Understanding Inventory Models in Supply Chain Management

1. SCM centers around INVENTORY. Where to keep, how much, how to ship? How to reduce it, trade it off? Inventory models provide foundation for understanding SCM concepts. Inventory Models: Planning and Managing Inventories in a Supply Chain Read: 3.1-3.5; 10.1 upto p281, 10.6; 12.1 -12.2.

3. A Macro-view of Supply Chain -- Flows Web Information Warehouse After sales support

4. List of Issues • The diversity of stock-keeping units • Functional classifications of inventories • Periodic review & continuous review models • Newsboy model

5. What Is Inventory? • Stock to be sold or transformed into a more valuable state • Stock in transit/storage - all materials in transit or in storage Previously, inventory is flow unit!

6. What Is Inventory? • Stock in transit/storage - all materials in transit or in storage • Examples

7. Companies hold inventories for the following reasons: • Pipeline inventory • Seasonal inventory • Cycle inventory • Decoupling inventory/buffers • Safety inventory • Speculative inventory • Display inventory

8. Pipeline inventory • An item (a flow unit) that has to spend in the process in order to be transformed from input to output • Pipeline inventory also refers to as an item in the up-stream supply chain that is designated to coming to you E.g., you order today, then it takes 1 wk for order preparation, then 3 wks shipping =4 wks

9. Zero inventory? • If one states “we need to achieve zero inventory in our process”, how will you respond? • By Little’s Law, Inv = flow rate * flow time

10. 5 Reasons for inventory • Seasonal demand • Christmas, Chinese NY, etc. • Seasonal supply • Harvests Economy of scale e.g., transportation, to take adv. of quant. discounts Pipeline inventory Seasonal inventory Cycle inventory Decoupling inventory/buffers Safety inventory Central DC -> Regional DC -> Retailers HK Vendor -> US OEM (brand owner) =) To maintain independence of operations Demand uncertainty Supply uncertainty

11. Reasons against Holding Inventory • Interest/Opportunity costs • Holding (or carrying) cost • Building lease, insurance, etc. • Depreciation of inventory value • Damages while in-hold • Hides production/operations problems

12. Lowering Inventory Reduces Waste Unreliable Vendors Capacity Imbalances Scrap

13. Lowering Inventory Reduces Waste Unreliable Vendors Capacity Imbalances Scrap

14. Lowering Inventory Reduces Waste Unreliable Vendors Capacity Imbalances Scrap

15. Lowering Inventory Reduces Waste Unreliable Vendors Capacity Imbalances Scrap

16. Lowering Inventory Reduces Waste Unreliable Vendors Capacity Imbalances Scrap

17. Lowering Inventory Reduces Waste Work in process inventory level(hides problems) Unreliable Vendors Capacity Imbalances Scrap

18. Lowering Inventory Reduces Waste Work in process inventory level(hides problems) Unreliable Vendors Capacity Imbalances Scrap

19. Lowering Inventory Reduces Waste Work in process inventory level(hides problems) Unreliable Vendors Capacity Imbalances Scrap

20. Lowering Inventory Reduces Waste Reducing inventory revealsproblems so they can be solved. WIP Unreliable Vendors Capacity Imbalances Scrap

21. Lowering Inventory Reduces Waste Reducing inventory revealsproblems so they can be solved. WIP Unreliable Vendors Capacity Imbalances Scrap

22. Lowering Inventory Reduces Waste Reducing inventory revealsproblems so they can be solved. WIP Unreliable Vendors Capacity Imbalances Scrap

23. Lowering Inventory Reduces Waste Reducing inventory revealsproblems so they can be solved. Therefore, quality is pre-requisite for low inventory. The core of JIT is of low inventory. Then, Total quality mgmt & JIT are interdependent. WIP Unreliable Vendors Capacity Imbalances Scrap “Japanese Style of Mgmt”

24. Japanese Mgmt Four CEOs, one English, one French, one Japanese and one American, were on their way to an international buz conference when they were kidnaped by terrorists and taken to a secret hideout. "You, your companies and your countries are enemies of the Revolution," screamed the terrorist leader, "and you're going to be executed! Do you have any last requests?" The Englishman spoke first. "Before I die, I want to honor my contry and ……” // "That can be arranged," said the terrorist. The Frenchman said, "And I want to honor MY country before I die by singing " La Marseilles" to your men." http://www.youtube.com/watch?v=-NzXGqEgq8Q&feature=related

25. Japanese Mgmt The Japanese said, "Before I die, I wish to honor MY country by giving the lecture I was going to present on the Japanese style of management." The terrorist turned finally to the American. "What is YOUR last request?" The American replied, "I want you to kill me right now so I don't have to listen to another lecture on the Japanese style of management!" JIT

26. SKU • Managerial decisions regarding inventories ultimately made at the level of an individual item or product • SKU - specific unit of stock - item of stock that is completely defined as to function, style, size, & colour.

27. The Diversity of Stock-Keeping Units SKU: an item of stock that is completely specified as to function, style, size, colour. • Facts • Large retailers carry about 100,00 SKUs • A typical medium-sized MNC mfg concern keeps in inventory about 10,000 types of raw materials, parts, and finished goods • Some large mfg companies & defence org. stock more than 500,000 distinct items • May be perishable -- deterioration, obsolescence • Goods also arrive by diff. transport. modes & in quant.

28. ABC Classification Do forecasting manually? Manage them by managers?

29. The ABC Classification • Close examination of multi-SKU inventory systems reveals a statistical regularity in the usage rate of diff items ($) • A class, B class, C class: 80/20 rule • Policies based on ABC analysis • Develop class A suppliers more ... • Give tighter physical control of A items • Forecast A items more carefully

30. 总销量 $ 90％ 80％ 20% 40% 100% 累积存货单元数

31. ABC Classification Solution* Note: Example is for illustration only; too few items.

32. More about 80/20 Principle • The 80/20 principle asserts that a minority of causes, inputs or effort usually lead to a majority of the results, outputs or rewards. • In business: 20% products - 80% revenue * • In society, 20% criminals - 80% value; 20% motorists - 80% accidents * • In home, 20% clothes - worn 80% time • In bars, 20% drinkers – 80% sales • IBM found 80% computer time spent executing about 20% of routines/codes • Winner takes all: 5% families - 75% equity

33. More about 80/20 Principle Causes Consequences Effort Results Input Output 65/35, 75/25, 80/20, 90/10, 95/5, 85/10

34. More about 80/20 Principle • “50/50 fallacy” - effort and results are not generally equally balanced • Resources that have weak effects in any particular use are not used, or are used sparingly • If course grades depend entirely on Finals ? • 80% of work done by 20% workers • 80% total beer was drunk by 28% drinkers

35. A typical refrigerator has its “freezer compartment” on the top and “cool store” in the lower part. So you would bend over to pick up fruits and so on. • But people 80% of time use “cold store”,, whearea only 20% of their time “freezer compartment”. The standard structure make a lot of housewives back-pains! • One dept director could only work for 3-4 hours due to hart problems recently。To his surprise, he found • No thing much he missed for his work quality-wise, as compared with his work of 0-12 hours per day before. 。

36. (1) 80%的外出吃飯都前往20%的餐館； • (2) 80%的生產量是源自20%的生產量； • (3) 80%的病假是由20%的員工所佔用； • (4) 80%的檔案使用量集中於20%的檔案； • (5) 80%的討論都是出自20%的討論者 • (6) 80%的垃圾是源自20%的地方； • (7) 80%的檔案使用量集中於20%的檔案； • (8) 80%的看電視時間都花在20%的節目； • (9) 80%的閱讀的書籍都是取自書架上20%的書籍； • (10) 80%的看報時間都花在20%的版面； • (11) 80%的電話都是來自20%的發話人； • (12) 80%的教師輔導時間都被20%的學生所佔用； • (13) 80%的菜是重複20%的菜色； • (14) 80%上課時間只學到 20％的…。

37. Time management class • One day a time mgmt expert was speaking to a group of business students. As this man stood in front of the group of high-powered overachievers he said, "Okay, time for a quiz." • Then he pulled out a one-gallon, wide-mouthed mason jar and set it on a table in front of him. Then he produced about a dozen fist-sized rocks and carefully placed them, one at a time, into the jar. • When the jar was filled to the top and no more rocks would fit inside, he asked, "Is this jar full?" • Everyone in the class said, "Yes."

39. He reached under the table and brought out a bucket of sand. He started dumping the sand in and it went into all the spaces left between the rocks and the gravel. Once more he asked the question, "Is this jar full?" • "No!" the class shouted. Once again he said, "Good!" Then he grabbed a pitcher of water and began to pour it in until the jar was filled to the brim. Then he looked up at the class and asked, "What is the point of this illustration?"

40. One eager beaver raised his hand and said, "The point is, no matter how full your schedule is, if you try really hard, you can always fit some more things into it! – drink beers, …” • "No," the speaker replied, "that's not the point. The truth this illustration teaches us is: If you don't put the big rocks in first, you'll never get them in at all." What’s the moral of this story? Put the rocks in first.

41. The Long Tail • Originated from Statistics: dinosaur’s long tail • <Wired>magazine editor,Chris Anderson, 2004coined it: so long as storage and channel are big enough, the sales of low demand items all together can match those of the hit products • 80-20： minority vs. majority • Long taillook at the 80%of trivial items

42. Amazon.com found among millions of books that it sold online, hundreds count for a half of its revenue, the other half from the rest of millions.

43. NPR: What is the value of an e-book? (Mar 12): • E.g., on-demand printing has been a boon for self-publishing. To put this all in perspective, Lightning Source produced 20 million books last year but its average print run per title was less than two. Mr. JASON EPSTEIN (Editor, Publisher, Author): It is the most exciting event, as far as books are concerned, in 500 years. … There will be no inventory. There will simply be digital files, and they’ll be available worldwide at the click of a mouse. This makes much of what publishers now do irrelevant: creating inventory, putting it in the warehouse, keeping track of it, selling it, shipping it. All that’s going to go. the Economist on on-demand printing (Just press print, Feb 27, 2010).  http://www.lightningsource.com/ http://www.youtube.com/watch?v=Q946sfGLxm4&feature=player_embedded

44. In fact, the industry is based on the understanding that as much as 70 percent of the books published will make little or no money at all for the publisher once costs are paid.

45. About 6% of books in America are now printed on toner-based or inkjet machines—a rough proxy for print-on-demand (POD)—as opposed to on offset presses, estimates InterQuest, a market-research firm. Over the next five years, it predicts, this figure will increase to 15%. In 2008, the latest year for which data are available, about 285,000 titles were printed on demand or in short runs—132% more than in 2007 and for the first time more than in the conventional way. Amazon, the world’s biggest online bookseller, uses POD machines, although it does not reveal how often.

46. Other Inventory Classifications Inventory

47. Other Inventory Classifications Inventory Process Stage

48. Inventory Classifications Inventory Process Stage Raw Mat'l WIP Fin. Goods

49. Inventory Classifications A Inventory Process Number Stage & Value B C Raw Mat'l A Items WIP B Items Fin. Goods C Items

50. Inventory Classifications Inventory Independent Process Number Demand Stage & Value Type Raw Mat'l A Items Independent WIP B Items Dependent Fin. Goods C Items Dependent