Inventory Inventory management is built on two frequently
Inventory ØInventory management is built on two frequently made decisions: • When to order • How much to order ØObjective of inventory management: • Strike the best balance between inventory investment and customer service
Functions of Inventory ØTo provide a selection of goods for anticipated customer demand to protect the firm from fluctuations in that demand ØTo decouple various parts of the production process ØTo take advantage of quantity discounts for inputs of production ØTo hedge against inflation and upward price changes, which increase the cost of inputs and labor
Types of Inventory ØRaw material inventory - Materials, usually purchased, that have yet to enter the manufacturing process ØWork-in-process inventory - Products or components that are no longer raw materials, but which have yet to become finished products ØMROs - Maintenance, Repair, and Operating materials ØFinished goods inventory - End items or products ready to be sold
Costs associated with managing inventory: ØHolding costs - The costs of holding or “carrying” inventory over time ØOrdering costs - The costs of placing an order and receiving goods ØSetup costs - Cost to prepare a machine or process for manufacturing an order, which may correlate significantly with setup time
To manage inventory, business leaders must recognize two types of demand for inventory: ØIndependent demand –The demand for the item is independent of the demand for any other item in inventory. • demand for finished products ØDependent demand –The demand for the item depends on the demand for some other item in the inventory. • demand for components, parts, and raw materials (the inputs of production)
Inventory Turnover (or Inventory Turns) ØA key metric in inventory management ØA number of times that the inventory is “turned” or replaced during a time period, usually a year. • More turns equals better inventory management, which translates • to a high rate of throughput and conversion to sales (cash) for the business. Companies that are managed well, especially those whose leaders have implemented TPS and Lean, typically exhibit high inventory turnover.
Fixed Quantity and Fixed Period Inventory Control Models ØFixed quantity (Q) system – An ordering system in which the same amount Q is ordered each time whenever the inventory level falls below the reorder point (ROP). • Requires a perpetual inventory system in which records are updated every time an item is added or withdrawn from inventory. ØFixed period (P) system – A system in which inventory orders are made at regular time intervals (P). • • Inventory is ordered at the end of a given period (such as a shift, day, week or month). Then and only then is on-hand inventory counted. Only the amount necessary to bring total inventory up to a prescribed target level (T) is ordered. The shorter the period, the higher the inventory turns. In JIT or TPS/Lean environments, periods can be as short as every shift or even every hour.
Service level -Measures the performance of the system -The complement of the probability of a stockout • Stockout – when an inventory item runs out -Should not be confused with fill rate • Fill rate – a measure of how effective inventory is at meeting demands
Supply Chain Management ØDescribes the coordination of all supply chain activities, starting with raw materials and ending with a satisfied customer ØIncludes activities required to manage the flow of materials, information, people, and money from the suppliers’ suppliers to the customers’ customers ØThe integration of and coordination between a number of traditional business functions, including purchasing, operations, transportation, distribution and logistics, marketing and sales, and information systems and technology ØObjective: to coordinate activities within the supply chain to maximize the supply chain’s competitive advantage and its benefits to the end user and consumer.
Managing Inventories and Sourcing ØGood supply chain management produces lower total system cost (lower inventory, higher quality, higher service levels, increased revenues, and increased profits for the supply chain). ØA key issue revolves around how the supply chain will share the benefits of improvements among players or partners in the supply chain.
Sourcing Strategies ØMany suppliers – may be used for commodity products, where purchasing is typically based on price. • The suppliers compete with each other, which produces cost savings for the buyer. ØFew or single supplier – the buyer forms longer-term relationships with fewer suppliers to create value through economies of scale and learning-curve improvements. • Suppliers are more willing to participate in JIT programs and contribute design and technological expertise, but the cost of changing suppliers (and bringing them up to speed) is high. ØVertical integration – integration may be forward, towards the customer, or backward, towards suppliers. • Can improve cost, quality, and inventory, but it requires capital, managerial skills, and demand; also risky in industries experiencing rapid technological change. ØJoint ventures – companies formally collaborate with one another. • Skills are enhanced, supply is secured, and costs are reduced, producing benefits for all of the participants.
Managing an Integrated Supply Chain ØIssues in managing the integrated supply chain: • Local optimization can magnify fluctuations. • The bullwhip effect occurs when orders are relayed through the supply chain, increasing at each step. • Incentives push merchandise into the supply chain for sales that • have not occurred. Large lots reduce shipping costs, but increase inventory holding costs and do not reflect actual sales.
ØOpportunities to address some of these issues: • Accurate “pull” data, shared information • Lot size reduction coupled with reduced ordering costs • Single-stage control of replenishment where there • • • is a single supply chain member responsible for ordering Vendor Managed Inventory (VMI), a common practice at the downstream supply chain partner Collaborative planning, forecasting, and replenishment (CPFR) throughout the supply chain Blanket orders against which actual orders are released Electronic ordering and funds transfer speed transactions and reduce paperwork Drop-shipping and special packaging bypasses the seller and reduces costs
Supply Chain Risks ØMore reliance on supply chains means more risk ØFewer suppliers increase dependence ØGlobalization and logistical complexity ØVendor reliability and quality risks ØPolitical and currency risks
Risk and Mitigation Tactics ØResearch and assess possible risks ØInnovative planning ØReduce potential disruptions ØPrepare responses for negative events ØFlexible, secure supply chains ØDiversified supplier base
Real-World Risk Mitigation Examples ØWhen Mc. Donalds opened in Russia, there was a real risk that local suppliers would fail to deliver the inputs ordered. • • One relevant risk reduction tactic is to use multiple suppliers, employ contracts with penalties, preplan the supply chain, and keep other subcontractors on retainer. Every plant involved in Mc. Donalds production in Russia — bakery, meat, chicken, fish, and lettuce — is closely monitored to ensure strong links and thus make on-time delivery more likely. ØDarden Restaurants, in an effort to avoid supplier quality failure, engages in careful supplier selection, training, certification, and monitoring. • It has placed extensive controls, including third-party audits, on supplier processes and logistics. This ensures constant monitoring and thus reduction of risk. ØWalmart has its own trucking fleet and employs numerous distribution centers throughout the United States. • • Using multiple, redundant transportation modes and warehouses, secure packaging, and contracts with penalties is one way to prevent logistics delays and damage to inputs. When necessary, Walmart finds alternative origins and delivery routes, bypassing problem areas.
Real-World Risk Mitigation Examples ØToyota trains its dealers around the world to monitor, select, and contract carefully with its distributors. • • • The principles of the Toyota Production System help dealers to improve customer service, usedcar logistics, and body and paint operations. Toyota also provides an excellent example of how to deal with the risk of natural disasters, such as earthquakes, fires, and tsunamis. It maintains at least two suppliers in different geographical regions for each component. ØBoeing uses a state-of-the-art internal communication system that transmits engineering, scheduling, and logistics data to Boeing facilities and suppliers worldwide. • The use of redundant databases, secure IT systems, and training of supply chain partners on proper interpretations and uses of information, helps prevent information loss or distortion. ØHonda and Nissan have moved manufacturing out of Japan as a means of combating economic risk. • • Hedging to combat exchange rate risk, and employing purchasing contracts that address price fluctuations, are other methods used to combat economic risk. The exchange rate for the Japanese yen makes Japanese-made automobiles more expensive. . . at least for the time being.
To Position Yourself for Profit, You Must Manage Inventory ØManaging the inputs of production — and ultimately making sure you have a product on the shelves to sell your customers — is a critical part of managing your business. ØTo position itself for economic advantage, a company must manage its inventory if it is to meet the anticipated demand for what it produces. ØSavvy business leaders must come to terms with inventory management as a critical component of ongoing operations.
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