Inventory Control

Inventory Control
Inventory Control
http://personales.upv.es/jpgarcia
Inventory Control is
everywhere.
Fuel for the Car

Milk to Drink
Milk to Sell
MotherBoards to
Assemble Computers
Production with Setups
Some youtube videos
http://es.youtube.com/watch?v=qkZQxXJuqKo
http://es.youtube.com/watch?v=_VrBKF6SUCA
Why we do store?
Unplanned shocks (labor strikes, natural

disasters, surges in demand, etc.)
To maintain independence of supply chain
Economies of production
Improve customer service
Economies of purchasing
Transportation savings
Hedge against future
Costs Related with Inventory
Control
Inventory deteriorates, becomes obsolete, lost, stolen, etc.
Order processing
Shipping
Handling
Carrying Costs
Capital (opportunity) costs
Inventory risk costs
Space costs
Inventory service costs
Out-of- Stock Costs

Lost sales cost
Back-order cost
Complacency
Nature of Inventory: Adding
Value through Inventory
Speed
location of inventory has gigantic effect on speed
Cost
direct: purchasing, delivery, manufacturing
indirect: holding, stockout.
Quality
inventory can be a buffer against poor quality; conversely,
low inventory levels may force high quality
Flexibility
location, level of anticipatory inventory both have effects
Nature of
Inventory:Functional Roles of
Inventory
Transit
Buffer
Seasonal
Decoupling
Speculative
Lot Sizing or Cycle
Mistakes
Promotional
Logistics Costs
Categora de Costes % sobre % Costes
Coste Totales Ventas Logsticos
Transporte 636 5,4% 62,7%
(5.9%)
Almacenamiento 82 0,7% 8,1%

(0.8%)
Costes de 250 2,1% 24,6%

Inventarios (3%)
Administracin 47 0,4% 4,6%

(0.4%)
Total 1015 8,6% 100%

(10.1%)
Source: 16th Annual State of Logistics Report, 2004

(Entre parentesis los datos del 2001)
http://www.loanational.org/documents/cscmp/17th_Annual_State_of_Logistics_Report.pdf
Sectores diferentes tienen diferentes
perfiles de coste
Costes Logsticos como Peroadems la logstica
Porcentaje de ventas adems tambin impacta en:
20%
Otros costes en la Cadena
de suministro como los de
Aerospacial
Maquinara Automovil
15%
fabricacin materia prima o
Comida&Bebida Electronica gestin de clientes.
Sanidad
La cantidad de capital en el
Qumicas 10% negocio.
Gas y Petrol
Distribucin Y una elevada proporcin

Banca
del riesgo global del
5%
negocio.
0%
Source: ILT, McKinsey, LCP Consulting analysis
Visin general
Which are the main factors
Main Factors defining an
Inventory
Demand Policy
Average Forecasted Demand

Error on Forecasted Demand

Setup
Cost
Time
Storage
Cost
Capacity
Expiration
Time
Lead Time
Lead Time (LT)
Basic Period
Period of Forecasting
Horizon
Finite and Infinite Horizon
Finite or Infinite Production Rate
EOQ Formula
Why to do it with Formulae
what has always been done
by
head?
Reduce Cost
Number of Different units
Time to do Added Value tasks
Computer Aid Management
Assumptions to derive the
EOQ formula
Production is Instantaneous.
Delivery is inmediate
Demand is deterministic
Demand is constant over time
A production run incurs a fixed setup cost
Products can be analyzed individually
Inventory Order Cycle
Order quantity, Q
Demand
rate
Inventory Level
Reorder point, R
0 Lead Lead Time

time time
Order Order Order Order
placed receipt placed receipt
EOQ Cost Model
Co - cost of placing order D - annual demand
Cc - annual per-unit carrying cost Q - order quantity
Co D
Annual ordering cost =
Q
CcQ
Annual carrying cost =
2
CoD CcQ
Total cost = +
Q 2
EOQ Cost Model
Deriving Qopt Proving equality of
costs at optimal point
CoD CcQ
TC = +
Q 2 CoD CcQ
=
TC Co D Cc Q 2
= +
Q Q2 2 2CoD
C0 D Cc Q2 =
Cc
0= +
Q2 2
2CoD
2CoD Qopt =
Qopt = Cc
Cc
EOQ Cost Model (cont.)
Annual
cost ($)
Total Cost
Slope = 0
CcQ
Minimum Carrying Cost = 2
total cost
CoD
Ordering Cost = Q
Optimal order Order Quantity, Q

Qopt
EOQ Example
Cc = $0.75 per yard Co = $150 D = 10,000 yards
2CoD CoD CcQ

Qopt = TCmin = +
Cc Q 2
2(150)(10,000) (150)(10,000) (0.75)(2,000)
Qopt = (0.75) TCmin = 2,000 + 2
Qopt = 2,000 yards TCmin = $750 + $750 = $1,500

Orders per year = D/Qopt Order cycle time = 311 days/(D/Qopt)
= 10,000/2,000 = 311/5
= 5 orders/year = 62.2 store days
Required Data to generate a
Policy
Time
Forecast Period
Horizon
Lead Time
Demand for a given Period (average and Standard Deviation)

Demand during Horizon
Cost
holding Cost ( per unit per year) =KCu
Unit Cost ( per unit)
Setup Cost S ()
Total Cost =Holding Cost + Setup Cost
Service Level (max % of runouts that we are willing to afford)
Policies
Reorder Point:
if stock<ROP then Buy(Q)
ROP=Level of inventory at which a new order is placed
ROP= Maximun demand that we want to serve during Lead
Time
Average Demand during Lead Time
Standard deviation of demand
Safety Stock (ss)
R = dL+ss
where
d = demand rate per period
L = lead time
Q: Quantity that minimizes Total Cost
Safety Stocks. Basic
Concepts
Safety stock
buffer added to on hand inventory during lead
time
Stockout
an inventory shortage
Service level
probability that the inventory available during
lead time will meet demand
Variable Demand with
a Reorder Point
Q
Inventory level
Reorder
point, R
0
LT LT
Time
Reorder Point with
a Safety Stock
Inventory level
Q
Reorder
point, R
Safety Stock
0
LT LT
Time
Reorder Point With Variable
Demand
R = dL + z d L
where
d = average daily demand
L = lead time
d = the standard deviation of daily demand
z = number of standard deviations
corresponding to the service level
probability
zd L = safety stock
Reorder Point for a Service Level
Probability of
meeting demand during
lead time = service level
Probability of
a stockout
Safety stock
z d L
dL R
Demand
Reorder Point for Variable
Demand
The carpet store wants a reorder point with a 95%
service level and a 5% stockout probability
d = 30 yards per day
L = 10 days
d = 5 yards per day
For a 95% service level, z = 1.65
R = dL + z d L Safety stock = z d L
= 30(10) + (1.65)(5)( 10) = (1.65)(5)( 10)
= 326.1 yards = 26.1 yards
Periodic Review Policies:
if time then Buy(OUL-Stock)
OUL: Max Demand we cover during next
Review Period + Lead Time
Time Review Period that minimizes Total
Cost
Economic Order Period (T*)
Power of Two Policies
Order Quantity for a Periodic Inventory
System
Q = d(tb + L) + zd tb + L - I
where
d = average demand rate
tb = the fixed time between orders
L = lead time
d = standard deviation of demand
zd tb + L = safety stock
I = inventory level
Fixed-Period Model with Variable
Demand
d = 6 bottles per day
d = 1.2 bottles
tb = 60 days
L = 5 days
I = 8 bottles
z = 1.65 (for a 95% service level)
Q = d(tb + L) + zd tb + L - I
= (6)(60 + 5) + (1.65)(1.2) 60 + 5 - 8
= 397.96 bottles
Problem
A toy manufacturer uses aproximately 32000 silicon chips
annually. The Chips are used at a steady rate during the 240
days a year that the plant operates. Annual holding cost is 60
cents per chip and ordering cost is 24$. A year has 288 days.
How muchh should we order each time?
How many times per year are we to order?
What is the length of an order cycle.
What is the total cost?
If the supplier has a lead time of 20 days?
Which is the reorder point?
Should do we have a safety stock? To prevent what?
Problem
Determine optimal number to order
D = 1,000 units
S = $10 per order
H = $.50 per unit per year
The pack has 150 units each
Management underestimated demand by 50%
C = $5/unit
There is a discount of 5% per unit if you buy more
than 500 units
Problem
A company substitutes in a regular way a
component of a given machine to ensure quality
parameters of the product. Machine works during
the whole year and needs 40 parts per week. The
component supplier offers a price of 10 per unit for
orders with less than 300 units, and a price of 9.70
per unit for bigger orders. The cost of setting each
order is stimated on 25 , and the holding cost is of
0.26 / / year.
How many units should you request each time?
If the supplier wants you to make orders bigger than
500 units which is maximum unit price that should
stablish for orders bigger than 500 units?
Karbonicas JuPe
Karbonicas JuPe is a company bottling drinks where you work. To simplify we are to
consider only one product. Our company has a warehouse where store product just
manufactured and from where we serve the three logistics platforms that our client holds.
The logistics platforms are cross-dock warehouses, where storing products has a high
cost, and from where there associated retail stores are served.
The lead time at the manufacturing side for Karbonicas JuPe is 7 days (i.e. it takes one
week from we have been asked to produce until the product is ready at the warehouse.
Each of the logistics platforms faces a demand (measured in pallets) that might be
approximated by a normal distribution. (Data can be found at Table I).
Each logistic platform knows the demand and the stock levels of each associated retail
store. It takes two (2) days since the platform asks for products until the product reaches
each retail store through the logistic platform. The inventory system is Reorder Point at
each echelon. (i.e. the platforms work with ROP logic to the central warehouse of
Karbonicas JuPe, and the central warehouse works with ROP to the manufacturing
facility). The relation between the logistic platform and the retail stores is not considere in
this problem.
You are considering the posibility of eliminate the central warehouse echelon. To do that
the three logistics platforms should agree a joint review period (considering all the costs)
with a power-of-two policy. The factory consolidates the three orders (that have been done
simultaneously) and will bottle them together. From the factory docks and without passing
through the central warehouse the product will be sent directly to each logistic platform.
Key questions are: how much does it cost now, how much will it cost the new system.
Karbonicas JuPe (ctnd)
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Fuel for the Car

Unplanned shocks (labor strikes, natural

Inventory risk costs

Inventory service costs

Out-of- Stock Costs

Almacenamiento 82 0,7% 8,1%

Costes de 250 2,1% 24,6%

Administracin 47 0,4% 4,6%

Total 1015 8,6% 100%

Source: 16th Annual State of Logistics Report, 2004

Distribucin Y una elevada proporcin

Source: ILT, McKinsey, LCP Consulting analysis

Error on Forecasted Demand

0 Lead Lead Time

Optimal order Order Quantity, Q

2CoD CoD CcQ

Qopt = 2,000 yards TCmin = $750 + $750 = $1,500

Demand for a given Period (average and Standard Deviation)

Unit Cost ( per unit)

Total Cost =Holding Cost + Setup Cost

Service Level (max % of runouts that we are willing to afford)

Q: Quantity that minimizes Total Cost

For a 95% service level, z = 1.65

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