Inventory Control

&
Balanced Score Card
for Store Operations
 To Integrate the food distribution system by
integrating the procurement and distribution
system
 Inventory & inventory
system
• Inventory is the set of items that an
organization holds for later use by
the organization. An inventory
system is a set of policies that
monitors and controls inventory. It
determines how much of each item
should be kept, when low items
should be replenished, and how
many items should be ordered or
made when replenishment is needed.
 Basic types of inventory

• independent demand,

• dependent demand, and

• supplies.
 Independent Demand
• Independent demand items are those items
that we sell to customers.

• Dependent demand items are those items

whose demand is determined by other items.
Demand for a car translates into demand for
four tires, one engine, one transmission, and
so on. The items used in the production of
that car (the independent demand item) are
the dependent demand items.

• Supplies are items such as copier paper,

cleaning materials, and pens that are not used
directly in the production of independent
demand items
 WHY INVENTORIES ARE
NEEDED
• To maintain independence of
operations
• To meet variations in demand
• To allow production schedule
flexibility
• To provide a safeguard for variations
in raw materials deliveries
• To take advantage of economic
purchase order size
 INVENTORY COSTS YOU
• Holding or carrying costs
• Ordering costs
• Shortage and/or wrong inventory
costs
• INVENTORY MODELS
– Independent versus Dependent
Demand
– Holding, Ordering, and Setup
Costs
• INVENTORY MODELS FOR
INDEPENDENT DEMAND
– Basic Economic Order Quantity
(EOQ) Model
– Minimizing Costs
– Reorder Points
 CAN YOU ….
Identify or Define:
– Record accuracy
– Cycle counting
– Independent and dependent
demand
– Holding, Ordering, and Setup
Costs
Describe or Explain:
– The functions of inventory and
basic inventory models
 What is Inventory?
• Stock of materials
• Stored capacity
• Examples
The Functions of Inventory
• To provide a stock of goods that
will provide a “selection” for
customers
• To take advantage of quantity
discounts
• To hedge against inflation and
upward price changes
 Types of Inventory
• Raw material
• Work-in-progress
• Maintenance/repair/operating supply
• Finished goods
Disadvantages of Inventory
• Higher costs
– Item cost (if purchased)
– Ordering (or setup) cost
• Costs of forms, clerks’ wages etc.
– Holding (or carrying) cost
• Building lease, insurance, taxes etc.

• Difficult to control
• Hides production problems
 Cycle Counting

• Physically counting a sample of

total inventory on a regular basis
 Advantages of Cycle
Counting
• Eliminates annual inventory
adjustments
• Provides trained personnel to audit
the accuracy of inventory
• Allows the cause of errors to be
identified and remedial action to
be taken
• Maintains accurate inventory
records
 Techniques for Controlling
Service Inventory Include:
• Good personnel selection, training,
and discipline
• Tight control of incoming shipments
• Effective control of all goods leaving
the facility
 Independent versus
Dependent Demand
• Independent demand - demand for
item is independent of demand for
any other item
• Dependent demand - demand for
item is dependent upon the demand
for some other item
 Inventory Costs
• Holding costs - associated with
holding or “carrying” inventory
over time
• Ordering costs - associated with
costs of placing order and
receiving goods
• Setup costs - cost to prepare a
machine or process for
manufacturing an order
 Holding (Carrying) Costs
• Obsolescence
• Insurance
• Extra staffing
• Interest
• Pilferage
• Damage
• Warehousing
• Etc.
 Ordering Costs
• Supplies
• Forms
• Order processing
• Clerical support
• Etc.
 Setup Costs
• Clean-up costs
• Re-tooling costs
• Adjustment costs
• Etc.
 Inventory Models

• Fixed order-quantity
models
– Economic order quantity
– Production order quantity
– Quantity discount
• Probabilistic models
• Fixed order-period
models
 EOQ Assumptions

• Known and constant demand

• Known and constant lead time
• Instantaneous receipt of material
• No quantity discounts
• Only order (setup) cost and holding
cost
• No stockouts
 Inventory Usage Over Time

Order quantity Usage Rate

=Q Average
(maximum Inventory
inventory (Q*/2)
Inventory Level

level)

Minimum
inventory
0
Time
 EOQ Model
How Much to Order?
Annual Cost

u r ve
o stC ve
al C C u r
Tot s t
Minimu
g Co
m total l din
cost Ho

Order (Setup) Cost Curve

Optimal Order quantity

Order Quantity (Q*)
Why Holding Costs Increase
• More units must be stored if more are
ordered

Purchase Order Purchase Order

Descriptio Qty. Descriptio Qty.
n
Microwave 1 n
Microwave 1000

Order Order
quantity quantity
 Deriving an EOQ
1. Develop an expression for setup or
ordering costs
2. Develop an expression for holding
cost
3. Set setup cost equal to holding cost
4. Solve the resulting equation for the
best order quantity
 EOQ Model
When To Order
Inventory Level

Optimal Average
Order Inventory
Quantit (Q*/2)
y
(Q*)
Reorder
Point
(ROP)
Time
Lead Time
 EOQ Model Equations
Optimal Order Quantity= Q* = 2×D×S
H
D
=N =
Expected Number of Orders
Q*
Working Days /Year
xpected Time Between Orders=T =
N
D D = Demand per year
d=
Working Days /Year S = Setup (order) cost
per order
ROP = d ×L H = Holding (carrying)
cost
d = Demand per day
L = Lead time in days
 The Reorder Point (ROP)
Curve
Q*

Slope = units/day
=d
Inventory level

ROP
(Units
(units)

Time
Lead time = (days)
L
Production Order Quantity
Model
• Answers how much to order and
when to order
• Allows partial receipt of material
– Other EOQ assumptions apply
• Suited for production environment
– Material produced, used immediately
– Provides production lot size
• Lower holding cost than EOQ model
 Quantity Discount Model
• Answers how much to order &
when to order
• Allows quantity discounts
– Reduced price when item is
purchased in larger quantities
– Other EOQ assumptions apply
• Trade-off is between lower price &
increased holding cost
 Probabilistic Models

• Answer how much & when to order

• Allow demand to vary
– Follows normal distribution
– Other EOQ assumptions apply
• Consider service level & safety stock
– Service level = 1 - Probability of stockout
– Higher service level means more safety stock
• More safety stock means higher ROP
 Probabilistic Models
When to Order?
Frequen Service
Inventory Level cy
Level P(Stockout)
Optimal
Order
X
Quantit SS
y
ROP
Reorder
Point
(ROP)

Safety Stock (SS)

Place Receive Time
order Lead Time order
 Fixed Period Model
• Answers how much to order
• Orders placed at fixed intervals
– Inventory brought up to target amount
– Amount ordered varies
• No continuous inventory count
– Possibility of stockout between
intervals
• Useful when vendors visit
routinely
– Example: P&G representative calls
every 2 weeks
 The Balanced Scorecard

The scorecard measures an organization’s

performance from four perspectives:

1. Financial

2. Customer

3. Internal business processes

4. Learning and growth

Perspectives of Performance

1. Financial

2. Customer

3. Internal business process

4. Learning and growth

 Aligning the Balanced
Scorecard to Strategy
Different strategies call for different scorecards.

What are some of the financial

perspective measures?

Operating income

Revenue growth

Cost reduction is some areas

Return on investment
 Aligning the Balanced
Scorecard to Strategy

What are some of the customer

perspective measures?

Market share

Customer satisfaction

Customer retention percentage

Time taken to fulfill customers requests

 Aligning the Balanced
Scorecard to Strategy
What are some of the internal business
perspective measures?

Innovation Process:

Manufacturing capabilities

Number of new products or services

New product development time

Number of new patents

 Aligning the Balanced
Scorecard to Strategy
Operations Process:

Yield

Defect rates

Time taken to deliver product to customers

Percentage of on-time delivery

Setup time

Manufacturing downtime
Aligning the Balanced
Scorecard to Strategy

Post-sales service:

Time taken to replace or repair

defective products

Hours of customer training for

using the product
 Aligning the Balanced
Scorecard to Strategy
What are some of the learning and growth
perspective measures?

Employee education and skill level

Employee satisfaction scores

Employee turnover rates

Information system availability

Percentage of processes with advanced controls

Pitfalls When Implementing
a Balanced Scorecard
What pitfalls should be avoided when
implementing a balanced scorecard?

1. Don’t assume the cause-and-effect

linkages to be precise.

2. Don’t seek improvements across

all measures all the time.

3. Don’t use only objective measures

on the scorecard.
 Pitfalls When Implementing
a Balanced Scorecard

4. Don’t fail to consider both costs and benefits

of initiatives such as spending on information
technology and research and development.

5. Don’t ignore nonfinancial measures when

evaluating managers and employees.

6. Don’t use too many measures.

Financial perspective – includes measures such as operating
income, return on capital employed and economic value added
Customer perspective – includes measures such as customer
satisfaction, customer retention and market share in target segments
Business process perspective – includes measures such as cost,
throughput and quality. These are for business processes such as
procurement, production and order fulfillment.
Learning & growth perspective – includes measures such as
employee satisfaction, employee retention, skill sets, etc.

Objectives – major objectives to be achieved for example , profitable

growth
Measures – the observable parameters that will be used to measure
progress towards reaching the objective. For example, the objective
of profitable growth might be measured by growth in net margin
Targets – the specific target values for the measures, for example,
+2% growth in net margin
Initiatives – action programs to be initiated in order to meet the
objective
Theses can be organized for each perspective in a table as below:

Objectiv Measure Targets Initiativ

es s es
Financial

Customer
Process

Learning