Appreciate the role and importance

Chapter 9 MANAGING INVENTORY IN THE SUPPLY CHAIN 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. After reading this chapter, you should be able to do the following: Learning Objectives Appreciate the role and importance of inventory in the economy. List the major reasons for carrying inventory. Discuss the major types of inventory, their costs, and their relationships to inventory decisions. Understand the fundamental differences among approaches to managing inventory. 2 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Describe the rationale and logic behind the economic order quantity (EOQ) approach to inventory decision making, and be able to solve some problems of a simple nature. Understand alternative approaches to managing inventoryjust-in-time (JIT), materials requirement planning (MRP), distribution requirements planning (DRP), and vendor-managed inventory (VMI). 3 Learning Objectives, continued 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Explain how inventory items can be classified. Know how inventory will vary as the number of stocking points changes. Make needed adjustments to the basic EOQ approach to respond to several special types of applications. 4 Learning Objectives, continued 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Inventory is an asset on the balance sheet and a variable expense on the income statement. Inventories also have an impact on return on investment (ROI) for the firm. Inventories also have an impact on return on investment (ROI) for an organization. Introduction 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Nominal GDP grew by 106.7 percent between 1994 and 2010. The value of inventory increased by 83.1 percent during the same time period. Inventory costs as a percent of GDP declined from 15.9 percent in 1994 to 14.1 percent in 2010. Inventory in the U.S. Economy 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Table 9.1 Macro Inventory vs. GDP 7 Source: 22nd Annual State of Logistics Report, CSCMP 2011 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Batching Economies or Cycle Stocks Arises from three sources. procurement production transportation Uncertainty and Safety Stocks All organizations are faced with uncertainty. On the demand side, there is usually uncertainty in how much customers will buy and when they will buy it. Inventory in the Firm 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Uncertainty and Safety Stocks, continued On the supply side, there might be uncertainty about obtaining what is needed from suppliers and how long it will take for the fulfillment of the order. Time/In-Transit and Work-in-Process Stocks The time associated with transportation means that even while goods are in motion, an inventory cost is associated with the time period. The longer the time, the higher the cost. 9 Inventory in the Firm, continued 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Time/In-Transit and Work-in-Process Stocks, continued WIP inventories, associated with manufacturing, can be significant while the length of time the inventory sits in a manufacturing facility waiting and should be carefully evaluated in relationship to scheduling techniques and the actual manufacturing/assembly technology. Seasonal Stocks Seasonality can occur in the supply of raw materials, in the demand for finished product, or in both. Those faced with seasonality issues are constantly challenged when determining how much inventory to accumulate. 10 Inventory in the Firm, continued 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Seasonal Stocks, continued Seasonality can impact transportation. Anticipatory Stocks A fifth reason to hold inventory arises when an organization anticipates that an unusual event might occur that will negatively impact its source of supply. The Importance of Inventory in Other Functional Areas Logistics interfaces with an organizations other functional areas. Marketing Manufacturing Finance 11 Inventory in the Firm, continued 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Table 9.2 Logistics Costs 2010 12 Source: 22nd Annual State of Logistics Report, CSCMP 2011 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 9.1 ABC Power Tools In-Transit Inventory Analysis 13 Source: Robert A. Novak, Ph.D. 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Table 9.3 ABC Power Tools In-Transit Inventory Analysis Current 14 Source: Robert A. Novak, Ph.D. 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Table 9.4 ABC Power Tools In-Transit Inventory Analysis Proposed 15 Source: Robert A. Novak, Ph.D. 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Inventory Carrying Costs Capital Cost (interest or opportunity cost) cost of capital tied up in inventory and the resulting lost opportunity from investing that capital elsewhere hurdle rate weighted average cost of capital (WACC) Storage Space Cost Includes handling costs associated with moving products into and out of inventory, as well as such costs as rent, heat, and light. Can be variable. Inventory Costs 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Inventory Service Cost Includes insurance and taxes. Inventory Risk Cost Reflects the possibility that inventory value might decline for reasons beyond firms control. Calculating the Cost of Carrying Inventory First, determine the value of the item stored in inventory. Second, determine the cost of each individual carrying cost component to determine the total direct costs consumed by the item while being held in inventory. Third, divide the total costs calculated in Step 2 by the value of the item determined in Step 1. 17 Inventory Costs, continued 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Table 9.5 ABC Power Tools Inventory Carrying cost for Item 1 18 Source: Robert A. Novak, Ph.D. 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Table 9.6 ABC Power Tools Inventory Carrying cost for Item 1 to Customer 19 Source: Robert A. Novak, Ph.D. 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Table 9.7 Inventory Carrying Costs for ABC Power Tools 20 Source: Robert A. Novak, Ph.D. 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Order and Setup Cost Order Cost cost of placing order which may have both fixed and variable components Setup Costs expenses incurred each time an organization modifies a production or assembly line to produce a different item for inventory Expected Stockout Cost Back order results in the vendor incurring incremental variable costs associated with processing the extra shipment. Customer might decide to purchase a competitors product resulting in a direct loss for the supplier. Customer might decide to permanently switch to a competitors product with loss of income. 21 Inventory Costs, continued 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Table 9.9 Summary of Inventory and Order Cost 22 Source: C. John Langley, Ph.D. 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 9.2 Inventory Costs 23 Source: C. John Langley, Ph.D. 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. In-Transit Inventory Carrying Cost Owner of product while it is in transit will incur resulting carrying costs. In-transit inventory carrying cost becomes especially important on global moves since both distance and time from the shipping location both increase. Owner should consider its delivery time part of its inventory carrying cost. Key Differences Among Approaches to Managing Inventory Dependent versus Independent Demand independent when such demand is unrelated to the demand for other items dependent when it is directly related, or derives from, the demand for another inventory item or product 24 Inventory Costs, continued 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 9.3 Safety Stocks and Service Levels 25 Source: Robert A. Novak, Ph.D. 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 9.4 Inventory and Service Levels 26 Source: Robert A. Novak, Ph.D. 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Key Differences Among Approaches to Managing Inventory, continued Pull versus Push The pull approach relies on customer orders to move product through a logistics system, while the push approach uses inventory replenishment techniques in anticipation of demand to move products Principle Approaches & Techniques for Inventory Management Fixed order quantity model involves ordering a fixed amount of product each time reordering takes place 27 Inventory Costs, continued 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Principle Approaches & Techniques for Inventory Management, continued Simple EOQ Model The following are the basic assumptions of the simple EOQ model: A continuous, constant, and known rate of demand A constant and known replenishment or lead time All demand is satisfied A constant price or cost that is independent of the order quantity (i.e., no quantity discounts) No inventory in transit One item of inventory or no interaction between items Infinite planning horizon Unlimited capital 28 Inventory Costs, continued 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 9.5 Fixed Order Quantity Model with Certainty 29 Source: John C. Coyle, DBA

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