BackgroundBut what has been the result?BottomlineBackgroundClassification of InventoryWhy hold inventory?Fundamental Purpose of InventoryCycle Stock & Safety StockRelevant CostsDimensions of Inventory ModelingInventory ManagementCapliceLecture 4ESD.260 Fall 2003© Chris Caplice, MIT2MIT Center for Transportation & Logistics – ESD.260BackgroundInventory is largest component of logistics $1.44 Trillion in 2002Used as the metric for a ‘healthy’ firm Inventory Turnover Inventory Days of Sale Inventory/Sales Ratio Inventory / COGSSource of many programs and initiatives to reduce total inventory investment VMI, JIT, MRP, DRP, CFRP© Chris Caplice, MIT3MIT Center for Transportation & Logistics – ESD.260But what has been the result?© Chris Caplice, MIT4MIT Center for Transportation & Logistics – ESD.260BottomlineInventory is not bad. Inventory is good. Inventory is an important tool which, when correctly used, can reduce total cost and improve the level of service performance in a logistics system.© Chris Caplice, MIT5MIT Center for Transportation & Logistics – ESD.260BackgroundQuestions to answer What items to carry as inventory? Where should these be maintained? In what form should they be maintained? How much of each should be held? Things to consider in the inventory decision Benefit of having inventory Total cost of inventory Potential alternatives for inventory© Chris Caplice, MIT6MIT Center for Transportation & Logistics – ESD.260Classification of InventoryValue addedCycle Stock versus Safety StockMulti-Echelon Multi-Indentured© Chris Caplice, MIT7MIT Center for Transportation & Logistics – ESD.260Why hold inventory?Cover process time Allow for the uncoupling of processes Economies of scale Dealing with uncertainty / bufferAnticipation & SpeculationMinimize control costs© Chris Caplice, MIT8MIT Center for Transportation & Logistics – ESD.260Fundamental Purpose of InventoryTo Reduce Total System Cost To buffer uncertainties in:-supply,- demand, and/or- transportationthe firm carries safety stocks. To capture scale economies in:-purchasing,- production, and/or- transportationthe firm carries cycle stocks.© Chris Caplice, MIT9MIT Center for Transportation & Logistics – ESD.260Cycle Stock & Safety StockCycleStockCycleStockCycleStockSafety StockOn HandTime© Chris Caplice, MIT10MIT Center for Transportation & Logistics – ESD.260Relevant CostsWhat makes a cost relevant?Components Purchase Cost Ordering Cost Holding Cost Shortage Cost© Chris Caplice, MIT11MIT Center for Transportation & Logistics – ESD.260Dimensions of Inventory ModelingDemand Constant vs Variable Known vs Random Continuous vs Discrete Lead time Instantaneous Constant or Variable (deterministic/stochastic)Dependence of items Independent Correlated IndenturedReview Time Continuous PeriodicDiscounts None All Units or IncrementalExcess Demand None All orders are backordered Lost orders SubstitutionPerishability None Uniform with timePlanning Horizon Single Period Finite Period
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