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Inventory Management - Lecture 09

The document outlines key concepts and processes in inventory management, including total costs, transportation methods, and inventory optimization models. It discusses continuous and periodic review systems, as well as the Newsvendor model for managing uncertain demand. Additionally, it addresses storage strategies in factories, warehouses, and retail stores, emphasizing the importance of accurate inventory records for effective management.

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Mohammad Rizwan
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9 views24 pages

Inventory Management - Lecture 09

The document outlines key concepts and processes in inventory management, including total costs, transportation methods, and inventory optimization models. It discusses continuous and periodic review systems, as well as the Newsvendor model for managing uncertain demand. Additionally, it addresses storage strategies in factories, warehouses, and retail stores, emphasizing the importance of accurate inventory records for effective management.

Uploaded by

Mohammad Rizwan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Inventory Management

K.U.B.S
Additional Inventory Management
Processes &
Concepts
Total Cost of the System

Total Cost = Holding Cost + Ordering Cost

Break Up of Ordering Cost:


 Item Cost
 Transportation Cost
 Custom Duties
 Insurance

 Order Placing Cost – e.g. Purchase order cost, all


kinds of clerical cost, communication cost.
Transportation

Transportation refers
to the movement of
Airways Carriers
products from one
location to another.
Modes of Water Carriers
transportation are;
Pipelines Carriers

Motor Carriers

Railroads Carriers
Transportation Cost
The amount charged for the transportation is based on the
rate a carrier changes from point A to point B.

Terminologies:
 FTL - Full Truck Load (Full capacity utilized of the
carrier)
 Transportation costs are a part of the ordering cost.

 LTL - Less Than Truck Load


 Transportation costs are a part of the unit cost.
 LTL rates are first based upon product class published by –
NMFC (National Motor Freight Classification)
Then the carrier’s tariff is used based on the origin and
destination -NMFTA (National Motor Freight Traffic Association).
Continuous Review System (Q-
System)

IP IP IP
Order Order
Order
received received
received
Order
received

Q Q Q
inventory
On-hand

ROP
Order Order Order
placed placed placed

Safety Stock
0
L1 L2 L3 Time
TBO1 TBO2 TBO3
Periodic Review System (P- System)

T
IP IP IP
Order Order Order
On-hand inventory

received receiv receiv


Q1 Q3 ed
ed
OH Q2 OH
IP1
IP3
Order Order
placed placed
IP2

Time
P P
Protection interval
Echelon Models - Inventory Management

There are two Echelon inventory optimization


models;

1. Single Echelon Inventory Optimization:


Each facility is considered as an “island”. So each facility is
forced to keep safety stock to cover against any uncertainty
in demand and lead time. There is no strategic decisions are
involved in the single echelon inventory optimization. It only
represents an elementary level inventory optimization
method.

2. Multi-echelon inventory optimization:


Each facility is considered as a member of the network.
Strategic decisions are involved to determine which facility
should hold safety stock.
Multi – Echelon Inventory Optimization
(Cont.)
Multi – Echelon Inventory Optimization
(Cont.)
Multi – Echelon Inventory Optimization
(Cont.)

Third Party Logistics Network


Multi – Echelon Inventory Optimization
(Cont.)

MEIO takes a whole view of the supply chain and delivers the best
possible tradeoff between service levels and inventory for each SKU at each
inventory stocking location, from raw material supplier to final consumer.
In other words, it optimizes inventory across all tiers of the supply chain.

Inventory Optimization
Is MEIO a Tactical or Strategic Tool?

MEIO can answer both tactical and strategic questions.

Tactical Level:
MEIO can provide optimal inventory levels for every SKU at every
location for every time period in order to immediately lower the
total supply chain inventory cost.

Strategic Level:
MEIO can be used to conduct “What if?” analysis. For example,
MEIO can be used to determine which product to postpone, which
product to outsource, and what happens when demand changes
or when supplier lead time variation changes.
Newsvendor Model
It is not always possible to exactly forecast the
customer
demands.
 Demand is uncertain

 By using the past data, we can determine a distribution


function to represent the demand.

Challenge: We have to determine the order size (Q)


before the demand is known.

If we order too much, then we have extra


inventory.
If we order too little, then we lose sale.
Newsvendor Model

What we already know?


 Selling Price of the Item (P)
 Purchasing or Producing cost (C)

 Salvage value (S)


Newsvendor Model
Cases:
There are three cases (Suppose demand is represented by d
and order
quantity represent by Q).

1. Demand is bigger than the order quantity (d > Q)


 Underage Cost (Cu) = Selling Price – Purchasing Cost = P – C

2. Demand is less than order quantity (d < Q)


 Overage Cost (Co) = Purchasing Cost – Salvage Value = C - S

3. Demand is equal to order quantity ( d = Q)


ac tor
ic alF
Crit
In Stock Probability = Cu / (Cu +
Co)
Example
Purchasing Cost (C) = Rs. 15.0, Selling Price (P) Deman Probabili
= Rs.27.0 d ty
Salvage Value (S) = Rs 5.0 20 0.05
21 0.15
Marginal Profit = P – C = 27.0-15.0 = Rs. 12.0
22 0.20
Marginal Loss = C – S = 15.0- 5.0 = Rs.10.0
23 0.40
For Supply 20: 24 0.20
Profit = 20 x 12 = Rs.240
For Supply 21:
Profit = 240 + 12(0.95) – 10 (0.05) = Rs.250.90
For Supply 22:
Profit = 250.90 + 12(0.8) – 10(0.2) = Rs. 258.50
For Supply 23:
Profit = 258.50 + 12(0.6) – 10(0.4) = Rs. 261.70
For Supply 24:
Profit = 261.70 + 12(0.2) – 10(0.8) = Rs. 256.10
Newsvendor Problem
If we assume that the newspaper boy pays Rs. 10 per paper, he
sells it for Rs. 30, and Salvage value is Rs. 5 How many
newspapers
(Q) should he order if the demand is normally distributed with a
mean of 90 and standard deviation of 10?

d = 90, σd = 10
Underage Cost (Cu) = Selling Price – Purchasing Cost = 30 - 10 = Rs. 20
Overage Cost (Co) = Purchasing Cost – Salvage Value = 10 – 5 = Rs. 5

In stock Probability = Cu / (Cu + Co) = 20 / (20+5) = 0.8 = 80%


Z = 0.84 (from table against SL = 80%)

Q= d+ z σd = 90 + 0.84 * 10 = 98.40 ~ 99 newspapers


Distribution Requirement
Planning
 DRP’s logic is similar to MRP’s.
 Also known as Distribution replenishment planning.

For Example;
 Toyota works with one distributor in each country.
Distribution Requirement Planning
(Cont.)

Inputs:
 Forecast demands

 Current inventory levels

 Target safety stock

 Recommended replenishment quantities

 Replenishment lead times


Storage of Inventory (In Factories)

If inventory is held centrally within a factory, every


time
a part is needed for production.
 The worker or robot has to leave the workstation to
retrieve it, or here is labor dedicated to keeping
workstations in stock.
 There is an additional “touch”.

 The number of times inventory is touched is often


correlated with shrink, damage, and labor.
 In a factory, the idea of storing inventory, at the
workstation that will need it for production makes
sense in terms of production lead time minimization
and also errors in using the wrong parts and damage.
Storage of Inventory (In Warehouses)

Fixed location Storage:


 Minimizes errors in terms of put away and picking.

Random location storage:


 When space is available, it is used for the inventory.
 Chances of error increases.
 Time increased to find out item or items.
Storage of Inventory (In Retail Stores)

 Most of the storage in retail backrooms is based on the


random
location strategy.
 Storage of inventory in retail backrooms is one of the
most difficult inventory storage management problems in
the industry.

Why???
it is difficult to find specific SKUs in retail backrooms
Because
there are typically so many different SKUs in a retail store,
and many times these SKUs are rotating, new products
are introduced, and some SKUs are discontinued.
Inventory Record Management
 Inventory records are a main part of any
inventory management system.
 If inventory records are inaccurate;

 If the firm uses a (Q,ROP) or Q inventory


replenishment system, it will not order at the correct
time.
 If the firm uses a (P,T) P replenishment system, it
will not order the correct quantity.

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