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T6: Inventory Management (CH9) (Inventory managers must plan and control…
T6: Inventory Management (CH9)
Types of inventories
Cycle inventories
Regular or cyclic batch basis
Queues of customers
Queues can help manage demand and supply
Buffer stocks
Ensuring there is enough inventory to meet spikes in demand and not leave a dry spell afterwards
Information inventories
Databases of info that can enable a smooth flow
Pipeline inventories
Supplier needs to 'fill' the pipeline of supply before they can reach the end customers
If there are potential bottleneaks, they need to account for this through inventory placement
Also known as 'transit inventories'
Inventory managers must plan and control for:
Storage, handling and the physical condition of inventory
Relationships with suppliers and logistics service providers
The timing, availability, and cost of inventory
Liaison with engineering and manufacturing over changes to available parts and raw material components
The quantities purchased
Checking incoming quality and invoking return policies
Reducing inventory in the system wherever possible
Inventories - Define: 'Accumulations' of materials, customers, or information
Pros/Cons of inventories (p.297)
Pros
Physical inventory (materials)
Can use to advantage in short-term opportunities
An insurance against uncertainty
Can be used to anticipate future demand, i.e. building up for xmas demand
Can reduce overall costs, i.e. bulk-buying or reduced admin/handling costs
Can increase in value
Fills the processing 'pipeline'
Counteract a lack of flexibility
Queues of customers (p.298)
Help balance capacity and demand
Enables prioritisation
Gives customers time to choose
Enables efficient use of resources (batching)
Databases (p.299)
Allow single data capture
Speed of process
Provide efficient multi-level access
Cons
Space
Queues - wait areas / phone lines
Materials - storage space
Database - Memory capacity, security, coms room
Quality
Queues - Upsets by long wait
Database - corrupted / lost / obsolete
Materials - deterioration / damage / obsolecence
Cost
Materials
Ties up working capital
Admin / Insurance costs
Queues - time-cost for customers
Database - set-up, access, update, maintenance
Operational / organisational
Materials - May hide problems - see Lean Ch11
Queues - stress on staff or reduced quality of throughput
Database - constant management / control / security
Table on some ways to reduce inventory, (p.300)
Ordering theories (p.300)
Economic Order Quantity (p. 302)
A means of calculating the optimal order size
Calculating benefits of smaller / bigger orders and determine best value
Based on steady demand
Once optimal quantity is determine, slight changes in the quantity for convenience of ordering won't make too much different to cost
Economic Batch Quantity (p.305)
Used to calculate order quantities for batches of continuous restocking items, such as between depts. in a factory
Inventory decisions - when to order (p.308)
Reorder point (ROP)
Based on a point in time
Usually related to the lead time to get the EOQ
Considers what the variation in demand may be during the lead time and how problematic a stock out is
Reorder Level (ROL)
Monitors the stock on hand
Continuous review system
Uses a 'fixed quantity' order
Once the ROL is hit, the order is generated for the EOQ
Timing between orders will vary because the ROL will be hit at different intervals based on demand variations
Uses an actual or virtual 'two bin' system
Safety stock levels
Buffer stock to minimise stock outs
A trade-off in the risks off stock out v risks of stock on hand
Generally don't try to avoid stock out in 100% of cases, except in critical situations, e.g. emergencies, but rather have a determined policy on what the ideal service level is
Helps to control for demand variations AND variable lead times
Period review systems
Works on target inventory level (which includes safety stock)
Does not have an EOQ because of demand variations
Complete different to 'continuous'
Has a 'fixed reorder period', often weekly or fortnightly
Staff review frequency at various points
Safety stock must cover the review period
and
the lead time
Inventory control (p.311)
Stock turn
Improving stock turn generally suggests better/efficient use of inventory
Average stock level = order quantity / 2 - then - stock turn = period demand (annual) / average stock level
ABC analysis
Based on the Pareto principle 80/20 rule
Classes
A-class
Accounts for 20% of items but 80% of annual usage value
B-class
Accounts for 30% of items but only 10% of annual usage value
C-class
Accounts for 50% of items but only 10% of annual usage value
Annual usage value = annual demand X cost per unit
Create a list from highest to lowest - this creates a priority list for where inventory cost reviews can start
Other factors can be considered also, i.e. bulky lost cost items, loss leaders, other reasons for holding stock, etc
Some critics believe B and C items actually deserve more attention because stock turn of Class A should be highest and therefore over supply is unlikely to cause major issues
Inventory information systems - features (p.312)
Features (p.312)
Generating inventory reports
Updating stock records
Forecasting
Generating orders
Problems (p.314)
Data inaccuracies
Infrequent physical stock checks