Transcript Class 1 - gru.edu

Chapter 6
Inventory Analysis
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Accurately Matching Demand with Supply is
the Key Challenge: Inventories
• ... by 1990 Wal-Mart was already winning an important technological
war that other discounters did not seem to know was on. “Wal-Mart
has the most advanced inventory technology in the business and
they have invested billions in it”. (NYT, Nov. 95).
• WSJ, Aug. 93: Dell Computer stock plunges. The company was
sharply off in forecast of demand resulting in inventory writedowns.
• BW 1997:
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Costs of not Matching Supply
and Demand
• Cost of overstocking
– liquidation, obsolescence, holding
• Cost of under-stocking
– lost sales and resulting lost margin
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Where is the Flow Time?
Buffer
Waiting
Operation
Processing
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Flow Times in White Collar
Processes
Source: J. Blackburn
Industry
Process
Average
Flow Time
Theoretical
Flow Time
Flow Time
Efficiency
Life Insurance
New Policy
Application
72 hrs.
7 min.
0.16%
Consumer
Packaging
New
Graphic
Design
Consumer
Loan
18 days
2 hrs.
0.14%
24 hrs.
34 min.
2.36%
Hospital
Patient
Billing
10 days
3 hrs.
3.75%
Automobile
Manufacture
Financial
Closing
11 days
5 hrs
5.60%
Commercial
Bank
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6.1: Operational Flows
I avg total inv = I input + I in-process + I output
I = Ii + Ip + Io
Throughput R
Inventory I
FLOW TIME T
I=RT
Flow time T = Inventory I / Throughput R
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6.2: Why do Buffers Build?
Why hold Inventory?
• Economies of scale
– Fixed costs associated with batches
– Quantity discounts
Cycle/Batch stock
– Trade Promotions
• Uncertainty
– Information Uncertainty
– Supply/demand uncertainty
• Seasonal Variability
• Strategic
– Flooding, availability
Safety stock
Seasonal stock
Strategic stock
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6.3: Cost of Inventory
• Physical holding cost
(out-of-pocket)
• Financial holding cost
(opportunity cost)
• Low responsiveness
– to demand/market
changes
– to supply/quality
changes
Holding cost
Inventory Unit Holding Cost =
H = (h + r) C
Physical holding cost
Rate of return Cost/flow unit
Example 6.2
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6.4: Economies of Scale:
Inventory Build-Up Diagram
R: Annual demand rate,
Q: Number per
replenishment order
• Number of orders per
year = R/Q.
Inventory
Inventory Profile:
# of jackets in
inventory over time.
Q
R = Demand rate
• I cycle = Q/2
Time t
T = Ti + Tp = (Q/2)/R + Ip/R
Example 6.3
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Economies of Scale:
Economic Order Quantity EOQ
R
S
H
Q
:
:
:
:
Demand per year,
Setup or Order Cost ($/setup; $/order),
Marginal annual holding cost ($/per unit per year),
Order quantity.
Total Cost = S(R/Q) + H(Q/2) + CR
2RS
Q
H
C :
r :
h :
Cost per unit ($/unit),
Cost of capital (%/yr),
Physical unit holding cost
($/unit,yr),
H = (h + r) C.
Total annual
costs
H Q/2: Annual
holding cost
S R /Q:Annual
setup cost
EOQ
Batch Size Q
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Economies of Scale:
Example 6.4
R=
r =
units
%/yr
C = $ / unit
S = $ / order
Total annual cost under current plan
Example 6.5
EOQ
Total annual cost under current plan
Icycle = Q*/2
TC*
Ti = I cycle / R
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Find most economical order quantity:
Spreadsheet (Table 6.2, p. 146)
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6.6: Role of Leadtime L
• The two key decisions in inventory management
are:
– How much to order?
– When to order?
ROP = L * R = Lead Time * Throughput
Example 6.8
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6.8: Levers
Ith = R * Tth
• Reducing critical activity time
• Eliminating NVA activities
• Redesigning the process to replace
sequential with parallel processing
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Learning Objectives:
Batching & Economies of Scale
• Increasing batch size of production (or purchase) increases average
inventories (and thus cycle times).
• Average inventory for a batch size of Q is Q/2.
• The optimal batch size trades off setup cost and holding cost.
• To reduce batch size, one has to reduce setup cost (time).
• Square-root relationship between Q and (R, S):
– If demand increases by a factor of 4, it is optimal to increase
batch size by a factor of 2 and produce (order) twice as often.
– To reduce batch size by a factor of 2, setup cost has to be
reduced by a factor of 4.
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