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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
Wants a
4 days
leadtime
? delivery in 1
week
• Anticipation inventory
• Safety stock
• Lot-size inventory
• Transportation inventory
• Hedge inventory
CODP1
Make to local stock
CODP2
Make to stock
CODP3
assembly to order
CODP4
production to order
KCODP5
purchase to order
1) Customer Order Disconnection Point : how far does a customer order penetrate?
7
Inventory in TFC
Components
pallets
Finished product
pallets
Supply Mixing Bottling Distribution
tankyard
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
Equipment Insurance
Deterioration
Cos of inventory versus out
of stock
Explore
TFC
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
13
What is the right
servicelevel?
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
Stock finished
product
Production
reliability
(Past) shelf life
Production interval
Service level
Finished goods
Volatility of demand
warehouse
Promotion
Number of Order Bonus
pressure
employees deadline policy
and 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
1-16
EOQ: Cost & Quantity
Relationships
1600
1400
EOQ
1200
Cost in Dollars
1000
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
But ordering in
Ordering in small small quantities
quantities minimizes requires more
inventory carrying orders and
costs increases order
costs
20%
15%
10%
5% TCQ /TCEOQ
0%
-5%
-50% -40% -30% -20% -10% 0%
EOQ 10% 20% 30% 40% 50%
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
+ Minimuml +
Total Cost
Cost of
out of stock
Inventory cost
Safetystock
T S
25
Exercise: Safety stock
Question:
• When do you order?
26
Exercise : Safety stock
0 0 0
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12
0 0 0
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12
27
Exercise: Safety stock
Question:
• When do you order?
No idea!
28
Order Point System
Quantity Replenishment
in
inventory
A
A
Reorderpoint
Demand
during lead C C
time (DDLT) B
LT B LT
Safetystock
Time
Source: Adapted from CPIM Inventory Management Certification Review Course (APICS 1998).
• Service level
• Production order quantity
• Demand uncertainty
• Supply uncertainty
In analytically determining
the safety stock, the starting
point is variation in demand
demand
μ
time frequency
µ = estimated demand
31
Optimal inventory is the desired
service level against minimal costs
Costs
Today
Target level
Optimum
0
100% Target% Service level
Differentation of servicelevel
based on uncertainty and value
revenue
low high
uncertainty
supplier RM FP customer
Order Quantity
Reorder
Point
Safety Stock
Time
Number of components
Obsoletes
obsolete
Shelflife is 20 weeks