INVENTORY MANAGEMENT IN A SUPPLY CHAIN

Definitions Inventory-A physical resource that a firm holds in stock with the intent of selling it or transforming it into a more valuable state. Inventory System- A set of policies and controls that monitors levels of inventory and determines what levels should be maintained, when stock should be replenished, and how large orders should be

Types of Inventory Raw materials Purchased parts and supplies Work-in-process (partially completed) products (WIP) Items being transported Tools and equipment

Inventory Costs Carrying cost cost of holding an item in inventory Ordering cost cost of replenishing inventory Shortage cost temporary or permanent loss of sales when demand cannot be met

Introduction Most manufacturing organisations are networks of manufacturing and distribution that produce raw material, transform them into intermediate finished products and distribute the finished products to customers. Often multiple managers are responsible for manufacturing , operations , logistics ,material distribution and transportation are responsible for different parts of S.C. This leads to difficulty in developing a coherent inventory handling policy

Inventory is held at various levels of a Supply Chain Introduction Inventory is held at various levels of a Supply Chain

Expensive Stuff The average carrying cost of inventory across all mfg.. in the U.S. is 30-35% of its value. What does that mean? Savings from reduced inventory result in increased profit.

Reasons for Inventories systems Improve customer service Economies of scales Transportation savings Hedge against future – buy today at lower cost Unplanned shocks (labor strikes, natural disasters, surges in demand, etc.)

Components of Inventory Decisions Cycle inventory Average amount of inventory used to satisfy demand between shipments Depends on lot size Safety inventory inventory held in case demand exceeds expectations costs of carrying too much inventory versus cost of losing sales Seasonal inventory inventory built up to counter predictable variability in demand cost of carrying additional inventory versus cost of flexible production

Overall trade-off Responsiveness ( to customer needs ) versus efficiency of supply chain more inventory: greater responsiveness but greater cost less inventory: lower cost but lower responsiveness

Value creation through Inventory handling Remember this? Quality Delivering right quality product to the customer Speed Ensuring products are delivered in time Flexibility Ability to take into account any variation in demand up and down the supply chain Cost Keeping the Inventory handling cost as low as possible

Design of Inventory Mgmt. Systems: Macro Issues Need for Finished Goods Inventories Need to satisfy internal or external customers? Can someone else in the value chain carry the inventory? Ownership of Inventories - proper accountability to minimize losses Specific Contents of Inventories - knowing your inventory - visibility Locations of Inventories - Placing inventory at the right place for quick order Tracking - Locating where your inventory is to eliminate uncertainty and timely delivery

Design of Inventory Mgmt. Systems: Micro Issues Order Quantity Economic Order Quantity Order Timing Reorder Point

Supply Chain Management and Uncertainty ( Bullwhip Effect ) demand information is distorted as it moves away from the end-use customer higher safety stock inventories to are stored to compensate Inventory and back-order levels fluctuate considerably across the supply chain even when customer demand doesn’t vary The variability worsens as we travel “up” the supply chain Manufacturer Wholesale Distributors Consumers Multi-tier Suppliers Retailers Time Sales Bullwhip Effect

How to counter BullWhip Effect JIT ? Difficult to implement - cost AGILITY A key characteristic of an agile organization is flexibility. Agility should not be confused with leanness. Lean is about doing more with less. can your company be lean and agile at the same time ? Achieving agility market sensitive Virtual Supply Chain Process Integration Networking

A realistic approach – Hold inventory where it is necessary Decoupling Point Decoupling point is where demand penetrates the supply chain Ideally final assembly of a product should be done as much down the supply chain as possible In the first line the decoupling point is up the supply chain therefore inventory will be in form of raw material In the last line inventory is held as a product ready to be assembled Which is better for the organisation ?

Inventory Related ISSUES i. Lack of Information Sharing An effective supply chain performance is measured based on different nodes joint performance Often each node performs its task independently without keeping in mind the impact its activity will have on the over all supply chain network e.g. Indiana based company started cutting inventory at manufacturing level therefore its final assembly unit and point of distribution had to keep inventory high to meet customer needs Therefore companies need to develop a metrics in which entire supply chain performance is measured based on the overall performance

Inventory Related ISSUES ii. Inadequate Definition of Customer Service Ideally a Supply Chain performance must be measured based on its responsiveness to customers .Customer expect their products to be delivered in time A dealer's order normally involves multiple orders e.g. a PC dealer may order printer’s, computers and software's in one order. The dealer is then selling these stocks to customers, supplier can ship these products separately without adversely effecting dealers business A customer who is ordering items online may demand all products to be delivered as a single shipment.

Inventory Related ISSUES iii. Inefficient information systems The database of different sites in a supply chain that informs of environment , inventory , future production plans should be inter linked Delay in information would make it impossible to make short production cycles leading to gross errors in inventory forecast errors e.g. Northern California base PC manufacturer developed a production plan. It dependant on information about inventory status that was collected from databases at a number of sites and functions. This forced the manufacturer to plan on monthly basis resulting in longer planning cycles which caused forecast errors . Manufacturing ends up building wrong products leading to high inventory.

Inventory Related ISSUES iv.Ignoring the Impact of Uncertainty There are many sources of uncertainties in a supply Chain e.g. supplier lead time quality of incoming material manufacturing process time customer demand etc. To reduce the impact of uncertainties a SC Manager should first understand the sources of these uncertainties and magnitude of their impact. It is easier said than done Consequently companies may over stock and under stock others. They can miscalculate lead times for material movement along the SC and invest in wrong resources for performance improvement. Emphasis of JIT is to closely monitor the performance

Inventory Related ISSUES v. Product-Process Design without Supply Chain Consideration Many new approaches to product process design have been introduced. Products can be manufactured and assembled at a fast rate but implications of supply chain inventory are usually ignored or poorly understood. The saving that is made through improved production process design could be lost. Similarly product introduction into a market , without proper supply chain planning can create problems like product unavailability , excessively long delivery lead times and unnecessary expediting costs etc. A US computer company made printers for worldwide distribution. The printers have a few country specific components such as power supply and owners manual. The US factory produces to meet demand forecasts but by the time printers reach regional distribution.

E.O.Q. Assumptions Ordering cost is constant Rate of demand is constant Lead time is fixed Purchase price of the item is constant ( no discount) Replenishment is made instantaneously Whole batch is delivered at once

E.O.Q. Variables C= Cost per unit D = Annual Demand Q= Lot Size S = Fixed cost incurred per order h= holding cost per year as a fraction of product/unit cost H = hC = holding cost per year

E.O.Q. Optimal Size = Q *

EOQ – EXAMPLE Demand for the desktop computer at Best buy is 1,000 units per month. Best Buy incurs a fixed order placement, transportation and receiving cost of $ 4,000 each time an order is placed . Each computer costs Best Buy $ 500 and the retailer has a holding cost of 20 percent. Evaluate the number of computers that the store manager should order in each replenishment lot.