Introduction to operations and supply chain management 3e bozarth chapter 11

 Calculate the target service level and target stocking point for a single-period inventory system.. Dependent Demand Inventory  Independent demand inventory – Inventory items whose de

Managing Inventory throughout

the Supply Chain

Chapter 11

Chapter Objectives

Be able to:

 Describe the various roles of inventory, including the different types of inventory and inventory drivers

 Distinguish between independent demand and dependent demand inventory

 Calculate the restocking level for a periodic review system

 Calculate the economic order quantity (EOQ) and reorder point (ROP) for a continuous review system

 Determine the best order quantity when volume discounts are available

 Calculate the target service level and target stocking point for a single-period inventory system.

 Describe how inventory decisions affect other areas of the supply chain In particular, describe the bullwhip effect, inventory positioning issues, and the impacts of

transportation, packaging, and material handling considerations

Inventory Management

 Inventory – Those stocks or items used to

support production (raw materials and in-process items), supporting activities

work-(maintenance, repair, and operating supplies) and customer service (finished goods and

spare parts). © 2010 APICS Dictionary

Types of Inventory

received in bulk by a downstream partner, gradually used up, and then replenished again in bulk by an upstream partner.

to protect itself against uncertainties in either

demand or replenishment time.

Types of Inventory

anticipation of customer demand.

buffer against some event that may not happen.

© 2010 APICS Dictionary

Types of Inventory

from one link in the supply chain to another.

smooth out differences between upstream

production levels and downstream demand.

Inventory Drivers

 Inventory drivers – Business conditions that force companies to hold inventory.

Table 11.2

Independent vs Dependent

Demand Inventory

 Independent demand inventory – Inventory items whose demand levels are beyond a

company’s complete control.

 Dependent demand inventory – Inventory items whose demand levels are tied directly

to a company’s planned production of

another item.

• Kitchen table legs – Need 4 per table or 2,000 legs

• Calculation of dependent demand (Chapter 12)

Inventory Control Systems

is used to manage independent demand inventory where the inventory level for an item is checked at regular intervals and restocked to some

predetermined level.

used to manage independent demand inventory where the inventory level for an item is constantly monitored and when the reorder point is reached,

an order is released.

Periodic Review System

Calculating the order quantity ( Q)

Periodic Review System

Calculating the restocking level (R)

Calculating Service Level

of demand to be met under conditions of demand and supply uncertainty.

period and the order lead time is normally

distributed.

Continuous Review System

 Key features:

 Inventory levels are monitored constantly, and a

replenishment order is issued only when the reorder point

is reached.

 The size of a replenishment order is typically based on the trade-off between holding costs and ordering costs.

 The reorder point is based on both demand and supply

considerations, as well as on how much safety stock

managers want to hold.

Continuous Review System

 Assumptions:

 Price of each unit is fixed.

Continuous Review System

When the demand rate and lead time are constant:

Reorder point = demand x lead time

R = dL

Economic Order Quantity

quantity that minimizes annual holding and

ordering costs for an item.

 Holding costs (H)– The cost to hold a single unit in

inventory for a year.

 Ordering costs (S) – The cost of placing an order regardless

of the order quantity.

Total Yearly Inventory Costs

Total holding and ordering costs for the year = Total yearly holding cost + Total yearly ordering cost =

Yearly holding cost = average inventory x holding cost

Yearly ordering cost = number of orders per year x fixed ordering cost

Comparing Ordering Costs to EOQ

Figure 11.9

Example 11.2

Annual demand (D) = 4,000

Annual holding cost (H) = $15

Ordering cost (S) = $50/order

Order quantity (Q) = 1,000 fans

Reorder Points and Safety Stock

 When demand rate (d) and lead time (L) are constant:

 When demand rate (d) and lead time (L) or both varies:

The impact of varying demand rates and lead time

Figure 11.10

Causes of Variability

 The variability of demand

 The variability of lead time

 The average length of lead time

 The desired service level

Reorder Point

 Reorder Point =

Example 11.3

Example 11.3

 Calculate Safety Stock:

Calculate Reorder Point:

Quantity Discounts

 Quantity Discounts – Price reductions for ordering larger quantities.

Quantity Discounts

 Two-step process:

1 Calculate the EOQ If the EOQ represents a quantity that

can be purchased for the lowest price, stop – we have found the lowest cost order quantity Otherwise, go to Step 2.

2 Compare total holding, ordering, and item costs at the

EOQ quantity with total costs at each price break above the EOQ There is no reason to look at quantities below the EOQ, as these would result in higher holding and ordering costs, as well as higher item costs

Example 11.4 – Hal’s Magic Shop

Example 11.4 – Hal’s Magic Shop

 Because 115 is not eligible for the lowest price, calculate total cost at 115:

Example 11.4 – Hal’s Magic Shop

 And compare to total cost at next price break

or 201.

 Price is cheaper at the 201 price break.

Single-Period Inventory System

 When excess inventory cannot be held in the future, firms must weigh the cost of being

short against the cost of holding excess units.

 Examples:

trees

Single-Period Inventory System

 Single-period inventory system – A system used when demand occurs in only a single point in time.

 Goals:

 Determine a target service level (SL T ) that strikes the best balance between shortage costs and

excess costs.

target stocking point (TS) for the item.

Single-Period Inventory System

 Target service level – The service level at

which the expected cost of a shortage equals the expected cost of having excess units.

 Target stocking point – The stocking point at which the expected cost of a shortage equals the expected cost of having excess units.

Target Service Level

OR

Target Service Level

 The target service level (SL T ) is the p value at which holds true

Target Stocking Point

Inventory in the Supply Chain

 Bullwhip Effect

 An extreme change in the supply position upstream in a supply chain generated by a small change in demand downstream in the supply chain

 Inventory Positioning

 Cost and value increases and flexibility decreases down the supply chain.

 Transportation, Packaging, Material Handling

 Physical size and quantity of lot, how it is packaged, material handling equipment needed, and disposal of packaging are all factors in

choosing appropriate supplier and distribution process.

© 2010 APICS Dictionary

Demand vs Order Size The Bullwhip Effect

Managing Inventory

Case Study

Northcutt Bikes: The Service

Department

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