Bài giảng môn Quản trị kinh doanh - Chapter 11: Inventory:managing to meet demand

Chapter 11Inventory:Managing to Meet Demand1Learning ObjectivesExplain why businesses carry inventory.Describe the costs associated with inventory.Compare independent and dependent demand inventory.Calculate days-of-supply.Explain how a reorder point system works.Describe the contribution made by a safety stock.Compute the reorder point for a desired service level.Make computations for the economic order quantity models.Describe weaknesses of the economic order quantity.Compute the appropriate order quantity for a fixed interval, variable quantity system.Describe the information inputs necessary to manage dependent demand inventory.Compute planned order releases using material requirements planning.Explain ABC analysis.Compute dollar days for a given inventory.2Introduction: A Balancing Act for ManagementBoth the presence and absence of inventory contribute to value and to costs.Too much inventory is an investment that will provide no return.Too little inventory results in missed or late sales and deliveries.Carrying the correct amount of inventory is a difficult balancing act.3Decoupling: Reducing the direct dependency of a process step on its predecessor. This could be in a process or in the supply chain. Decouple customer from supplier and machine from machineDisruptions, if decoupled, don’t have as serious of an impactDecoupling enhances reliability and response timeWhy Should Businesses Carry Inventory?4Inventory is an investment that should provide a financial return.Excess inventory is an investment that provides no return. In addition to the cost of purchasing it, inventory also has other “carrying” costs:Cost of storageCost of insuranceReduction in flexibilityWhy Should Businesses Avoid Carrying Too Much Inventory?5Costs and BenefitsOrder cost:The fixed cost associated with ordering inventory.Changeover (setup) cost:The cost of changing equipment from producing one product or service to another. Analogous to order cost.Carrying cost:Costs associated with carrying inventory. Insurance, storage, opportunity cost of money tied up in inventory.Stockout cost:Costs associated with not having inventory when a customer wants it.Purchasing cost:Cost of purchasing the actual inventory. Sometimes quantity discounts lower this cost, but this comes at the expense of raising carrying costs.6Costs and BenefitsIf inventory is replenished when it reaches zero, average inventory is half the order quantity.Order costs and carrying costs are inversely related. Large orders increase average inventory and carrying cost, but the larger the orders, the less frequently you have to order.Exhibit 11.1 Average Inventory as Q/27Retailing and Finished-Product InventoriesContinuous ReplenishmentThe delivery of inventory, frequently, and in small quantities.Results in lower average levels of inventory.Exhibit 11.2 Frequent Small Deliveries versus Infrequent Large Deliveries8Retailing and Finished-Product Inventories: Independent Demand InventoriesIndependent Demand Inventory is inventory whose demand is dictated by the marketplace.Finished productsRetailer stocksMaintenance, Repair, and Operating (MRO) Inventory (Inventory that consists of items consumed in the day-to-day activities of a business).9Inventory provides a supply or coverage for a given length of time.Days-of-supply is inventory on hand divided by average daily demand.StockoutAn instance when demand cannot be satisfied by existing inventory.Delays in replenishment can cause stockouts.Retailing and Finished-Product Inventories: Inventory and Time10Calculate days of supply when average demand is 40 gallons per day, and 60 gallons remainRetailing and Finished-Product Inventories: Days-of-Supply Calculation11If a retailer has a six-day supply of a product, how soon a stockout occurs depends on the rate demand. If the rate is “average” it will last for six daysIf demand is less than average, it will last longer.If demand is greater than average, it won’t last as longExhibit 11.3 Example of Days’ SupplyRetailing and Finished-Product Inventories: Days-of-Supply Example12Level production in manufacturing uses finished-goods inventory to reduce the need to change the output rate to match demand changes.Production is greater than demand during low-demand periods.Production is less than demand during high-demand periods.Inventory accumulated during low demand is then used to satisfy high demand.Exhibit 11.4 Inventory to Buffer against Seasonal DemandRetailing and Finished-Product Inventories: Inventory and Time13Work-in-process inventory (WIP)Inventory that has begun processing, but has not yet completed it.Transfer batchThe quantity produced at a workcenter before transferring the products to the next step in the process.Pipeline inventoryInventory in transit. Inventory in oil pipelines, on trucks, planes, and so onReducing transit times reduces pipeline inventorySKUs (stock-keeping units) Unique numbers that identify items in inventory.Component and Raw Materials Inventory14Dependent demand inventory is inventory whose demand is determined by the production schedule for finished productsIt usually consists of components and raw materialsDependent Demand Inventory15When should it be ordered?How many should be ordered?Inventory Decisions16Service Level: Percent of orders satisfied from existing inventory.Replenishment Lead Time: The time required to receive inventory that has been ordered.Since there is a replenishment lead time, orders must be made before the inventory has run out.Two general approaches:Fixed quantity, variable interval systemsFixed interval, variable quantity systemsManaging Independent Demand Inventory17Demand during the replenishment lead time is uncertain.Assume:Demand averages 60 units per week and is normally distributedThe replenishment lead time is 2 weeksWhen should inventory be reordered?Fixed Quantity, Variable Interval System: The Reorder Point Model18If the order is placed when the onhand inventory is equal to the average demand during the replenishment lead time (120), what is the probability having enough inventory to meet demand? 50%Fixed Quantity, Variable Interval System: The Reorder Point Model19If the order is placed when the onhand inventory is equal to 1 standard deviation above the average demand during the replenishment leadtime (132) , what is the probability of having enough inventory to meet demand? 84.13%Fixed Quantity, Variable Interval System: The Reorder Point Model20If the order is placed when the onhand inventory is equal to 3 standard deviations above the average demand during the replenishment leadtime (132) , what is the probability of having enough inventory to meet demand? 99.87%Fixed Quantity, Variable Interval System: The Reorder Point Model21Fixed Quantity, Variable Interval System: The Reorder Point ModelSafety Stock: Additional inventory (above mean demand) maintained to increase service levels in response to demand variability.A safety stock of 36 units increasesthe probability of not stocking out during the replenishment lead time from 50% to 99.87%22To meet demand during the replenishment lead time, the reorder point must include a safety stock linked to demand variability. Where:ROP = Reorder Point (i.e., quantity at which more inventory is ordered)dLT = Average demand during replenishment lead timeσLT = Standard deviation of demand during replenishment lead timeZ = Number of standard deviations above the average demand during  replenishment lead time required for desired service level.Fixed Quantity, Variable Interval System: The Reorder Point Model23 The diagram shows how a fixed-quantity reorder point system works.What should the reorder point be if we wanted a 99% service level?Exhibit 11.6 Reorder Point SystemFixed Quantity, Variable Interval System: The Reorder Point Model24A service level of 99% implies an inventory level that is 2.33 standard deviations above the mean demand during the replenishment lead time.The mean is 120 and standard deviation is 12ROP = 120 + 2.33(12) = 120 + 28 = 148A ROP of 148 would be sufficient to satisfy demand during the replenishment lead time with 99% confidence.Fixed Quantity, Variable Interval System: The Reorder Point Model25Exhibit 11.7 ROP at 2.33s1σ provides 84.13% confidence2σ provides 97.73%confidence2.33σ provides 99.00%confidence3σ provides 99.87%confidenceThe mean provides50.00% confidenceService LevelsFixed Quantity, Variable Interval System: The Reorder Point Model26Inventory is reordered when there is enough inventory remaining to meet demand during the replenishment lead time.Assume:Demand is always exactly 60 units per weekReplenishment lead time is always exactly 2 weeksThe reorder point would be 120 units and would always be just enough. In the real world, though, demand is variable.Fixed Quantity, Variable Interval System: The Reorder Point Model27Suppose. . .Lead time is 2 weeksAverage weekly demand is 62Weekly standard deviation is 13Compute a reorder point with a 95% service levelFixed Quantity, Variable Interval System: Reorder Point Model Example28Fixed Quantity, Variable Interval System:Reorder Point Model ExampleSolution: Average demand during lead time = 2*62 = 124 Standard deviation of demand during the lead time = 18.38 Weekly Standard Deviation (σ) = 13 Therefore, weekly variance (σ2) = 169 Therefore, the variance over the lead time = 2*169 = 338 Therefore, the standard deviation over the lead time = Z for a (approximate) 95% service level is 1.645 29Where:ROP = Reorder Point (i.e., quantity at which more inventory is ordered)dLT = Average demand during replenishment lead timeσLT = Standard deviation of demand during replenishment lead timeZ = Number of standard deviations above the average demand during  replenishment lead time required for desired service level.Notes:Pay attention to interval over which standard deviation is calculated. Make sure it matches the lead time demand interval.Adjust using variance (σ2) and convert back to standard deviation.Round up to the next highest unit to ensure that the safety stock will be sufficient for the desired service level.ROP = 124 + 18.385(1.645) = 154.243 = 155Fixed Quantity, Variable Interval System: Reorder Point Model Example30How Many to Order:The Economic Order QuantityThe ROP tells us when to order, but the order quantity (how many?) still needs to be determined.The economic order quantity (EOQ) model is used to determine an order quantity that minimizes the sum of ordering and carrying costs. The basic EOQ model makes the following assumptions:Annual demand is knownDemand is evenLead time is constantNo quantity discountsOnly one product is involvedOrders are received in single deliveries31These assumptions allow us to use a simple calculation for total costs related to the quantity we order.Where:TC = Total costH = Carrying or holding cost per unit, on an annual basisQ = Order quantityS = Cost of orderingD = Annual demandHow Many to Order:The Economic Order Quantity32How Many to Order:The Economic Order QuantityThe relationships among the ordering cost, carrying costs, and total cost curve:Exhibit 11.8 Carrying Costs, Ordering Cost, and Total Cost in EOQOrdering at this quantitywill minimize the totalcosts33By taking the first derivative with respect to Q of the formula for the total cost curve, we obtain the formula for the optimal Q which is the EOQ:Step-by-Step: The Economic Order Quantity CalculationDetermine the annual demand (D)Determine the inventory carrying cost per unit (H). If carrying costs are given as a percentage of the item value, H will be the percentage (i) multiplied by the item value (P)Determine the cost of ordering (S) per orderUse the formula above to compute EOQHow Many to Order:The Economic Order Quantity34The University Bookstore wished to utilize the EOQ formula to determine the appropriate order quantity for its most popular backpack. Determine the EOQ given the following information:Annual demand = 600Order cost = $13 per orderCarrying cost = $3.25 per unit, per yearAs a matter of practice we would round up to order 70 units.282.6948003.2513*600*2H2DS====EOQEconomic Order Quantity Calculation35The EOQ has been criticized for inflating order quantities. Many feel it underestimates carrying costs by ignoring well-accepted nonfinancial costs of carrying inventory:Loss of flexibilityIncreased quality feedback timeIncreased lead timesWeaknesses of the EOQ Model36Various modifications of the basic EOQ model are used as the assumptions are relaxed.One such commonly relaxed assumption relates to quantity discountsIf discounts are available for certain order quantities, the order quantity no longer just affects order costs and carrying costs—it also affects the cost of purchasing it. In that scenario, the total cost consists of order cost, carrying cost, and purchase cost.Step-by-step: EOQ with quantity discountsCompute basic EOQ. It will fall within one of the price ranges specified by the supplier.If the EOQ falls within the cheapest price range, the EOQ is the optimal order quantity.If the EOQ does not, all price ranges having lower prices than the range the EOQ falls in must be evaluated.The optimal quantity will be at the lowest allowable quantity of a price range. For each quantity, compute the total cost (carrying, order, and purchase price) for the quantity at each price break.How Many to Order: The Economic Order Quantity with Quantity Discounts37Total cost with quantity discounts:How Many to Order: The Economic Order Quantity with Quantity DiscountsWhere D = annual demand Q = order quantity S = cost per order H = carrying cost P = price per unitTC = D/Q(S) + Q/2(H) + DP38Quantity Discount Model CalculationGiven the following quantity discount information . . . 1-20 units: $229 each 21-60 units: $210 each 61-120 units: $199 each 120 units: $175 each Order cost: $20 per order Carrying cost: $36 per unit per year Annual demand: 476 unitsWhat would the low-cost order quantity be?39Quantity Discount Model CalculationSolution:Calculate Basic EOQCalculate TC for EOQ and lower priced quantitiesTC at 23 units per order = $100,787.91TC at 61 units per order = $95,978.07TC at 121 units per order = $85,556.68Order 121 units per order40Periodic Review System: An independent demand management system that orders inventory on fixed time intervals.If the timing cannot vary, the order quantity must vary to meet demandThis system is used when user needs to order at periodic intervals because of supplier shipment schedules, or needs to combine orders for different products to save on transaction costsFixed Interval, Variable Quantity Systems41Fixed Interval, Variable Quantity SystemsThe order quantity must cover the expected demand during the order interval and replenishment lead time.Order Quantity = Target Inventory Level –Inventory On HandQ = TI - AThe target inventory level =Where = the average demand during the order interval and lead timeSS = the safety stockOI = the number of days in the order intervalLT = the number of days in the replenishment lead time42Fixed Interval, Variable Quantity SystemsThe safety stock is calculated asWhereSS = the safety stockOI – the number of days in the order intervalLT = the number of days in the replenishment lead timeZ = the number of standard necessary for the desired confidence levelσOI+LT = the standard deviation of demand over the OI and LTσt = the daily standard deviation 43Step-by-Step: Determining the Order QuantityBased on the average daily demand, determine the average demand during the order intervalBased on the average daily demand, determine the average demand during the replenishment lead timeIdentify the Z value from Appendix B and the desired service levelDetermine the amount of inventory on hand currentlyUsing formula 11.8, determine the safety stockUsing formula 11.7, determine the target inventory levelUsing formula 11.6, determine the order quantityFixed Interval, Variable Quantity Systems44The periodic review modelFixed Interval, Variable Quantity SystemsExhibit 11.9 Periodic Review SystemPeriodic order is placed hereOrder arrives hereOrder quantity must be enough to cover demand until the next order arrives, here.45Periodic Review Model ExampleAverage daily demand: 3.6 unitsReplenishment lead time: 2 daysStandard deviation of demand (daily): 5Inventory on hand: 5Service level desired: 95%Order Interval: 7 days.SS =1.645(.5)(3) =2.4675= 32.4 + 2.4675= 34.87Round up to 35Compute safety stockCompute target inventory levelSubtract on hand inventoryQ = TI – A= 35 – 5= 3046Material Requirements Planning (MRP) is an inventory management approach used to manage dependent demand inventory that plans order releases for the future based on production schedules.The same two questions get answered: ‘When?’ and ‘How many?’“How many” is determined by a process called netting: computing net requirements. Net requirements are total quantity needed less on-hand inventory“When” is determined by backward scheduling, where a known completion date or due date is used to determine a start dateManaging Dependent Demand Inventory:Material Requirements Planning47Netting and backward scheduling in MRP require information that comes from master production schedules (MPS), bills of material, and inventory master files.Managing Dependent Demand Inventory:Material Requirements PlanningExhibit 11.10 Material Requirements Planning Inputs48Managing Dependent Demand Inventory:Material Requirements PlanningMaster Production Schedule (MPS): A schedule of end products that must be completed in a specific time period.Exhibit 11.11 Master Production Schedule (MPS) for Staple Remover49Bill of material: A file containing information about the materials required to produce a product or component.Managing Dependent Demand Inventory:Material Requirements PlanningExhibit 11.12 Structure for Staple Remover50Inventory master file: A file containing information about an inventory item such as the quantity on hand, the cost, and so on.More MRP terms:Gross requirements: The total quantity needed to meet demandBeginning on-hand inventory: Inventory at the beginning of a time periodEnding on hand inventory: Inventory at the end of a time periodNet requirements: Gross requirements less beginning on-hand inventoryPlanned order receipt: The planned receipt of material that results from a planned order releasePlanned order release: An order planned to be released to satisfy a future net requirementManaging Dependent Demand Inventory:Material Requirements Planning51MRP takes individual component lead times into account to make sure that required components arrive on timeManaging Dependent Demand Inventory:Material Requirements PlanningExhibit 11.14 Time Line for Staple Remover Component OrdersIf staple remover order is due here, and assembly takes one week . . .All components must be available hereDepending on how long it takes to get each one, they must be ordered here.52Managing Dependent Demand Inventory: Material Requirements PlanningHow many does the MPS say I need? (usage)How many do I already have? (Ending Inventory from previous week)How many will be left? (Beginning + Receipts - Usage)How many more do I need? (Gross Requirement - Beginning Inventory)How many will be received? (receipts)How many should be ordered (or produced) this week in order to meet the demand? Exhibit 11.13 Quantity and Timing for Staple Remover Orders (Staple Remover MRP Record)53Gross requirements for components come from “planned order release” of the parent“Parent” ItemComponentItemManaging Dependent Demand Inventory: Material Requirements Planning54If I am going to need 62 units of the “parent” in week 8,I need to release the order (start making them) in week 7 ,so I need the component in week 7 ,And I need to order (or start making) it in week 6 (it has a 1-week lead time)Managing Dependent Demand Inventory:Material Requirements Planning55Component Lead TimeStaple Remover (parent) 1 weekOuter jaw 1 weekInner jaw 1 weekConnecting Pin 2 weeksSpring 2 weeksManaging Dependent Demand Inventory:Material Requirements Planning, also, where I ordered the outer jaw one week before I needed it ,, I have to order connecting pins two weeks before I need them.56Lot-for-lot ordering: Ordering exactly the amount of the net requirements.Used in previous exampleFixed-quantity order policy: Rather than ordering the quantity of the net requirements, orders are placed in increments of a fixed quantity.Trades off reduction in ordering costs against increases in carrying costsManaging Dependent Demand Inventory:Extended MRP57As products included in MRP logic become more complex, the logic must accommodate various potential situations.Components may be used in different end productsDemand for some components may be both dependent and independentManaging Dependent Demand Inventory:Extended MRP58Managing inventory can be expensive.Reorder point systems require continuous review of inventory levels, but stockouts can only occur in the replenishment lead timeA primitive form of a reorder point system is the two-bin system, where two bins full of inventory are kept and more inventory is ordered when one of them becomes empty.Periodic review systems have a constant risk of stockoutSophistication of the management approach (and therefore investment) should be relative to cost of getting it wrong.e.g., stocking outPrioritizing Inventory: ABC Analysis59Prioritizing Inventory: ABC AnalysisBased on the Pareto principle, which states that 80% of the effects are the result of 20% of the causes.Categorization of inventory items by importance (demand or dollar usage) as “A”, “B”, and “C” items“A” items are most important. Generally, around 10% of inventory items are “A” items“B” items are next, generally comprising around 30-40% of items“C” items make up the rest, and are relatively unimportantClassification of items will determine what type of inventory management system to use, service level, number of suppliers or backup suppliers, etc.60Inventory turns: A measure of inventory productivity computed by dividing sales by the average value of inventory.Could be improved by increasing sales, but this isn’t the usual interpretationCan be improved by reducing inventoryTurnover should be increased in a way that will not harm service quality or delivery reliabilityMeasuring Inventory Productivity61Dollar days: The dollar value of an item in inventory multiplied by the number of days until it will be sold.Targets high cost inventoryTargets slow-moving inventoryMeasuring Inventory Productivity:Dollar DaysExample 11.7The value of a particular camcorder inventoried by an electronics shop is exactly $1000, and the annual demand is 730 units (2 per day). Currently, there are 12 units in inventory. Another product, an autofocus 35mm camera, has a value of $214.29 and has an annual demand of 52 units (essentially one every seven days) and 7 units on hand. What are the dollar days associated with each of these items?62Measuring Inventory Productivity:Dollar DaysCamcorder $1000 valueAnnual demand = 73012 units on handConsumption:2 sold in one day2 more in two days2 more in three days2 more in four days2 more in five dayslast 2 in six days* $100063Measuring Inventory Productivity:Dollar Days35mm camera$214.29 value Annual demand = 52 7 units on handConsumption:1 sold in 7 days1 more in 14 days1 more in 21 days1 more in 28 days1 more in 35 days1 more in 42 dayslast 1 in 49 days* $214.2964Measuring Inventory Productivity:Dollar DaysDollar days for both items = $42,000Eliminating one camcorder reduces dollar days by 6,000Eliminating one 35mm camera reduces dollar days by 10,500Also consider impact of reduction on service levelsReducing inventory of the camcorder reduces service level and sales.Reducing inventory of the 35mm camera is of very little consequence65