Description
This is a presentation describes on inventory management.
1
Inventory Performance-India
Food Textile Machinery Metal
Worst 1.2 1.9 1.2 2.5
Average 4.0 5.3 5.5 5.5
Best 31.0 45.2 17.1 42.5
2
Reliance Industries :
1997: 3.5 billion Rs (4% sales)
2005: 10 billion Rs (1 % sales)
Godrej Sara Lee: Brands
Dominant Aerosol Brand
Ambipur – Aircare Pioneer
Superbrand 2005,
Ranked 21
st
in
Brand Equity Survey
Types of Inventory
? Cycle Stock
? Safety Stock
? Pipeline Inventory
? Anticipation stock
? To manage special events
4
Inventory in Chain
? Supply Chain Consist of series of stock points
connected by processes ( Conversion processes &
Transportation processes)
? Each stock point has demand process and supply
process
? Inventory at stock point : Cycle stock, safety stock
? Inventory within conversion and transportation
processes:
? Pipeline stock , work in process
5
Inventory Management: Key
Decisions
? What type of review mechanism
? Continuous Review
? Periodic Review
? How much to Order
? When to Order
? Where to hold inventory
6
7
Inventory Management: Relevant
Cost
? Ordering cost/setup cost
? Inventory carrying cost
? Cost of shortage
? Lost sales
? Backlogging cost
? Purchase cost ( value addition cost) of Item (?)
8
Ordering Cost
? Administration Cost
? Transportation Cost
? Receiving Cost
9
Inventory Carrying Cost
? Financial Cost
? Storage and handling cost
? Inventory risk
Continuous Review-
( R,Q) Policy
? In this inventory policy,
? The order of size Q is placed when the inventory
position reaches the reorder point.
? Inventory position = inventory on the shelf +
inventory ordered from the vendor – items
backordered
? Also called two bin system
10
Cycle Stock Inventory
11
Inventory
on hand
L L L
Q Q Q Q
Time
Basic Fixed Order Quality Model
Inventory Models: Cycle Stock
__________
Q = \ 2 A D / i C
A = Ordering Cost / Cost of setup
D = Annual Demand
i = Inventory carry cost
C = cost of item
12
Pipeline Inventory
13
Pipeline Inventory = PLT * D
where
PLT = Pipeline Lead-time
D = average demand
INVENTORY MANAGEMENT SHOULD BE BASED ON STATISTICAL TECHNIQUES
14
110
–
100
–
90 –
80 –
70 –
60 –
50 –
40 –
30 –
20 –
10 –
0 –
Dead stock
Days
1 2 3 4 5 6 7 8 9 10 11 12
I
n
v
e
n
t
o
r
y
* This is the pumpable inventory. Actual inventory will be safety stock plus dead stock.
•Demand variability
•No supply variability
•Instantaneous demand
replenishment
•Average demand = 25 units
per day
•Batch size = 100 units
Case 2
Safety Stocks and
Service level Measures
? Clearly some stock would be required to handle
variability
? Cycle service level ( Stock-out Probability)
? Order fill rate
15
INVENTORY MANAGEMENT SHOULD BE BASED ON STATISTICAL TECHNIQUES
16
140
–
130
–
120
–
110
–
100
–
90 –
80 –
70 –
60 –
50 –
40 –
30 –
20 –
10 –
0 –
Demand side safety stock = safety factor
* standard deviation of demand * (lead time)
1/2
Dead stock
1 2 3 4 5 6 7 8 9 10 11 12
I
n
v
e
n
t
o
r
y
* This is the pumpable inventory. Actual inventory will be safety stock plus dead stock.
•Demand variability
•No supply variability
•Instantaneous demand
replenishment
•Average demand = 25 units
per day
•Batch size = 100 units
Case 2
Days
17
Safety Stock
Distribution of Demand During Lead Time
Continuous Review: Safety Stock
(R, Q)- No LT variability
S.S = K o
Lead Time Demand
____________
o
Lead Time Demand =
\ L o
D
2
D = average Demand ,o
D
= S.D. of Demand ,
L = Average Lead-time, o
L
= S.D. of Lead-time
K = Safety Factor ( to meet cycle service level)
? Quantity ordered in each period is constant.
? EOQ can be used to place each period order.
18
Quiz
? Gillette India Ltd, Bhivadi, Gujarat imports Gillette Mach3
Turbo blade pack (2 units) from Gillette D.G.C , Berlin. The
landed cost of the blade pack for the company is 200 Rs. The
annual holding cost is 18 percent of the product cost. The
fixed ordering cost is 45000 Rs. The ERP system suggests that
the average weekly demand is 44.58 units and standard
deviation of the weekly demand is 32.08. Being the high
value SKU, the company uses air shipping for transport. The
import lead time is 2 weeks. Company assumes that there is
negligible variation in the lead time. Suggest the appropriate
(R, Q) policy to Gillette to manage it. Being high margin
product, the company wants to maintain 97 percent service
level.
19
? Average demand during lead time
? = 44.58 x 2 = 89.16 twin blades
? Safety stock = 1.9 x 32.08 x
2
20
= 86.2
Reorder point = 89.16 + 86.2 = 175.4 twin blades
INVENTORY MANAGEMENT SHOULD BE BASED ON STATISTICAL
TECHNIQUES
21
* This is the pumpable inventory. Actual inventory will be safety stock plus dead stock.
•Demand variability
•Supply variability
•No instantaneous
demand replenishment
•Average demand = 25 units
per day
•Batch size = 100 units
Case 3
140
–
130
–
120
–
110
–
100
–
90 –
80 –
70 –
60 –
50 –
40 –
30 –
20 –
10 –
0 –
Demand side safety stock = safety factor * standard deviation of demand *
(lead time)
1/2
Dead stock
1 2 3 4 5 6 7 8 9 10 11 12
I
n
v
e
n
t
o
r
y
Supply side safety stock = Safety factor * Lead time variability * average daily demand
Days
Inventory Models- Continuous
Review: Safety Stock (R, Q)
S.S = K o
Lead Time Demand
____________
o
Lead Time Demand =
\ L o
D
2
+ D
2
o
L
2
D = average Demand ,o
D
= S.D. of Demand ,
L = Average Lead-time, o
L
= S.D. of Lead-time
K = Safety Factor ( to meet cycle service level)
? Quantity ordered in each period is constant.
? EOQ can be used to place each period order.
22
Gillette Example- Continued
? Despite of setting higher service level, the retailers
were complaining of poor service. The SC manager
then realized that there is considerable variation in the
import lead time due to delays at customs and in the
production plan. SD of the lead time is one week.
What would be new inventory policy ?
23
?Safety stock= K \ L o
D
2
+ D
2
o
L
2
?
= 1.9
\ 2 x 32.08
2
+ 44.58
2
x 1
2
?
= 120.8 twin blades
?
Reorder Point = 89.2 + 120.8 = 210 twin blades
24
Periodic Review
? At the end or start of each period, the order is
placed whose size is equal to
? Order up to Level – inventory position
? Where inventory position contains on
the shelf inventory +
? inventory in transit to that entity minus
? items backordered
25
Inventory Models- Periodic Review:
Safety Stock
S.S = K o(
Lead Time+review period) Demand
____________
o
Lead Time Demand =
\(L+T)o
D
2
+D
2
o
L
2
D = average Demand ,o
D
= S.D. of Demand ,
L = Average Lead-time, T= Review Period
K = Safety Factor
26
Inventory Models- Periodic Review: Order
up to Level
? Order upto Level = D(L+T)+ Safety Stock
27
Example
? Now, Gillette India is deciding to design a new system.
The company plans to use periodic review to reduce
the stock monitoring efforts. Review period would be
three weeks. Suggest the order up to level to manage
inventories. Assume no lead time variability in this
case.
28
Example Continued
? Average demand during the lead time = d
(L+T)
? = 44.58 x 5 = 222.9
? Safety stock for 97 percent service level
? = 1. 9 x 32.8 x
5
29
= 136
Order up to level = 223 + 136 = 359 twin blades
Impact of cycle service level on
safety factor (K)
Safety factor Service level
0 0.500
0.5 0.690
1.0 0.841
1.5 0.933
2.0 0.977
2.5 0.994
3.0 0.998
30
31
82
84
86
88
90
92
94
96
98
100
400 600 800 1000 1200 1400 1600
S
e
r
v
i
c
e
L
e
v
e
l
Inventory
Impact of cycle Service Level On Safety Stock
? Manager thinks:
? Boss is not happy with the current inventory performance.
I want to improve the performance. But how ?
? Should I implement better forecasting system?
? Should I start inviting proposals for air transport ?
? Should I reduce the variability in the manufacturing plant
that affects the delivery reliability ?
32
Basic Demand and Lead Time
Data
33
Demand Data
d
1
d
2
d
3
d
4
d
5
d
6
d
7
d
8
d
9
d
10
Demand 115 95 150 125 28 90 93 115 93 96
Lead-time data
L
1
L
2
L
3
L
4
L
5
L
6
L
7
L
8
L
9
L
10
Lead-
time
12 15 4 21 18 11 12 18 19 20
Average
Demand
Standard
deviation
of demand
Average
lead-
time
Standard
deviation
of lead-
time
Safety
stock
- units
Safety
stock in
days of
inventory
Remark
100
30 15 5 1026 10.3 Base case
100
15 15 5 1006 10 Reduce demand
uncertainty
100
30 15 2.5 526 5.3 Reduce supply
uncertainty
100
30 7.5 5 1003 10 Reduction in
lead-time
34
Fill Rate Based Model
? Allows us to compute the fraction of the annual
demand that would be met given the SS and order
quantity.
? Allows us to explicitly compute the average annual cost
of stock outs.
? Can study the tradeoffs between stock out costs and
the inventory costs and set the optimal service level.
35
Fill Rate Based Model
? Suppose the average daily demand for the Tea ( 1 Kg)
pack at the Bazaar is 100 packs. The bazaar places an
order of 1600 packs after reaching the RP. The
standard deviation of the demand during the lead
time is 513. Currently the bazaar keeps the safety stock
of 200 packs. What would be the fill rate for the Tata
Tea SKU.
? The retailer looses 15 Rs per stock out.
36
Method
? First Calculate K
4 . 0
513
200
= = =
LTD
SS
K
o
926 . 0
1600
23 . 0 513
1
) (
1 =
|
.
|
\
|
×
÷ =
|
|
.
|
\
|
÷ =
Q
K E
FR
LTD
o
37
From the table, for given K, determine E(K)
For k =0.4, E(K) = 0.23
? On every ordering cycle, the retailer is likely to loose
the demand of
? 1600 (1- 0.926) = 118 packs
? The retailer will place (320 x 100)/1600=20 orders in a
year assuming 320 days/year
? The annual cost of stock out to the retailer is = 118 x 20
x 15 = 35400 Rs
38
Computing the safety stock for a Fill
rate
? Suppose the Food Bazaar decide to keep the fill rate of
98 % for the TATA tea pack.
? What would be the safety stock
39
Method
Rs
t shortage annual
bags K SS
K
K E
K E
LTD
9000
1600 / 100 300 1600 ) 98 . 0 1 ( 15
cos
590 513 15 . 1
15 . 1
0624 . 0 ) (
1600
) ( 513
1 98 . 0
=
× × × ÷ ×
=
= × = × =
= ¬
= ¬
|
.
|
\
|
×
÷ =
o
40
Set the optimal service level
? We can easily calculate the annual inventory holding
cost given order quantity and reorder point.
? We can select the optimal fill rate by doing this
exercise for different fill rates that minimizes the total
SC cost.
41
COMFORT LEVEL IS BASED ON TOTAL COST
42
4
6
8
10
12
14
16
18
92.0% 92.5% 93.0% 93.5% 94.0% 94.5% 95.0% 95.5% 96.0% 96.5% 97.0% 97.5% 98.0% 98.5% 99.0% 99.5% 100.0
%
Optimal comfort level is 97% at 1.5 days of average RO inventory
Total cost in Rs lakhs (Stock out + Inventory holding)
* Inventory is valued at price, Inventory holding cost includes 0.5% as loss due to handling, storage etc
Source: SAP
DEPOT MS EXAMPLE
o
97% =
o
99.5% =
o
93% =
Four parameters
used to set comfort
level
• Inventory holding
cost and loss due to
handling, storage
• Stock out cost
• Average RO
inventory
• Lead time to
service dealer
Comfort level in
percent
Dealer stock at
RO = 1 day
Dealer stock at
RO = 1.5 day
Dealer stock at
RO = 2 days
IMPLICATIONS OF COMFORT LEVEL AT DEPOT
43
Safety stock
inventory cover
Chances of dry-out at depot
resulting in RO dry out
HSD 10 days
1 in 2740 years
MS 7 days
In days
HSD 11 days
1 in 21918 years
MS 8 days
HSD 4.2 days
1 in 8 years
MS 3.8 days
2005-06
Comfort level
Percent
DEPOT EXAMPLE
93 %
99 %
99.5 %
* Assumes 1.5 days of inventory at dealers
Implementing Inventory
Systems in Effective way
? Instead of using a single review period, set review
periods carefully.
? Cost of review Vs benefits from frequent reviews
44
Increase Counting Frequency
? Replace annual physical inventory counting by a process
where part of the inventory is counted every day. Thus,
each item is counted several times a year.
? Make periodic review decisions based on actual inventory
instead of the inventory shown by the software.
45
Develop a schedule for
counting and periodic review
? Develop a schedule for counting and periodic
review (order generation) to balance the efforts
needed for counting over week.
46
Use proper shelving methods
? Train, motivate and monitor staff to keep newly
arrived units at the back of the “right shelf “.
47
? Remember administrative ( labor, IT etc) costs are
insignificant component of SCM costs ( ~ 4 percent)
compared to inventory costs ( ~ 50 percent) and
transportation (~45 percent).
? Even if admin cost gets doubled and inventory and
transport costs reduce by 10 %, the firm can save lot in
SCM costs.
48
doc_453824083.pptx
This is a presentation describes on inventory management.
1
Inventory Performance-India
Food Textile Machinery Metal
Worst 1.2 1.9 1.2 2.5
Average 4.0 5.3 5.5 5.5
Best 31.0 45.2 17.1 42.5
2
Reliance Industries :
1997: 3.5 billion Rs (4% sales)
2005: 10 billion Rs (1 % sales)
Godrej Sara Lee: Brands
Dominant Aerosol Brand
Ambipur – Aircare Pioneer
Superbrand 2005,
Ranked 21
st
in
Brand Equity Survey
Types of Inventory
? Cycle Stock
? Safety Stock
? Pipeline Inventory
? Anticipation stock
? To manage special events
4
Inventory in Chain
? Supply Chain Consist of series of stock points
connected by processes ( Conversion processes &
Transportation processes)
? Each stock point has demand process and supply
process
? Inventory at stock point : Cycle stock, safety stock
? Inventory within conversion and transportation
processes:
? Pipeline stock , work in process
5
Inventory Management: Key
Decisions
? What type of review mechanism
? Continuous Review
? Periodic Review
? How much to Order
? When to Order
? Where to hold inventory
6
7
Inventory Management: Relevant
Cost
? Ordering cost/setup cost
? Inventory carrying cost
? Cost of shortage
? Lost sales
? Backlogging cost
? Purchase cost ( value addition cost) of Item (?)
8
Ordering Cost
? Administration Cost
? Transportation Cost
? Receiving Cost
9
Inventory Carrying Cost
? Financial Cost
? Storage and handling cost
? Inventory risk
Continuous Review-
( R,Q) Policy
? In this inventory policy,
? The order of size Q is placed when the inventory
position reaches the reorder point.
? Inventory position = inventory on the shelf +
inventory ordered from the vendor – items
backordered
? Also called two bin system
10
Cycle Stock Inventory
11
Inventory
on hand
L L L
Q Q Q Q
Time
Basic Fixed Order Quality Model
Inventory Models: Cycle Stock
__________
Q = \ 2 A D / i C
A = Ordering Cost / Cost of setup
D = Annual Demand
i = Inventory carry cost
C = cost of item
12
Pipeline Inventory
13
Pipeline Inventory = PLT * D
where
PLT = Pipeline Lead-time
D = average demand
INVENTORY MANAGEMENT SHOULD BE BASED ON STATISTICAL TECHNIQUES
14
110
–
100
–
90 –
80 –
70 –
60 –
50 –
40 –
30 –
20 –
10 –
0 –
Dead stock
Days
1 2 3 4 5 6 7 8 9 10 11 12
I
n
v
e
n
t
o
r
y
* This is the pumpable inventory. Actual inventory will be safety stock plus dead stock.
•Demand variability
•No supply variability
•Instantaneous demand
replenishment
•Average demand = 25 units
per day
•Batch size = 100 units
Case 2
Safety Stocks and
Service level Measures
? Clearly some stock would be required to handle
variability
? Cycle service level ( Stock-out Probability)
? Order fill rate
15
INVENTORY MANAGEMENT SHOULD BE BASED ON STATISTICAL TECHNIQUES
16
140
–
130
–
120
–
110
–
100
–
90 –
80 –
70 –
60 –
50 –
40 –
30 –
20 –
10 –
0 –
Demand side safety stock = safety factor
* standard deviation of demand * (lead time)
1/2
Dead stock
1 2 3 4 5 6 7 8 9 10 11 12
I
n
v
e
n
t
o
r
y
* This is the pumpable inventory. Actual inventory will be safety stock plus dead stock.
•Demand variability
•No supply variability
•Instantaneous demand
replenishment
•Average demand = 25 units
per day
•Batch size = 100 units
Case 2
Days
17
Safety Stock
Distribution of Demand During Lead Time
Continuous Review: Safety Stock
(R, Q)- No LT variability
S.S = K o
Lead Time Demand
____________
o
Lead Time Demand =
\ L o
D
2
D = average Demand ,o
D
= S.D. of Demand ,
L = Average Lead-time, o
L
= S.D. of Lead-time
K = Safety Factor ( to meet cycle service level)
? Quantity ordered in each period is constant.
? EOQ can be used to place each period order.
18
Quiz
? Gillette India Ltd, Bhivadi, Gujarat imports Gillette Mach3
Turbo blade pack (2 units) from Gillette D.G.C , Berlin. The
landed cost of the blade pack for the company is 200 Rs. The
annual holding cost is 18 percent of the product cost. The
fixed ordering cost is 45000 Rs. The ERP system suggests that
the average weekly demand is 44.58 units and standard
deviation of the weekly demand is 32.08. Being the high
value SKU, the company uses air shipping for transport. The
import lead time is 2 weeks. Company assumes that there is
negligible variation in the lead time. Suggest the appropriate
(R, Q) policy to Gillette to manage it. Being high margin
product, the company wants to maintain 97 percent service
level.
19
? Average demand during lead time
? = 44.58 x 2 = 89.16 twin blades
? Safety stock = 1.9 x 32.08 x
2
20
= 86.2
Reorder point = 89.16 + 86.2 = 175.4 twin blades
INVENTORY MANAGEMENT SHOULD BE BASED ON STATISTICAL
TECHNIQUES
21
* This is the pumpable inventory. Actual inventory will be safety stock plus dead stock.
•Demand variability
•Supply variability
•No instantaneous
demand replenishment
•Average demand = 25 units
per day
•Batch size = 100 units
Case 3
140
–
130
–
120
–
110
–
100
–
90 –
80 –
70 –
60 –
50 –
40 –
30 –
20 –
10 –
0 –
Demand side safety stock = safety factor * standard deviation of demand *
(lead time)
1/2
Dead stock
1 2 3 4 5 6 7 8 9 10 11 12
I
n
v
e
n
t
o
r
y
Supply side safety stock = Safety factor * Lead time variability * average daily demand
Days
Inventory Models- Continuous
Review: Safety Stock (R, Q)
S.S = K o
Lead Time Demand
____________
o
Lead Time Demand =
\ L o
D
2
+ D
2
o
L
2
D = average Demand ,o
D
= S.D. of Demand ,
L = Average Lead-time, o
L
= S.D. of Lead-time
K = Safety Factor ( to meet cycle service level)
? Quantity ordered in each period is constant.
? EOQ can be used to place each period order.
22
Gillette Example- Continued
? Despite of setting higher service level, the retailers
were complaining of poor service. The SC manager
then realized that there is considerable variation in the
import lead time due to delays at customs and in the
production plan. SD of the lead time is one week.
What would be new inventory policy ?
23
?Safety stock= K \ L o
D
2
+ D
2
o
L
2
?
= 1.9
\ 2 x 32.08
2
+ 44.58
2
x 1
2
?
= 120.8 twin blades
?
Reorder Point = 89.2 + 120.8 = 210 twin blades
24
Periodic Review
? At the end or start of each period, the order is
placed whose size is equal to
? Order up to Level – inventory position
? Where inventory position contains on
the shelf inventory +
? inventory in transit to that entity minus
? items backordered
25
Inventory Models- Periodic Review:
Safety Stock
S.S = K o(
Lead Time+review period) Demand
____________
o
Lead Time Demand =
\(L+T)o
D
2
+D
2
o
L
2
D = average Demand ,o
D
= S.D. of Demand ,
L = Average Lead-time, T= Review Period
K = Safety Factor
26
Inventory Models- Periodic Review: Order
up to Level
? Order upto Level = D(L+T)+ Safety Stock
27
Example
? Now, Gillette India is deciding to design a new system.
The company plans to use periodic review to reduce
the stock monitoring efforts. Review period would be
three weeks. Suggest the order up to level to manage
inventories. Assume no lead time variability in this
case.
28
Example Continued
? Average demand during the lead time = d
(L+T)
? = 44.58 x 5 = 222.9
? Safety stock for 97 percent service level
? = 1. 9 x 32.8 x
5
29
= 136
Order up to level = 223 + 136 = 359 twin blades
Impact of cycle service level on
safety factor (K)
Safety factor Service level
0 0.500
0.5 0.690
1.0 0.841
1.5 0.933
2.0 0.977
2.5 0.994
3.0 0.998
30
31
82
84
86
88
90
92
94
96
98
100
400 600 800 1000 1200 1400 1600
S
e
r
v
i
c
e
L
e
v
e
l
Inventory
Impact of cycle Service Level On Safety Stock
? Manager thinks:
? Boss is not happy with the current inventory performance.
I want to improve the performance. But how ?
? Should I implement better forecasting system?
? Should I start inviting proposals for air transport ?
? Should I reduce the variability in the manufacturing plant
that affects the delivery reliability ?
32
Basic Demand and Lead Time
Data
33
Demand Data
d
1
d
2
d
3
d
4
d
5
d
6
d
7
d
8
d
9
d
10
Demand 115 95 150 125 28 90 93 115 93 96
Lead-time data
L
1
L
2
L
3
L
4
L
5
L
6
L
7
L
8
L
9
L
10
Lead-
time
12 15 4 21 18 11 12 18 19 20
Average
Demand
Standard
deviation
of demand
Average
lead-
time
Standard
deviation
of lead-
time
Safety
stock
- units
Safety
stock in
days of
inventory
Remark
100
30 15 5 1026 10.3 Base case
100
15 15 5 1006 10 Reduce demand
uncertainty
100
30 15 2.5 526 5.3 Reduce supply
uncertainty
100
30 7.5 5 1003 10 Reduction in
lead-time
34
Fill Rate Based Model
? Allows us to compute the fraction of the annual
demand that would be met given the SS and order
quantity.
? Allows us to explicitly compute the average annual cost
of stock outs.
? Can study the tradeoffs between stock out costs and
the inventory costs and set the optimal service level.
35
Fill Rate Based Model
? Suppose the average daily demand for the Tea ( 1 Kg)
pack at the Bazaar is 100 packs. The bazaar places an
order of 1600 packs after reaching the RP. The
standard deviation of the demand during the lead
time is 513. Currently the bazaar keeps the safety stock
of 200 packs. What would be the fill rate for the Tata
Tea SKU.
? The retailer looses 15 Rs per stock out.
36
Method
? First Calculate K
4 . 0
513
200
= = =
LTD
SS
K
o
926 . 0
1600
23 . 0 513
1
) (
1 =
|
.
|
\
|
×
÷ =
|
|
.
|
\
|
÷ =
Q
K E
FR
LTD
o
37
From the table, for given K, determine E(K)
For k =0.4, E(K) = 0.23
? On every ordering cycle, the retailer is likely to loose
the demand of
? 1600 (1- 0.926) = 118 packs
? The retailer will place (320 x 100)/1600=20 orders in a
year assuming 320 days/year
? The annual cost of stock out to the retailer is = 118 x 20
x 15 = 35400 Rs
38
Computing the safety stock for a Fill
rate
? Suppose the Food Bazaar decide to keep the fill rate of
98 % for the TATA tea pack.
? What would be the safety stock
39
Method
Rs
t shortage annual
bags K SS
K
K E
K E
LTD
9000
1600 / 100 300 1600 ) 98 . 0 1 ( 15
cos
590 513 15 . 1
15 . 1
0624 . 0 ) (
1600
) ( 513
1 98 . 0
=
× × × ÷ ×
=
= × = × =
= ¬
= ¬
|
.
|
\
|
×
÷ =
o
40
Set the optimal service level
? We can easily calculate the annual inventory holding
cost given order quantity and reorder point.
? We can select the optimal fill rate by doing this
exercise for different fill rates that minimizes the total
SC cost.
41
COMFORT LEVEL IS BASED ON TOTAL COST
42
4
6
8
10
12
14
16
18
92.0% 92.5% 93.0% 93.5% 94.0% 94.5% 95.0% 95.5% 96.0% 96.5% 97.0% 97.5% 98.0% 98.5% 99.0% 99.5% 100.0
%
Optimal comfort level is 97% at 1.5 days of average RO inventory
Total cost in Rs lakhs (Stock out + Inventory holding)
* Inventory is valued at price, Inventory holding cost includes 0.5% as loss due to handling, storage etc
Source: SAP
DEPOT MS EXAMPLE
o
97% =
o
99.5% =
o
93% =
Four parameters
used to set comfort
level
• Inventory holding
cost and loss due to
handling, storage
• Stock out cost
• Average RO
inventory
• Lead time to
service dealer
Comfort level in
percent
Dealer stock at
RO = 1 day
Dealer stock at
RO = 1.5 day
Dealer stock at
RO = 2 days
IMPLICATIONS OF COMFORT LEVEL AT DEPOT
43
Safety stock
inventory cover
Chances of dry-out at depot
resulting in RO dry out
HSD 10 days
1 in 2740 years
MS 7 days
In days
HSD 11 days
1 in 21918 years
MS 8 days
HSD 4.2 days
1 in 8 years
MS 3.8 days
2005-06
Comfort level
Percent
DEPOT EXAMPLE
93 %
99 %
99.5 %
* Assumes 1.5 days of inventory at dealers
Implementing Inventory
Systems in Effective way
? Instead of using a single review period, set review
periods carefully.
? Cost of review Vs benefits from frequent reviews
44
Increase Counting Frequency
? Replace annual physical inventory counting by a process
where part of the inventory is counted every day. Thus,
each item is counted several times a year.
? Make periodic review decisions based on actual inventory
instead of the inventory shown by the software.
45
Develop a schedule for
counting and periodic review
? Develop a schedule for counting and periodic
review (order generation) to balance the efforts
needed for counting over week.
46
Use proper shelving methods
? Train, motivate and monitor staff to keep newly
arrived units at the back of the “right shelf “.
47
? Remember administrative ( labor, IT etc) costs are
insignificant component of SCM costs ( ~ 4 percent)
compared to inventory costs ( ~ 50 percent) and
transportation (~45 percent).
? Even if admin cost gets doubled and inventory and
transport costs reduce by 10 %, the firm can save lot in
SCM costs.
48
doc_453824083.pptx