Inventory

Management
Definition of inventory
control

Inventory control is the activity and methods of keeping the

right level of inventory .

Three questions:
What should I keep on stock?
How much to order?
When to order?

Order Quantity

Reorder
Point

Safety Stock

Time

2 What
What is
is the
the right
right level?
level?
Inventory finished
products and its
traditional conflicts

High inventory turns

VP Supply Chain
Maximum flexibility

Components Finished product

Supply Production Distribution

VP Purchasing VP Operations VP Sales

Long runs minimize High service level

changeovers Safety stocks
Intermezzo: How much
inventory do you need?

Wants
Wants aa
44 days
days
leadtime
leadtime
? delivery
delivery in
in
11 week
week

supplier
supplier You customer
customer

How much inventory do you

need ?
nothing
a little bit
enough
Reasons for Carrying
Inventory

The only good reason for carrying inventory beyond

current needs is if it costs less to carry it than not.
Inventory allows the company to operate with
different production rates and batch sizes throughout
the supply, production, and distribution system.
Inventory decouples . . .
Demand from Supply
Customer demand from Finished goods
Finished goods from Component availability
Output of one operation from Output of prec. operation
Materials to begin production from Suppliers of materials

2009 APICS 65
CONFIDENTIAL AND
Functions of Inventory

Anticipation inventory
Safety stock
Lot-size inventory
Transportation inventory
Hedge inventory

2009 APICS 66
CONFIDENTIAL AND
CODP is important in
designing the planning
methods

supplier production distribution customer

parts
HF FG FG installation

s CODP1 Make to local stock

tie
t ivi
ac
d
lle
rt o CODP2 Make to stock
n
co
i ng s
ann t ie
Pl CODP3 assembly to order
tiv
i
ac
d
olle
tr
CODP4 production to order con
e r
ord
e r
om
KCODP5 purchase to order t
us
C

1) Customer Order Disconnection Point : how far does a customer order penetrate?

7
Inventory in TFC

Components

pallets
Finished product
pallets
Bottlin Distributi
Supply Mixing
g on
tankya
rd

Explore
TFC
How much inventory in weeks and value in
components and finished products?
For what reasons we need inventory in this supply
chain?

8
Inventory
management

Balancing act of
Service level offering to the market
Production reliability
Capacity
Availability of components
Safety stock and production frequencies
Inventory carrying Costs

Capital Storage
Costs Risk Costs
Costs

Obsolescence

Space Damage

Opportunity Cost Personnel Pilferage

Equipment Insurance

Deterioration
Cos of inventory versus
out of stock

Out of stock costs Inventory costs

Cost of backorders Capital
Expediting costs Storage
Cost of complaints Risk
Revenue loss
Loss of customers
Idle time at your
customer

Explore
TFC
Estimate the inventory carrying costs for a finished
product
The optimum safety stock is
the stock where the stock
costs and shortages are equal

costs/year
total

stock costs

costs of shortages

safety stock
optimum
safety stock

12
The optimum service
level is the service level
with an optimum safety
stock

safety stock
Service level curve
optimum safety stock

min. 100% 98% 96% 94% 92%

costs service level
optimum
service level

13
What is the right
servicelevel?

In
In most
most cases
cases this
this is
is aa
management
management decision
decision

profit
0
loss
loss

costs
tevenu
result

optimum 100%
servicelevel

14
Optimal inventory is the
desired service level against
minimal costs

Costs

Target level

Optimum

0
100% Target% Service level
Excersise

Costs
Today

Target level

Optimum

0
100% Target% Service level

- How to get this curve lower?

Service level

Stock finished
product
Production
reliability
(Past) shelf life
Production
interval
Service
level
Finished goods Volatility of
warehouse demand

Number Promotion
Order
of pressure Bonus
deadlin
employee and policy
e
s horizon
How much to order?

+ minimum +
Total costs
Ordering costs

Inventory costs

Order quantity

T S

18
Inventory in time

Order Quantity

Reorder
Point

Safety Stock
Time

What is the influence of the ordersize of finished products?

How to decide on the order size?

1-16
EOQ: Cost & Quantity
Relationships
1600

1400

EOQ
1200

1000
Cost in Dollars

800
Ordering Costs

600
Carrying Costs

Total Cost
400

200

0
0 200 400 600 800 1000 1200
Order Quantity
Source: Arnold et al., Introduction to Materials Management, 6th ed.
Reprinted by Permission of Pearson Education
2009 APICS 7 20
CONFIDENTIAL AND
Batch sizes
Manage Cost
Tradeoffs
Inventory Carrying Costs Ordering Costs

But ordering in
Ordering in small small quantities
quantities minimizes requires more
inventory carrying orders and
costs increases order
costs

Managing tradeoffs by balancing

ordering costs and inventory carrying costs
The sensitivity of EOQ is
limited

% deviation from min cost

TCQ /TCEOQ

EOQ
% deviation from EOQ

Is this all?
TC = total cost Available production capacity
Customer value?

22
Ordering cost

Administration
Cost of supplier mgt and selsection
Cost of order preparation
Cost of invoicing and paiment
Physical.:
Cost of receiving and QC
Cost of change over
Other.:
Transportation cost
..

23
Order quantity

O
Q

Time

O
Q

What is the influence of orderquantity on

servicelevel?
Wjem to order

+ Minimuml +
Total Cost
Cost of
out of stock

Inventory cost

Safetystock

T S

25
Exercise: Safety stock

For item X the following applies:

Average consumption 100 pc/mth
Delivery time 1 month
Present stock 200 pc
Service level-target 98 %

Question:
When do you order?

26
Exercise : Safety stock

27
Exercise: Safety stock

For item X the following applies:

Average consumption 100 pc/mth
Delivery time 1 month
Present stock 200 pc
Service level-target 98 %

Question:
When do you order?

No idea!
28
Order Point System

Quantity Replenishment
in
inventory

A
A
Reorderpoint

Demand during
lead time C C
(DDLT) B
LT B LT

Safetystock

Time

Source: Adapted from CPIM Inventory Management Certification Review Course (APICS 1998).

2 29 2010 APICS CONFIDENTIAL

AND PROPRIETARY
How to decide on
safety stocks?

Service level
Production order quantity
Demand uncertainty
Supply uncertainty
In analytically
determining the safety
stock, the starting point
is variation in demand

demand

time frequency
= estimated demand

31
Optimal inventory is the
desired service level against
minimal costs

Are you on the curve?

How to assess?

Costs
Today

Target level

Optimum

0
100% Target% Service level
Differentation of servicelevel
based on uncertainty and
value

revenue
low high
uncertainty

low 99%? 95%?

high 95%? 90%?

Intermezzo: How much
inventory do you need?

22 weeks
weeks ? Fixed
Fixed ? 11 day
day
leadtime
leadtime period
period of
of leadtime
leadtime
33 weeks
weeks
supplier
supplier RM FP customer
customer

How much inventory do you need on both

points ?
nothing
a little bit
enough
Something to think
about

Where do you prefer to have the highest service

levels? Components Finished product

Supply Production Distribution

Is 95% component service level ok?

Is 100% component service level ok?
Inventory of components

Order Quantity

Reorder
Point

Safety Stock
Time

What makes inventory management of

components different from finished products?
service level and demand
supply
product
Something to think
about (cont)

Number of
components
#=2 #=3 #=4

90% 81% 73% 66%

Component
availability

95% 90% 86% 81%

98% 96% 94% 92%

Obsolete
management

Obsoletes

Stock Customer agreements

Shelf life
Safety Production
agreement
stock interval
s
Shelf life %
Agreement vs realisation

obsolete

Shelflife realisation= 85%

85%

Shelf life agreement= 70% Internal shelflife

Shelflife is 20 weeks