Managing Service Inventory NKFUST Reasons to Hold Inventory - - PDF document

1

Managing Service Inventory

• Reasons to Hold Inventory
• Inventory Models
• News Vendor Problem
• ABC Classification

Shin‐Ming Guo NKFUST

Who Cares About a Surplus?

2

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. In North America, the loss from

• verstocks in the region is estimated to

cost retailers $123.4 billion annually

2

What About a Shortage?

3

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

• nline for several hundred dollars over the retail price

What is Inventory Management?

The planning and controlling of inventories to meet the competitive priorities of the organization.

What is Inventory?

A stock of materials used to satisfy customer demand

• r 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)

4

3

Flow of Inventory

5

Reasons to Hold Inventory

• In‐transit Inventory
• Decoupling Inventory/Buffers
• Seasonal Inventory
• Cycle Inventory
• Safety Inventory
• Speculative Inventory

6

4

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

5

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

10

 Holding or Carrying cost

• rder too much or too early

storage cost: facility, handling risk cost: depreciation, pilferage, insurance

• pportunity cost

 Ordering cost

• rder too little or too often

cost placing an order: preparing, negotiating, receiving and inspection

 Shortage costs or Lost Sales

• rder too little or too late

costs of canceling an order or penalty

Annual cost ≈ 20% to 40% of the inventory’s worth

6

Inventory Performance

11

 Inventory Cost (inventory on hand + in transit inventory)  Inventory turn =  Service level = in‐stock probability before the

replenishment order arrives

 Fill rate =

Cost of Goods Sold ___________________ average inventory value number of demands number of sales _________________

Video: What Is Inventory Management

Inventory Control Decisions

12

Periodic Review Fixed Order Period Continuous Review Fixed Order Quantity When to order? Reorder point, order frequency How many to order? Order quantity, target inventory level

7

Economic Order Quantity

13

H DS Q 2 * 

H 2 Q S Q D TC(Q)  

d=daily demand L=lead time Reorder point = dL Ideal situation: Order Q* units when inventory drops to dL D=annual demand, Q=order quantity, S=ordering cost, H=unit holding cost Total annual cost =ordering cost + holding cost

14

8

Continuous Review System: Variable Demand

Time On-hand inventory

TBO1 TBO2 TBO3 L1 L2 L3

R Q Order placed Order placed Order received IP IP Q Order placed Q Order received Order received IP

15

Place a new order whenever the inventory position (on hand + on order ‐ backorder) drops to ROP (reorder point).

Q Model Example

Day Demand OH On Order BO Inventory Position Q 1 400 2 3 4 5 6 7 8 400 + 0 = 400 340 + 0 = 340 250 after ordering 260 < R before ordering 60 80 40 75 55 95 260+250 after ordering 260 220 145 90 340 250 available Day 8 250 250 250 220 + 250 = 470 145 + 250 = 395 90 + 250 = 340 250+ 250 = 500 after ordering

0+250–5=245 before ordering 245 + 250 after ordering

250 available Day 12 5

ROP=300, Q=250, L=4 days

50 250‐50‐5 =195 250 195 + 250 = 445

16

9

 amount of inventory carried in addition to the expected

demand, in order to avoid shortages when demand increases

Safety Stock

17

safety stock Service level=probability of no shortage =P (demand ≤ inventory) =P(demand ≤ E(D)+safety stock)

 depends on service level, demand variability, order lead time  service level depends on Holding cost  Shortage cost

18

=daily demand =std dev. of daily demand

         L z L L ROP stock safety during demand expected

Service level or probability of no shortage =95% (99%)  z=1.64 (2.33)

Q  EOQ

10

Periodic Review System

P P

Target

L L L

Protection interval Time On-hand inventory

IP3 IP1 IP2

Order placed Order placed Order received Order received Order received

IP OH

Q1 Q2 Q3 Order placed

19

Place an order at fixed time points and bring inventory position (on hand + on order ‐Backorder) up to Target Inventory Level.

P Model Example

Day Demand OH

On Order BO

Inventory Position

Q

1 2 3 4 5 6 7 8 400 340 before ordering 280 260 + 280 = 540 60 80 40 75 55 95 260 220 145 90+280– 95=275 90 340 620 – 340 = 280 available Day 7 280 280 280 220 + 280 = 500 145 + 280 = 425 90 + 280 = 370 400 280 after

• rdering

340+280=620 after ordering 275 + 0 = 275 620–225=395 available Day 13 225 395 after

• rdering

225 before ordering 225+395=620 after ordering 50

Target = 620, P = 6 days, L = 4 days

20

11

21

Review Period Order Quantity = target inventory – inventory position

        L P z L P ) (

Target Inventory = expected demand + safety stock 𝑄 𝐹𝑃𝑅 𝑒̅

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.

12

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.

23

 Order too much: low salvage

value for each unit of leftover.

 Forecasting helps balancing cost

• f ordering too much vs. cost of
• rdering too little.

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

13

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
• utcome 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%
• f total sales) to get market information.
• Forecasts are updated based on those early orders.

26

14

Order Planning at Sport Obermeyer

Early bird

• rders

Panel forecasts Phase 1

• min. orders

Revised forecasts Phase 2 revised orders 1st shipment Summer extra orders and expensive styles 2nd shipment Selling season

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.

15

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=gEQJxNDSKAE https://www.youtube.com/watch?v=eob532iEpqk

16

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

31

Management

 Analyze how much is spent on every type of illness and

surgical procedure.

 Computers keep track of stock and automatically reorder

from suppliers

ABC Classification

32

dollar usage=usage × cost

There are other ways to do ABC classification. Review ABC classification periodically.

Pareto’s 80/20 principle

17

ABC Classification for Inventory Control

33

A  Q model B  P model with R=1 week C  P model with R=1 month

Long Tail Effects

• A retailing concept describing the niche strategy of selling

small volumes of hard‐to‐find items to many customers instead of only selling large volumes of popular items.

• A streaming music service currently offers more than 735,000
• tracks. Once you dig below the top 40,000 tracks, you cannot

find inventory in most real‐world record stores. However, not

• nly is every one of its top 100,000 tracks streamed at least
• nce each month, the same is true for its top 400,000.
• The market that lies outside the reach of the physical retailer

is big and getting bigger.

34

18

Surplus Stocks

• There are various reasons for surplus stocks.

Over ordering, obsolescence, fall in demand, inaccurate stock records, stocks being retuned

• Solutions

Retention with reduction of any further orders. Offer discount to other users . Sale as scrap or for recycling. Disposal as waste.

Summary

• Good inventory management is

characterized by concern for holding costs, ordering costs, shortage costs, and the purchase price.

• Consider lead time for replenishment

and the appropriate service level.

• Keeping track of inventory using

information technology is common practice.