At the end of this lecture, students should be able to define inventory, understand the various types of inventory, understand the reasons for keeping inventory, understand the inventory models (EOQ, POQ, QD).
Logistics Management LSM 730 Lecture 25 Dr Khurrum S Mughal 1-1 Actions When Forecasting is Not Appropriate • Seek information directly from customers • Collaborate with other channel members • Apply forecasting methods with caution (may work where • • • systems forecast accuracy is not critical) Delay supply response until demand becomes clear Shift demand to other periods for better supply response Develop quick response and flexible supply CR (2004) Prentice Hall, Inc 8-2 Managing Highly Uncertain Demand • Delay forecasting as long as possible • Prioritize supply by product’s degree of uncertainty (supply to the more certain products first) • Apply the principle of postponement to the most uncertain products (delay committing to a final product form until an order is received) • Create flexible supply to changing demand (alter capacity and output rates through subcontracting, computer technology, multi-purpose processes, etc.) • Be able to respond quickly to uncertain demand levels CR (2004) Prentice Hall, Inc 8-3 Reasons for Inventories • Improve customer service - Provides immediacy in product availability • Encourage production, purchase, and transportation • • • economies - Allows for long production runs (buffer against demand fluctuations) - Takes advantage of price-quantity discounts - Allows for transport economies from larger shipment sizes Act as a hedge against price changes - Allows purchasing to take place under most favorable price terms Protect against uncertainties in demand - Provides a measure of safety to keep operations running when demand levels and lead times cannot be known for sure Act as a hedge against contingencies - Buffers against such events as strikes, fires, and disruptions in supply 9-4 Reasons Against Inventories • They consume capital resources that might be put to better use elsewhere in the firm • They too often mask quality problems that would more immediately be solved without their presence • They divert management’s attention away from careful planning and control of the supply and distribution channels by promoting an insular attitude about channel management CR (2004) Prentice Hall, Inc 9-5 Types of Inventories • Pipeline - Inventories in transit • Speculative - Goods purchased in anticipation of price increases • Regular/Cyclical/Seasonal - Inventories held to meet normal operating needs • Safety - Extra stocks held in anticipation of demand and • uncertainties Obsolete/Dead Stock - Inventories that are of little or no value due to being spoiled, damaged, etc 9-6 lead time out of date, Nature of Demand • Perpetual demand - Continues well into the foreseeable future • Seasonal demand the year - Varies with regular peaks and valleys throughout • Lumpy demand - Highly variable (3 Mean) Accurately forecasting • Regular demand demand is singly the - Not highly variable (3 < Mean) most important factor • Terminating demand - Demand goes to in foreseeable future in good inventory • Derived demand management - Demand is determined from the demand of another item of which it is a part 9-7 Inventory Management Philosophies • Pull - Draws inventory into the stocking location - Each stocking location is considered independent - Maximizes local control of inventories • Push - Allocates production to stocking locations based on • demand - Encourages economies of scale in production Just-in-time - Attempts to synchronize stock flows so as to just demand as it occurs - Minimizes the need for inventory CR (2004) Prentice Hall, Inc 9-8 overall meet Pull vs Push Inventory Philosophies PUSH - Allocate supply to each warehouse based on the forecast for each warehouse PULL - Replenish inventory with order sizes based on specific needs of each warehouse Demand forecast Q1 Warehouse #1 A1 A2 Plant Q2 Warehouse #2 A3 Demand forecast Q3 A = Allocation quantity to each warehouse Q = Requested replenishment quantity by each warehouse CR (2004) Prentice Hall, Inc Warehouse #3 Demand forecast 9-11 Inventory Management Philosophies (Cont’d) • Supply-Driven - Extensive Forecasting needed - All supply must be accepted and processed - Inventories are controlled through demand • Aggregate Control - Classification of items: › Groups items according to their sales level › the 80-20 principle Allows different control policies for or more product groups CR (2004) Prentice Hall, Inc 9-10 based on broad ... 9-7 Inventory Management Philosophies • Pull - Draws inventory into the stocking location - Each stocking location is considered independent - Maximizes local control of inventories • Push -. .. stocking locations based on • demand - Encourages economies of scale in production Just-in-time - Attempts to synchronize stock flows so as to just demand as it occurs - Minimizes the need for inventory... Warehouse #3 Demand forecast 9-1 1 Inventory Management Philosophies (Cont’d) • Supply-Driven - Extensive Forecasting needed - All supply must be accepted and processed - Inventories are controlled