Managing Inventory throughout the Supply Chain Chapter 11 Chapter Objectives Be able to: Describe the various roles of inventory, including the different types of inventory and inventory drivers Distinguish between independent demand and dependent demand inventory Calculate the restocking level for a periodic review system Calculate the economic order quantity (EOQ) and reorder point (ROP) for a continuous review system Determine the best order quantity when volume discounts are available Calculate the target service level and target stocking point for a single-period inventory system Describe how inventory decisions affect other areas of the supply chain In particular, describe the bullwhip effect, inventory positioning issues, and the impacts of transportation, packaging, and material handling considerations Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 11 - Inventory Management Inventory – Those stocks or items used to support production (raw materials and workin-process items), supporting activities (maintenance, repair, and operating supplies) and customer service (finished goods and spare parts) © 2010 APICS Dictionary Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 11 - Inventory Types Cycle stock Safety stock Anticipation inventory Hedge inventory Transportation inventory Smoothing inventory Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 11 - Types of Inventory Cycle stock – Components or products that are received in bulk by a downstream partner, gradually used up, and then replenished again in bulk by an upstream partner Safety stock – Extra inventory that a company holds to protect itself against uncertainties in either demand or replenishment time Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 11 - Types of Inventory Anticipation inventory – Inventory that is held in anticipation of customer demand Hedge inventory – A form of inventory buildup to buffer against some event that may not happen © 2010 APICS Dictionary Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 11 - Types of Inventory Transportation inventory – Inventory that is moving from one link in the supply chain to another Smoothing inventory – Inventory that is used to smooth out differences between upstream production levels and downstream demand Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 11 - Inventory Drivers Inventory drivers – Business conditions that force companies to hold inventory Table 11.2 Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 11 - Independent vs Dependent Demand Inventory Independent demand inventory – Inventory items whose demand levels are beyond a company’s complete control Dependent demand inventory – Inventory items whose demand levels are tied directly to a company’s planned production of another item Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 11 - Independent vs Dependent Demand Inventory Example: Independent demand: • Kitchen table – Need 500 tables five weeks from now Dependent demand: • Kitchen table legs – Need per table or 2,000 legs • Calculation of dependent demand (Chapter 12) Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 11 - 10 Quantity Discounts Quantity Discounts – Price reductions for ordering larger quantities Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 11 - 30 Quantity Discounts Two-step process: Calculate the EOQ If the EOQ represents a quantity that can be purchased for the lowest price, stop – we have found the lowest cost order quantity Otherwise, go to Step 2 Compare total holding, ordering, and item costs at the EOQ quantity with total costs at each price break above the EOQ There is no reason to look at quantities below the EOQ, as these would result in higher holding and ordering costs, as well as higher item costs Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 11 - 31 Example 11.4 – Hal’s Magic Shop Demand (D) = 1,000 masks Ordering cost (S) = $20 Holding cost (H) = $3 Solve for EOQ: Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 11 - 32 Example 11.4 – Hal’s Magic Shop Because 115 is not eligible for the lowest price, calculate total cost at 115: Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 11 - 33 Example 11.4 – Hal’s Magic Shop And compare to total cost at next price break or 201 Price is cheaper at the 201 price break Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 11 - 34 Single-Period Inventory System When excess inventory cannot be held in the future, firms must weigh the cost of being short against the cost of holding excess units Examples: Fresh fish, magazines, newspapers, Christmas trees Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 11 - 35 Single-Period Inventory System Single-period inventory system – A system used when demand occurs in only a single point in time Goals: Determine a target service level (SLT) that strikes the best balance between shortage costs and excess costs Use the target service level to determine the target stocking point (TS) for the item Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 11 - 36 Single-Period Inventory System Target service level – The service level at which the expected cost of a shortage equals the expected cost of having excess units Target stocking point – The stocking point at which the expected cost of a shortage equals the expected cost of having excess units Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 11 - 37 Target Service Level OR Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 11 - 38 Target Service Level The target service level (SLT) is the p value at which holds true Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 11 - 39 Target Stocking Point Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 11 - 40 Inventory in the Supply Chain Bullwhip Effect An extreme change in the supply position upstream in a supply chain generated by a small change in demand downstream in the supply chain © 2010 APICS Dictionary Inventory Positioning Cost and value increases and flexibility decreases down the supply chain Transportation, Packaging, Material Handling Physical size and quantity of lot, how it is packaged, material handling equipment needed, and disposal of packaging are all factors in choosing appropriate supplier and distribution process Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 11 - 41 Demand vs Order Size The Bullwhip Effect Figure 11.12 Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 11 - 42 Managing Inventory Case Study Northcutt Bikes: The Service Department Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 11 - 43 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher Printed in the United States of America Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 11 - 44 ... Prentice Hall 11 - Types of Inventory Transportation inventory – Inventory that is moving from one link in the supply chain to another Smoothing inventory – Inventory that is used to smooth out... as Prentice Hall 11 - Types of Inventory Anticipation inventory – Inventory that is held in anticipation of customer demand Hedge inventory – A form of inventory buildup to buffer against.. .Chapter Objectives Be able to: Describe the various roles of inventory, including the different types of inventory and inventory drivers Distinguish between independent demand and dependent