Inventory Risk (3)
- Lack inventory assortment: loss sales and customer dissatisfaction
- Materials/component shortage: shut down/production delay or modification/increased cost/FG shortage
- Overstock: increased inventory holding cost/ warehouse space/ taxes/insurance, decreased profitability,
Reason to hold inventory (3)
- Economic of scale:
- Procurement: take advantage of discount
- Transportation: transportation cost per unit
- Manufacturer: long production run –> production saving - Balancing with supply and demand
- fulfill customer demand but increase of holding cost
- For seasonal supply and demand - Protect form uncertainties
- transporting vehicle break down
- Production line stop due to equipment problem
- Price rise in raw material
- shortage in raw materials
- Labor strike
Centralized inventory management VS Decentralized Inventory Management
Centralized INV MGT:
- require effective transportation management, communication and coordination
- Availability of information technology and integrated planning system
- Suitable for reduce demand uncertainty due to better visibility and identify trends
Decentralized INV MGT:
- Suitable for High demand uncertainty as it can make decision based on specific region demand pattern
- quick accessibility for customer
two types of service level
- Performance cycle: from release of a purchase order to receipt of shipment
- fill rate: % of order that is shipped as requested
Average amount (definition, calculation)
Order quantity
Average amount: the average inventory that company holds for a specific period
=(base stock/2 + safety stock)
Order quantity: amount ordered for replenishment
Reorder point
Order initiated (calculation)
Inventory turnover (calculation)
Relationship between average inv. and reorder quantity
Reorder point: when a replenishment is initiated
Order initiated = (working days/reorder days)
Inventory turnover: how fast can company able to sell its good
= (Total sales/ average inv.)
Higher = faster moving product, selling more frequently
Lower = slower moving product, excess inventory
Lower reorder quantity –> lower average inventory –> higher inventory turnover
Types of inventory (7)
- Basic stock: normal
- safety stock: cover uncertainty
- transit inventory: not yet received
- psychic stock: stimulate demand
- seasonal stock: accumulation
- speculative stock
- obsolete inventory: out-of-date, no recent demand
Types of cost (4)
Inventory carrying cost:
- Capital cost, inventory service cost, inventory risk cost, storage space cost
Order cost:
- prepare or processing order
- preparing inventory to be available for sale
Setup cost:
- changing product line
Stockout cost:
- may accept backorders
- Loss of sale and customer
EOQ
Total inv. cost and ordering cost under EOQ
EOQ= square root(2OD/HC)
total inv. cost= (EOQ/2 + safety stock) = avg. stock x total inv. cost per unit
total ordering cost = (Total demand/EOQ) = order initiated x ordering cost per unit
Demand uncertainty and Performance cycle uncertainty
Demand uncertainty: variation in sales during inventory replenishment
Performance cycle uncertainty: variation in replenishment time
Standard deviation for single uncertainty
Standard deviation for combined uncertainties
Single: square root {(sum of frequency x deviation2)/n}
combined: square root(Txd2 + S2 x D2)
avg. performance cycle time: T
deviation of sales: d
avg. sales: S
deviation of performance cycle: D
Inventory management policy
Policy: how often inventory level is reviewed
Perpetual review (real-time updates)
- continuously review
- implement through reorder point and quantity
- if on-hand and on-order < reorder point –> replenishment
Periodic review (physical count)
- regular review (weekly or monthly)
Collaborative Inventory Replenishment (3)
- Quick responses
- increased product velocity
- share real-time information to facilitate right product assortment
- reduce uncertainty due to continuous data exchange - Vendor-managed inventory
- Vendor take responsibility for setting target inv. level and making decision through daily transmission of real-time info
- Vendor: keep customer in stock and increase product velocity
-customer can eliminate the need of WH - Profile replenishment
- giving supplier the rights to anticipate in future requirements
- eliminates the need of tracking unit of sales and inv. level of fast-moving product
- Use IT system: extend planning framework to customer WH or retailer store
ABC classification (80-20 rules and ranking system)
group products or customer with similar characteristics or degree of importance
80-20 rule: 80% of customer generate 20% of profit
Ranking system:
Group A: fast-moving and high volume product, required higher service level and safety stock
Group B,C: slower moving product and lower volume product, require lower service level and safety stock
