September 24, 2024

Suppose you have been given the task of reducing inventory in your company, without negatively impacting customer service. What actions might you be able to take to acc

Suppose you have been given the task of reducing inventory in your company, without negatively impacting customer service. What actions might you be able to take to accomplish the task? (125-150 words) Use Taco Bell as example

Use the attached Source only

No Ai

Swink_MOAS_4e_Ch07_PPT.pdf

prior written consent of McGraw-Hill Education.

Chapter 7

Managing Inventories

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Learning Objectives

7-1 Define the different types and roles of inventory in the supply chain.

7-2 Explain the financial impact of inventory on firm performance.

7-3 Explain and compute asset productivity and customer service–related measures of inventory performance.

7-4 Calculate inventory policy parameters to minimize total acquisition cost in continuous review, periodic review, and single period models.

7-5 Determine the cost of a company’s service level policy.

7-6 Explain the advantages and disadvantages of different inventory location strategies.

7-7 Describe practical techniques for inventory planning and management.

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Learning Objective 7-1

Inventory at PolyCorp

Inventory:

• When do I order?

• How much do I order?

• Where do I deploy the inventory?

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Learning Objective 7-1

Types of Inventory

• Raw materials and component parts: items that are bought from suppliers to use in the production of a product

• Work in process inventory: inventory that is in the production process

• Finished goods inventory: items that are ready for sale to customers

• MRO inventory: maintenance, repair, and operating supplies

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Learning Objective 7-1

Roles of Inventory

• Balancing supply and demand: decouples differences in supply and demand requirements

• Buffers against uncertainties: variation in supply and demand are managed with buffer (safety) stock

• Enabling economies of buying: price discounts or reduced shipping costs

• Enabling geographic specialization: supply and demand locations vary

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Types of Stock

• Cycle Stocks: inventory repeatedly produced/ordered and used to fill demand

• Seasonal Stocks: additional inventories produced in advance of seasonal peak demands or held after seasonal peak supplies

• Buffer (or Safety) Stock: extra inventory held to guard against uncertainty in demand or supply

• Speculative Stock: stock purchased or produced to hedge against future price increases or shortages

Learning Objective 7-1

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Learning Objective 7-1

Student Activity (1 of 6)

Each of the uses of inventory described has a particular cause. For example, safety stock is needed because managers are uncertain about demand or supply. For each inventory type, list the cause(s) and how each cause could be reduced or eliminated, thereby reducing the need for inventory.

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Learning Objective 7-2

Financial Impact of Inventory

Carrying (Holding) Costs Ordering and Setup

Costs Stockout Costs

• Opportunity cost (including cost of capital)

• Storage and warehouse management

• Taxes and insurance • Obsolescence, spoilage, and

shrinkage • Materials handling, tracking,

and management

• Purchased items: placing and receiving orders

• Made items: change- over between items

• Lost sales or customer loyalty

• Expediting • Schedule disruption

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Learning Objective 7-2

Student Activity (2 of 6)

Using your library’s electronic databases or a Web browser, find three articles that describe specific companies and their efforts to reduce inventory. Summarize the different reasons given for the desire to reduce inventory.

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Measures of Inventory Performance: Inventory Turnover (1 of 2)

Inventory Turnover: ratio between average inventory on hand and level of sales

= Cost of goods sold/Average inventory at cost

= Net sales/Average inventory at selling price

= Unit sales/Average inventory in units

Learning Objective 7-3

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Learning Objective 7-3

Measures of Inventory Performance: Inventory Turnover (2 of 2)

Advantages of high turnover:

• “Fresh” inventory from high sales

• Reduced risk of obsolescence or need to mark down

• Reduced total carrying costs

• Lower asset investment and higher productivity

Dangers of high turnover:

• Stockouts may mean lower sales

• Increased costs from missing quantity requirements

• Increased purchasing, ordering, and receiving time, effort, and cost

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Learning Objective 7-3

Measures of Inventory Performance: Inventory Turnover—Example 7-2

Suppose a firm has an annual cost of goods sold of $500 million and its average inventory level during the year is $80 million at cost. What is the firm’s inventory turnover?

Inventory turnover =

= Cost of goods sold/Average inventory level

= $500/$80

= 6.25 turns

Or, in terms of days

= 365 days/6.25 times

= 58.4 days

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Learning Objective 7-3

Measures of Inventory Performance: Days of Supply, Service Level, Stockouts

• Days of Supply: length of time operations can be supported with inventory on hand

• Service Level: ability to meet customer demand without a stockout

• Stockout: no inventory is available

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Measures of Inventory Performance: Days of Supply—Example 7-3

Suppose there are currently 2,000,000 finished automobiles sitting in dealer or manufacturing facility lots. If expected sales of automobiles are 25,000 units per day, how many days of supply are there?

= Current inventory/Expected daily sales

= 2,000,000/25,000

= 80 days

Learning Objective 7-3

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Student Activity (3 of 6)

Choose three companies that are competitors in an industry of interest to you. Find their most recent annual reports and compute and compare their inventory turnover ratios. Explain the financial and marketing implications of the differences in inventory turnover rates for each of the three companies.

Learning Objective 7-3

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Learning Objective 7-4

Inventory Management Systems (1 of 2)

• Independent Demand: demand for an item is beyond control of the organization

• Dependent Demand: demand for an item is driven by demand for another item

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Learning Objective 7-4

Inventory Management Systems (2 of 2)

• Continuous Review Model: inventory is constantly monitored to decide when a replenishment order needs to be placed

• Periodic Review Model: management system built around checking and ordering inventory at some regular interval

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Total Acquisition Costs (1 of 2)

• Total Acquisition Cost: sum of all relevant annual inventory costs

– Holding Costs: associated with storing and assuming risk of having inventory

– Ordering Costs: associated with placing orders and receiving supply

Learning Objective 7-4

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Total Acquisition Costs (2 of 2)

TAC = annual ordering cost + annual carrying cost

TAC = Co (D/Q) + UCi * Q/2

N = D/Q

I = Q/2

Where:

N = orders per year I = average inventory level

D = annual demand Co= order cost

Q = order quantity U = unit cost

Ci = % carrying cost per year

Learning Objective 7-4

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Total Acquisition Costs—Example 7.4

If we need 3,000 units per year at a unit price of $20 and we order 500 each time, at a cost of $500 per order, with a carrying cost of 20 percent, what is the TAC?

N = D/Q = 3000/500 = 6 orders per year

I = Q/2 = 500/2 = 250 average inventory

TAC = ordering cost + carrying cost

= Co (D/Q) + (UCi )(Q/2)

= $50 (3000/500) + ($20 × 20%) × (500/2)

= $1,300

Where:

N = D/Q Q = 500 I = Q/2

U = $20 D = 3,000 Co = $50 Ci = 20%

Learning Objective 7-4

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Total Acquisition Costs—Example 7.5

If we need 3,000 units per year at a unit price of $20 and we order 200 each time, at a cost of $500 per order, with a carrying cost of 20 percent, what is the TAC?

N = D/Q = 3000/200 = 15 orders per year

I = Q/2 = 200/2 = 100 average inventory

TAC = ordering cost + carrying cost

= Co(D/Q) + (UCi)(Q/2)

= $50(3000/200) + ($20 × 20%) × (200/2)

= $1,150

Where:

N = D/Q Q = 200 I = Q/2

U = $20 D = 3,000 Co = $50 Ci = 20%

Learning Objective 7-4

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Total Acquisition Costs Comparison

Figure 7-1 Trexoid Inventory Saw-Tooth Diagram: Order Quantity 500

Figure 7-2 Trexoid Inventory Saw-Tooth Diagram: Order Quantity 200

Learning Objective 7-4

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Learning Objective 7-4

Economic Order Quantity (EOQ) (1 of 4)

• Economic Order Quantity (EOQ): minimizes total acquisition costs; points at which ordering costs and carrying costs are equal

EOQ = 2DC

UC i

D = Annual Demand

C 0

= Ordering cost

U =Unit cost

C i =Holding cost

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Learning Objective 7-4

Economic Order Quantity (EOQ) (2 of 4)

Example 7-6

If we need 3,000 units per year at a unit price of $20, at a cost of $50 per order with a carrying cost of 20 percent, what is lowest TAC order quantity?

EOQ = 2DC

UC i

= 2´3000´50

20´20%

=273.86 =274

D = 3,000

C 0

= $50

U = $20

C i = 20%

prior written consent of McGraw-Hill Education.7-25

Learning Objective 7-4

Economic Order Quantity (EOQ) (3 of 4)

Example 7-6

If we need 3,000 units per year at a unit price of $20, at a cost of $50 per order with a carrying cost of 20 percent, what is lowest TAC order quantity?

3000/274 = 10.948, rounded to 11. Average inventory will be 137 units.

TAC = Order cost + Inventory carrying cost = 11($50) + 137($20)(.2) = $550 + $548 = $1,098

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Learning Objective 7-4

Economic Order Quantity (EOQ) (4 of 4)

Figure 7-3 EOQ Cost Trade-Offs

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Learning Objective 7-4

Reorder Point (1 of 2)

• Reorder Point: minimum level of inventory that triggers a replenishment

• When to order:

ROP = d( ) t d = average demand per time period

t = average supplier lead time

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Reorder Point (2 of 2)

Example 7-7 If you use 10 units per day, and the lead time for resupply is 9 days, how low can your inventory get before placing a new order?

ROP = d( ) t = 9´10

= 90

d =10

t = 9

Learning Objective 7-4

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EOQ Extensions

Assumptions underlying EOQ:

• No quantity discounts

• No lot size restrictions

• No partial deliveries

• No variability

• No product interactions

Learning Objective 7-4

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Quantity Discounts

Determining best price break quantity:

• Identify price breaks/lot size restrictions

• Calculate EOQ for each price/lot size

• Evaluate viability of each option

• Calculate TAC for each option

• Select best TAC option

Learning Objective 7-4

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Learning Objective 7-4

Total Acquisition Costs

TAC+C 0

è ç

ø ÷+UC

è ç

ø ÷+UD

C 0

= Ordering cost

D = Annual demand

Q = Order quantity

U =Unit cost

C i =Holding cost

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Total Acquisition Costs—Without Price Discount

Example 7-8

If we need 3,000 units per year at a unit price of $20, at a cost of $50 per order with a carrying cost of 20 percent, what is TAC with a Q=1,000?

Where:

C 0

= $50 D = 3,000 Q =1,000

U = $20 C i = 20%

TAC =C o

è ç

ø ÷+UC

è ç

ø ÷+UD

= $50 3,000

274

è ç

ø ÷+$20´ 20%

274

è ç

ø ÷+$20´3,000

= $61,095.45

Learning Objective 7-4

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Learning Objective 7-4

Total Acquisition Costs—With Price Discount

Example 7-8

If we need 3,000 units per year at a unit price of $19, at a cost of $50 per order with a carrying cost of 20 percent, what is TAC with a Q=1,000?

Where: C 0

= $50 D = 3,000 Q =1,000

U = $19 C i = 20%

TAC =C o

è ç

ø ÷+UC

è ç

ø ÷+UD

= $50 3,000

1,000

è ç

ø ÷+$19´ 20%

1,000

è ç

ø ÷+$19´3,000

= $59,050

TAC at unit cost $20= $61,095.45, new price saves

$2,045.45

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Student Activity (4 of 6)

Think about several instances where you have bought a larger quantity of an item than you would normally buy. What factors influenced you to do so? Explain how those factors relate to the discussion of EOQ and TAC.

Learning Objective 7-4

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Learning Objective 7-4

Production Order Quantity (1 of 2)

Production Order Quantity: most economical order quantity when units become available at rate produced

 

  

 −

d UC

DC Q

2 0

D = Annual demand

C o

= Ordering cost

C i =Holding cost

U =Unit cost

d = daily rate of demand

p = daily rate of production

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Learning Objective 7-4

Production Order Quantity (2 of 2)

Example 7-9

Q p

= EOQ

D = 500,000

C 0

= $2,000

C i = 25%

U = $10

d = 2,000

p = 5,000

Economic Production Size:

Q p

= 2DC

C i U 1-

è ç

ø ÷

= 2´500,000´$2,000

25%´$10 1- 2,000

5,000

è ç

ø ÷

= 36,514.84

= 36,515

Length of Production Days:

=Q p

= 36,515 5,000 =7.3 days

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Production Order Quantity—Example 7-9

Consider the manufacturer of the Trexoid video games you have been ordering for your store. The manufacturer expects annual demand from all retailers to be 500,000 units of Trexoid games. It receives orders from retailers for, on average, 2,000 units per day (250 days per year). To change from production of another game to production of Trexoid requires a setup cost of $2,000. Once production of Trexoid units begins, it can produce 5,000 units per day. The cost to produce a unit of Trexoid is $10. Finally, the manufacturer has determined that its inventory carrying cost is 25 percent annually. The fundamental question to answer is how many units of Trexoid should be ordered in each production run? It is also useful to know the length of the production run in days.

Qp= production order quantity (the same concept as EOQ)

D = annual demand = 500,000

Co= setup cost (the same concept as ordering cost in EOQ) = $2,000

Ci = annual inventory carrying cost percentage = 25%

U = unit cost = $10

d = daily rate of customer demand = 2,000

p = daily rate of production = 5,000

Learning Objective 7-4

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Student Activity (5 of 6)

Verify the difference between the Qp quantity and the EOQ. You can do that by using the standard EOQ formula and assuming that all items produced arrive simultaneously.

Learning Objective 7-4

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Standard Deviation of Demand During Lead Time (1 of 2)

Variation can occur in both demand rates and lead times

s ddlt

= ts 2

d + d 2s

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Suppose you have been given the task of reducing inventory in your company, without negatively impacting customer service. What actions might you be able to take to acc

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