Drived inventory objectives

DERIVED INVENTORY OBJECTIVES Organizational Objectives profit return on investment market share customer satisfaction productivity Inventory System Objectives 1. Provide customer service 2. Support plant efficiency 3. Minimize inventory investment Performance Measurement external (balance sheet, income statement ) Reports internal (stock levels, usage, stockouts)

DERIVED INVENTORY STRATEGIES Organizational Objectives Organizational Strategies Operations Strategies Inventory Strategies Marketing Strategies Finance Strategies

BALANCING INVENTORY OBJECTIVES Maximize Customer Service Operating Efficiency Minimize Inventory Investment

INVENTORY SYSTEM REQUIREMENTS Ensure sufficient goods/materials are available Identify excess and fast/slow moving items Provide accurate, concise, and timely reports to management Perform the above at low cost

INVENTORY SYSTEM CONSIDERATIONS 1. Development of demand forecasts and treatment of forecast errors 2. Selection of inventory models (EOQ, EPQ, EOI, MRP, and SOQ) 3. Measurement of inventory costs (order, holding, stockout) 4. Methods to record and account for items 5. Methods for receipt, handling, storage, and issue of items 6. Information procedures to report exceptions

ORGANIZATIONAL OBJECTIVE CATEGORIES Service to Owners / Investors Service to Customers Service to Society

TYPICAL ORGANIZATIONAL OBJECTIVES Growth Market Share Profit Maximization Product Leadership Return on Investment Social Responsibility Customer Satisfaction Survival

INVENTORY CONTROL SYSTEMS Perpetual Two Bin Periodic Optional Replenishment Distribution Requirements Planning Material Requirements Planning Just-in-Time Theory of Constraints

DEMAND-BASED INVENTORY SYSTEMS Demand Independent (Continuous) Dependent (Discrete) Fixed Order Size System Fixed Order Interval System EOQ/B; EPQ/B EOI/E Time-Phased Order Point (TPOP) System Derived Order Quantity System Perpetual System Two-Bin System Periodic System Optional Replenishment System Distribution Requirements Planning (DRP) System Single Order Quantity System Material Requirements Planning (MRP) System Just-In-Time System

PERPETUAL INVENTORY SYSTEM SAFETY STOCK 0 B A C D E F G H I TIME INVENTORY LEVEL 1. Variable Demand (slope) 2. Fixed reorder point B 3. Fixed reorder quantity AC 4. Fixed lead time DE = FG= HI 5. Variable time between orders DF  FH

PERPETUAL SYSTEM ADVANTAGES Efficient, meaningful order size Safety stock need for lead time only Relatively insensitive to forecast and parameter errors Less attention on slow moving items

PERPETUAL SYSTEM DISADVANTAGES Clerks may set order quantities Lot sizes, reorder points, & safety stocks must be revised Delays in posting transactions Errors and mistakes in transactions High freight and transportation charges Fewer chances for dollar value discounts

PERIODIC INVENTORY SYSTEM 1. Variable demand (slope) 2. Fixed review period FH =HJ 3. Variable reorder points C = B = D 4. Variable reorder quantities E-C  E-B  E-D 5. Variable lead time FG  HI  JK 6. Safety stock = OB (Reorder quantity = E - inventory level at review period SAFETY STOCK 0 B C F G H I J K TIME INVENTORY LEVEL E D

PERIODIC SYSTEM ADVANTAGES Fewer orders are placed Purchase discounts more likely Lower shipping and freight costs

OPTIONAL REPLENISHMENT INVENTORY SYSTEM 1. Variable demand (slope) 2. Fixed review period = FG =GJ = IJ = JL = LM = MN 3. Reorder points = D or lower 4. Variable reorder quantity = E-C  E-B 5. Fixed lead time = GH = JK = NP 6. Safety stock = OA 0 A C F G H I J K TIME INVENTORY LEVEL E D B P Q N L M

TRILEVEL DISTRIBUTION NETWORK LDC 101 LDC 102 LDC 103 LDC 104 RDC 100 LDC 201 LDC 202 LDC 203 RDC 200 LDC 301 LDC 302 LDC 305 LDC 305 RDC 300 MDC MDC = master (central) distribution center RDC = regional distribution center LDC = local distribution center

TYPICAL ABC INVENTORY ANALYSIS 0 20 40 60 80 100 120 0 20 40 60 80 100 C B A PERCENT OF TOTAL DOLLAR USAGE PERCENT OF TOTAL ITEMS A = HIGH VALUE ITEMS B = MEDIUM VALUE ITEMS C = LOW VALUE ITEMS

TYPICAL ABC INVENTORY ANALYSIS 40 20 0 20 40 60 80 60 A B C PERCENT OF DOLLAR VALUE PERCENT OF ITEMS

RELATIVE ANALYSIS OF ABC CLASSIFICATIONS Item Degree of Control Type of Records Lot Sizes Frequency of Review Size of Safety Stocks A Tight Accurate / Complete Low Continuous Small B Moderate Good Medium Occasional Moderate C Loose Simple Large Infrequent Large

ABC EXCEPTIONS 1. Difficult Procurement Items 2. Short Shelf Life 3. Large Storage Space Requirements 4. Item’s Operational Criticality 5. Likelihood of Theft 6. Difficult Forecast Items

INVENTORY CONTROL SYSTEM Reorder Point EOQ EPQ EOI SOQ DRP TPOP MRP MPS JIT TOC END ITEM FORECASTS FORECASTING MODELS INVENTORY DECISION RULES ITEM ORDERS INVENTORY STATUS DATA SUPPLIERS 1. External 2. Internal RECEIPT Market Research Sales Orders Opinions INVENTORY Transfer

INVENTORY SYSTEM IMPROVEMENT 1. Standardize Stock Items 16. Simplify Product Structures 2. Reduce Lead Times 17. Multishift operations 3. Reduce Cycle Times 18. Continuous Improvement 4. Use Fewer Suppliers 5. Inform Suppliers of Expected Demand 6. Contract for Minimum Annual Purchases 7. Buy on Consignment 8. Consider Transportation Costs 9. Order Economical Quantities 10. Control Access to Storage Areas 11. Obtain Better Forecasts 12. Dispose of Excess Stock 13. Improve Record Accuracy (cycle count) 14. Improve Capacity Planning 15. Minimize Setup Times

INACCURATE INVENTORY RECORDS Too much of wrong stuff Not enough of right stuff Unawareness of obsolete material High shrinkage rate Low turnover rate Excessive expediting / staging Ineffective scheduling

DISTRIBUTION AND MANUFACTURING INTEGRATION MASTER PRODUCTION SCHEDULE Production Plan CDC RDC LDC LDC LDC End Item Component Component Component Component Component Distribution Requirements Production Efficiency DRP MRP

LARGE INVENTORY SYNDROME Functional Problem inaccurate forecasts absenteeism substandard quality equipment breakdowns large setup items scheduling problems Classic Response increase finished goods inventory maintain buffer inventory maintain buffer inventory maintain work-in-process queues run larger lot size maintain buffer inventory

AGGREGATE INVENTORY MEASUREMENT Aggregate Inventory Value Ratio of Aggregate Inventory Value to Annual Sales Days of Supply Inventory Turnover

AGGREGATE INVENTORY PROFILE Supplies Raw Materials In-Process Goods Finished Goods Outputs Inputs Total Inventory Level

RAW MATERIALS / SUPPLIES INVENTORY PROFILE Excess Stock Surplus / Idle Stock Working Stock Safety Stock Outputs Inputs Nonproductive Productive

FINISHED GOODS INVENTORY PROFILE Surplus Stock Working Stock Safety Stock Outputs Inputs Nonproductive Productive Seasonal Stock (anticipation) Excess Stock

IN-PROCESS INVENTORY PROFILE Unreleased Orders Orders in Transit Orders in Temporary Storage Orders Waiting to be Worked Orders Being Inspected Orders Being Worked Backlog Nonproductive Productive In-Process Inventory Outputs Inputs Finished Goods

CLASSIC INVENTORY PROBLEMS Ever - increasing storage space needs Slow-moving materials Disposition of scrap, obsolete, & surplus materials Transaction recording errors Misplaced materials

THE INVENTORY FUNCTION Mgt. policies Working capital Space Plant capacity INVENTORY PLANNING AND CONTROL Purchase Order / Set-up Holding Stockout OPERATIONS PLANNING Forecasts Demand rates Production rates Stock-on-hand Backorders Lead times Product structures REPEAT ORDER SYSTEMS 1. Perpetual 2. Two-Bin 3. Periodic 4. Optional Replenishment 5. MRP 6. Just-in-Time 7. DRP 8. TOC SINGLE ORDER SYSTEMS DECISION RULES 1. What to order? 2. When to order? 3. How much? 4. From whom? INPUTS CONSTRAINTS COSTS OUTUTS

MAJOR INVENTORY SYSTEM PROBLEMS 1. No goals and objectives 2. No strategies 3. Weak formal inventory system 4. Inaccurate forecasts 5. Inaccurate records

AGGREGATE SYSTEM ELEMENTS 1. Determination or delineation of organizational goals 2. Assessment of the significance of materials management to organizational goals 3. Determination of aggregate material needs 4. Design of appropriate material control models 5. Design of forecasting models 6. Measurement and collection of model parameter inputs 7. Model testing and implementation 8. Variable reporting and model redesign 9. Operationalization of the materials management system

Drived inventory objectives

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Drived inventory objectives