Learning Outcomes: Management of Stocks A [Link] the benefits of effective stock management. A [Link] the development of stock replenishment policies. /_ [Link] the understanding of service level setting. VY [Link] the advantages and disadvantages of holding inventories. Y_5.Explain the core elements of inventory management.Benefits of Stock Management Financial and Operational Justification Ss = Cost Efficiency: Effective management maintains a “healthy balance” of inventories, leading to substantial cost savings. ‘Competitive Advantage: Firms can pass savings to customers through lower prices. did Profitability: Lower prices generate higher sales volume, ultimately increasing profits. O Operational Efficiency: Efficient systems allow goods to be replaced without the capital burden of ‘maintaining excessively large quantities of stock.Stocks as a Strategic Buffer Supplier NA Customer Uncertainty Demand (Late Deliveries) wr (Fluctuations) Cushioning Uncertainty: Inventory _ Service Protection: It protects the Continuity: Good management acts as a buffer to absorb the impact. firm against inefficient services ensures a firm is never caught off- of late deliveries by suppliers. within the supply chain and ‘guard by insufficient supplies, fluctuating, uncertaindemands. _ preventing disruptions in production ‘schedules and customer shipments.Stock Replenishment Policies The Operational Context: © Natural Depletion: Stock naturally depletes, as orders are received and dispatched to customers. © Policy Definition: Replenishment policies are the rules that determine whether an. inventory system is executed and maintained effectively. © Function: These policies guide the daily operations of the inventory system to ensure sustainability.Three Major Replenishment Decisions The Quantity to Order Time to Order Determining exactly how Deciding the specific time much stock to purchase or stock level at which to once the replenishment place an order to minimize decision is triggered. the risk of a stock-out. System Operations Establishing procedures to maintain up-to-date information on stock levels (eg,, systems that warn when items fall below safety levels).erview of Inventory Cost © The Cost Equation: Costs added on top of the item price consist of holding costs, ordering costs, and stock-out costs. Ordering Costs © The Balancing Act: These costs often have an inverse relationship with one another (eg, high holding costs usually mean low stock-out costs). © The Goal: A good control system strives to balance = these three costs to obtain maximum benefits. Stock-out CostsInventory Cost: Holding Costs The Cost of “Having” Definition: Costs associated with carrying inventory over a period of time. Cost Components: © Facilities: Storage area costs including rentals, power, security, and insurance. © Operations: Record keeping and labor. © Financial: Interest on loans i financing the inventory. @& © Risks: Product deterioration, spoilage, and obsolescence.Inventory Cost: Ordering Costs The Cost of Replenishing Definition: Costs incurred during the process of replenishing stock. Shipping and custom taxes. © Administrative: Stationery and record keeping. © Labor: Processing requisitions, purchase orders, and receiving goods.Inventory Cost: Stock-out Costs The Cost of Failing Definition: Costs occurring when customer demands are not met due to depleted inventory. Impact: * Customer Impact: Dissatisfied customers, loss of goodwill, and lost sales. © Operational Impact: Disruptions in production schedules. Financial |mpact: Potential penalty charges paid to disgruntled customers.Basic Economic Order Quantity (EOQ) The Concept: The EOQis the optimal order size that keeps the sum of carrying and ordering costs at the minimum level. Carrying cost The Trade-off: + Fewer Ordering Cycles: Leads to larger order sizes > Higher carrying costs. ‘+ More Frequent Orders: Leads to smaller Ordering cost sizes > Lower carrying costs but higher ordering effort/cost. Cost (dollars) 0 EOQ Order size (units)Assumptions of the EOQ Model To apply the basic EOQ model, the following assumptions are made: 1. Simultaneous Receipt: Orders are received at the same time (instantaneous replenishment). 2. Constant Lead Time: The time between placing and receiving an order does not fluctuate. [Link]: Demands are known with certainty.The Inventory Order Cycle Order quantity gorder point Inventory Lead time Time 1. Usage: A quantity (Q) is received and used up over a constant period of time. 2. Trigger: When inventory drops to a specific ‘reorder point; anew order is placed. [Link]: The order is received just in time to replenish stock back to the original quantity.The Reorder Point (R) Definition: The reorder point is the inventory level on hand when a new order R == d x. / must be placed. Objective: d= demand rate per period This calculation ensures the new L=lead time shipment arrives exactly before the existing stock is exhausted.Brample3 ‘The maer ofa steel cenpany wants to plce a oder or ual to been the ‘ght rumaces i the prevution Horr heat eaten Each Furnace requires {Beton fal pr day to operate ae the company rans 35 ays ye The rer costs RMINS por err cot of coal 1 RE por tonne and te cost ot Folding slr 5' of he average monetary val of invortory hed. Detersine: (©) Thooptimal quantity of ol tbe recived ines odor (©) The tot inventory costs assciated with the optimal ordering Ply (dominate he cont he al) ed (6) The quantty of cal that shouldbe on hand when an order pics, 110 days ade rele wo vee ances ‘lee peat sina Fe kf nl per dy pr fan Boma “Cie pe C84) = RM porte opin sy cline moe neon, asia, ey ot nd artProbability Service Level Setting & Uncertainty Demand During Lead Time Stock-out Risk 10% Managing Risk: * Service Level: The probability that inventory will meet demand during lead time. * Demand During Lead Time (DDLT): The demand placed on inventory while waiting for an order to arrive. Subject to variation. Safety Stock: + When demand is uncertain, the Reorder Point is adjusted. * Formula logic: Order Point = Expected DDLT + Safety Stock.Service Level: The Probability of Reliability. Service Level Definition: The probability that inventory on hand will meet customer demand during the lead time without a stock-out occurring. Example: A 90% Service Level = 0.90 probability of fulfillment. Service Level (90% Probability of ‘The Managerial Trade-off: Meeting Demand) Managers must balance the cost of holding “safety” inventory against the cost of lost sales. Higher service levels require exponential capital investment. Average Reorder Point Demand (with Safety Stock) ‘Stock-out Risk (10% Probability)Navigating Un certainty: Demand During Lead Time (DDLT) Why simple averages fail in the real world. Supplier Uncertainty Customer Uncertainty (Delays, Processing Issues) _ (Demand Spikes/Soars) A e - - >e Order Placed > Order Received Lead Time The Concept The Variables The Solution Demand During Lead Time (ODLT) is__Static plans are ruined by dynamic Accurate order points cannot be the specific consumption of stock reality. Supplier stock-outs, shipping guesses. They require rigorous that occurs while waiting for: replenishment order to arrive. a interruptions, or sudden unforecasted analysis of historical demand data sales spikes create variance, and probability distributions.The Safety Net Formula: Calculating Order Points. A calculated approach to manage risk and ensure availability. Order Expected Safety Point = Demand + Stock (OP) (EDDLT) (SS) OP Demand Levels x Historical Frequency. Calculation: Order Point - EDDLT. Pre ‘Meaning: What we mathematically expect. + Meaning: The Insurance policy. Extra to sell based on averages. inventory held specifically to protect against the variance and stock-out risks identified in the previous slide.Pao » eet dt | co eae 18 gent he ABO a 6 Remmgane ite (© ote wetsuit ain (Bee on br pra He wane “The expected demand ding lead ine (EDDLT) cn be ound ‘mutplyng te demand levels by the rues an ing te ‘bythe mumbo erro Te Bde daS 5B OK TAD BD (152488 “The rnuing lective salty socks ‘Oder Poin (OP) =EDDLT + Sat Stock ‘SleySack — =0P-EDDLI 48-112 4ake3) We should ot be ety concert wih the ale of 112 on ey sok, Srbow can aoa ake ie lhe vals of 12. Te portant ing othe oder ot fou tbe tren ci oh ef tehoe oe wl be taken om Deisous Caso. Th zen Ses Ire eleivly the sey ck who the rer pin ct att oeThe Modern Context: Inventory in ia Global Economy. The Old Way (Generous Stocking) Strategy: Keep large buffer stocks. Goal: Minimize transport and ordering costs. Result: High storage costs, low agility. Pee ceeeienct emacs a The New Reality (Lean & Precise) 1" Driver: Global Competition. Constraint: Product Evolution. Technology and fashion feature shorter shelf-lives, making long-term storage risky. Result: Inventory is now a liability if not moving. Precision is required over volume. they are a risk of obsolescence.The Case For Inventory: Strategic Advantages Economies of Scale Price Leverage Lower Ordering Costs. Quantity Discounts. Consolidating needs into fewer, Suppliers frequently offer price larger orders reduces breaks for bulk purchases, administrative processing and reducing the per-unit cost. receiving frequency. Logistics Efficiency Customer Reliability Reduced Freight. Prevention of Disruption. smu ull Larger orders amortize shipping i eh Adequate inventory acts as a and handling charges across @® buffer against supply chain shocks, TOMMO® more units NZ. ensuring customer satisfaction is never compromised,The Case Against Inventory: Financial Disadvantages Carrying Costs Diluted ROI Depreciation & Risk The ‘hidden’ Inventory is an ‘The risk of time. operational costs of asset sitting idle. It Driven by rapid holding stock. does not generate product evolution, Includes immediate returns, stock loses value warehouse rental, thereby diluting the the longer it sits. insurance premiums, company’s overall Obsolet ventory security, and Return on leads to direct interest on capital Investment financial write-offs. tied up in stock. compared to active capitalCase Study: The [Link] Pivot. From "Virtual" Retailer to Inventory Master. The 1995 Vision The Reality ‘Jeff Bezos' original intent: A ‘virtual retailer. Strategy: Zero inventory, zero warehouses. Outcome: Failure to meet customer service expectations, High stock outs and delays, “The Pivot: Massive investment in physical inventory and global warehousing ‘Outcome: Precise stock management enabled 2-day delivery dominance. Result: Scaled to one ofthe world’s largest retailers ($48 billion revenue in 2011). Key Insight: You cannot dominate retail without mastering the phy: aeDemand Types: Independent vs. Dependent. Independent Demand Market Driven, Unrelated to other products. Must be FORECASTED. Example: Consumer desire for Frozen Cakes. Drives requirement for... Dependent Demand Production Driven. Derived directly from the schedule of the parent item. Should be CALCULATED. Example: Flour needed to bake the specific number of cakes ordered.Executive Summary: Management of Stocks. S The Core Policy S The Cost Triad Effective management requires Decisions are driven by minimizing the answering two fundamental questions: sum of Holding Costs, Ordering Costs, How much to order? When to order? and Stock-out Costs. f The Optimization Tool ‘ f The Reliability Metric Economic Order Quantity (E0Q) is the Service Level is the probability of mathematical tool used to balance meeting demand during lead time. It is a carrying vs. ordering costs. strategic choice between cost and customer satisfaction. VS The Scope Inventory is not just finished goods; it encompasses the entire ecosystem from raw materials to maintenance supplies.