Operations & Supply Planning

Transcription

1 Operations & Supply Planning PGDM Inventory Management Vinay Kumar Kalakbandi Assistant Professor Operations Management Survey No. 38, Cherlaguda Village, Shamshabad Mandal, RR District, Hyderabad Phone: /3/ Economies of Scale Why inventories? Supply and Demand Uncertainty Volume Discounts/Impending Price Rise Long Lead Times and Quick Response to Customer s Demand To maintain independence of operations To allow flexibility in production scheduling 11/3/

2 Inventory 11/3/ Inventory is injurious to your health! Get Lean Get healthy! 11/3/

3 11/3/ We want to turn our inventory faster than our people A quote by James D. Sinegal Co-founder, Costco 11/3/

4 Inventory turns!!! Sales/average inventory D/AI Low or high?? What is AI/D? 11/3/ Independent Dependent Demand 11/3/

5 Inventory classification Classification by form Raw Materials (RM) Work-in-Process (WIP) Finished Goods (FG) Classification by Life cycle Perishable Non-perishable 11/3/ Inventory classification by function Cyclic stock Ordering lot size/2 Safety stock To protect against uncertainties Anticipation To absorb uneven rates of demand or supply Pipeline Scheduled receipts or open orders 11/3/

6 Quantity 11/3/2017 Cyclic, Pipeline and Safety Stocks Cyclic Stock Pipeline inventory L Safety stock Time Cyclic inventory, pipeline inventory and safety stocks are critically linked to how much and when decisions in inventory planning 11/3/

7 Costs of Inventory Physical holding cost (outof-pocket) Financial holding cost (opportunity cost) Transportation cost Ordering costs Low responsiveness to demand/market changes to supply/quality changes Obsolescence Holding (or carrying) costs Fixed costs Shortage costs Inventory writedown 11/3/ Inventory Policy parameters WHEN to order? HOW MUCH to order? In WHAT FORM? (RM, WIP or FG) WHERE TO DEPLOY in the supply chain? 11/3/

8 Simplest case Perpetual inventory system Demand for the product is known constant and uniform throughout the period Lead time (time from ordering to receipt) is constant Replenishment is instantaneous Price per unit of product is constant Inventory holding cost is based on average inventory Ordering or setup costs are constant All demands for the product will be satisfied (no back orders are allowed) How would the inventory level look like? 11/3/ What should be the ordering quantity (Q)? 11/3/

9 11/3/ EOQ model 11/3/

10 Inventory Planning Models Mean of weekly demand : 200 Standard deviation of weekly demand : 40 Unit cost of the raw material : Rs. 300/- Ordering cost : Rs. 460/- per order Carrying cost percentage : 20% per annum Lead time for procurement : 2 weeks EOQ Model Weekly demand = 200 Number of weeks per year = 52 Annual demand, D = 200*52 = 10,400 Carrying cost, C c = Rs per unit per year Economic Order Quantity = Time between orders = DS H * 460*10, weeks Practical issues with the EOQ model It may not be possible to Order exactly Q* Estimate the parameters (D,S,H) accurately Instantaneous replenishment Price discounts 11/3/

11 Robustness of the EOQ model 11/3/ Incorporating Lead time 11/3/

12 Price Discounts Why do suppliers give price discounts? Compute Q* values From lowest price to the highest Until valid Q* is obtained Compute TRC at this Q* and each price break above this Q* Choose the order quantity with least TC 11/3/ Reducing inventory Type of inventory Primary Lever Secondary Lever Cyclic Reduce Q Reduce ordering and setup cost Increase repeatability Safety Stock Anticipation Pipeline Place orders closer to the time when the must be received Vary the production rate to follow the demand rate Cut productiondisitribution lead time Improve forecasting Reduce lead time Reduce supply uncertainties Increase equipment and labor buffers Level out demand rates Forward positioning Selection of suppliers and carriers 11/3/ Reduce Q 12

13 The elephant in the room Demand uncertainty!!! Vinay Kalakbandi 11/3/ If life were predictable it would cease to be life, and be without flavor. Eleanor Roosevelt 11/3/

14 Lets keep it simple first! Single period Uncertain demand Examples? Newspapers Cakes Fashion products? 11/3/ Demand characteristics Demand follows a discrete probability distribution How much would you order? 11/3/

15 Managing the average will make you an average manager! A quote by 11/3/ Understanding Service level What if demand follows a normal distribution NORM(5,2) What area of the demand distribution would you cover? Extending the idea to multiple periods 11/3/

16 Inventory Level 11/3/2017 Lets complicate things! What if demand follows UNIF(A,B)? Normal (μ, σ) What area of the demand distribution would you cover? Service Level Extending the idea to multiple periods 11/3/ Certain Demand Q Inventory Position Physical Inventory ROP Mean Demand during LT L Time 16

17 Inventory Level 11/3/2017 Uncertain Demand Inventory Position Physical Inventory ROP Mean Demand during LT Safety Stock L Time Back to the multi-period setting 11/3/

18 Computing safety stock Let the demand during lead time follow a Normal distribution Mean demand during lead-time = (L) Standard deviation of demand during lead-time = Desired service level = ( 1 ) (L) The probability of a stock out = Standard normal variate corresponding to an area of ( 1 ) covered on the left side of the normal curve = Z Safety stock (SS) is given by SS = Z * ( L), Factors effecting safety stock Demand uncertainty (forecast uncertainty) Reducing demand uncertainty (better forecast) reduces safety stock required, reducing material cycle time Replenishment lead time Reducing replenishment lead time, improves forecast accuracy, reducing safety stock required (square root factor) Variability of supply lead time Reducing variability of supply, improves forecast accuracy, reducing safety stock required 11/3/

19 Inventory Level 11/3/2017 Relationship between Service Level and Safety Stock 11/3/ Continuous Review (Q) System Q Inventory Position Physical Inventory ROP SS Mean Demand during LT Safety Stock L Time 19

20 Continuous review policy 11/3/ Inventory Planning Models Q System Mean weekly demand = 200 Standard deviation of weekly demand = 40 Lead time, L = 2 weeks (L) = 2* 200 = 400 Mean demand during L, Standard deviation of demand during L, (L) = 2 * For a service level of 95%, SS = Z * ( L) = 1.645*56.57 = ROP = (L) + Z * ( L) = = 493 Using EOQ as the fixed order quantity, Q system can be designed as follows: As the inventory level in the system reaches 493, place an order for 400 units. This will ensure in the long run a service level of 95%. 20

21 Inventory Level 11/3/2017 Periodic Review (P) System Inventory Position Physical Inventory S Q R Q 2R Q 3R Order Up to Level SS Safety Stock R 2R 3R L Time Periodic Review policy 11/3/

22 Inventory Planning Models P System Using the time between orders derived from the EOQ model as the basis for review period Review period, R = 2 weeks Mean demand during (L + R), ( L R) = 200*(2 + 2) = 800 Standard deviation of demand during (L + R), ( L R) = For a service level of 95%, SS = Z * ( L R) = 1.645*80 = Order up to level, S = ( L R) + Z * ( L R) = = *40 80 The P system can be designed as follows: The inventory level in the system is reviewed every two weeks and an order is placed to restore the inventory level back to 932 units. This will ensure a service level of 95%. Periodic & Continuous Review Systems Criterion How much to order When to order Continuous Review (Q) System Fixed order qty: Q ROP = μ (L) + Z α σ (L) Periodic Review (P) System S = μ (L+R) + Z α σ (L+R) Q R = S I R Every R periods Safety stock SS = Z α σ (L) SS = Z α σ (L+R) Salient aspects Implemented using two bin system Suited for medium and low value items More safety stock More responsive to demand Ease of implementation 22

23 Effect of variability in Lead time 11/3/ Hybrid Inventory Policies (s,s) policy Optional replenishment system Periodic review with a order upto level Ensures minimum ordering level Eliminates continuous review Base stock system Order as much as you sell Base stock level = expected demand during lead time + safety stock Usually orders are accumulated periodically 11/3/

24 11/3/ Back to the single period model What is the Optimal service level? Happiness is a mysterious thing, to be found somewhere between too little and too much 24

25 Newsvendor model Inventory decision under uncertainty The too much/too little problem : Order too much and inventory is left over at the end of the season Order too little and sales are lost. Notation Demand D is a random variable Cumulative distribution function F(D) Wholesale price W Selling price R Salvage value S (<W) How much should the retailer order? 25

26 Too much and too little costs C o = overage cost The cost of ordering one more unit than what you would have ordered had you known demand. Increase in profit you would have enjoyed had you ordered one unit lesser. C o = Cost Salvage value = W S = C u = underage cost The cost of ordering one fewer unit than what you would have ordered had you known demand. Increase in profit you would have enjoyed had you ordered one unit more. C u = Price Cost = R W = 53 Balancing the risks and benefits Risk : Ordering one more unit increases the chance of overage Expected loss on the Q th unit = C o x F(Q), where F(Q) = Prob{Demand <= Q) Benefit: Ordering one more unit decreases the chance of underage: Expected benefit on the Q th unit = C u x (1-F(Q)) 26

27 Expected profit maximizing order quantity To minimize the expected total cost of underage and overage, order Q units so that the expected marginal cost with the Q th unit equals the expected marginal benefit with the Q th unit: Co F( Q) Cu 1 F Q Cu Rearrange terms in the above equation -> F( Q) C C o u The ratio C u / (C o + C u ) is called the critical ratio. In other terms, (R-W)/(R-S). R and S are determined by the market. 55 What is the Optimal service level? Let C o = Cost of over stocking per unit C u = Cost of under stocking per unit Q = Number of units to be stocked d = Single period demand P( d Q) = The probability of the single period demand being at most Q units P( d Q) Cu C C u o = Service Level 27

28 11/3/ Selective Control of Inventories ABC Classification (on the basis of consumption value) XYZ Classification (on the basis of unit cost of the item) High Unit cost (X Class item) Medium Unit cost (Y Class item) Low unit cost (Z Class item) FSN Classification (on the basis of movement of inventory) Fast Moving Slow Moving Non-moving VED Classification (on the basis of criticality of items) Vital Essential Desirable On the basis of sources of supply Imported Indigenous (National Suppliers) Indigenous (Local Suppliers) 28

29 Consummption value (%) 11/3/2017 ABC Classification 100% 90% 80% 70% Class B Class C 60% 50% Class A 40% 30% 20% 10% 0% 0% 10% 20% 30% 40% 50% 60% No. of items (%) 70% 80% 90% 100% Inventory Management in Practice Problem of Shrinkage Stock mismatch Inventory Management software RFID technology IoT tech 11/3/

30 THANK YOU 11/3/