Supply Chain Management

Inventory Management
 Inventory Management

 Inventory refers to stocks of goods and materials that

are maintained for many purposes, the most common

being to satisfy normal demand patterns.

 Inventory Management

 Inventory management
Inventory decisions drive other business activities like:
 Warehousing
 Transportation
 Materials handling
Objectives can differ for different functional areas of an
organization
 Inventory Management

 Inventory management
Must consider inventory costs
Carrying costs
Ordering costs
Stockout costs
 Inventory Classifications

 Cycle or base stock refers to inventory that is needed

to satisfy normal demand during the course of an
order cycle.

 Safety or buffer stock refers to inventory that is held

in addition to cycle stock to guard against uncertainty
in demand or lead time.
 Inventory Classifications

 Pipeline or in-transit stock is inventory that is en route

between various fixed facilities in a logistics system such as
a plant, warehouse, or store.

 Speculative stock refers to inventory that is held for

several reasons, including seasonal demand, projected
price increases, and potential shortages of a product.

 Psychic stock is inventory carried to stimulate demand

(retail).
 Inventory Costs

 Inventory costs in the twenty-first century represent approximately

one-third of total logistics costs.

 Inventory cost should factor into an organization’s inventory

management policy.

 Inventory costs include:

Carrying cost
Ordering cost
Stockout cost
 Inventory Costs

 Inventory carrying (holding) costs

 the costs associated with holding inventory.

 In general expressed in percentage terms and this percentage is

multiplied by the inventory’s value

 Resulting number represents dollar value associated with

holding the particular inventory
Inventory Costs
Inventory Costs
 Inventory Costs

 Obsolescence category of inventory carrying costs and refer to

the fact that products lose value through time.

 Inventory shrinkage: refers to the fact that more items are

recorded entering than leaving warehousing facilities.

 Inventory Costs

 Shrinkage is generally caused by damage, loss, or theft and

although shrinkage costs can be reduced, such efforts often
generate other costs.

 For example , although better packaging may reduce damage

,or loss better packaging likely translates into increased
packaging costs.
 Inventory Costs

 Storage costs: refers to those costs associated with occupying

space in a plant, storeroom , or warehousing facility.

 Handling costs: involve the costs of employing staff to receive,

store, retrieve , and move inventory.

 Insurance costs : which insure inventory against fire, flood, theft,

and other risks, are another component of inventory carrying
costs.
 Inventory Costs

 Taxes : represent yet another component of inventory carrying

costs, and they are calculated on the basis of the inventory on

hand on a particular date.

 Interest costs : take into account the money that is required to

maintain the investment in inventory.

 Inventory Costs

 Opportunity costs: the costs of taking a position in the wrong

materials.

 This can be an issue for those companies that engage in

speculative inventory.

 Opportunity costs are also incurred by firms that hold too

much inventory in reserve for customer demand.
 Inventory Costs

 Ordering costs refer to those costs associated with

ordering inventory, such as order costs and setup

costs.
 Inventory Costs

 Examples of order costs include:

Costs of receiving an order (wages)

Conducting a credit check

Verifying inventory availability

Entering orders into the system

Preparing invoices

Receiving payment
 Inventory Costs

 Trade-Off between Carrying and Ordering Costs

Costs respond in opposite ways to the number of orders or size of
orders

An increase in the number of orders leads to higher order costs

but lower carrying costs
 Inventory Costs

• Calculations:
Ordering = # of orders per year x ordering cost per order
Cost

Carrying = average inventory x carrying cost per unit

Cost
 Inventory Costs

 Stockout costs

 an estimated cost or penalty for a stockout

 involve an understanding of a customer’s reaction to a company

being out of stock when a customer wants to buy an item

Inventory Costs
 Inventory Costs

 General Rules Regarding Stockout Costs

The higher the average cost of a stockout, the better it is for the
company to hold some amount of inventory (safety stock) to
protect against stockouts.

The higher the probability of a delayed sale, the lower the average
stockout costs and the lower the inventory that needs to be held by
a company.
 Inventory Costs

 Trade-Off between Carrying and Stockout Costs

Costs move in opposite directions

Higher inventory levels (higher carrying costs) result in lower

chances of a stockout (lower stockout costs)

 When to Order

 Key issue involves when product should be ordered

Can order a fixed amount of inventory (fixed order quantity

system)

Or orders can be placed at fixed time intervals (fixed order

interval system)
 When to Order

• Reorder (trigger) point (ROP)

Level of inventory at which a replenishment order is placed

Necessary for efficient fixed order quantity system

 When to Order

• Reorder Point (ROP) calculations:

ROP = DD x RC under certainty

ROP = (DD x RC) + SS under uncertainty

Where DD = daily demand

RC = length of replenishment cycle

SS = safety stock
 How Much to Order

 Economic order quantity (EOQ)

 Deals with calculating the proper order size with respect to
two costs
 Costs of carrying the inventory
 Costs of ordering the inventory
 Determines the point at which the sum of
carrying costs and ordering costs is minimized,
or the point at which carrying costs equal
ordering costs
 How Much to Order

• Economic order quantity (EOQ) in dollars

Where:
EOQ = the most economic order size, in dollars
A = annual usage, in dollars
B = administrative costs per order of placing the order
C = carrying costs of the inventory (%)
 How Much to Order

• Economic order quantity (EOQ) in units

Where:
EOQ = the most economic order size, in units
A = annual demand, in units
B = administrative costs per order of placing the
order
C = carrying costs of the inventory (%)
I = dollar value of the inventory, per unit
How Much to Order
How Much to Order
Inventory Flows
 Inventory Flows

 Safety stock can prevent against two problem areas

Increased rate of demand
Longer-than-normal replenishment

 When fixed order quantity system like EOQ is used, time

between orders may vary
 When reorder point is reached, fixed order quantity is
ordered
 Inventory Management: Special
Concerns

 ABC Analysis of Inventory

recognizes that inventories are not of equal value to a firm
as such all inventory should not be managed in the same
way

 Dead inventory (dead stock)

is a fourth category, D, to ABC analysis where D stands for
either “dogs” or dead inventory (dead stock)
refers to product for which there is no sales during a 12
month period.
 Inventory Management: Special
Concerns

 Inventory Turnover
 number of times that inventory is sold in a one-year period.
(Compare with competitors or benchmarked companies
Inventory turnover = cost of goods sold
average inventory
 Complementary Products
inventories that can be used or distributed together, i.e. razor
blades and razors.

 Substitute Products
products that can fill the same need or want as another product.
Transportation

Copyright © 2015 Pearson Education, Inc.

 Transportation

 Transportation is the actual, physical movement of

goods and people between two points. It carries the

goods as they move along the chain.

37
 Transportation Modes

 The attractiveness of a particular mode depends on the following attributes:

 Cost: price that the carrier charges to transport a shipment

 Speed: elapsed transit time from pickup to delivery
 Reliability: consistency of delivery
 Capability: amount of different types of products that can be transported
 Capacity: volume that can be carried at one time
 Flexibility: ability to deliver the product to the customer
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 Basic Transportation Modes
39
 Motor Carriers
40

 Can carry majority of consumer goods.

 Compete with air carriers for small shipments and rail carriers for
large shipments.

 Most flexible mode and offers customers fast, reliable service,

with low levels of damage or loss.

 The only mode that offers point-to-point market coverage.

 Railroads
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 Dominant transportation mode in many regions like Europe and

China.

 Lacks flexibility of motor carriers because of limited rail network

and fixed track facilities.

 They tend to transport lower-value, high volume shipments of bulk-

type commodities such as coal, chemicals, farm products and others.

 Less costly than air and motor.

 Airfreight
42

 Viewed as a premium service because of its higher costs.

 Airfreight is best suited for high-value, lower-volume products that are of a

perishable nature or otherwise require urgent or time-specific delivery.

 Cannot be cost-justified for low-value items, because the great cost of air

freight would represent too high a percentage of a product cost.

 Customers choose air transport only when service issues are more important

than cost
 Airfreight

 Examples of products:
 Auto parts and accessories

 Electronic or electrical equipment (cell phones)

 Fruits and vegetables

 Wearing apparel

 Printed matter
 Water
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 The majority of commodities are semi-processed or raw materials

transported in bulk.

 Most inexpensive method of shipping high-bulk, low-value

commodities.

 Limited by the availability of lakes, rivers or canals.

 Many domestic and most international shipments involve the use of

containers.
 Containers
45

 A uniform sealed reusable “box” in which goods are shipped.

 Enables the transfer of goods from the vehicle of one mode to another
without the content being reloaded or disturbed.

 Containers enable minimal handling of the items, reduce staffing

needs, minimize in-transit damage.
 Pipelines
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 Are a unique mode of transportation  the only one without vehicles.

 They transport only a limited number of products (natural gas, crude oil,
petroleum products, water and chemicals).

 Are the most reliable form of transportation; i.e. they offer shippers an
extremely high level of service dependability at a relatively low cost, because:
 Flows of products within the pipeline are monitored and
controlled by computers.
 Loss and damage due to pipeline breakage is extremely
rare.
 Climate conditions have minimal effects.
 Pipelines are not labor intensive.
 Intermodal Transportation
47

 Occurs when two or more modes work closely together to move goods from
origin to destination.
 It utilizes the advantages of each mode while at the same time minimizes their
disadvantages.
 A form of intermodal transportation is piggyback transportation.
Piggyback transportation:
 Container-on-flatcar:

 Truck trailer-on-flatcar:
 Piggyback transportation
48

 The company might put either a truck trailer on a flatcar or a

container on a flatcar.

 The flatcar moves by rail for long distances.

 A motor carrier then moves the container for short distance pickups
and deliveries.

 It takes advantage of rail’s low transportation costs and the truck’s

ability to provide door-to door service