Topic 3 Definitions Inventory refers to stocks of goods and materials that are maintained for many purposes the most common being to satisfy normal demand patterns The fundamental purpose of inventory is to achieve high fill rates supply that meets demand Reasons for maintaining inventory a Allow geographic specialization separation b Achieve economies of scale c Balance supply availability and seasonal demand d Buffer against uncertainty in demand sudden increases and lead time replenishment cycle execution High Inventory levels yield Low Inventory levels yield Stockout protection wide variety and selection Short lead times Use stock as an insurance policy Low holding costs inventory carrying costs Easier and more accurate control of inventory A focus on quality execution no cushion of safety stock Being lean forces encourages perfect quality Inventory Carrying Costs Average Inventory units Value of unit Inventory Carrying Cost A higher APR means the ICC equation will generate a higher sum Inventory Carrying Costs as a percentage of total logistics could be between20 40 Components of Inventory Carrying Costs Opportunity cost of capital Interest cost largest component Obsolescence costs Inventory shrinkage Storage costs Handling costs Insurance costs Taxes Cycle or base stock refers to inventory that is needed to satisfy normal demand during the course of an order cycle expect to sell Safety or buffer stock refers to inventory that is held in addition to cycle stock to guard against uncertainty in demand or lead time Factors influencing safety stock o o o o Forecast Error Exposure to stock out Lead Time Service Level requirement Inventory Classifications Pipeline or in transit stock is inventory that is en route between various fixed facilitities in a logistics system such as a plant warehouse or store don t yet have in possession Speculative stock refers to inventory that is held for several reasons including seasonal demand projected prive increases and potential shortages of a product Psychic stock is inventory carried to stimulate demand retail similar to impulse item concept spur of the moment Dead stock inventory that has lost its value i e no sales in a 12 month period 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 safety stock SS 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 Four Basic Inventory Models Fixed Quantity Fixed Time Newspaper Fixed Quantity Irregular Time Keep it coming Q System EOQ 3 4 Irregular Quantity Fixed Time Irregular Quantity Irregular Time Just in Time P System Min Max Wait and See When to order Reorder point Point in which inventory is to be re purchased ordered Under certainty ROP DD x RC RC is lead time Under uncertainty ROP DD x RC SS Inventory Shrinkage Expect inventory to be there and it s not 1 2 How much to order EOQ represents order quantities where carrying and ordering costs are balanced employed in the Q System Segment Products ABC Classification Maintain Inventory Availability Accordingly Ensure ready availability of A products Try to anticipate demand of B products Phase out or consolidate C products When ordering cost carrying cost total cast is at its minimum Assumptions o o o Continuous constant and known rate of demand Constant and known replenishment or lead time Constant purchase price independent of order quantity All demand is satisfies o o No inventory in transit o Unlimited capital availability Rank inventory in importance according to the criterion o o o A high priority B moderate priority C low priority Contemporary Approach to Managing Inventory Lean Manufacturing Service Parts Logistics Vendor Managed Inventory Topic 4 Definitions Warehousing refers to that part of the firm s logistics system that stores products raw materials parts goods in process finished goods at and between points and point of consumption Warehousing is a 112 billion annual logistics cost and is 9 of the total business logistics spend Warehousing employs over 2 million workers annually at 52 billion in wages Warehousing and transportation are substitutes for each other with warehousing having been referred to as transportation at zero miles per house Reasons for Warehousing To effectively and efficiently meet the firm s logistics objectives by protecting the inventories that Support the customer service objective ensuring availability Smooth production covering demand peaks Allow the firm to take advantage of economies in Procurement quantity discounts o o o Production economies of scale Transportation economies of scale Support form postponement LTL Less than Truck Load Cost changes by unit lower cost is the entire large truck is utilized typically flat rate LTL less than 15 000 lbs generally and needs terminals TL beyond 15 000 lbs How can you grow your market a Presence Lead time b Those are achieved from providing a central warehousing location Warehousing Management allows rearranging of products as they move through the chain regrouping or sorting function Emphasize the storage of products Primary purpose is to maximize the usage of available storage space The regrouping function is broken into four forms 1 Accumulating bulk making 2 Allocating bulk breaking 3 Assorting building up a variety of products 4 Sorting Out separating products into grades and qualities for different target markets Distribution Centers emphasize rapid movement of products through the facility Throughput is the amount of product entering and leaving a facility in a given time period Kinds of Warehouses All the While Clerical Administration o o Housekeeping o Maintenance of material and handling equipment Ability to store different things together water tire example Climate temperature control Workplace safety issues Overexertion is the most common work related injury Traditional Warehousing Operations Upon Arrival o o Receiving and unloading Storage Placement Upon Receipt of Order o Order selection picking o o o Packaging Final processing Checking and verification of orders Staging consolidations and containerization Loading and shipping o Product Profile of a Warehouse What s getting stored How large is the inventory warehouse Stacking Cross docking can be defined as the process of receiving product and shipping it out the same day or overnight without