1. INVENTORY MANAGEMENT IN A SUPPLY CHAIN

2. 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

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

4. 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

5. 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

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

7. 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.

8. 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.)

9. 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

10. 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

11. 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

12. 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

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

14. 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

15. 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

16. 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 ?

17. 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

18. 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.

19. 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.

20. 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

21. 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.

22. 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

23. 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

24. E.O.Q.
Optimal Size = Q *

25. 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.