1. Inventory management plays a very significant role in the organizations and is closely linked to the supply chain management. Business organizations maintain of finished goods to serve customers using various policies like vendor managed inventory and electronic data interchange. Inventory is considered to be an important asset and companies manage this asset strategically. The apex management plans, coordinates and controls acquiring, storage and movement of stocjk of finished goods and raw materials.
Types of Inventory
Raw materials, component parts, subassemblies, and supplies
Inputs to manufacturing and service-delivery processes
Work-in-process (WIP) inventory
Partially finished products in various stages of completion that are awaiting further processing
Finished-goods inventory
Completed products ready for distribution or sale to customers
Safety stock inventory
Additional amount of inventory kept over and above the average amount required to meet demand
Managing Inventories in Global Supply Chains
Today’s global supply chains present significant challenges to inventory management.
The components and materials used in nearly any product are often purchased from suppliers across the globe and shipped through complex supply chains. Effective use of technology, processes, and information technology (IT) support combine to effect:
Global sourcing and total system cost considerations
Quality, delivery performance, and technical support
New suppliers and products based on evaluated potential to the company/organization.
Many firms (as well as consumers) subscribe to environmentally preferable purchasing (EPP), (green purchasing)which is the affirmative selection and acquisition of products and services that most effectively minimize negative environmental impacts over the manufacturing life cycle, transportation, use, and recycling or disposal provisions.
Inventory managers deal with two fundamental decisions:
Inventory management is all about making trade-offs among the costs associated with these decisions.
Inventory costs can be classified into four major categories:
a) Ordering or setup costs incurred as a result of the work involved in placing orders with suppliers or configuring tools, equipment, and machines within a factory to produce an item.
b) Inventory-holding costs or expenses associated with carrying inventory.
c) Shortage costs (stock outs) associated with inventory being unavailable when needed to meet demand.
d) Unit cost of the stock-keeping unit (SKUs) or single items or assets stored at a particular location.
2.Various inventory situations are introduced, the first steps inventory problem analysis comprises description of environment and inventory system characteristics. A description of each approach is offered given the seriousness to which inventory management is considered across industry sectors.
Inventory Characteristics
The number of Items in multiple locations are assigned a unique identifier, called a stock-keeping unit, or SKU.
Stock-keeping unit (SKU): Single item or asset stored at a particular location
The nature of demand independent versus dependent, constant versus uncertain, and dynamic versus static.
1.Independent demand
Demand for an SKU that is unrelated to the demand for other SKUs and needs to be forecasted
2.Dependent demand
Directly related to the demand of other SKUs and can be calculated without needing to be forecasted
3.Static demand is stable in nature
4.Dynamic demand varies over time
The Number and Duration of Time Periods
Analyzing inventory for single or multiple periods
Lead time – Time between placement of an order and its receipt
Stockouts – Inability to satisfy the demand for an item
Backorder: Occurs when a customer is willing to wait for an item
Lost sale: Occurs when the customer is unwilling to wait and purchases the item elsewhere
3. ABC Inventory Analysis
One useful method for defining inventory value is ABC analysis. It is an application of the Pareto principle (after an Italian economist who studied the distribution of wealth in Milan during the 1800s who found that a “vital few” controlled a high percentage of the wealth).
ABC analysis gives managers useful information to identify the best methods to control each category of inventory.
Class A items require close control by operations managers.
Class C items need not be as closely controlled and can be managed using auto- mated computer systems.
Class B items are some- where in the middle.
ABC analysis consists of categorizing inventory items or SKUs into three groups according to their total annual dollar usage.
1.“A” items account for a large dollar value but a relatively small percentage of total items.
2.“C” items account for a small dollar value but a large percentage of total items.
3.“B” items are between A and C.
Total dollar usage = Item usage (volume) x Item’s dollar value (unit cost)
With a good SKU system, you’ll be able to determine the popularity of different products and their variants, enabling you to make better business decisions. A good way of putting this into practice is through the ABC analysis: A-items are the top sellers with the highest annual consumption value, followed by B-items of medium consumption, and finally, C-items of low consumption value.
ABC analysis can help you to decide which products are worth investing in, and which aren’t. Inventory management software can provide specific insights into this through sales order reports, as opposed to spreadsheets and paper, which only provides retailers with a rough idea of what’s doing well and what isn’t. This works well in relation to the Pareto principle, which states that 80% of the overall consumption value is based on only 20% of the items. Once you’ve drawn up a graph and taken a close look at what your top performers are, it’ll be easier to organize your inventory to reflect this.
As your top performers, A-items need more attention through better inventory control and sales forecasts, and ensuring regular reorder points and avoiding stock-outs of A-items should be your priority.
On the other end of the scale, there are the C-items. Stocking too much of these means you’ll have to bear more carrying costs. Due to the low demand, a recommended policy is to stock only one unit of every C-item on hand, and to place reorders only once a purchase is made.
B-items straddle the two extremes, and reorder points should be adjusted accordingly. The thing about B-items is, they can easily swing either way: becoming top sellers or bottom sellers, depending on their continued performance.
4. Managed Fixed Quantity Inventory
In a fixed-quantity system (FQS), the order quantity or lot size is fixed; that is, the same amount, Q, is ordered every time.
The order quantity (Q) can be any quantity of product, such as a box, pallet, or container, as determined by the vendor or shipping standards; it does not have to be determined economically. FQSs are used extensively in the retail industry.
The general principles associated with FQS comprise:
Fixed-Quantity System (FQS)
Deals with a fixed order quantity or lot size
Same quantity is ordered every time, and it does not have to be economically determined
A fixed order quantity system is the arrangement in which the inventory level is continuously monitored and replenishment stock is ordered in previously-fixed quantities whenever at-hand stock falls to the established re-order point. Replenishment takes place after inventory is counted according to a designated time period.
In other words it is an Inventory Control Systems. An inventory system controls the level of inventory by determining how much to order (the level of replenishment), and when to order.
A summary of fixed-quantity systems is given in Exhibits 11.5. Exhibits 11.6 and 11.7 contrast the performance of FQS when demand is relatively stable and highly variable, for those interested in the finer technicalities of the Q Model.
Reorder point (r) is determined
r = μL + zσL
–Where
Suppose that μt and σt are the mean and standard deviation of demand for some time interval (t), then
μL = μtL
σL = σt√(“L ” )
Summary of Fixed-Quantity System (FQS)
A more appropriate way to manage an FQS is to continuously monitor the inventory level and place orders when the level reaches some “critical” value. The process of triggering an order is based on the inventory position.
Inventory position (IP) is defined as the on-hand quantity (OH) plus any orders placed but which have not arrived (called scheduled receipts, SR), minus any back-orders (BO).
Fixed-Quantity System managed using:
Inventory position (IP)
On-hand quantity (OH) plus any orders placed that have not arrived (scheduled receipts, SR), minus any backorders (BO)
IP = OH + SR − BO
When IP falls at or below a certain value (reorder point), a new order is placed
Reorder point (r): Value of the inventory position that triggers a new order
Fixed-Quantity System (FQS) under Stable Demand
Fixed-Quantity System (FQS) with Highly Variable Demand
Cycle Inventory Pattern for the EOQ Model
The economic order quantity (EOQ) model is a classic economic model developed in the early 1900s that minimizes the total cost, which is the sum of the inventory-holding cost and the ordering cost.
Several key assumptions underlie the quantitative model.
Only a single item (SKU) is considered
Entire order quantity (Q) arrives in the inventory at one time
Deals with only order/setup and inventory-holding costs
No stockouts are allowed
Demand for an item is constant and continuous over time
Lead time is constant
Under the assumptions of the model, the cycle inventory pattern shown here, suggests we we begin with Q units in inventory.
Because units are assumed to be withdrawn at a constant rate, the inventory level falls in a linear fashion until it hits zero.
Because no stockouts are allowed, a new order can be planned to arrive when the inventory falls to zero; at this point, the inventory is replenished back up to Q. This cycle keeps repeating. This regular pattern allows us to compute the total cost as a function of the order quantity, Q.
Economic Order Quantity (EOQ) Model
Annual ordering cost = (Number of orders per year) × (Cost per order)
= “D” /”Q” C0
Where
D – Annual demand for the product
Q – Number of items ordered
C0 – Cost of placing one order
Total annual cost (TC)
TC = “1” /” 2 ” QCh + “D” /”Q” C0
Economic order quantity (Q*)
Minimizes the total annual cost
Q* = √(“2DC0 ” )/√(“Ch” )
Reorder point (r)
r = Lead time demand
= (Demand rate)(lead time)
= (d)(L)
Because the EOQ model depends only on the order quantity, fixed costs associated with any ordering or inventory holding are irrelevant (in accounting language, these are sunk costs). Therefore, only variable costs of ordering and inventory holding are required for the model.
5. Managed Fixed Period Inventory
The alternative to a fixed-order-quantity system is a fixed-period system (FPS)—sometimes called a periodic review system—in which the inventory position is checked only at fixed intervals of time, T, rather than on a continuous basis.
The two principal decisions in an FPS:
1.The time interval between reviews.
2.The replenishment level.
Fixed-Period System (FPS)
Optimal policy is established using the EOQ model that provides the best economic time interval under model assumptions
T = “Q∗” /”D”
Where
Q* – Economic order quantity
Optimal replenishment level without safety stock
M = d(T + L)
Where
d – Average demand per time period
L – Lead time in the same time units
M – Demand during the lead time plus review period
The length of the review period based on the importance of the item or the convenience of review can be left to judgement.
For example, management might select to review non-critical SKUs every month and more critical SKUs every week.
Also the economics of using the EOQ model come in handy to facilitate optimisation
Operation of a Fixed- Period System (FPS)
at the time of the first review, a rather large amount of inventory (IP1) is in stock, so the order quantity (Q1) is relatively small. Demand during the lead time was small, and when the order arrived, a large amount of inventory was still available.
At the third review cycle, the stock level is much closer to zero because the demand rate has increased (steeper slope). Thus, the order quantity (Q3) is much larger. During the lead time, demand was high and some stockouts occurred.
Note that when an order is placed at time T, it does not arrive until time T 1 L. Thus, in using an FPS, managers must cover the risk of a stockout over the time period T 1 L, and therefore, must carry more inventory.
Summary of Fixed-Period Inventory Systems
The choice of which system to use—FQS or FPS— depends on a variety of factors, such as how many total SKUs the firm must monitor, whether computer or manual systems are used, availability of technology and human resources, the nature of the ABC profile, and the strategic focus of the organization, such as customer service or cost minimization.
The ultimate decision from an OM persepective is a combination of technical expertise and subjective judgment.
Many other advanced inventory models are available, but the FQS and FPS provide the foundation.
6. Single period inventory model
The single-period inventory model applies to inventory situations in which one order is placed for a good in anticipation of a future selling season where demand is uncertain.
At the end of the period the product has either sold out, or there is a surplus of unsold items to sell for a salvage value.
Single-period models are used in situations involving seasonal or perishable items that cannot be carried (inventory) and sold in future periods.
Single-Period Inventory Model
–Costs are defined as
–Optimal order quantity is the quantity of Q* that satisfies
P(demand ≤ Q*) = “cu” /”cu + cs”
Examples include clothing stores that must place orders as far as 6 months in advance of their selling seasons; or ordering dough (which stays fresh for only 3 days) for a pizza restaurant, or and purchasing seasonal holiday items such as Christmas trees.
In such a single-period inventory situation, the only inventory decision is how much of the product to order at the start of the period.
Because newspaper sales are a typical example of the single-period inventory problem is sometimes referred to as the newsvendor problem.
The newsvendor problem can be solved using a technique called marginal economic analysis, which compares the cost or loss of ordering one additional item with the cost or loss of not ordering one additional item.
7. Supply Chain Management and Logistics
Supply Chain Management (SCM) encompasses the management of all activities that facilitate the fulfillment of a customer order for a manufactured good, to achieve customer satisfaction at reasonable cost.
Requires several operational activity dimensions
1.Working closely with suppliers
2.Purchasing
3.Transportation
4.Inventory management
5.Managing risks that may disrupt the supply chain
6.Measuring supply chain performance
7.Ensuring sustainability
Logistics is a component of supply chain management which extends to the management of materials and transportation activities to ensure adequate customer service at reasonable cost
1.Vital to satisfy customers’ needs and expectations
2.Leads to efficiency in supply chain performance
3.Select transportation carriers
4.Manage company-owned fleets of vehicles, distribution centers, and warehouses
5.Control efficient interplant movement of materials and goods within supply chains
6.Ensure that goods are delivered to customers
APICS Supply Chain Council’s SCOR Model for Supply Chains
The Supply Chain Operations Reference (SCOR) model is a framework for understanding the scope of supply chain management (SCM) that is based on five basic functions involved in managing a supply chain:
1.Plan—Developing a strategy that balances resources with requirements and establishes and communicates plans for the entire supply chain. This includes management policies and aligning the supply chain planned or actual demand. This includes identifying and selecting suppliers, scheduling deliveries, authorizing payments, and managing inventory.
2.Source—Procuring goods and services to meet planned or actual demand. This includes identifying and selecting suppliers, scheduling deliveries, authorising payments, and managing inventory.
3.Make—Transforming goods and services to a finished state to meet demand. This includes production scheduling, managing work-in-process, manufacturing, testing, packaging, and product release.
4.Deliver—Managing orders, transportation, and distribution to provide the goods and services. This entails all order management activities from processing customer orders to routing shipments, managing goods at distribution centers, and invoicing the customer.
5.Return—Processing customer returns; providing maintenance, repair, and overhaul; and dealing with excess goods. This includes return authorization, or credit
Sourcing
Key activity in manufacturing
Obtaining raw materials, manufactured components, and subassemblies
Sourcing options for services
Employment agencies
Equipment maintenance and repair companies
Information systems providers
Third-party logistic firms
Engineering services
Health services
Retirement providers
Global sourcing – Seeks to balance various economic factors with delivery performance and quantity requirements
Purchasing
1.Responsible for acquiring raw materials, component parts, tools, services, and other items required from external suppliers
2.Acts as an interface between suppliers and the production function in goods-producing firms
3.Buys the goods necessary to perform services in service firms
Goals of Purchasing
Supporting key internal customers
Ensuring quality, delivery performance, low cost, and technical support
Seeking new suppliers and products continually
Being able to evaluate the strategic, market, and the economic potential of new suppliers and products to the company
Purchasing Responsibilities
1.Learn the material needs of the organization
2.Aggregate orders
3.Select qualified suppliers and negotiating price and contracts
4.Select transportation modes and mix
5.Ensure delivery, expedite, and authorise payments
6.Monitor cost, quality, and delivery performance by supplier worldwide
7.Maintain good relationships with: (i) Internal departments (ii) External suppliers (iii) Third-party logistic providers (iv) Transportation services
Integrate Supply & Value Chain
Supply chain integration is the process of coordinating the physical flow of materials to ensure that the right parts are available at various stages of the supply chain, such as manufacturing and assembly plants. From a broader perspective, drawing upon the value chain concepts in Chapter 1, we may define value chain integration as the process of managing information, physical goods, and services to ensure their availability at the right place, at the right time, at the right cost, at the right quantity, and with the highest attention to quality.
Value chain integration—where value is in the form of low prices, convenience, and access to special, time-sensitive deals and travel packages takes many forms.
8. Logistics
Logistics managers have the following three primary responsibilities:
1.Purchasing transportation services. ? Selecting appropriate modes of shipment and mix of specific carriers. ? Contracting with suppliers for domestic and global transportation services. ? Negotiating transportation rates, and shipping, insurance, and liability contracts. ? Managing international trade agreements, custom laws, and import/export fees. ? Using business analytics to evaluate different shipping options.
2.Managing the transportation of materials and goods through the supply chain. ? Tracing shipments in transit and expedite them when necessary. ? Coordinating shipments with airports, rail yards, and seaport docks. ? Issuing and auditing freight bills.
3.Managing inventories. ? Managing the flow of goods through warehouses, and sometimes, shipping directly to retail stores and customers. ? Filing claims for damaged goods.
The selection of transportation services is a complex decision, as varied services are available— rail, trucks, airlines/aircargo, ships, and pipeline.
Primary Responsibilities of Logistics Managers
a) Purchasing transportation services
b) Managing the transportation of materials and goods through the supply chain
c) Managing inventories
Consider leisure travel value chains include, Thomas Cook, Contiki, Topdeck, G Adventures and Travelocity which manage information purely to improve value chain more efficient and create value for their customers.
Electronic data interchange and Internet links streamline information flow between global customers and suppliers and increase the velocity of supply chains. Many firms now use cloud-based software for managing inventories in supply chains and synchronizing marketing and supply chain functions. Trucking companies track their trucks via global positioning system (GPS) technology as they move across the country, and many use in-vehicle navigational systems.
Purchase of Transportation Services involves:
Selecting appropriate modes of shipment and mix of specific carriers
Contracting with suppliers for domestic and global transportation services
Negotiating transportation rates and shipping, insurance, and liability contracts
Managing international trade agreements, custom laws, and import/export fees
Using business analytics to evaluate different shipping options
Management of Transportation of Materials and Goods through Supply Chain
Tracing shipments in transit and expedite them when necessary
Coordinating shipments with airports, rail yards, and seaport docks
Issuing and auditing freight bills
Inventory Management
Managing the flow of goods through warehouses and shipping directly to retail stores and customers
Filing claims for damaged goods
Vendor-Managed Inventory (VMI)
Vendor monitors and manages inventory for the customer
Advantages
Optimization of production operations
Better control on inventory and capacity
Reduction in total supply chain costs
Disadvantage
Substitutable products from competing manufacturers are not accounted for, resulting in higher than necessary customer inventories
Bullwhip Effect
Inventories exhibit wild swings up and down
Results from order amplification in a supply chain
Order amplification: Occurs when each member of a supply chain orders up to buffer its own inventory
Steps to Counteract Bullwhip Effect
9. Risk management in supply chains
Companies face a multitude of risks in managing supply chains.
Risks in domestic supply chains are often minimal; however, risks in global supply chains are much greater.
These include production problems with suppliers that result in material shortages, labour strikes, unexpected transportation delays, delays from customs inspection or port operations, political instability in foreign countries, natural disasters, and even terrorism.
Risk Management
Risk management involves identifying risks that can occur, assessing the likelihood that they will occur, determining the impact on the firm and its customers, and identifying steps to mitigate the risks.
On the tactical side:
1.Inventory Risks
2.Capacity Risks
3.Logistics and Scheduling Risks
Tactical Supply Chain Risks and possible Management Actions
On the strategic side:
1.Global Economic Risks
2.Government Risks
3.Product Risks
4.Security Risks
Strategic Supply Chain Risks and Possible Management Actions
10. Supply chains in e-commerce
E-commerce has greatly influenced the design and management of supply chains.
There are many types of supply chains other than business to customer (B2C).
Other major e-commerce relationships and supply chain structures include B2B—business to business; C2C—customer to customer; G2C—government to customer; G2G— government to government; and G2B—government to business.
E- Commerce View of Supply Chain
The e-commerce view of the supply chain shown above features details concerning intermediaries. An intermediary is any entity—real or virtual—that coordinates and shares information between buyers and sellers.
UPS Supply Chain Solutions (SCS), a subsidiary of the giant delivery company United Parcel Service (UPS), is a third- party logistics provider that can act as a return facilita- tor. UPS-SCS focuses on all aspects of the supply chain, including order processing, shipping, repair of defec- tive or damaged goods, and even staffing customer service phone centers.
Return facilitators specialize in handling all aspects of customers re- turning a manufactured good or delivered service and requesting their money back, repairing the manufactured good and returning it to the customer, and/or invoking the service guarantee.
11. Measuring supply chain performance
Supply chain managers use numerous metrics to evaluate performance and identify improvements to the design and operation of their supply chains. Business analytics is used to create a visual dashboard for supply chain managers to gain insights into the relationships between these metrics.
Common Metrics Used to Measure Supply Chain Performance
Supply chain metrics typically balance customer requirements as well as internal supply chain efficien- cies, and fall into several categories, as summarised.
12. Sustainability in supply chains
Today, sustainability is one of the key goals of supply chains.
Large amounts of harmful emissions and pollutants emanate from the supply chain.
Research suggests that upward of 60 to 70 percent of a company’s carbon footprint is found along their supply chain.
How much value does your company place on its supply chain?
Is that value at risk from blind spots or practises that could make you the next poster-child for corporate irresponsibility?
Will your Chief Procurement Officer be taking the rap for a reputational disaster for
your brand of potentially epic proportions?
Sustainable Supply Chain
Uses environmentally friendly inputs and transforms these inputs through change agents
Byproducts can improve or be recycled within the existing environment
Resulting outputs can be reclaimed and reused at the end of their life-cycle
Supplier Certification
Certified supplier: Supplies material of such quality that routine testing on each lot received is unnecessary
Provides recognition for high-quality suppliers, which motivates them to improve continuously and attract more business
Driven by performance measurement and rating processes
Examples of a Manufactured Goods Recovery (Reverse Logistics) Supply Chain
Recovering manufactured goods that will be discarded or unusable
Reuse or resell an equipment
Repair and refurbish a manufactured good
Remanufacture a good
Cannibalize parts
Recycle goods
Incineration or landfill disposal of goods
Reverse Logistics
Manages the flow of finished goods, materials, or components that are unusable or discarded
Uses supply chain from customers toward either suppliers, distributors, or manufacturers
Purpose – Reuse, resale, or disposal
Activities – Logistics, marketing/sales, accounting/finance, call center service, and legal/regulatory compliance
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