After reading the material in this chapter, you should be able to: Distinguish dependent from independent demand inventories, Describe the four basic types of inventories & their functions, understand the costs of inventory & inventory turnovers, understand ABC classification, ABC inventory matrix & cycle counting, know RFID & how it can be used in inventory management,…
1 Advances in Supply Chain Management Chapter 2a: Advancements in Inventory Management Lec 5 : Learning Objectives n n n n n n n n n Distinguish dependent from independent demand inventories Describe the four basic types of inventories & their functions Understand the costs of inventory & inventory turnovers Understand ABC classification, ABC inventory matrix & cycle counting Know RFID & how it can be used in inventory management Understand the EOQ model & its underlying assumptions Understand the Quantity Discounts & the EMQ Models & their relationships with the basic EOQ model Understand & able to distinguish among the various statistical ROP models Describe the continuous review & periodic review systems SUMMARY of Last Lecture n n key performance measures are presented in detail in order to understand the excellence a supply chain achieves. The focus was on the importance of the integration of partners for the overall performance of the supply chain. For the optimization of inventory, the main principle of inventory management has to be considered: The objective is to balance the costs arising from holding inventories and the benefits of it. Furthermore, this tradeoff has to be handled for each separate component. In the coming lectures, we will show how APS can support this critical task of inventory management The focus of the present lecture is to present different concepts and models, evolved over the period of time, that can be used inventory management LAYOUT n n n n n n n Introduction Dependent and Independent Demand of inventory Concepts and Tools of Inventory Management ABC Inventory Analysis System RFID Inventory Models The continuous and periodic review system Introduction (inventory management) § § § Inventory can be one of the most expensive assets of an organization Inventory may account for more than 10% of total revenue or 20% of total assets Management must reduce inventory levels yet avoid stock outs and other problems Matching Demand and Supply § § § Suppliers must accurately forecast demand so they can produce & deliver the right quantities at the right time at the right cost Suppliers must find ways to better match supply & demand to achieve optimal levels of cost, quality, & customer service to enable them to compete with other supply chains Problems that affect product & delivery will have ramifications throughout the chain Dependent and Independent Demand Inventory management models – Generally classified as dependent demand and independent demand models Dependent Demand – Describes the internal demand for parts based on the demand of the final product in which the parts are used. Subassemblies, components, & raw materials are examples of dependent demand items § Independent Demand – The demand for final products & has a demand pattern affected by trends, seasonal patterns, & general market conditions. Demand for tooth paste, plasma TV, cars are example of independent demand § Concepts and Tools of Inventory Management Functions and Basic Types of Inventory The primary functions of inventory are to – n Buffer from uncertainty in the marketplace & n Decouple dependencies in the supply chain (e.g., safety stock) Four broad categories of inventories (already discussed in detail in the last lecture) n Raw materials unprocessed purchase inputs n Workinprocess (WIP) partially processed materials not yet ready for sales n Finished goods products ready for shipment n Maintenance, repair & operating (MRO) materials used in production (e.g., cleaners & brooms) Cont’d… Inventory Costs – The cost of holding goods in stock. Expressed usually as a percentage of the inventory value, it includes capital, warehousing, depreciation, insurance, taxation, obsolescence and shrinkage costs In other words, Total Inventory Cost is the sum of the carrying cost and the ordering cost of inventory Total Inventory Cost Formula TIC = C (Q/2) + F (D/Q) n Where, n C=Carrying cost per unit per year n Q=Quantity of each order n F=Fixed cost per order n D=Demand in units per year Direct costs directly traceable to unit produced (e.g., labor) When determining and accounting for direct and indirect labor costs, it is best to begin with the direct labor costs. Direct labor costs are those costs accumulated as a result of workers producing the product. Because this cost is a single cost, it is easier to determine than indirect labor costs. Various factors can go into direct labor costs, but for the most part direct labor can be determined by multiplying the number of units produced by the number of hours required to produce the product. The resulting figure then is multiplied by the cost of labor per hour to determine the direct labor cost for that product. If multiple products are produced, the cost is determined for each product and then added together Indirect costs cannot be traced directly to the unit produced (e.g., overhead) The indirect costs associated with the manufacturing process are any costs not directly attributable to the cost of labor. Therefore, the simplest way to 10 Demand During Lead Time n n Specify mean and standard deviation Standard deviation of demand during lead time σdLT = σ d2L = σ d L l Safety stock and reorder point Safety stock = zσdLT where z =number of standard deviations needed to achieve the cycleservice level σdLT =stand deviation of demand during lead time Reorder point R = dL + safety stock 28 Continuous Review Systems General Cost Equation Calculating total systems costs Total cost = Annual cycle inventory holding cost + Annual ordering cost + Annual safety stock holding cost Q D C = (H) + (S) + (H) (Safety stock) Q 29 Periodic Review System (P) n l Fixed interval reorder system or periodic reorder system Four of the original EOQ assumptions maintained u u u u l No constraints are placed on lot size Holding and ordering costs Independent demand Lead times are certain Order is placed to bring the inventory position up to the target inventory level, T, when the predetermined time, P, has elapsed 30 Periodic Review System (P) T IP3 On-hand inventory IP1 IP Q1 IP Order received OH Order received Q2 IP Q3 Order received OH Order placed Order placed IP2 L L P L P Protection interval Figure 12.10 – P System When Demand Is Uncertain 31 Time How Much to Order in a P System EXAMPLE A distribution center has a backorder (BO) for five 36inch color TV sets. No inventory is currently on hand (OH), and now is the time to review. How many should be reordered if T = 400 and no receipts are scheduled (SR)? SOLUTION IP = OH + SR – BO = 0 + 0 – 5 = –5 sets T – IP = 400 – (–5) = 405 sets That is, 405 sets must be ordered to bring the inventory position up to T sets 32 Inventory Management Example 1 An auto parts supplier sells Hardybrand batteries to car dealers and auto mechanics. The annual demand is approximately 1,200 batteries. The supplier pays $28 for each battery and estimates that the annual holding cost is 30 percent of the battery's value. It costs approximately $20 to place an order (managerial and clerical costs). The supplier currently orders 100 batteries per month n a. Determine the ordering, holding, and total inventory costs for the current order quantity n b. Determine the economic order quantity (EOQ) n c. How many orders will be placed per year using the EOQ? n d. Determine the ordering, holding, and total inventory costs for the n EOQ. How has ordering cost changed? Holding cost? Total inventory cost? 33 Cont’d… n Solution, We are given the following information: n annual demand: D = 1200 batteries per year n item cost: c = $28 per battery n holding cost: C=H= ic = 30% of (28) = $8.40 per battery per year n order cost: F=S= $20 per order n current order quantity: Q = 100 batteries a. The current ordering and holding costs are: TIC = C (Q/2) + F (D/Q) = 100/2(8.40) +1200/100(20) = 420 + 240 = $660 34 Cont’d… 35 EXAMPLE 2 Foster Drugs, Inc., handles a variety of health and beauty aid products. A particular hair conditioner product costs Foster $2.95 per unit. The annual holding cost rate is 20 percent. Using an EOQ model, they determined that an order quantity of 300 units should be used. The lead time to receive an order is one week, and the demand is normally distributed with a mean of 150 units per week and a standard deviation of 40 units per week a. What is the reorder point if the firm is willing to tolerate a 1percent chance of a stock out during an order cycle? b. What safety stock and annual safety stock cost are associated with your recommendation in part a? c. Foster is considering making a transition to a periodicreview system in an attempt to coordinate ordering of some of its products. The review period would be two weeks and the delivery lead time would remain one week. 36 What target inventory level would be needed to ensure the same 1percent risk of stockout? d. What is the safety stock associated with your answer to part c? What is the annual cost associated with holding this safety stock? e. Compare your answers to parts b and d. If you were the manager of Foster Drugs, would you choose a continuous or periodicreview system? 37 38 39 Radio Frequency Identification (RFID) Radio Frequency Identification (RFID) Successor to the barcode for tracking individual unit of goods. RFID does not require direct line of sight to read a tag and information on the tag is updatable. RFID Tags (Transponders) Readers Information Infrastructure (Local/ERP Servers) Item Box Hand Held Readers Shelf Readers Fixed Portal Readers Database RFID Middleware Local / ERP Server Pallet Crate 40 RFID Automates the supply chain: n n n n Materials Management – goods automatically counted and logged as they enter the supply warehouse Manufacturing – assembly instructions encoded on RFID tag provide information to computer controlled assembly devices Distribution Center – shipment leaving DC automatically updates ERP to trigger a replenishment order and notify customer for delivery tracking Retail Store – no check out lines as scanners link RFID tagged goods in shopping cart with buyers credit card 41 SUMMARY The present lecture has further analyzed the concepts and models related to inventory management. It included basic types of inventories, distinguished between independent and dependent demand, cost of inventories and their turnover. Explanation of ABC classification was also included. How RFID can be used in inventory management, EOQ model and its underlying assumption, the relationship of quantity discount and EMQ models with EOQ model. Further distinguished among various statistical ROP models and described the continuous and periodic review system of inventory management. The purpose is the optimization of inventory: to balance the costs arising from holding inventories and the benefits of it. In the coming lectures, we will show how APS can support this critical task of inventory management 42 .. .Advances? ?in? ?Supply? ?Chain? ? Management Chapter? ?2a: Advancements? ?in? ? Inventory? ?Management Lec? ?5? ?: Learning Objectives n n n n n n n n n Distinguish dependent from independent demand inventories... associated price of storing inventory or assets that remain unsold. Holding costs are a major component of? ?supply? ?chain? ?management, since businesses must determine how much of a product to keep? ?in? ?stock 12 Holding costs include an opportunity cost because money that’s tied up? ?in? ?... Holding costs include an opportunity cost because money that’s tied up? ?in? ? inventory can’t benefit the company? ?in? ?another way, such as an investment? ?in? ? new product development.? ?In? ?addition, maintaining inventory levels greater