. Table 6-8 Frequency of Demand

  16. Figure 6-7 Normal Distribution

  17. Table 6-9 Calculation of Standard Deviation and Daily Demand

  18. Table 6-10 Calculation of Standard Deviation of Replenishment Cycle Duration

  19. Figure 6-8 Combined Demand and Performance Cycle Uncertainty

  20. Table 6-11 Frequency Distribution – Demand and Replenishment Uncertainty

  21. Figure 6-9 Impact of Order Quantity on Stock Out Magnitude

  22. Table 6-12 Average Inventory Impact Resulting from Changes in EOQ

  23. Table 6-13 Information for Determining Required Safety Stock

  24. Table 6-14 Lost Integral for Standardized Normal Distribution

  25. Table 6-15 Impact of Order Quantity on Safety Stock

  26. Table 6-16 Sample Demand, Performance Cycle, Order Quantity Characteristics

  27. Figure 6-10 A Reactive Inventory Environment

  28. Figure 6-11 Fair Share Allocation Example

  29. Figure 6-12 Conceptual Design of Integrated MRP/DRP System

  30. Figure 6-13 Distribution Requirements Planning Example

  31. Table 6-17 Comparative Service and Inventory Characteristics for Anticipatory vs. Responsive Inventory Systems

  32. Table 6-18 Suggested Inventory Management Logic

  33. Table 6-19 Product Market Classification (Sales)

  34. Table 6-20 Integrated Strategy

  35. CHAPTER 6 SUPPLEMENTAL The following slides present supplementary materials.

  36. Focusing on Inventory • Sales = $100,000 • Average inventory = $50,000 • Range of inventory ($30,000 - 70,000) • Annual turns = 2.00 • Days of supply = 180

  37. “Peeling the Inventory Onion”

  38. Perspectives on Product Positioning • Provide for uncertainty - Inventory management • Reduce demand uncertainty • Reduce cycle uncertainty

  39. Provide for Uncertainty Inventory Management • Manage • Where to stock? • When to order? • How much to order? • Control • Accountability • Accuracy

  40. Inventory Cycle for Typical Product 2 months Average Inventory 1.5 months 1.5 months 1.0 months Safety Stock 1 2

  41. Inventory Cycle for Typical Product 2 months Average Inventory 1.5 months 1.5 months Cycle Safety stock In-transit Obsolete Speculative 1.0 months 2 1

  42. Inventory Cycle for Typical Product 2 months Average Inventory 1.5 months 1.5 months 1.0 months Safety Stock 1 2

  43. Elements Influencing Average Inventory Average = OQ/2 + SS + IT Where: • Average = average inventory level • OQ = average replenishment order quantity • SS = average safety stock level • IT = average in-transit inventory

  44. Reorder Point and Safety StockWhen to order ROP = LT * DD + SS Where: • ROP = reorder point • LT = replenishment lead time • DD = average daily demand • SS = safety stock

  45. Factors Influencing Safety Stock Requirements Demand Lead time Forecast f(k) * C Service Level (SL)  OQ Replenishment cycle Transport mode

  46. Determining Safety Stock f(k) = (1 - SL) * (OQ/C) Where: • f(k) = normal loss integral for safety factor k • SL = desired service level in percent unit fill rate • OQ = order quantity • C = standard deviation of lead time demand

  47. Example Safety Stock Calculation Key parameters • SL = 99 percent availability • DD = 5 units/day, DD = 2.54 • LT = 10 days, LT = 2 • OQ = 300 units

  48. Combining Demand and Lead Time Uncertainty + Lead Time LT = 10 LT = 2.00 Demand DD = 5 DD = 2.54 = Average LTD (Lead time demand) = LT * DD = 50

  49. Combined Uncertainty C = LT * DD2 + DD2 * LT2 C = 10 * 2.542 + 52 * 2.002 C = 12.83 (rounded to 13)

  50. Calculating Safety Stock k factor f(k) = (1 - SL) * (OQ/C) f(k) = (1.0 - .99) * (300/13) = 0.2308 f(k) = 0.2308 ==> k =0.4 SS = k * C = 0.4 * 13 = 5.2 units (Round to 6) ROP = DD * LT + SS = 50 + 6 = 56

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