1. MRI 2315 Warehousing and Distribution

2. 4. Inventory and Materials Management
4.1 Basic concepts of inventory management.

3. Inventory serves 5 purposes:
It enables the firm to achieve economies of scale
It balances supply and demand
It enables specialization in manufacturing
It provides protection from uncertainties in demand and order cycle
It acts as a buffer between critical interfaces within the supply chain

4. Economies of Scale
Purchase contracts are being negotiated based on annual volumes
Enjoy lower transportation cost per unit
Manufacturing economies where plant capacity is greater, and per- unit manufacturing costs are lower with few production run changes
Manufacturing in small quantities leads to short production runs and high changeover costs

5. Balancing Supply and Demand
Seasonal supply and/or demand may make it necessary for a firm to hold inventory
Raw materials may be available only at certain times during the year
The cost of establishing production capacity to handle the volume at these peak periods would be substantial
To maintain a relatively stable workforce, and produce at a constant level throughout the year to lower total cost

6. Specialization
Finished products can be shipped to large mixing warehouses, from which customer orders and products for field warehouses can be shipped
Specialized facilities are known as “focused factories” (Characteristics)
Process Technologies – Typically, unproven and uncertain technologies are limited to one per factory. Proven, mature technologies are limited to what their managers can easily handle, typically two or three.
Market Demands – Quality, Price, lead times, and reliability specifications.
Product volumes – comparable levels such as tooling, order quantities, materials handling techniques, and job contents, can be approached with a consistent philosophy. But what about the inevitable short runs, customer specials, and one-of-a-kind orders that every factory must handle? The answer usually is to segregate them.
Quality levels – set approaches to neither over-specify nor over-control quality and specifications.
Manufacturing Tools – limited to one or two at a time.

7. Protection from Uncertainties
Raw materials inventory
Speculative purchase, e.g. future price increase or strike
Seasonal availability
Work-in-Process inventory
Eliminate manufacturing bottlenecks
Excessive inventories can increase costs and reduce profitability
Finished goods inventory
Improve customer service levels by reducing the likelihood of a stockout due to an-unanticipated demand or variability in lead time

8. A Buffer throughout the Supply Chain
Acts as a buffer (impact reduction) for the following critical interfaces:
Supplier – procurement (purchasing)
Procurement – production
Production – marketing
Marketing – distribution
Distribution – intermediary
Intermediary – consumer/use
Forward logistics flow & reverse logistics flow

9. Components of Logistics Management

10. 4. Inventory and Materials Management
4.2 Calculate safety stocks.

11. Cycle Stock
Cycle stock is inventory that results from the replenishment process and is required in order to meet demand under conditions of certainty, i.e. when the firm can predict demand and replenishment times (lead times) perfectly.
Example : Average cycle stock

12. Safety or Buffer Stock
Safety or buffer stock is held in excess of cycle stock because of uncertainty in demand or lead time.
Example: Demand varies and lead time constant
Example: Demand constant and lead time varies
Example: Demand and lead time vary

13. Demand 1: 20/day Demand 2: 25/day

14. Demand: 20/day Lead time : 10  12 days

15. Demand: 20/day  25/day + Lead time : 10  12 days
 Safety Stock = [12days x 25/day] – 200 [original stock] = 300 – 200 = 100

16. 4. Inventory and Materials Management
4.3 Production policies influence inventory levels.

17. Production Policies Influence Inventory Levels
Production Rate ↑
Total Production Cost ↓
 Inventory Level ↑
Reverse is true
Inventory Levels ↓
 Production Rate ↓
 Total Production Cost ↑ significantly

18. 4. Inventory and Materials Management
4.4 Interrelated within Inventories and customer service levels.

19. Service Level
Service level measures the performance of a system. Certain goals are defined and the service level gives the percentage to which those goals should be achieved.
Examples of service level:
Percentage of calls answered in a call center.
Percentage of customers waiting less than a given fixed time.
Percentage of customers that do not experience a stockout.

20. Relationship between inventory investment and customer service levels
Service Level ↑  Inventory Investment ↑

21. To improve service level
Increase inventory Investment (easy but astronomical)
Substitution Transportation Cost for Inventory Carrying Cost
Associate each product on demand levels and demand variation and set inventory levels accordingly
Decentralization of products (e.g. stock highest volume at retail locations; high- and moderate-volume items at field warehouse locations; slow-moving items at centralized locations)

22. 4. Inventory and Materials Management
4.5 Financial aspects of inventory strategy.

23. Financial Aspects of Inventory Strategy
Inventory and Corporate Profitability
Excessive Inventories Can Lower Profitability
Net profit is reduced by out-of-pocket costs associated with holding inventory, such as insurance, taxes, storage, obsolescence, damage, and interest expense, if the firm borrows money specifically to finance inventories
Total assets are increased by the amount of the inventory investment, which decreases asset turnover. The result is a reduction in return on assets and return on net worth

24. Financial Aspects of Inventory Strategy (con’t)
Inventory and Corporate Profitability (con’t)
Capital Rationing Raises the Cost of Carrying Inventory
If the company does not have enough money to invest in all of the new projects available, then the management has to decide where to invest the money from the inventory reduction and at what rate of return
Inventory cut; Production Efficiency Improvement
 Inventory level Cost of goods sold

25. Financial Aspects of Inventory Strategy

26. Cost Tradeoffs Required in Marketing and Logistics
Marketing Objective:
Allocate resources to the marketing mix in such a manner as to maximize the long-term profitability of the firm.
Logistics Objective:
Minimize Total costs given the customer service objective where total costs = Transportation Costs + Warehousing Costs + Order Processing and Information Costs + Lot Quantity Costs + Inventory Carrying Costs

27. Components of Inventory Carrying Costs
Capital Costs
interest bearing debt from banks, and opportunity costs of capital
Inventory service costs
insurance, taxes
Storage space costs
plant warehouses, public warehouses, rental warehouses, company-owned warehouses
Inventory risk costs
obsolescence, damage, shrinkage, relocation costs

28. Inventory and Least Total Cost Logistics
Least total cost logistics is achieved by minimizing the total costs for a specified level of customer service.
Given the same customer service level, low inventory carrying costs lead to multiple warehouses and a slower mode of transportation, such as rail roads.
High inventory carrying costs resulted in limited number of stock locations and a faster means of transportation, such as motor or air carriers, in order to minimize total totals.

29. 4. Inventory and Materials Management
4.6 Ways to recognize poor inventory management and improvement methods.

30. The following symptoms may be associated with poor inventory management:
Increasing numbers of back orders
Increasing dollar investment in inventory with back orders remaining constant
High customer turnover rate
Increasing number of orders being canceled

31. The following symptoms may be associated with poor inventory management: (con’t)
Periodic lack of sufficient storage space
Wide variance in inventory turnover among distribution centers and among major inventory items
Deteriorating relationships with intermediaries, as typified by dealer cancellations and declining orders
Large quantities of items

32. In many instances inventory levels can be reduced by one or more of the following steps:
Multi-echelon inventory planning. ABC analysis is an example of such planning
Lead time analysis
Delivery-time analysis. This may lead to a change in carriers or negotiation with existing carriers
Elimination of low turnover and/or obsolete items
Analysis of pack size and discount structure

33. In many instances inventory levels can be reduced by one or more of the following steps: (con’t)
Examination of returned goods procedures
Encouragement/automation of product substitution
Installation of formal reorder review systems
Measurement of fill rates by stock-keeping unit (SKU)
Analysis of customer demand characteristics
Development of a formal sales plan and source demand by a pre- determined logic.

34. Improving Inventory Management Techniques:
ABC analysis
Forecasting
Enterprise Resource Planning (ERP) Systems
Advanced Order processing systems

35. ABC analysis

36. Forecasting
buyer intentions by mail questionnaires, telephone interviews, or personal interviews
Data to develop into a sales forecast
Disadvantages
Costly
Accuracy
Opinions of sales people or experts in the field (judgment sampling)
Disadvantage
Personal biases of individuals
Past sales data
Forecasting for groupings of Stock-Keeping Units (SKUs) increases forecast accuracy

37. Enterprise Resource Planning (ERP)
Financial Modules: Financial Accounting (FI), Controlling (CO), Investment Management (IM), Treasury (TR), Enterprise Control (EC).
Logistics Modules: Material management (MM), Sales & distribution (SD), Production, Planning & Control (PP), Product Data Management (PDM), Quality Management (QM), Plant maintenance (PM), Service management(SM), Project systems (PS)
Human resource management Module: Personnel Management, Organizational Management, Payroll Accounting, Time Management, Personnel Development, Training & Event Management
Cross Application Module: Workflow (WF), SAP Office.

38. Enterprise Resource Planning (ERP)
Real-time
Information-directed
Video on ERP (SAP)
Common Types of ERP
SAP (German firm SAP AG)
Oracle (America, California)
Microsoft (America, Washington State)
Baan (America/Netherlands)
Others (

39. Advanced Order Processing Systems
Specialized order processing software package
Linking members of the supply chain with timely and accurate product usage information
An order processing system captures order data from customer service employees or from customers directly, stores the data in a central database and sends order information to the accounting and shipping departments, if applicable. Order processing systems provide tracking data on orders and inventory for every step of the way.