SCMN 77007706 Demand Fulfillment

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SCMN 7700/7706Demand Fulfillment Segment
14 Inventory Mgt.
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What is inventory?

• Inventory-A physical resource that a firm holds
  in stock with the intent of selling it or
  transforming it into a more valuable state.
• All materials in the supply chain that are used
  to achieve customer satisfaction
• Raw materials
• Work-in-process
• Finished goods

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Inventory Asset or Necessary Evil?

• Promotes economies of scale
• Balances supply and demand
• Enables specialization in manufacturing
• Single line plants
• Provides protection from uncertainties in demand
  and order cycle
• Acts as a buffer between critical interfaces
  within the supply chain
• Can enhance customer service levels

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Inventory - asset or necessary evil?

• It is not free!
• Carrying costs
• It is risky
• Short product life cycles increase risk of
  product obsolescence
• It may not be needed
• Information substitution
• It hides other problems
• It may not add value to the supply chain

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Inventory Management

• Determine and maintain the lowest inventory
  levels possible while meeting required customer
  service levels
• Key activities/decisions
• Forecasting demand and order quantity
• Inventory replenishment how to reorder
• Inventory deployment where to hold goods
• Goal service level optimization

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Inventory Management Issues

• Key decisions include
• How much to order
• When to reorder
• Where to hold inventory
• How much at each location
• Who should own and/or manage inventory
• When to substitute transportation for inventory
• How to balance service and cost
• Ideal on-hand volume (model stock level)
• Need for safety stock
• Customer service levels
• What items should never be out of stock
• What items can be backordered

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Objectives of Inventory Mgmt.

• Predict and work toward the lowest level of
  inventory that will
• Fulfill corporate policies and goals
• Minimize the total cost of logistics activities
• Promote corporate profitability
• Streamline the supply chain
• Service the customer demand

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Inventory Ordering Models
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Fixed Order Quantity Model

• Economic Order Quantity
• Fixed order quantity model that seeks to balance
  ordering costs with holding costs
• EOQ suggest appropriate reordering intervals and
  highlights the value of reducing order placement
  costs
• EOQ does not address real world issues due to
  flawed assumptions
• No stock outs, no lead time
• Order when no inventory
• Order size determines policy

(2DemandOrder Cost)/holding cost
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Fixed Time Period Model

• Every time period, a variable order is placed to
  bring the inventory level up to maximum desired
  quantity

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Continuous Replenishment Model

• Combines fixed time period and fixed order
  quantity methods
• Vendor re-supplies customer based on
  point-of-sale data, inventory levels, warehouse
  information, rather than purchase orders
• Continuous replenishment goals
• 1. Improve inventory turnover 2. Reduction in
  inventory 3. Reduce the chances of stock outs
  4. Improve customer service levels 5. Improve
  warehouse efficiency 6. Enhance trading
  partners' perception of value.  

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Strategies to manage inventory
Optimal positioning Shift in ownership and/or
responsibility Postponement Removing
echelons Inventory models
ABC Analysis Reduced safety stock, lead time,
usage levels Real-time visibility Centralized
decision making
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Strategically Deploy Inventory

• Centralization inventory is placed in fewer,
  more centrally located facilities
• Lower inventory carrying costs due to less safety
  stock
• Better control over inventory
• Economies of scale and lower overhead
• Reduced inbound transport costs
• Decentralization inventory is placed in many,
  customer-facing facilities
• Faster response to customers
• Lower outbound delivery costs

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Prioritize Inventory

• Classifying inventory according to some measure
  of importance (e.g., demand) and allocating
  control efforts accordingly.
• A - very important
• B - mod. important
• C - least important

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ABC Classification Process

• Follow the Pareto Principle to determine the
  items that drive revenue profitability
• Top 80 of demand A items
• Next 15 of demand B items
• All other items C items
• Develop inventory service level and positioning
  policies for each group
• Be cautious - dont ignore dependent demand or
  other must have items

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Postpone Final Form of Inventory Until Demand is
Known

• Common examples of postponement

Paint pizza fountain soda tailored
clothing industrial chemicals Concert
tickets Golf clubs
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Inventory Risk Pooling

• Centralizing inventory reduces both safety stock
  and average inventory level for the same service
  level.
• Why? As we aggregate demand across locations, it
  becomes more likely that the high demand from one
  location will be offset by low demand from the
  other location.
• Works best when
• Products have high coefficient of variation
• Demand between facilities is negatively correlated

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What are some strategies to reduce inventory
levels?

• Use multi-echelon inventory location
• Optimal inventory planning
• Some items are centralized, others are
  regionalized
• Use ABC product demand characteristics in
  location plan
• Conduct lead time reduction initiatives
• Analyze cycle time and delivery time
• Eliminate gaps and delays
• Use faster carriers to reduce safety stock
• Engage in dynamic redeployment
• Change locations as needed to rebalance inventory
  levels across system

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What are some strategies to reduce inventory
levels?

• Perform four-wall inventory management
• Conduct cycle counts to maintain accuracy
• Eliminate low turnover obsolete items
• Use technology to manage inventory
• Auto ID
• Real-time WMS systems
• Increase inventory visibility across supply chain
• Use postponement of final form when possible

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Other ways to effectively manage inventory levels

• Examine/modify returned goods procedures
• Adopt/automate product substitution policy
• Install formal reorder review systems
• Measure fill rates at SKU levels
• Analyze customer demand patterns