INVENTORY MANAGEMENT Kishore Kumar Pochampally, PhD, PMP®, Six Sigma Black Belt (ASQ) School of Business, Southern New Hampshire University Women & Money Forum Center for Women’s Business Advancement January 9, 2014

Historical Perspective Toyota Camry and Corolla Old cars race car pit stop Toyota - 2 pages

Need for Inventory Lead time Economies of scale (quantity discounts) Uncertainty in quantity and quality of supply Uncertainty in lead time

customer Finished products Parts inventory inventory Supplier Supplier 4

customer Finished products Parts inventory inventory Supplier Supplier 5

Lean Production / Just-in-Time Production Supplier customer Supplier Supplier Finished products inventory Parts inventory Lean Production / Just-in-Time Production 6

customer push pull Finished products Parts inventory inventory Supplier push pull customer Supplier Supplier Finished products inventory Parts inventory 7

Central Distribution Center (can ship to any dealer in 24 hours) push-pull Dealer A Dealer B

Concept of Functional and Innovative Products Functional products characterized by: slow technology clock speed, low product variety, and typically low profit margins Innovative products characterized by: fast technology clock speed and short product life cycle, high product variety, and relatively high margins. push strategy push-pull strategy

In a push strategy, the focus is on forecasted demand In a pull strategy, the focus is on reacting to actual demand Higher demand uncertainty leads to a preference for a pull strategy Lower demand uncertainty leads to a preference for a push strategy Fast clock speed products should have modular product structure (so that final assembly can be postponed as much as possible)

Economic Packaging

Standardization part standardization process standardization (common parts) process standardization (common processes)

Benetton Old Manufacturing Process Spin or Purchase Yarn Dye Yarn Finish Yarn Manufacture Garment Parts Join Parts

Benetton New Manufacturing Process Spin or Purchase Yarn Manufacture Garment Parts Join Parts Dye Garment This step is postponed Finish Garment

Third Party Logistics (3PL) Use of an outside company to perform all or part of a firm’s product distribution functions. Ryder designs, manages, and operates all of Whirlpool’s inbound logistics.

The Five S’s Sort Keep only what is needed Straighten A place for everything, and everything in its place Shine Clean work areas to expose problems Standardize Develop systems and procedures to monitor conformance to the first 3 rules Sustain Maintain the standard processes for the first 3 rules

The Five S’s Sort Before Sorting Sort: Unneeded items take up valuable work space. Red-tagging Before Sorting

The Five S’s Straighten 5S kitchen After Straightening

The Five S’s Shine After Shining

5S Game This sheet represents our current work place. Our job during a 30 second shift, is to strike out the numbers 1 to 49 in correct sequence. Example: 1 2 3 .. Instruction: Strike out numbers 1 to 49 in sequence during the 30 second shift

AVG: Average Daily Demand STD: Standard Deviation of Daily Demand (Higher the variation in daily demand, higher the STD) α: Service Level (90% service level means 10% stockout) Inventory Level Reorder Point Safety Stock Time Lead Time (L)

AVG: Average Daily Demand STD: Standard Deviation of Daily Demand (Higher the variation in daily demand, higher the STD) α: Service Level (90% service level means 10% stockout) Reorder Point = (AVG * L) + (Safety Stock) Safety Stock = z * STD * SQRT(L) {The higher the α, the higher the z value} Inventory Level Reorder Point Safety Stock Lead Time (L) Time

Safety Stock = z * STD * SQRT(L) AVG: Average Daily Demand STD: Standard Deviation of Daily Demand (Higher the variation in daily demand, higher the STD) α: Service Level (90% service level means 10% stockout) Safety Stock = z * STD * SQRT(L) {The higher the α, the higher the z value} Reorder Point = (AVG * L) + (Safety Stock) Average Inventory Level = (Order Quantity / 2) + (Safety Stock) Inventory Level Order Quantity Reorder Point Safety Stock

HOW TO REDUCE INVENTORY? Safety Stock = z * STD * SQRT(L) {The higher the α, the higher the z value} Reorder Point = (AVG * L) + (Safety Stock) Average Inventory Level = (Order Quantity / 2) + (Safety Stock) HOW TO REDUCE INVENTORY? Reduce L Reduce STD Reduce Order Quantity

Kishore Kumar Pochampally Thank you! Kishore Kumar Pochampally k.pochampally@snhu.edu 617-216-2508