Inventory

1. Inventory • Inventory • is any quantifiable item that is stored and used in an operation to satisfy a customer demand • Inventory management • is the planning and controlling of inventory in order to meet the competitive priorities of the operation

2. Why Keep Inventory? • Demand is not always predictable so a buffer may be needed to take account of variation • Planning ahead for future requirements can lead to the following competitive advantages; • Cost, due to bulk purchasing opportunities • Quality, by being able to sort material to obtain the best for each operation • Flexibility, by being able to cater for short-term demand • Dependability, by ensuring a constant supply of raw materials or finished goods in stock • Speed, if there is always material available at each work station the process will flow at a faster rate

3. Different Types of Inventory • Raw Material Inventory - the essential ingredients, components and subassemblies needed to make a product • Work in Progress (WIP) Inventory – also known as semi-finished goods. Partially completed products not yet completed • Finished Goods Inventory – goods which have had all necessary work done on them and awaiting despatch to the customer • Cycle inventory - usually related to products made in batches when more than one type of product is produced

4. Different Types of Inventory • Buffer Inventory – also known as safety stock. Extra material or products made available in case of uncertainty in the supply chain • Anticipation Inventory – stock held in order to absorb large increases in supply or demand • Pipeline Inventory – also known as inventory in transit. These goods are moving between factories warehouses or retail units over large distances and therefore cannot be used on any orders

5. ABC Inventory Classification A way of categorizing inventory items by cost and usage: • Class A items have the highest value • 20% by Quantity, 80% by Value • e.g. motor car engines or gearboxes • Class B items would have less value • 25 -30% by Quantity, 10 - 15% by Value • e.g. motor car seats or wheels • Class C items would have least value • 50-55% by Quantity, 5 -10% by Value • e.g. motor car electrical fixings, cables, switches etc.

6. Inventory Order Models • Lot for Lot - exact quantities are ordered with no safety stock • Fixed Order Quantity – same quantity ordered on each occasion in a variable order time interval • Fixed Order Period – material is ordered at equal time intervals. Quantities will vary. • Economic Order Quantity (EOQ) - a calculation is made which aims to determine the most cost efficient quantity of material to purchase. Based on annual demand, ordering cost, holding cost and the cost per unit.

7. Economic Order Quantity (EOQ) EOQ = (Square Root) of (2*(Annual Demand) *(Order Cost) / (Annual Holding Cost per unit) This more usually expressed as the following formula: Q = √ ((2D x S) /H) Where Q = economic order quantity D = annual demand S = annual ordering cost per unit H = annual holding cost per unit

8. Economic Order Quantity (EOQ)

9. Economic Order Quantity (EOQ) Example: • If the annual demand of a Stock Keeping unit (SKU) is 20,000, the annual ordering cost is £50 per order and the annual holding cost is £20, then the economic order quantity, Q will be: • Q = √ ((2* 20,000 * 50) / 20) • Q = √ (2,000,000 / 20) • Q = √ 100,000 = 316.2 • Therefore the most economical batch quantity to order given those conditions would be 316.

10. Economic Order Quantity (EOQ) • Assumptions and Limitations • Annual and stable (constant) demand • Linear quantity / cost relationship • Constant delivery lead time • Fixed ordering costs • In today’s trading conditions it is unlikely that • organizations will want to bring in all of their requirements in one large consignment. In addition the use of Just in Time (JIT) scheduling has further reduced the use of EOQ models.

11. Demand Fluctuation • Customer demand is variable but in most cases a calculation of safety stock can accommodate this. • However in some instances a disproportionately large fluctuation in demand at the supply end can be caused by a relatively change in demand at the customer demand end of the supply chain. This is known as the Bullwhip Effect, or the Forrester Effect after Jay Forrester (1961) who first reported it in an academic context.

12. Bullwhip Effect

13. Bullwhip Effect Taking an example (see next slide) of a supply relationship between a retailer, wholesaler and manufacturer, we can see the effect of a relatively small change in customer demand. In this case due to the stock and replenishment rules in existence, an increase in customer demand of 8 items sets in motion a disproportionate increase in orders along the supply chain. After Week 3 the customers orders have returned to normal levels but the manufacturer has an order for an additional 64 items.

14. Bullwhip Effect

15. Production Planning and Control Systems These work best when there is dependent demand i.e. orders for one item affect one or more other items. These are usually delivered using a computerized production planning system. Four such systems are: • Materials Requirements Planning (MRP) • Manufacturing Resources Planning (MRPII) • Theory of Constraints (TOC) • Enterprise Resource Planning (ERP)

16. Materials Requirements Planning (MRP) • A system which aggregates demand from Customers taking into account any existing stock. • Developed in the 1960’s using software based planning and inventory control systems. • Based on a Master Production Schedule (MPS) detailing all orders required, a Bill of Material (BOM) which itemizes all component parts, and any finished goods inventory.

17. Materials Requirements Planning (MRP)

18. Manufacturing Resource Planning (MRPII) • An extension of MRP which was seen as having limitations due to inappropriate batch sizes to control inventory, and the fact that it only dealt with materials and no account was taken of capacity issues. • MRP II includes finance, sales and marketing and human resources planning on one database

19. Theory of Constraints (TOC) • An operations control system based on identification of bottlenecks or constraints in the production flow process • Originally developed by Goldratt and Cox (1993) in The Goal: A Process of Ongoing Improvement. • Uses the drum – buffer – rope methodology • Drum – the operation which limits the ability of the system to produce more • Buffer – the amount of work, expressed in time, available to feed the drum • Rope – the way in which work is scheduled through the drum, in order to avoid excessive WIP

20. Enterprise Resource Planning (ERP) • An extension of business systems integration across different companies in the supply network. • Uses web-enabled software to provide real time data and visibility at all points in the supply network. • Relies on rigid software architecture and strict operating rules to ensure information is accurate at all levels. • Integration can be expensive so initially ERP was installed in very large organizations. • However not always successful.

21. Enterprise Resource Planning (ERP) • Research by Wheatley (2010) suggests four features of a successful implementation: • Select a system which fits the industry sector. Many ERP vendors now offer ‘industry templates’ to help with this. • Develop a method to ‘screen’ the available data from the huge amount of information produced by the system. Users can then see only that which they need to act upon. • Design the system in modular form so that it is adaptable as business needs change. • Consider alternative approaches. Rather than having an expensive central server many organizations now make use of ‘cloud computing’ . This is often referred to as Software as a Service (SaaS).

22. Relationship Between ERP and MRP Systems

23. Trends in Inventory Management • Just in Time (JIT) – a method for optimizing operations processes by eliminating all forms of extraneous waste. • Radio Frequency Identification (RFID) – a system whereby tracking devices using global position satellite (GPS) technology are used to identify and locate inventory items in transit. • Electronic Data Interchange (EDI) – the transfer of information using the internet or secure network. An example is the ODETTE system used in the automotive supply industry.