MATA KULIAH MANAJEMEN

OPERASI
(Operational Management)
Modul 3 : Rantai Pasok
Normansyah Syahruddin
norman.syahruddin@gmail.com

Fokus Pembahasan Pertemuan Ke-3

1.Manajemen Rantai Pasok
2.Manajemen Stok / Persediaan

MANAJEMEN
RANTAI PASOK

Supply Chain Management Introduction

A value chain is another name for a supply chain.

A supply chain is a sequence of organizations - their
facilities, functions and activities - that are involved
in producing and delivering a product or service.
Li & Fung is Hong Kongs largest export trading
company. It has also been innovative in supply
chain management.
In the interview example, it can be seen that Li &
Fung has created a supply chain for the purpose of
meeting a customers needs. In general, this case is
more the exception than the rule, but serves to
illustrate some of the pieces of a supply chain.

Supply Chain Management - Introduction

Supplier
Supplier

Storage

Mfg.

Storage

Dist.

Retailer

Customer

Supplier

Supplier

Supplier

Storage

Service

Customer

Supply Chain Management Introduction

Yarn

Zippers

Yarn
Dying &
Weaving

Factory
1
Factory
2
Factory
3
Factory
4
Factory
5

The
Customer
(Retailer)

SUPPLY CHAIN
MANAGEMENT

Value Chain
Supply side- raw materials, inbound
logistics and production processes
Demand
sideoutbound
logistics,
marketing and sales.

WHAT IS SUPPLY CHAIN MANAGEMENT

" Is the strategic management of activities involved in
the acquisition and conversion of materials to finished
products delivered to the customer"

Supplier
Management

Schedule /
Resources

Material Flow
Information Flow

Conversion

Customer
Management

Stock
Deployment

Leads to Business Process Integration

Delivery

Supply chain is the system by which

organizations
source,
make
and
deliver their products or services
according to market demand.
Supply chain management operations
and decisions are ultimately triggered
by demand signals at the ultimate
consumer level.
Supply chain as defined by
experienced practitioners extends
from suppliers suppliers to
customers customers.

SUPPLY CHAIN INCLUDES :

MATERIAL FLOWS
INFORMATION FLOWS
FINANCIAL FLOWS

SUPPLY CHAIN MANAGEMENT

FACILITATED BY :
PROCESSES
STRUCTURE
TECHNOLOGY

IS

Supply chain serves two functions:

Physical
Market mediation

Supply chain objectives may differ

from situation to situation.
For
functional
products,
cost
efficiency is the critical factor.
For
innovative
products,
responsiveness is the important
factor.
Leanness + Agility together make up
Leagility

Supply Chain Structure

SUPPLIER

FACTORY

DC

RDC

RETAILER

Raw Materials
Finished Goods
Information Flow

Supply Chain and Demand Chain

Demand chain is defined as the system

by which organizations manage sales
and distribution of products and
services to end users.
Conceptually incorrect to look at
demand chain separately
Look at the pipe as a whole.

But is there a pipe at all?

More a network
Not necessarily linear

Value chain orchestration rather than

controlling the flow through the pipe

A
network
of
independent
and
interdependent organizations mutually
and cooperatively working together to
control, manage and improve the flow of
materials and information from suppliers
to end users

SUPPLY CHAIN DRIVERS

Not new. Value system of Michael Porter
Why sudden interest?
Demanding customers
Shrinking product life cycles
Proliferating product offerings
Growing retailer power in some cases
Doctrine of core competency
Emergence
of
specialized
logistics
providers
Globalization
Information technology

SUPPLY CHAIN ELEMENTS

Strategic

Supply Chain Design

Resource Acquisition
Long Term Planning (1 Year ++)

Tactical

Production/ Distribution Planning

Resource Allocation
Medium Term Planning (Qtrly,Monthly)

Shipment Scheduling
Operational

Resource Scheduling
Short Term Planning (Weekly,Daily)

Supply Chain Goals

Efficient supply chain management
must result in tangible business
improvements. It is characterized
by a sharp focus on
Revenue growth
Better asset utilization
Cost reduction.

Supply Chain Management - Introduction

Supply chains and vertical integration

For any organization vertical integration involves either
taking on more of the supplier activities (backward)
and/or taking on more of the distribution activities
(forward)
An example of backward vertical integration would be a
peanut butter manufacturer that decides to start growing
peanuts rather than buying peanuts from a supplier
An example of forward vertical integration would be a
peanut butter manufacturer that decides to start
marketing their peanut better directly to grocery stores
In supply chains, some of the supplying and some of the
distribution might be performed by the manufacturer

SCM - Inventory Management

Issues

Manufacturers would like to produce in large lot

sizes because it is more cost effective to do so. The
problem, however, is that producing in large lots
does not allow for flexibility in terms of product mix.
Retailers find benefits in ordering large lots such as
quantity discounts and more than enough safety
stock.
The downside is that ordering/producing large lots
can result in large inventories of products that are
currently not in demand while being out of stock for
items that are in demand.

SCM - Inventory Management

Issues

Ordering/producing in large lots can also increase the

safety stock of suppliers and its corresponding
carrying cost. It can also create whats called the
bullwhip effect.
The bullwhip effect is the phenomenon of orders and
inventories getting progressively larger (more
variable) moving backwards through the supply
chain. This is illustrated graphically on the next slide.

Order Size

SCM - Inventory Management

Issues

Customer
Demand
Distributor Orders

Retailer Orders

Production Plan

Time

ource: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998

SCM - Inventory Management

Issues

Some of the causes of variability that leads to the

bullwhip effect includes:
Demand forecasting Many firms use the min-max
inventory policy. This means that when the inventory level
falls to the reorder point (min) an order is placed to bring the
level back to the max , or the order-up-to-level. As more
data are observed, estimates of the mean and standard
deviation of customer demand are updated. This leads to
changes in the safety stock and order-up-to level, and hence,
the order quantity. This leads to variability.
Lead time As lead time increases, safety stocks are
increased, and order quantities are increased. More
variability.

SCM - Inventory Management

Issues

Batch ordering. Many firms use batch ordering such as

with a min-max inventory policy. Their suppliers then see a
large order followed by periods of no orders followed by
another large order. This pattern is repeated such that
suppliers see a highly variable pattern of orders.
Price fluctuation. If prices to retailers fluctuate, then they
may try to stock up when prices are lower, again leading to
variability.
Inflated orders. When retailers expect that a product will
be in short supply, they will tend to inflate orders to insure
that they will have ample supply to meet customer demand.
When the shortage period comes to an end, the retailer goes
back to the smaller orders, thus causing more variability.

SCM - Inventory Management

Issues

How then can we cope with the bullwhip effect?

Centralizing demand information occurs when
customer demand information is available to all
members of the supply chain. This information can
be used to better predict what products and volumes
are needed and when they are needed such that
manufacturers can better plan for production.
However, even though centralizing demand
information can reduce the bullwhip effect, it will not
eliminate it. Therefore, other methods are needed to
cope with the bullwhip effect.

SCM - Inventory Management

Issues

Methods for coping with the bullwhip effect include:

Reducing uncertainty. This can be accomplished by
centralizing demand information.
Reducing variability. This can be accomplished by using
a technique made popular by WalMart and then Home
Depot called everyday low pricing (EDLP). EDLP eliminates
promotions as well as the shifts in demand that accompany
them.
Reducing lead time. Order times can be reduced by
using EDI (electronic data interchange).
Strategic partnerships. The use of strategic partnerships
can change how information is shared and how inventory is
managed within the supply chain. These will be discussed
later.

SCM - Inventory Management

Issues

Other helpful techniques for improving inventory

management include:
Cross-docking. This involves unloading goods arriving
from a supplier and immediately loading these goods onto
outbound trucks bound for various retailer locations. This
eliminates storage at the retailers inbound warehouse,
cuts the lead time, and has been used very successfully by
WalMart and Xerox among others.
Delayed differentiation. This involves adding
differentiating features to standard products late in the
process. For example, Bennetton decided to make all of
their wool sweaters in undyed yarn and then dye the
sweaters when they had more accurate demand data.
Another term for delayed differentiation is postponement.

SCM - Inventory Management

Issues

Direct shipping. This allows a firm to ship directly to

customers rather than through retailers. This approach
eliminates steps in the supply chain and reduces lead
time. Reducing one or more steps in the supply chain is
known as disintermediation. Companies such as Dell use
this approach.

SCM - Strategic Partnering

Strategic partnering (SP) is when two or more

firms that have complementary products or
services join such that each may realize a
strategic benefit. Types of strategic partnering
include:

Quick response,
Continuous replenishment,
Advanced continuous replenishment, and
Vendor managed inventory (VMI)

SCM - Strategic Partnering

In quick response SP vendors receive point-ofsales (POS) data from retailers. The data are then
used to synchronize production and inventory
management at the supplier. Although the
retailer still prepares and submits individual
orders to the supplier, the POS data is used to
improve forecasting and scheduling.
In continuous replenishment SP vendors again
receive POS data and use them to prepare
shipments at previously agreed to intervals as
well as to maintain agreed to inventory levels.
This approach is used by WalMart.

SCM - Strategic Partnering

In advanced continuous replenishment SP suppliers

will gradually decrease inventory levels at the
retailers location as long as they can still meet
service levels. The result is that inventory level are
continuously improved. Kmart uses this approach.
In vendor managed inventory SP the supplier will
decide on the appropriate inventory levels for each
of the products it supplies and the appropriate
inventory policies to maintain these levels. One of
the best examples of this is the SP between
WalMart and Proctor & Gamble. (See summary on
next slide.)

SCM - Strategic Partnering

Criteria
Types

Decision
Maker

Inventory
Ownership

New Skills
Employed by vendors

Quick
Response

Retailer

Retailer

Forecasting Skills

Continuous
Replenishment

Contractually Agreed to Levels

Either
Party

Forecasting & Inventory Control

Advanced
Continuous
Replenishment

Contractually agreed to & Continuously

Improved Levels

Either
Party

Forecasting & Inventory Control

VMI

Vendor

Either
Party

Retail
Management

Source: Simchi-Levi, Kaminsky & Simchi-Levi, Irwin McGraw Hill, 2000

SCM - Strategic Partnering

Requirements for an effective SP include:

Advanced information systems,
Top management commitment, and
Mutual trust

Steps in SP implementation include:

Contractual negotiations

Ownership
Credit terms
Ordering decisions
Performance measures

SCM - Strategic Partnering

Develop or integrate information systems
Develop effective forecasting techniques
Develop a tactical decision support tool to assist in
coordinating inventory management and transportation
policies

Advantages of SP include:

Fully utilize system knowledge

Decrease required inventory levels
Improve service levels
Decrease work duplication
Improve forecasts

SCM - Strategic Partnering

Disadvantages of SP include:

Expensive technology is required

Must develop supplier/retailer trust
Supplier responsibility increases
Expenses at the supplier also often increase

Third party logistics (3PL) involves the use of an

outside company to perform part or all of a firms
materials management and product distribution
function.
Examples of companies that provide 3PL include Ryder
Dedicated Logistics and J.B. Hunt.
Examples of companies that use 3PL include 3M, Dow
Chemical, Kodak and Sears.

Supply Chain
Management
Underlying Principles
Compression (Planning/Manufacturing/Supply)

Conformance (Forecasts/Plans/Distribution)
Co-operation (Cross -Functional)
Communication (Real Time Data)

uce Overall Cycle Time : Improve Response

Changing Paradigm

Functional vs Process
Products vs Customers
Revenues vs Performance
Inventory vs Information
Transactions vs Relationships

Critical Success Factors today

Cross functional management and
planning skills
Ability to define, measure and
manage service requirements by
market segment
Information systems
Relationship management and win
win orientation

PUTTING IN PLACE A WELL OILED

SUPPLY CHAIN

Supply chain as an efficient customer

satisfying process
Effectiveness of the whole supply chain
is more important than the efficiency of
each individual department.

.
The steps involved

Step1- Designing the supply chain

Determine the supply chain network
Identify the levels of service required

Step 2 - Optimizing the supply chain

Determine pathways from
suppliers to the end customer
Customer markets to Distribution
centers
Distribution centers to production
plants
Raw material sources to production
plants
Identify constraints at vendors,
plants and distribution centers
Get the big picture
Plan the procurement, production
and distribution of product groups
rather than individual products in

Step 3- Material flow planning

Determine the exact flow and timing of
materials
Arrive at decisions by working back from
the projected demand through the
supply chain to the raw material
resources
Techniques
ERP

Step 4 - Transaction processing and

short term scheduling
Customer orders arrive at random
This is a day to day accounting system
which tracks and schedules every order to
meet customer demand
Order entry, order fulfillment and physical
replenishment

Information flows in Supply Chain

Management
Information is overriding element
Need for databases
Master files: Information about customers,
products, materials, suppliers, transportation,
production and distribution data- do not
require frequent processing
Status files- heart of transaction processingtrack orders and infrastructure statusupdated daily.
Essentially using the same information to
make all plans right from structuring the

THE VIRTUAL VALUE CHAIN

The value chain connects a companys

supply side with its demand side.
Traditionally information has been a
supporting function.
Information however can be managed far
more creatively.
There are various stages of using value
added information processes.

Visibility : See physical operations more

effectively through information.
Information can be used for effective
coordination of value chain activities.
Mirroring capability : In this stage,
virtual activities are substituted for
physical ones. A parallel value chain is
created.
New customer relationships : The
company can draw on the flow of
information in the virtual value chain to
deliver value to customers in new ways.

Dealer Management
Conventional functions

Inventory ownership and management

Sales and technical support
Order handling
Credit

Contemporary Trends

Channels being divided into twoFulfillment and Franchised agent

Fulfillment channel- responsible for

getting the manufacturers product
from the plant to the end user through
a highly efficient logistics and
inventory management system

Contemporary Trends

Fulfillment channel may not take

ownership of the product but may
perform these functions on a per box
fee structure
Franchised agents responsible for sales
and sales support but will not write
the order or supply the product

Issues in customer management

Penetration vs Spread
Concentration is necessary to commit
the necessary resources for true
customer integration
Depth of customer contact
R&D - sharing information vs developing
new products together
Logistics - Pros and cons of methods of
transportation vs reengineering the
logistics process

Implementation: Points to keep in

mind

Recognize the difficulty of change.

Prepare a blueprint for change that maps
linkages among initiatives.
Assess the entire supply chain from supplier
relationships to internal operations to the
market place, including customers,
competitors and industry as a whole.

IS THE SUPPLY CHAIN

WORKING?

Does our manufacturing strategy increase

product line flexibility while continuing to
drive down overall production costs?
When was the last time we measured lost
sales to end customers?
Do we have an efficient system to get POS
data from retailers?
Are we testing our products with end
customers? Do we use the resulting data to
adjust our forecasting and supply positions?
Is the ratio of returned orders to sales
increasing?

The New Model of Relationships

Hard bargaining vs shared destiny
Exit vs Voice
Arms length relations vs Involving dealers
and suppliers in product development
Piling up vs Replenishing dealer inventory
more frequently
In short working together as partners to
cut costs, boost efficiencies, innovate and
share value

Adversarial vs partnerships
Short term vs long term contracts
Large vs small order quantity
Full truck load vs small parcels
Inspection vs no inspection

Written order vs understanding

Many vs few suppliers
Design and then invite quote from
vendor vs involving vendor in
development
Bargaining, holding cards close to
chest vs Shared destiny,
transparency

Summary
Segmentation of customers based on
service needs
Customization of logistics network
Listen to signals of market demand and
plan accordingly.
Differentiate product close to the
customer
Source strategically
Develop a supply chain wide technology
strategy
Accept channel spanning performance
measures

The Bullwhip Phenomenon

Volatility amplification along the network

Increase in demand variability as we move
upstream away from the market
Mainly because of lack of communication
and coordination
Delays in information and material flows

Bullwhip effect occurs because of various

reasons:
Order Batching - Accumulate orders
Shortage gaming- Ask for more than what
is needed
Demand forecast updating

Important points to keep in mind

Segment customers based on service

needs.
Modify the supply chain to meet these
service requirements profitably.
Customize the logistics network.
Develop forecasts collaboratively involving
every link of the supply chain.
Locate the leverage point where the
product is unalterably configured to meet a
single requirement
Delay product differentiation till the last

Assess options such as modularized

design or modification of manufacturing
processes that can increase flexibility.
Cultivate warm relationships with
suppliers.
Efficient supply chain management has
to be accompanied by a technology
strategy.

ITALIAN CLOTHING
MANUFACTURE

Warehousing and transportation

Inventory
Late delivery returns
Obsolescence
Lost sales
60

6
5
2
20

Need to minimize obsolescence costs

Minimize product range flexibility
Reduce product development cycle

Dells Direct Business Model

of Virtual Integration

Advantages of a tightly coordinated supply chain

traditionally facilitated by vertical integration.
Combined with focus and specialization.
Leveraging on investments others have made
and focusing on delivering solutions and
systems to customers
Fewer things to manage - fewer things go wrong
Suppliers engineers part of Dells Design team
Have only a few partners

Dells Direct Business

Model of Virtual Integration

Share information with partners in Real time

fashion.
Stitch together a business with partners that
are treated as if they are inside the company.
Change focus from how much inventory
there is to how fast it is moving
Assets collect risks around them one way or
the other.
Limited or no testing - Eg. Sony Monitors

Dells Direct Business

Model of Virtual
Integration

Only three Manufacturing centers - Austin,

Ireland and Malaysia.
Inventory levels and replenishment needs
sometimes conveyed to vendors on hourly
basis.
Substitute information for inventory and
ship only when we have real demand from
real end customers
Clever segmentation - Focus on institutional
markets - 70% to very large customers with
annual purchases exceeding $1 million.

Dells Direct Business

Model of Virtual Integration

Exit from retail business after wrong entry in 1989.

Segmentation - closeness to customers and access
to valuable information.
Demand forecasting as a critical sales skill
Help global customers, manage their total
purchase of PCs by selling them a standard product
Dell server loads software on customers
computers
Meet customers needs faster and more efficiently
than any other model.

Li and Fung, Hong Kong

Founded in 1906
Today 35 offices in 20 countries
1997 revenues of $ 1.7 billion
Largest export trading company in Hong Kong
Customers- American and European retailers
Sources clothing and other consumer goods
ranging from toys to fashion accessories to
luggage

Order from Europe

Buy yarn from Korea
Weave and dye in Taiwan
Buy Japanese zippers made in China
Make the garments in Thailand in five
different factories
Pulling apart the value chain and optimizing
at each step

Victor Fung
Today, assembly is the easy part. The hard part is
managing your suppliers and the flow of parts.
Good supply chain management strips away time
and cost from product delivery cycles. Our
customers have become more fashion driven,
working with six or seven seasons a year instead of
just two or three. Once you move to shorter life
cycles, the problem of obsolete inventory increases
dramatically. With customer tastes changing rapidly
and markets segmenting into narrow niches, its not
just fashion products that are becoming
increasingly time sensitive.

Endorsement by Stan Shih, CEO, Acer

Buying right things
Reaching into suppliers to ensure that
certain things happen on time and at the
right quality level.

Buyer informs five weeks before delivery.

Reserve undyed yarn from yarn supplier.
Lock up capacity in weaving and dyeing mills.
Outsourcing not same as leaving suppliers to
do the worrying.
Single factories are too small to have much
buying power and to demand faster deliveries
from suppliers.
To shorten delivery cycle, need to go
upstream to organize production.
Li & Fung able to delay commitment to a
particular fashion trend.

Integrated logistics management

Elimination of consolidators in container
shipments
Smokeless factory

Design
Procurement
Inspection of raw materials
Production planning
Line balancing
Inspection of finished goods
No worker ownership
No labour management

MANAJEMEN
STOK / PERSEDIAAN

Inventories in the Supply

Chain

Independent vs. Dependent

Demand
Independent demand items are finished
goods or other items sold to someone
outside the company
Dependent demand items are materials or
component parts used in the production of
another item (e.g., finished product)

Types of Inventory:
How Inventory is Used
Anticipation or seasonal inventory
Safety stock: buffer demand fluctuations
Lot-size or cycle stock: take advantage of
quantity discounts or purchasing
efficiencies
Pipeline or transportation inventory
Speculative or hedge inventory protects
against some future event, e.g. labor strike
Maintenance, repair, and operating (MRO)
inventories

Objectives of Inventory
Management
Provide acceptable level of customer
service (on-time delivery)
Allow cost-efficient operations
Minimize inventory investment

Relevant Inventory Costs

Item Cost Cost per item plus any other direct
Holding
Costs
Ordering
Cost
Shortage
Costs

costs associated with getting the

item to the plant
Capital, storage, and risk cost
typically stated as a % of the unit
value,
e.g. 15-25%
Fixed, constant dollar amount
incurred for each order placed
Loss of customer goodwill, back
order handling, and lost sales

Order Quantity
Strategies
Lot-for-lot Order exactly what is needed for
the next period
FixedOrder a predetermined amount
order
each time an order is placed
quantity
Min-max
When on-hand inventory falls
system
below a predetermined minimum
level, order enough to refill up to
maximum level
Order n
Order enough to satisfy demand
periods
for the next n periods

Examples of Ordering
Approaches

Three Mathematical Models for

Determining Order Quantity

Economic Order Quantity (EOQ or Q

System)
An optimizing method used for determining order
quantity and reorder points
Part of continuous review system which tracks
on-hand inventory each time a withdrawal is made

Economic Production Quantity (EPQ)

A model that allows for incremental product delivery

Quantity Discount Model

Modifies the EOQ process to consider cases where
quantity discounts are available

Economic Order Quantity

EOQ Assumptions:

Demand is known &

constant - no safety stock is
required
Lead time is known &
constant
No quantity discounts are
available
Ordering (or setup) costs
are constant
All demand is satisfied (no
shortages)
The order quantity arrives
in a single shipment

EOQ: Total Cost Equation

TC EOQ

D Q

S
H
Q 2

Where
TC total annual cost
D annual demand
Q quantity to be ordered
H annual holding cost
S ordering or setup cost

EOQ Total Costs

Total annual costs = annual ordering costs + annual holding
costs

The EOQ Formula

Minimize the TC by ordering the EOQ:

2 DS
EOQ
H

When to Order:
The Reorder Point

Without safety stock:

R dL
where R reorder point in units

With safety
d stock:
daily/weekly demand in

units

L lead time in days/weeks

R dL SS

where SS safety stock in units

EOQ Example
Weekly demand = 240 units
No. of weeks per year = 52
Ordering cost = $50
Unit cost = $15
Annual carrying charge = 20%
Lead time = 2 weeks

EOQ Example Solution

D 52 240 12,480 units / year

H 0.2 15 $3 per unit per year

2 DS
2 12,480 50
Q

644.98 645 units

H
3
D Q 12,480
645
TC
S
H
50
3
2

Q 2 645
967.44 967.5 $1,934.94
R dL 240 2 480 units

EPQ (Economic Production

Quantity) Assumptions

Same as the EOQ except: inventory arrives

in increments & is drawn down as it
arrives

EPQ Equations

Adjusted total cost: TC EPQ

D I MAX

S
H

Q 2

Maximum inventory:I MAX Q 1 d

p

Adjusted order quantity: EPQ

2 DS

d
H 1
p

EPQ Example
Annual demand = 18,000 units
Production rate = 2500 units/month
Setup cost = $800
Annual holding cost = $18 per unit
Lead time = 5 days
No. of operating days per month = 20

EPQ Example Solution

d

18,000
1500 units / month; p 2500 units / month
12

2 DS
2 18,000 800

2000 units
1500

d
18

H 1
2500
p

d
1500

Q 1 2000 1
800 units
p
2500

I MAX

D I MAX 18,000
800

S
H
800
18
2000
2

Q 2

TC

7,200 7,200 14,400

EPQ Example Solution

(cont.)

The reorder point:

1500
R dL
5 375 units
20

With safety stock of 200 units:

1500
R dL SS
5 200 575 units
20

Quantity Discount Model

Assumptions

Same as the EOQ, except:

Unit price depends upon the quantity ordered

Adjusted total cost equation:

TCQD

D Q

S
H PD
Q 2

Quantity Discount
Procedure
Calculate the EOQ at the lowest price
Determine whether the EOQ is feasible at
that price

Will the vendor sell that quantity at that price?

If yes, stop if no, continue

Check the feasibility of EOQ at the next
higher price

Continue to the next slide ...

QD Procedure

(continued)

Continue until you identify a feasible EOQ

Calculate the total costs (including total
item cost) for the feasible EOQ model
Calculate the total costs of buying at the
minimum quantity required for each of the
cheaper unit prices
Compare the total cost of each option
& choose the lowest cost alternative
Any other issues to consider?

QD Example
Annual Demand = 5000 units
Ordering cost = $49
Annual carrying charge = 20%
Unit price schedule:

Quantity
Unit Price
0 to 999
$5.00
1000 to 1999
$4.80
2000 and over
$4.75

QD Example Solution

Step 1

QP $4.75

2 5,000 49

718 not feasible

0.2 4.75

QP $4.80

QP $5.00

2 5,000 49
714 not feasible
0.2 4.80

2 5,000 49

700 feasible
0.2 5.00

QD Example Solution
(Cont.)

Step 2

TCQ 700

5,000
700

49
0.2 5.00 5.00 5000 $25,700
700
2

TCQ 1000

5,000
1000

49
0.2 4.80 4.80 5000 $24,725
1000
2

TCQ 2000

5,000
2000

49
0.2 4.75 4.75 5000 $24,822.50
2000
2

What if Demand is
Uncertain?

Safety Stock and Service

Level
Order-cycle service level is the probability
that demand during lead time wont exceed
on-hand inventory.
Risk of a stockout = 1 (service level)
More safety stock means greater service
level and smaller risk of stockout

Safety Stock and Reorder

Point

Without safety stock:

R dL

where R reorder point in units

d daily demand in units
With safety stock:
L lead time in days

R dL SS

where SS safety stock in units

Reorder Point
Determination

SS z dL
i.e.,

R dL z dL

R = reorder point
d = average daily demand
L = lead time in days
z = number of standard deviations associated with
desired service level
= standard deviation of demand during lead
time

Safety Stock Example

Daily demand = 20 units

Lead time = 10 days

S.D. of lead time demand = 50 units

Service level = 90%

Determine:

1. Safety stock
2. Reorder point

Safety Stock Solution

Step 1 determine z
Step 2 determine safety stock

From Appendix B :

z 1.28

Step 3 determine reorder point

SS 1.28 50 64 units

R dL SS 20 10 64 264 units

ABC Inventory
Classification

ABC classification is a method for determining

level of control and frequency of review of inventory
items
A Pareto analysis can be done to segment items into
value categories depending on annual dollar volume
A Items typically 20% of the items accounting for
80% of the inventory value-use Q system
B Items typically an additional 30% of the items
accounting for 15% of the inventory value-use Q or
P
C Items Typically the remaining 50% of the items
accounting for only 5% of the inventory value-use P

ABC Example: the table below shows a solution to an ABC analysis.

The information that is required to do the analysis is: Item #, Unit $
Value, and Annual Unit Usage. The analysis requires a calculation of
Annual Usage $ and sorting that column from highest to lowest $
value, calculating the cumulative annual $ volume, and grouping into
typical ABC classifications.

Item
Annual Usage ($) Percentage of Total $ Cumulative Percentage of Total $
106
16,500
34.4
34.4
110
12,500
26.1
60.5
115
4500
9.4
69.9
105
3200
6.7
76.6
111
2250
4.7
81.3
104
2000
4.2
85.5
114
1200
2.5
88
107
1000
2.1
90.1
101
960
2
92.1
113
875
1.8
93.9
103
750
1.6
95.5
108
600
1.3
96.8
112
600
1.3
98.1
102
500
1
99.1
109
500
1
100.1

Item Classification
A
A
B
B
B
B
C
C
C
C
C
C
C
C
C

Inventory Record Accuracy

Inaccurate inventory records can cause:

Lost sales
Disrupted operations
Poor customer service
Lower productivity
Planning errors and expediting

Two methods are available for checking record

accuracy
Periodic counting-physical inventory
Cycle counting-daily counting of pre-specified items
provides the following advantages:

Timely detection and correction of inaccurate records

Elimination of lost production time due to unexpected stock outs
Structured approach using employees trained in cycle counting