1. Global Logistics Management Shihyu Chou National Taiwan Normal University 1 Unless noted, the course materials are licensed under Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Taiwan (CC BY-NC-SA 3.0) Attribution-NonCommercial-ShareAlike 3.0 Taiwan

2.  Logistics involves the following activities: sourcing and purchasing inputs, managing inventory, maintaining warehouses, and arranging transportation and delivery.  There are three key flows within supply chains: –Flows of materials –Flows of information –Flows of involving resources such as people, equipment, logistics partners and financial flows.  Note: Logistics involves getting, in the right way, the right product, in the right quantity and right quality, in the right place at the right time, for the right customer at the right cost (8Rs)

3. 3 Unit 4 Inventory Management

4. 4 Learning objectives  Explain the significance of inventory in logistics and SCM  Introduce the costs involved in inventory management  Introduce common inventory control systems designed to reduce costs  Identify inventory reduction strategies including ‘just-in-time’ inventory management in a global supply chain

5. The importance of inventory management 5

6. 6  Inventory –any material that a firm holds in order to satisfy customer demand (and these customers may be internal and / or external to the firm)  Inventory costs money! It ties up working capital and affects cash flow  Inventory takes up space  Firms need to hire people to take care of inventory  The goal in inventory management is to minimize inventory holding while maintaining a desired customer service level.

7. 7 Supplier finished goods consumers In transit Manufacturer raw materials Manufacturer finished goods Manufacturer work in progress Distributor warehouse Inventory Along The Supply Chain National Taiwan Normal University Shihyu Chou (reference: Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p90))

8.  Inventory turnover –A concept used to measure a firm’s performance in inventory management –Most firms achieve an inventory turnover of about 10, while well-performing firms can achieve a turnover of 50 or more –See example on next slide 8

9.  The Yang’s company manufactures Crystal TVs. In 2010, the total costs of TVs they sold was $300000. The average holding cost for the year was $25000. At the end of year 2010, the company implemented just-in-time principles to improve its inventory performance. In 2011, their sales increased and the cost of TVs was $450000,while the average inventory holding cost was $30000. Has the performance improved? Turnover (2010) = 300000 / 25000=12 times Turnover (2011) = 450000 / 30000=15 times Yes, the performance has improved! 9

10. 10 Reasons for holding inventory Buffer against uncertaintyEconomic trade-offs Maintain customer service levels for volatile demand Production batch size Hedges against price and exchange rate fluctuations Transportation batch size Protects against delivery lead-time variability Transportation mode Buffer against unreliable supply sourcesOrder quantity size Buffer against seasonal demand and supply Order frequency duration Maintain supply of scare supplyBulk purchase savings Provide cover for emergenciesSupply price fluctuations National Taiwan Normal University Shihyu Chou (reference: Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p91))

11. The economic order quantity (EOQ) model 11

12. 12 The economic order quantity (EOQ) model  Notation: –D:Annual use of a particular item, in number of units per year –S:Order-processing cost, in $/order –p:Price per item, in $/unit –H:Holding cost per unit per year, in $/unit/year –Q:Number of items ordered in one purchase order, in units –T:Time periods between purchase orders in fraction of a year –SS: Safety Stock, in units –L: Lead time, in fraction of a year –I: Current inventory on hand, units –TAC:Total annual cost National Taiwan Normal University Shihyu Chou (reference: Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p91))

13. 13 Why? See Example on the following slide National Taiwan Normal University Shihyu Chou (reference: Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p93.94))

14.  The Dragon department store sells fashion clothing. The forecasted annual demand for a premium leather coat is 2400. The order- processing cost per order is $50, and inventory holding cost is $100 per coat per year. How many coats should the store order each time to attain minimal annual total inventory cost? 14

15. 15 time Inventory level Order quantity, Q Safety Stock, SS Lead time Reorder point Arrival of an order Steady drop in inventory level How inventory build up and deplete National Taiwan Normal University Shihyu Chou (reference: Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p93))

16. 16 Best Q Q Least TAC Total Annual Cost (TAC) Order quantity vs total annual cost National Taiwan Normal University Shihyu Chou (reference: Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p94))

17. Inventory Control Systems 17

18. 18  Inventory levels are continuously monitored, and orders are issued when the inventory is depleted to a predetermined level, called the reorder point (ROP)  ROP = D * L + SS  Example  See the following slide Reorder point inventory control system

19.  The Dragon department store wants to use a reorder point system. It has the order quantity set at 49 (EOQ). Taking uncertainties in delivery and in demand into account, they want to hold three weeks of demand as safety stock. What should their reorder point be if the delivery lead time is two weeks? 19

20. 20 The periodic inventory control system  Orders are reviewed periodically (not continuously as in the reorder point system), after the passage of a fixed time period (T)  T = EOQ / D (T can also be determined by taking other factors into account)

21. 21 Time Inventory level Periodic system Target maximum level (M) Time of review L LT Q=M-I I T L National Taiwan Normal University Shihyu Chou (reference: Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p97))

22.  Design a periodic inventory system for The Dragon Department Store if it wishes to hold 5 weeks of demand as safety stock. If on a day of review, the inventory of the premium coat is 204, how many coats should be ordered? 22

23. Safety stock -1  This is the amount of inventory stocked by the system to allow for unforeseen events. –Late deliveries –Inventory use is higher than that forecast –Providing a safeguard against issues such as poor quality, production problems, transportation problems, etc.  Sometimes referred to as buffer stock 23

24. Safety stock -2  The root reason for safety stock could be described as variation – variation of demand, variation of lead time, variation of production, etc.  If there was no variation, firms would not need safety stock. Safety stock needs to be held in proportion to such variations.  Safety stock is not free. The cost is SS×H. 24

25. Supply Chain Inventory Management 25

26.  Traditionally in a supply chain, inventory managers in individual firms along the supply chain make their own inventory decisions.  Each firm or location holds its own safety stock. 26

27. Inventory centralization strategy  If all the inventory in different firms can be centralized at a location (for example, at the manufacturer’s location), this particular location needs to consider the total demand for all different firms, but the variation of the total demand will be less than the total variation of the demand considered separately. 27

28. 28 The square root rule  An approximation  The inventory buffer required is proportional to the square root of the number of locations  For example, if we can consolidate inventories of nine retailers into a distribution center, then the safety stock needed at this DC is roughly 1/3 of the sum of the safety stocks of the nine retailers.

29. 29 Inventory reduction strategies  Delayed product differentiation: reducing variation by combining demand at different points is the case of a manufacturer making multiple products  Part commonality: attempts simply to reduce the number of different parts in a product range wherever possible  Transit inventory reduction –Reduce lead time: cheaper transport modes may be slower –Annual transit inventory cost = Q×L ×H ×(D/Q)=D ×L ×H  Warehouse reduction –Mobile warehouses –The ‘gearbox’ approach (we can change the transport modes to do so)

30. 30 common parts across products Product 1 AB Product 2 CD Product 1 XB Product 2 XD National Taiwan Normal University Shihyu Chou (reference: Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p101)

31. Matching Inventory Policy with Inventory Type 31

32. 32 ABC analysis  Too many SKUS! (stock keeping unit)  ABC analysis identifies the most important items so that more attentions can be focused on these items  The idea is that out of so many items a manager needs to take care, there are only a few that account for most of the inventory expenses

33. 33 ABC Classification Approach Percentage of total annual expenses 10% 20% 30% 40% 50% 60% 70% A B C Inventory Category A: 20% of SKUs B: 30% of SKUs C: 50% of SKUs National Taiwan Normal University Shihyu Chou (reference: Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p104)

34. Inventory reduction principles 34

35. 35  Pool inventory: Wherever demand for inventory can be combined, the safety stock can be lowered, still providing the same service level  Reduce variation: Wherever variation (demand, supply, quality etc.) can be reduced, safety stock can also be reduced  Reduce lead time: When the lead time is long, we need to forecast more into the future, thus the accuracy of the forecast suffers, increasing the variability of demand and hence requiring higher safety stock

36. 36  Just-in-time inventory system (JIT): making do with the minimum possible level of inventory holding –Inventory hides problems! By purposely removing inventory holdings, the problems the inventory was covering are surfaced, and the problems are then proactively fixed –Small lot production Ordering in small quantities keeps the average inventory level small –Hence reduce order processing costs so that the ideal of small quantity ordering can be accomplished The time and effort spent in process setups are the manufacturing equivalent of order processing costs –Hence, reduce the time and effort in setups

37. PageWork LicensingAuthor/Source 2 Logistics involves the following activities: …arranging transportation and delivery. Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p59) 2 There are three key flows within supply chains: Flows of materials …, logistics partners and financial flows. Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p59) 2 Logistics involves getting, in the right way, …for the right customer at the right cost (8Rs) Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p9) 4 Explain the significance of inventory in logistics and SCM Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p89) 4 Introduce the costs involved in inventory management Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p89) Copyright Declaration 37

38. PageWork LicensingAuthor/Source 4 Introduce common inventory control systems designed to reduce costs Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p89) 4 Identify inventory reduction strategies including ‘just-in-time’ inventory management in a global supply chain Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p89) 6 any material that a firm holds in order …internal and / or external to the firm) Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p90) 6 Inventory costs money! It ties up working capital and affects cash flow Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p90) 6 Inventory takes up space Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p90) 6 Firms need to hire people to take care of inventory Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p90) Copyright Declaration 38

39. PageWork LicensingAuthor/Source 6 The goal in inventory management …maintaini ng a desired customer service level. Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p90) 7 National Taiwan Normal University Shihyu Chou (reference: Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p90)) 8 A concept used to measure a firm’s performance in inventory management Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p90) 8 Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p91) 8 Most firms achieve an inventory turnover of about 10, while well- performing firms can achieve a turnover of 50 or more Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p91) Copyright Declaration 39

40. PageWork LicensingAuthor/Source 9 The Yang’s company manufactures Crystal TVs. …holding cost was $30000. Has the performance improved? Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p91) 9 Turnover (2010) = 300000 / 25000=12 times Turnover (2011) = 450000 / 30000=15 times Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p91) 10 National Taiwan Normal University Shihyu Chou (reference: Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p91)) 12 National Taiwan Normal University Shihyu Chou (reference: Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p91)) 13 National Taiwan Normal University Shihyu Chou (reference: Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p93.94)) Copyright Declaration 40

41. PageWork LicensingAuthor/Source 15 National Taiwan Normal University Shihyu Chou (reference: Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p93)) 16 National Taiwan Normal University Shihyu Chou (reference: Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p94)) 18 Inventory levels are continuously monitored, and orders are issued … level, called the reorder point (ROP) Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p96) 18 ROP = D * L + SS Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p96) 20 Orders are reviewed periodically (not … reorder point system), after the passage of a fixed time period (T) Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p97) Copyright Declaration 41

42. PageWork LicensingAuthor/Source 20 T = EOQ / D (T can also be determined by taking other factors into account) Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p97) 20 Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p97) 20 Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p97) 21 National Taiwan Normal University Shihyu Chou (reference: Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p97)) 23 This is the amount of inventory stocked by the system to allow for unforeseen events. …transportation problems, etc. Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p98) Copyright Declaration 42

43. PageWork LicensingAuthor/Source 23 Sometimes referred to as buffer stock Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p98) 24 The root reason for safety stock could …lead time, variation of production, etc Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p98) 24 If there was no variation, firms would not need …proportion to such variations. Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p98) 24 Safety stock is not free. The cost is SS×H. National Taiwan Normal University Shihyu Chou (reference: Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p98)) 26 Traditionally in a supply chain, inventory managers in individual firms along the supply chain make their own inventory decisions Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p98) Copyright Declaration 43

44. PageWork LicensingAuthor/Source 26 Each firm or location holds its own safety stock Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p98) 27 this particular location needs to consider the total …variation of the demand considered separately. Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p99) 28 The inventory buffer required is proportional to the square root of the number of locations Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p100) 29 reducing variation by combining demand at different points is the case of a manufacturer making multiple products National Taiwan Normal University Shihyu Chou (reference: Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p100)) 29 attempts simply to reduce the number of different parts in a product range wherever possible Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p100) Copyright Declaration 44

45. PageWork LicensingAuthor/Source 29 Reduce lead time: cheaper transport modes may be slower Annual transit inventory cost = Q×L ×H ×(D/Q)=D ×L ×H Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p101) 29 Mobile warehouses The ‘gearbox’ approach (we can change the transport modes to do so) Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p101) 30 National Taiwan Normal University Shihyu Chou (reference: Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p101) 32 ABC analysis identifies the most important items so that more attentions can be focused on these items Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p103) 32 there are only a few that account for most of the inventory expenses Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p103) Copyright Declaration 45

46. PageWork LicensingAuthor/Source 33 National Taiwan Normal University Shihyu Chou (reference: Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p104) 35 Wherever demand for inventory can be …stock can be lowered, still providing the same service level Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p106) 35 Wherever variation (demand, supply, quality etc.) can be reduced, safety stock can also be reduced Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p106) 35 When the lead time is long, we need to forecast …of demand and hence requiring higher safety stock Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p106) 36 Just-in-time inventory system (JIT): making do with the minimum possible level of inventory holding Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p106) Copyright Declaration 46

47. PageWork LicensingAuthor/Source 36 By purposely removing inventory holdings, the…, and the problems are then proactively fixed Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p107) 36 Hence reduce order processing costs so that the ideal of small quantity ordering can be accomplished Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p107) 36 The time and effort spent in process setups are the manufacturing equivalent of order processing costs Hence, reduce the time and effort in setups Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p107) Copyright Declaration 47