Managing Service Inventory

Transcription

1 Managing Service Inventory Shin Ming Guo NKFUST Reasons to Hold Inventory Inventory Models News Vendor Problem ABC Classification Who Cares About Inventory? In North America, the loss from overstocks in the region is estimated to cost retailers $123.4 billion annually In Taiwan, convenience stores and supermarkets reportedly throw away 36,000 tons of food every year. The loss is at least 3.8 billion NT dollars. 2 1

2 What About a Shortage of Vaccine? In 2006, Nintendo launched the Wii game console and could not make enough units to keep up with the demand. Some people would wait in long lines to purchase scarce units and resell them online for several hundred dollars over the retail price 3 Physical Goods Distribution 4 2

3 Reasons to Hold Inventory In transit Inventory Decoupling Inventory/Buffers Seasonal Inventory Cycle Inventory Safety Inventory Speculative Inventory 5 Cycle Inventory and Seasonal Inventory 3

4 Reasons to Hold Less Inventory Inventory might become obsolete. Inventory might perish. Inventory might disappear. Inventory requires storage space and other overhead cost. Opportunity cost. 7 Inventory Costs Holding or Carrying cost order too much or too early storage cost: facility, handling risk cost: depreciation, pilferage, insurance opportunity cost Ordering cost order too little or too often cost placing an order: preparing, negotiating, receiving and inspection Shortage costs or Lost Sales costs of canceling an order or penalty order too little or too late Annual cost 20% to 40% of the inventory s worth 8 4

5 Average Inventory Value average unit cost P average inventory value = avg. inventory P unit holding cost H =40% of the unit cost Total Holding Cost= average inventory H number of years Inventory Performance Inventory Cost (inventory on hand + in transit inventory) Inventory turn = Cost of Goods Sold average inventory value Service level = in stock probability before the replenishment order arrives Fill rate = number of sales number of demands Video: What Is Inventory Management 10 5

6 Inventory Control Decisions Ordering of general merchandise, supplies When to order? Reorder point, order frequency How many to order? Order quantity, target inventory level Fixed Order Period P model Fixed Order Quantity Q model 11 Fixed Order Quantity Models 12 6

7 Economic Order Quantity D=annual demand, Q=order quantity, S=setup cost, H=unit holding cost D Q TC(Q) S H Q 2 Total annual cost =ordering cost + holding cost 2DS Economic Order Quantity Q* H Q d L d=daily demand L=lead time Reorder point =d L L

8 Inventory Control under Demand Uncertainty Place a new order whenever the inventory position (on hand + on order) drops to ROP (reorder point). ROP How to avoid possible stock out? d=daily demand L=lead time Reorder point =d L+ safety stock 15 Safety Stock amount of inventory carried in addition to the expected demand, in order to avoid shortages when demand increases Service level=probability of no shortage =P (demand inventory) =P(demand E(D)+safety stock) safety stock depends on service level, demand variability, order lead time service level depends on Holding cost Shortage cost 16 8

9 =daily demand =std dev. of daily demand ROP expected demand during L safety stock L z L Service level or probability of no shortage =95% (99%) z=1.64 (2.33) 17 P model: fixed time period We place an order at fixed time points and bring the inventory position (on hand + on order) up to TIL. RP is the review period. TIL is the target inventory level determined by the forecasts. RP RP RP 18 9

10 Timespan = length of review period + lead time = RP+ L Target Inventory = expected demand + safety stock (RP L) z RP L Order Quantity = target inventory inventory position 19 Quantity Discounts vs. Planned Shortage Suppliers offer a price discount to customers who buy in large quantities to obtain the savings in manufacturing cost, inventory holding cost, or transportation cost. Price discount vs. holding a large than desired quantity. What if customers are willing to tolerate stockouts? Reduce safety stock or target inventory level to save holding costs. 10

11 Single Period Inventory Model Only one production or procurement opportunity. Stochastic demand leads to lost sales or leftover. There are losses of profit and goodwill for each unsatisfied customer. There is a salvage value for each unit of leftover. Forecasting helps balancing cost of ordering too much vs. cost of ordering too little. 21 News Vendor Problem D = boxes of donuts demanded Q = boxes of donuts stocked P = price of one box of donuts, $10 C = cost of one box of donuts, $4 S = salvage value of one box, $

12 P = price of one box, $10 C = cost of one box, $4 S = salvage value of one box, $2 C u = unit contribution: P C = $6 C o = unit loss: C S = $ Finding Optimal Order Quantity F(Q) = probability of having leftover inventory To maximize expected profit, we order Q units so that the expected loss on the Q th unit equals the expected gain on the Q th unit: C F( Q) C 1 F Q o u Cu Rearrange the above equation > F( Q) 0.75 Co Cu C u / (C o +C u ) is called the critical ratio. Choose Q such that the probability of no lost sales (i.e., demand < Q) equals the critical ratio

13 25 Effective Inventory Management A system to keep track of inventory on hand and on order. periodic counting, perpetual counting. A reliable forecast of demand. Knowledge of lead times and lead time variability. Reasonable estimates of inventory costs. holding costs, ordering costs, shortage costs. A classification system for inventory items. 13

14 Barcode Scanning A barcode consists of a series of vertical bars of varying widths that represent letters, numbers and other symbols. Barcodes are used to identify products, locations in the warehouse, containers (totes, cartons, pallets), serial and batch numbers. EAN 13 Radio Frequency IDentification RFID is a means of uniquely identifying an item using radio waves. Data is exchanged between tags and readers and depending on the frequency, may or may not require line of sight. Many opportunities exist for RFID applications in services, such as medical bracelets for patients in hospitals

15 Hospitals and Inventory Management Control Barcodes and computers keep track of every bottle of antibiotics and other supplies. Secure supply cabinets with thumbprint security technology Management Analyze how much is spent on every type of illness and surgical procedure. Computers keep track of stock and automatically reorder from suppliers 29 ABC Classification Pareto s 80/20 principle dollar usage=usage cost There are other ways to do ABC classification. Review ABC classification periodically

16 ABC Classification for Inventory Control A Q model B P model with R=1 week C P model with R=1 month 31 Long Tail Effects A retailing concept describing the niche strategy of selling small volumes of hard to find items to many customers instead of only selling large volumes of popular items. Rhapsody, a subscription based streaming music service, currently offers more than 735,000 tracks. Once you dig below the top 40,000 tracks, you cannot find inventory in most realworld record stores. However, not only is every one of Rhapsody's top 100,000 tracks streamed at least once each month, the same is true for its top 400,000. The market that lies outside the reach of the physical retailer is big and getting bigger

17 Surplus Stocks There are various reasons for surplus stocks. Over ordering, obsolescence, fall in demand, inaccurate stock records, stocks being retuned Solutions Retention with reduction of any further orders. Offer discount to other users. Sale as scrap or for recycling. Disposal as waste. Summary Good inventory management is characterized by concern for holding costs, ordering costs, shortage costs, and the purchase price. Consider lead time for replenishment and the appropriate service level. Keeping track of inventory using information technology is common practice. 17