Managing Service Inventory NKFUST Reasons to Hold Inventory - PDF document

Shin‐Ming Guo Managing Service Inventory NKFUST • Reasons to Hold Inventory • Inventory Models • News Vendor Problem • ABC Classification Who Cares About a Surplus? In North America, the loss from overstocks in the region is estimated to cost retailers $123.4 billion annually In Taiwan, convenience stores and supermarkets reportedly throw away 36,000 tons of food every year. The loss is at least 3.8 billion NT dollars. 2 1

What About a Shortage? In 2006, Nintendo launched the Wii game console and could not make enough units to keep up with the demand. Some people would wait in long lines to purchase scarce units and resell them online for several hundred dollars over the retail price 3 What is Inventory? A stock of materials used to satisfy customer demand or to support the production of services or goods. Manufacturing Inventory raw materials, WIP, maintenance and repairs, supplies, FGI Retail Inventory merchandise, supplies, goods in transit (pipeline inventory) What is Inventory Management? The planning and controlling of inventories to meet the competitive priorities of the organization. 4 2

Flow of Inventory 5 Reasons to Hold Inventory • In‐transit Inventory • Decoupling Inventory/Buffers • Seasonal Inventory • Cycle Inventory • Safety Inventory • Speculative Inventory 6 3

Cycle Inventory and Seasonal Inventory Reasons to Hold Less Inventory • Inventory might become obsolete. • Inventory might perish. • Inventory might be stolen. • Inventory requires storage space and other overhead cost. • Opportunity cost. 8 4

Inventory Value vs. Holding Cost average unit cost P average inventory value = avg. inventory  P annual holding cost H =% of the unit cost Total Holding Cost= average inventory value  H  number of years Costs of Inventory Control  Holding or Carrying cost order too much or too early storage cost: facility, handling risk cost: depreciation, pilferage, insurance opportunity cost  Ordering cost order too little or too often cost placing an order: preparing, negotiating, receiving and inspection  Shortage costs or Lost Sales order too little or too late costs of canceling an order or penalty Annual cost ≈ 20% to 40% of the inventory’s worth 10 5

Inventory Performance  Inventory Cost (inventory on hand + in transit inventory) Cost of Goods Sold ___________________  Inventory turn = average inventory value  Service level = in‐stock probability before the replenishment order arrives number of sales _________________  Fill rate = number of demands Video: What Is Inventory Management 11 Inventory Control Decisions When to order? Reorder point, order frequency How many to order? Order quantity, target inventory level Continuous Review Periodic Review Fixed Order Quantity Fixed Order Period 12 6

Economic Order Quantity D=annual demand, Q=order quantity, S=ordering cost, H=unit holding cost Total annual cost =ordering cost + holding cost D Q   TC(Q) S H Q 2 2 DS *  Q H d=daily demand L=lead time Reorder point = d  L Ideal situation: Order Q* units when inventory drops to d  L 13 14 7

Continuous Review System: Variable Demand Place a new order whenever the inventory position (on hand + on order ‐ backorder) drops to ROP (reorder point). IP IP IP Order Order received received Order received On-hand inventory Q Q Q R Order Order Order placed placed placed 0 Time L 1 L 2 L 3 TBO 1 TBO 2 TBO 3 15 Q Model Example ROP=300, Q=250, L=4 days Day Demand OH On Order BO Inventory Position Q 400 + 0 = 400 1 400 60 340 340 + 0 = 340 2 260 < R before ordering 250 available 250 after ordering 3 80 260 260+250 after ordering Day 8 40 220 250 220 + 250 = 470 4 145 + 250 = 395 75 145 250 5 55 90 250 90 + 250 = 340 6 95 0 250+ 250 = 500 5 0+250–5=245 before ordering 250 available 7 after ordering 245 + 250 after ordering Day 12 250‐50‐5 50 195 + 250 = 445 8 250 =195 16 8

Safety Stock  amount of inventory carried in addition to the expected demand, in order to avoid shortages when demand increases Service level=probability of no shortage =P (demand ≤ inventory) =P(demand ≤ E(D)+safety stock) safety stock  depends on service level, demand variability, order lead time  service level depends on Holding cost  Shortage cost 17 Q  EOQ   =daily demand ROP expected demand during L  safety stock  =std dev. of daily demand        L z L Service level or probability of no shortage =95% (99%)  z=1.64 (2.33) 18 9

Periodic Review System Place an order at fixed time points and bring inventory position (on hand + on order ‐Backorder) up to Target Inventory Level . Target IP Order Order Order received received received Q 1 On-hand inventory Q 3 OH Q 2 IP 1 IP 3 Order Order placed placed Order IP 2 placed L L L Time P P Protection interval 19 P Model Example Target = 620, P = 6 days, L = 4 days Day Demand OH Q On Order BO Inventory Position 1 400 400 340 before ordering 620 – 340 = 280 280 after 60 340 2 340+280=620 after ordering available Day 7 ordering 80 260 3 280 260 + 280 = 540 40 220 280 4 220 + 280 = 500 75 145 5 280 145 + 280 = 425 6 280 90 + 280 = 370 55 90 90+280– 7 275 + 0 = 275 95 95=275 395 after 225 before ordering 620–225=395 50 8 225 ordering 225+395=620 after ordering available Day 13 20 10

𝑄  𝐹𝑃𝑅 Review Period 𝑒̅ Target Inventory = expected demand + safety stock         Order Quantity = target inventory – ( P L ) z P L inventory position 21 Quantity Discounts vs. Planned Shortage • Suppliers offer a price discount to customers who buy in large quantities to obtain the savings in manufacturing cost, inventory holding cost, or transportation cost. • Price discount vs. holding a large‐than‐desired quantity. • What if customers are willing to tolerate stockouts? • Reduce safety stock or target inventory level to save holding costs. 11

Single Period Inventory Decision • Only one production or procurement opportunity. • Stochastic demand leads to lost sales or leftover. • Order too little: losses of profit and goodwill for each unsatisfied customer.  Order too much: low salvage value for each unit of leftover.  Forecasting helps balancing cost of ordering too much vs. cost of ordering too little. 23 Case : Order Management at Sport Obermeyer Klaus Obermeyer founded Obermeyer in 1947, when he was  among the first ski instructors on Aspen Mountain. Customer service, marketing, design & research, accounting  in Colorado Rockies. Contract manufacturers in Hong Kong and China.  Long lead time, short sales period  Increasing product variety, more marked downs  12

Forecasting and Ordering at Sport Obermeyer • Demands depend on weather, fashion trend, economy. • Forecasts based on Panel Consensus. • Dominant members have stronger influence on the outcome of a consensus forecast. • Independent forecasts can provide an indicator of the forecast accuracy for each style. 25 Working with Customers to Improve Forecasts • Obermeyer invites key customers to place early orders (20% of total sales) to get market information. • Forecasts are updated based on those early orders. 26 13

Order Planning at Sport Obermeyer Panel Early bird Revised 1st 2nd forecasts orders forecasts shipment shipment Phase 1 Phase 2 Summer Selling min. orders revised orders extra orders and season expensive styles Effective Inventory Management  A system to keep track of inventory on hand and on order. periodic counting, perpetual counting.  A reliable forecast of demand.  Knowledge of lead times and lead time variability.  Reasonable estimates of inventory costs. holding costs, ordering costs, shortage costs.  A classification system for inventory items. 14

Barcode Scanning A barcode consists of a series of vertical bars of varying widths that represent letters, numbers and other symbols. Barcodes are used to identify products, locations in the warehouse, containers (totes, cartons, pallets), serial and batch numbers. EAN‐13 Radio Frequency IDentification • RFID is a means of uniquely identifying an item using radio waves. Data is exchanged between tags and readers and depending on the frequency, may or may not require line of sight. Many opportunities exist for RFID applications in services, such as medical bracelets for patients in hospitals. https://www.youtube.com/watch?v=eob532iEpqk https://www.youtube.com/watch?v=gEQJxNDSKAE 15

Hospitals and Inventory Management Control • Barcodes and computers keep track of every bottle of antibiotics and other supplies. • Secure supply cabinets with thumbprint security technology Management  Analyze how much is spent on every type of illness and surgical procedure.  Computers keep track of stock and automatically reorder from suppliers 31 ABC Classification Pareto’s 80/20 principle dollar usage=usage × cost There are other ways to do ABC classification. Review ABC classification periodically. 32 16