Chapter 10 - Inventory Management, Planning and Control PDF

CHAPTER 10 Inventory Management, Planning and Control LEARNING OBJECTIVES · Explain the significance of inventory in LSCM. · Describe the various costs associated with inventory management. · Introduce common inventory control systems and strategies used to reduce inventory related costs....

CHAPTER 10 Inventory Management, Planning and Control LEARNING OBJECTIVES · Explain the significance of inventory in LSCM. · Describe the various costs associated with inventory management. · Introduce common inventory control systems and strategies used to reduce inventory related costs. · Illustrate techniques used for supply chain planning and control and outline how performance metrics are established. The importance of inventory management · Inventory is another name for materials and is any material that a firm holds in order to satisfy customer demand (and these customers may be internal and / or external to the firm) · Inventory costs money! It ties up working capital and affects cash flow · Inventory takes up space · Firms need to hire people to take care of inventory · The goal in inventory management is to minimise inventory holding while maintaining a desired customer service level. Companies hold inventory for a number of reasons · Cope with fluctuations in demand and to provide choice for customers. · On the supply side to cope with fluctuations in availability and the risk of upward price changes. · Quantity discounts are often available for buying in bulk (but note that this can result in excess inventory being carried). · We saw the importance of JIT in Chapter 3. Not every system, however, can operate on a fully JIT basis – invariably some inventory may need to build up before a production run can start or there is enough to comprise a full transport load. Inventory categorization · Raw material inventory is material purchased and waiting to be processed. · Work in progress (WIP) inventory comprises material that is being processed along the production line. · Finished goods inventory are the products awaiting shipment. Inventory holding costs · Fixed costs · Variable costs · Opportunity costs · Obsolescence costs Inventory turnover · A concept used to measure a firm’s performance in inventory management · Compares annual sales with the amount of average inventory held throughout the year · The higher the turnover, the lower the firm’s inventory costs Inventory turnover ABC classification The economic order quantity (EOQ) model · Notation: – D: Annual use of a particular item, in number of items per year – S: Order-processing cost, in $/order – p: Price per item, in $/unit – H: Holding cost per unit per year, in $/unit/year – Q: Number of items ordered in one purchase order, in units – T: Time periods between purchase orders in fraction of a year – SS: Safety Stock, in units – L: Lead time, in fraction of a year – I: Current inventory on hand, units – TAC: Total annual cost Inventory build-up and depletion Source: Basnet, C. & Childerhouse, P. (2016) Chapter 9 in Mangan et al., Global Logistics and Supply Chain Management, Wiley. Reproduced with permission of John Wiley & Sons. Small versus large order quantities Source: Basnet, C. & Childerhouse, P. (2016) Chapter 9 in Mangan et al., Global Logistics and Supply Chain Management, Wiley. Reproduced with permission of John Wiley & Sons. Order quantity versus total annual cost Source: Basnet, C. & Childerhouse, P. (2016) Chapter 9 in Mangan et al., Global Logistics and Supply Chain Management, Wiley. Reproduced with permission of John Wiley & Sons. Economic Order Quantity (EOQ) Inventory Planning and Control · Independent and dependent demand · MRP and ERP · CPFR · VMI An MRP System A simplified VMI Scenario Source: Adapted from Matthias, H., Disney, S., Holmstrom, J. & Smaros, J. (2005) Supply chain collaboration: Making sense of the strategy continuum, European Management Journal, 23(2), 170–181. Driving Forces for performance measurement in LSCM · Increased reliance on contract manufacturers · Strategic importance of LSPs to supply chain success · Adoption of manufacturing management techniques, such as JIT and Six Sigma, has increased the demand for metric reporting · Customer expectations · A need for visibility around resource utilization · Information technology improvements · Empowerment of employees – affording them the opportunity to have visibility of KPIs, and then using expectations of performance as a motivator Examples of strategic and operational KPIs in LSCM CHAPTER 10 – END OF SHOW