Inventory is stocks/items used to
- Support Production
Raw Materials & WIP items - Supporting Activities
MRO: maintenance, repair & operating supplies - Cx Srv
finished goods & spare parts
___ is
- One of the most $$$ assets
- > 10% of Revenue or 20% of Assets
- Reduce Inv. yet avoid Stockouts
Inventory Mngt
6 Types of Inventory
- Cycle Stock
prod. received/replenished in bulk - Safety Stock
extra held against uncertainties - Anticipation Inventory
for anticipated Cx demand - Hedge Inventory
buffer against events might not happen - Transportation Inventoy
moving - Smoothing Inventory
smooth out diff. btw up/down-stream prod./demand
Business conditions that force companies to hold inventory
Inventory Drivers
Inventory Driver #1
Uncertainty in Supply or DD
which impacts
- Safety Stock
- Hedge Inv.
Inventory Driver #2
Mismatch between downstream DD & Most Efficient Prod./Shipment for upstream
Cycle Stock
Inventory Driver #3
Mismatch between downstream DD level & upstream Prod. Capacity
Smoothing Inventory
Inventory Driver #4
Mismatch between Timing of Cx DD & SC Lead Times
- Anticipation Inv.
- Transportation Inv.
2 Uncertainties
- Risk of Interruptions from upstream
- Risk of Fluctuations in downstream
- Supply Uncertainty
- Demand Uncertainty
Inventory items whose DD level are
1. beyond ctrl
2. tied to planned prod. of another item
- Independent DD Inv
e.g. tables - Dependent DD Inv
e.g. table legs for tables
Inventory Turnover
. COGS
= —————
. Avg Inventory
. Annual DD
= —————
. Order Qty
A Ratio of how fast SKU Inventory is being replaced
Inventory Turnover
an indicator of SKU Velocity
2 Operational Decisions for High Velocity SKU
- Location in Warehouse
closest to shipping - Inventory Count Interval
count regularly
___ is required to achieve Inventory Accuracy
Counts
- Annual count
- Cycle count
by area/ subsets of inv on planned cycles
- Open/ Blind/ Dbl Blind count
A System to determine which inventories should be counted/ managed more closely
ABC Inventory Ctrl Sys
A: Very Important
20% TotalQty w/ 80% TotalCost
B: Mod. Important
C: Least Important
4 Inventory Models
- Periodic Review Sys.
ind DD inv checked at regular intervals - Continuous Review Sys.
ind DD inv constantly monitored if reaching reorder point - Economic Order Qty Model
order Qty min. annual holding/ordering costs - Qty Discount Model
$ ↓ for larger Qty order
Periodic Review Sys.
calculate
Q = R - I
Q: Order Qty
R: ReStocking Level
I: Inventory at Review
R = μ + z·σ
R: ReStocking Level
μ: Avg DD
σ: St. Dev. of DD
z: Safety Stock factor of Srv Level
Reorder Period =?
Order Lead Time =?
A term of Amt of DD to be met under DD/Supp uncertainty
Service Level
98% Srv Level = 98/100 times that Cx DD is in-stock
⇒ 2% of the time out-of-stock
Service Level ↑
⇒ Inventory Amt ___
↑ Exponentially
In Cont. Review Sys.
calculate annual
Total Holding
& Ordering Costs
=Total Cost of Inventory
= Total Holding Cost
+ Total Ordering Cost
= (Avg Inv. Qty)×(Hld. Cost/unit)
+ (# of Orders/yr)×(Cost/order)
= (Q/2) × H
+ (D/Q) × S
Q: Order Qty ; H: Hld Cost/unit
D: Annual DD; S: Ording Cost
the Order Qty that minimizes Annual Holding & Ordering Costs of an item
Economic Order Qty
EOQ
=sqrt( 2DS/H )
. 2xDD/yrxOrd. Cost
=sqrt (——————————)
. Annual Hld. Cost/unit
5 Factors to Decide Safety Stock SS
& calculate
SS = z ·sqrt(L σₐ²+d² σₗ²)
σₐ : Variability of DD
σₗ : Variability of Lead Time
L : Avg Lead Time
z : Desired Srv Level
d : Avg DD
Reorder Point (ROP)
when
DD Qty d & Lead Time L
1. remain constant
2. both vary
- ROP = dL =μ
- ROP = dL + SS =μ+zσ
SS = z ·sqrt(L σₐ²+d² σₗ²)
. = z ·st dev of DD
