Week 4 Demand &Inventory Definitions - Coggle Diagram
Week 4 Demand &Inventory Definitions
Inventory Policy : answers to
what, when, how much
what to purchase or manufacture
when to take action
in what quantity should action be taken
where products should be located geohraphically
decision about which inventory management practices to adopt
Inventory policy is affected by
Overall targets: service levels, cost reduction/minimization, manufacturing cost
inventory carrying cost is the expense associated with maintaining inventory
inventory expense is annual inventory carrying cost percent times average inventory value
cost of capital
is specified by senior management
on inventory held in ware houses
is based on estimated risk or loss over time and facility characteristics
results from deterioration of product during storage
is facility expense related to product holding rather than product handling
restriction of other investments that could have been
made with the same money
: lost sale(how to calculate – who to blaim ?) ◦ halted production
Quantity on hand (by agency and by location)
Consumption (by cost center and by commodity)
Zero balance report
Field returns report
Charge backs (to each cost center)
Ad-Hoc inventory reports that are easily be generated
Demand : is the quantity we expect a customer/consumer to purchase from the market – from us in a certain period of time
Demand Management is a key process of SCM balancing the
with the capabilities of the supply chain.
Customer requirements :Product availability at the requested time/price/quality and quantity
Patterns of demand
are wavelike occurrences that repeat over longer periods of time. They’re usually tied to economic conditions or the business cycle. Big-ticket items such as automobiles often display this type of pattern.
are changes that result from a one-time event. They’re not representative of normal conditions. A celebrity using a product in public that spurs fans to go out and purchase in mass and the sale of water bottles before a major weather event are examples of irregular variations.
occur without any known reason or explanation. They’re the unforeseeable and unexpected changes in demand.
are regular variations that occur over and over and are related to some particular event. Products and services with significant seasonal demand include air conditioners and snow shovels (which vary by time of year) and back-to-school clothing and supplies (which vary according to certain events).
Some industries have “seasonal” demand patterns that occur more frequently, such as the weekly increase in customers on Fridays and Saturdays at restaurants. Seasonal factors can sometimes be self-induced, as in end-of-quarter or end-of-year’s quotas.
dependent demand: used to meet a production schedule in manufacturing------CERTAIN
independent demand: not used to meet a production schedule----UNCERTAIN
Retail and distributor inventories
Top 3 Business challenges of supply chain management at all times
Role of inventory
Geographical specialization allows us to specialize production across different locations
Decoupling allows us to run processes for maximum economic lot sizes within a single facility
Supply/Demand balancing accommodates the elapsed time between inventory availability and consumption
Responding to distribution failures
Buffering uncertainty accommodates uncertainty related to:Demand in excess of forecast or Unexpected delays in delivery (aka safety stock)
Role in Competitive Strategy
Form, location, and quantity of inventory allow a supply chain to range from being very low cost to very responsive
Objective is to have right form, location, and quantity of inventory that provides the right level of responsiveness at the lowest possible cost
Types of Inventory
:Average amount of inventory used to satisfy demand between two shipments
: Inventory held in case demand exceeds expectations (demand fluctuations)
Composition of the inventory reports
: Inventory built up to counter predictable variability in demand for a given time frame
:Inventory kept to help with marketing programs (should have a book value of zero)
Types of inventory
represents the amount typically in transit between facilities or on order but not received
is stock that is out-of-date or is not in recent demand (inv.value >12m average sales)
is the portion of stock which is not selling as planned (inv.value>6 m average sales)
is bought to hedge a currency exchange or to take advantage of a discount
Overall trade-off: Responsiveness versus efficiency
Increasing inventory generally makes the supply chain more responsive in stable and predictive economies/markets
A higher level of inventory facilitates a reduction in production and transportation costs because of improved economies of scale
However ...Inventory holding costs increase OR you face bullwhip effect in fluctuating markets
Forms of Inventories
Raw materials & purchased parts
Partially completed goods called
work in progress
Finished-goods inventories---- (manufacturing firms) or merchandise in retails stores---Replacement parts, tools, & supplies----Goods-in-transit to warehouses or customers
Objective of Inventory Management
To achieve satisfactory levels of customer service while keeping inventory costs within reasonable level
Level of customer service is a strategic decision.
Costs of ordering and carrying inventory needs to be considered.
Turnover ratio to be aligned with industry targets
Inventory turnover is the ratio of average cost of goods sold to average inventory investment.
Inventory Turnover Ratio=cost of goods sold/average inventories
average inventory is the typical amount stocked over time, equals the maximum inventory plus the minimum inventory divided by two
typically equal to 1/2 order quantity + safety stock+in-transit stock
Benchmarking InvTurn ratio
Inventory turnover is the speed with which a company purchases and resells its inventory.
A company’s inventory turnover varies greatly by industry. Fashion retailers average between 4 and 6. Automotive components can be as high as 40. Grocery stores are around 14. And car dealerships are often as low as 2 to 3.
Low-margin industries or commodity sectors tend to have higher inventory turnover ratios than high-margin industries.
Slow inventory turnover could be a sign of poor management or inefficient purchasing practices.
High inventory turnover can signal an industry as a whole is seeing strong sales or has efficient operations.
For Effective Inventory Management, We need :
A system to keep track of inventory
A reliable forecast of demand
Knowledge of lead times
Reasonable estimates of Holding costs/Ordering costs/Shortage costs
A classification system
Customer demand Characteristics
Replenishment lead time
Number of Products
Service level requirements
Fixed, variable holding cost
Taxes, insurance, maintenance, handling, obsolescence, and opportunity costs
Objectives: minimize costs
Role of Inventory Manager
Highlevel targets of inventory management role
working capital contribution(free up cash)
carrying cost reduction
scrap and rework control
ensure highest level of customer service.
Inventory. Manager’s tasks
makes decisions about
replenishment time & quantity
replenishment production runs
challenges stockability criteria
challenges forecasts tru S&OP process
guides & uses inventory policy
Signs of successful inventory management
Inventory cost reduction tru lot size management
Effective excess, slow, return management
Above sector average inv. turns
Database management !!!
Effective replenishment management
Stockability policy definition
Fill rates (order & line)
Out of stock ratio
Slow of dead stock
Average inventory level & value
Inventory turns (also forecast performance)
Days of inventory(Products with more than a specified number of days in inventory)
100% physical availability
Cash-to-cash cycle time
Products with more than a specified number of days of inventory
Average replenishment batch size
Average safety inventory
Fill rate (order/demands met on time)
Fraction of time out of stock (Zero inventory)