Inventory

Management
Definition of inventory
control

Inventory control is the activity and methods of keeping the right level
of inventory .

Three questions:
– What should I keep on stock?
– How much to order?
– When to order?

Order Quantity

Reorder
Point

Safety Stock

Time

2 What is the right level?

Inventory finished products
and its traditional conflicts

VP Supply Chain • High inventory turns

• Maximum flexibility

Components Finished product

Supply Production Distribution

VP Purchasing VP Operations VP Sales

• Long runs – minimize • High service level

changeovers
• Safety stocks
Intermezzo: How much
inventory do you need?

Wants a
4 days
leadtime
? delivery in 1
week

supplier You customer

How much inventory do you need ?

• □ nothing
• □ a little bit
• □ enough
Reasons for Carrying
Inventory

The only good reason for carrying inventory beyond current

needs is if it costs less to carry it than not.
Inventory allows the company to operate with different
production rates and batch sizes throughout the supply,
production, and distribution system.
Inventory decouples . . .
Demand from Supply
Customer demand from Finished goods
Finished goods from Component availability
Output of one operation from Output of prec. operation
Materials to begin production from Suppliers of materials

© 2009 APICS 65

CONFIDENTIAL AND
Functions of Inventory

• Anticipation inventory
• Safety stock
• Lot-size inventory
• Transportation inventory
• Hedge inventory

© 2009 APICS 66

CONFIDENTIAL AND
CODP is important in
designing the planning
methods

supplier production distribution customer

parts
HF FG FG installation

CODP1
Make to local stock

CODP2
Make to stock

CODP3
assembly to order

CODP4
production to order

KCODP5
purchase to order

1) Customer Order Disconnection Point : how far does a customer order penetrate?

7
Inventory in TFC

Components

pallets
Finished product
pallets
Supply Mixing Bottling Distribution

tankyard

Explore
TFC
How much inventory in weeks and value in components and
finished products?
For what reasons we need inventory in this supply chain?

8
Inventory management

Balancing act of
• Service level offering to the market
• Production reliability
– Capacity
– Availability of components
• Safety stock and production frequencies
Inventory carrying Costs

Capital Storage
Costs Risk Costs
Costs

Obsolescence

Space Damage

Opportunity Cost Personnel Pilferage

Equipment Insurance

Deterioration
Cos of inventory versus out
of stock

Out of stock costs Inventory costs

– Cost of backorders – Capital
– Expediting costs – Storage
– Cost of complaints – Risk
– Revenue loss
– Loss of customers
– Idle time at your
customer

Explore
TFC

Estimate the inventory carrying costs for a finished product

The optimum safety stock is the
stock where the stock costs and
shortages are equal

costs/year
total

stock costs

costs of shortages

safety stock
optimum
safety stock

12
The optimum service level is
the service level with an
optimum safety stock

safety stock
Service level curve
optimum safety stock

min. 100% 98% 96% 94% 92%

costs service level
optimum
service level

13
What is the right
servicelevel?

In most cases this is a

€ management decision

profit
0
loss loss

costs
tevenu
result

optimum 100%
servicelevel

14
Optimal inventory is the desired
service level against minimal costs

Costs

Target level

Optimum

0
100% Target% Service level
Excersise

Costs
Today

Target level

Optimum

0
100% Target% Service level

-How to get this curve lower?

Service level

Stock finished
product
Production
reliability
(Past) shelf life

Production interval

Service level

Finished goods
Volatility of demand
warehouse

Promotion
Number of Order Bonus
pressure
employees deadline policy
and horizon
How much to order?

+ minimum +
Total costs
Ordering costs

Inventory costs

Order quantity

T S

18
Inventory in time

Order Quantity

Reorder
Point

Safety Stock

Time

• What is the influence of the ordersize of finished products?

• How to decide on the order size?

1-16
EOQ: Cost & Quantity
Relationships
1600

1400

EOQ
1200
Cost in Dollars

1000

800
Ordering Costs

600
Carrying Costs

Total Cost
400

200

0
0 200 400 600 800 1000 1200
Order Quantity
Source: Arnold et al., Introduction to Materials Management, 6th ed.
Reprinted by Permission of Pearson Education
© 2009 APICS 7  20
CONFIDENTIAL AND
Batch sizes
Manage Cost Tradeoffs

Inventory Carrying Costs Ordering Costs

But ordering in
Ordering in small small quantities
quantities minimizes requires more
inventory carrying orders and
costs increases order
costs

Managing tradeoffs by balancing

ordering costs and inventory carrying costs
The sensitivity of EOQ is
limited

% deviation from min cost

25%

20%

15%

10%

5% TCQ /TCEOQ
0%

-5%
-50% -40% -30% -20% -10% 0%
EOQ 10% 20% 30% 40% 50%

% deviation from EOQ

Is this all?
TC = total cost • Available production capacity?
• Customer value?

22
Ordering cost

• Administration
– Cost of supplier mgt and selsection
– Cost of order preparation
– Cost of invoicing and paiment
• Physical.:
– Cost of receiving and QC
– Cost of change over
• Other.:
– Transportation cost
– ..

23
Order quantity

O
Q

Time

O
Q

What is the influence of orderquantity on servicelevel?

Wjem to order

+ Minimuml +
Total Cost
Cost of
out of stock

Inventory cost

Safetystock

T S

25
Exercise: Safety stock

• For item X the following applies:

– Average consumption 100 pc/mth
– Delivery time 1 month
– Present stock 200 pc
– Service level-target 98 %

Question:
• When do you order?

26
Exercise : Safety stock

600 600 600

500 500 500

400 400 400

300 300 300

200 200 200

100 100 100

0 0 0
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12

600 600 600

500 500 500

400 400 400

300 300 300

200 200 200

100 100 100

0 0 0
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12

27
Exercise: Safety stock

• For item X the following applies:

– Average consumption 100 pc/mth
– Delivery time 1 month
– Present stock 200 pc
– Service level-target 98 %

Question:
• When do you order?

No idea!
28
Order Point System

Quantity Replenishment
in
inventory

A
A
Reorderpoint

Demand
during lead C C
time (DDLT) B
LT B LT

Safetystock

Time
Source: Adapted from CPIM Inventory Management Certification Review Course (APICS 1998).

2  29 © 2010 APICS CONFIDENTIAL

AND PROPRIETARY
How to decide on safety
stocks?

• Service level
• Production order quantity
• Demand uncertainty
• Supply uncertainty
In analytically determining
the safety stock, the starting
point is variation in demand

demand 
  

  
μ    
         
  
 
 


time frequency
µ = estimated demand

31
Optimal inventory is the desired
service level against minimal costs

Are you on the curve?

How to assess?

Costs
Today

Target level

Optimum

0
100% Target% Service level
Differentation of servicelevel
based on uncertainty and value

revenue
low high
uncertainty

low 99%? 95%?

high 95%? 90%?

Intermezzo: How much
inventory do you need?

2 weeks ? Fixed ? 1 day

leadtime period of leadtime
3 weeks

supplier RM FP customer

How much inventory do you need on both points ?

• nothing
• a little bit
• enough
Something to think
about

• Where do you prefer to have the highest service levels?

Components Finished product

Supply Production Distribution

• Is 95% component service level ok?

• Is 100% component service level ok?
Inventory of components

Order Quantity

Reorder
Point

Safety Stock
Time

What makes inventory management of components

different from finished products?
• service level and demand
• supply
• product
Something to think
about (cont)

Number of components

#=2 #=3 #=4

Component availability
90% 81% 73% 66%

95% 90% 86% 81%

98% 96% 94% 92%

Obsolete management

Obsoletes

Stock Customer agreements

Production Shelf life

Safety stock
interval agreements
Shelf life %
Agreement vs realisation

obsolete

Shelflife realisation= 85%

85%

Shelf life agreement= 70% Internal shelflife

Shelflife is 20 weeks