Part 4- Planning the SC--> Inventory planning Flashcards
Inventory planning steps
1) Demand calculated
2) How much + when to produce (or purchase)
3) Determine current inventory position (CIP = sku´s ability to satisfy future demand)
4) CIP is adjusted with demand forecast + lead time + safety stock –> Future period inventory (planned orders)
5) Aggregate planning (considering material, manpower, machine constraints etc)
CIP
CIP = scheduled receipts (production or purchase orders- includes the quantities that are already planned to produce) + on-hand inventory (already produced and in the warehouse) - open customer orders
Example:
10 bikes produced today + 10 we have in the warehouse - 5 sold and shipped out today = 15 bikes
2 general categories of inventory
1) Dependent demand inventory → demand of a product linked to the demand of other products
Example: Tires on a bike
2) Independent demand inventory → inventory requirements for finished goods (ready for the consumer)
4 main types of inventory
1) Raw materials and components
2) WIP (Work in progress) → Materials and parts that have been partially transformed but are not yet finished goods
3) Finished goods
4) MRO- Maintenance, repair and operations → office equipments, packing boxes and tools
Costs of inventory
1) Holding costs → total from 15-40%
- Capital/ opportunity cost + physical space occupied by the inventory + handling of inventory + pilferage, scrap, deterioration and obsolescence
- huge impact on a business profitability
2) Ordering costs
- Fixed (facility, computer system) + variable (preparing and creating purchase orders, processing payment etc) costs
3) Setup costs
- Fixed + variable costs
- Costs connected with changing production (labour, spare parts, downtime..)
Total costs
The target is to minimize total costs when placing inventory orders. That occurs where holding costs intersects with setup costs –> EOQ (economic order quantity)
- assume ordering costs are constant
- only focus on holding and setup costs
- holding costs→ increase with order quantity increased
- setup costs→ decrease with order quantity increased
Reorder point (ROP) Models
- When should the company make the orders?
- The point when the company should make the order is called ROP
- If suddenly the manufacturer are out of products the process fully stops which creates big problems
- Workers/employees are redundant for a certain time, no progress ++
Two different models:
- fixed quantity model
- fixed period model
The fixed quantity model (ROP)
Always the same quantity
ROP = d x L (the simple model)
d = demand per day
L = the replenishment lead time for a new order (in days)
Example: If the demand is 10 un/day and the replenishment time is 3 days, the ROP will be 30 un.
To reflect reality we can’t assume d and L are constant–> we need to include safety stock to compensate this real variability.
ROP = d x L + SS (via rules of thumb or statistics)
Rules of thumb for safety stock calculations
- half lead time (d x L / 2)
- maximum sales - average sales
- statistical ss converted to days
Fixed period model (ROP)
- the time is the constant
- inventory is continuously monitored
ordered each monday/ first day of the month etc - same time always
Example of people using this method: When vendors make routine visits to customers and take orders for their complete line of product - make the order after they have seen the stock of inventory
Single period model (ROP)
- for the companies that make just a single order
- used for seasonal products ( make on order and have for the whole season), perishable goods (fresh bread, fruits ++) or one-time items (newspapers
- extra costs to ordering both too much or too little
ABC method of inventory planning and control
Based on the Pareto principle, 80/20 rule → fem number of items (the A items) typically generate a large % of sales or profits
A items → the biggest sellers, high volume of sales, few days of supply (20% of the items and account for 80% of the sales)
C items → small amounts sold, demand is more volatile, many days of supply inventory (50% of the items and account for only 5% of the sales)
B items → in the middle (30% of the items and account for 15% of the sales)
Realities of ABC classification
→ better to use sales/ costs in dollars than units- the importance is the profit, not the volume
→ it’s not always exactly 80/20- depends on the company, can be difficult to make the classifications
→ an A is not always an A- when a company has different locations the ABC codes may change from one location to another
→ history vs forecast for ABC classification- better to use history
Other uses for ABC classification
→ sku rationalization- to decide if products should be discontinued etc
→ quality control- to find out why an item deteriorate from its classification from A down to B
Inventory control and accuracy
- companies normally have a software system that keeps perpetual count of the inventory- can be inaccurate due to inadequate procedures, lost paperwork and lack of training
- a complicated task- most companies have to stop the activities
- a physical inventory count is normally done at the end of the year when people are on holiday/ there is a slow production etc
- physical inventory count once per year
the traditional method
