Distribution Planning and Inventory Management - Introduction to Operations Management - Lecture Slides, Slides of Production and Operations Management

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Distribution Planning

One last look at shortest paths

Inventory Management

What is it, why keep it, inventory policies

Inventory Management (pg. 132)

Inventory = goods that have not yet been sold

• raw material
• work-in-process
• finished goods
• supplies

Year Total inventory

% of GDP

Total inventory / monthly shipments 95 $52 B 6.7% 1.

Why Keep Inventory?

1. Seasonality (anticipated variation)

2. Provide flexibility (unanticipated

variation) a.k.a.:

3. Economies of scale

4. Price speculation (not an ops reason)

5. Something to work on

6. NDR,JP

Inventory Policy

Answers two general questions

• When to order? (ROP = reorder point)

• How much to order? (Q = reorder quantity)

A&E Noise (VCRs) (pg. 134)

• Cost: $
• Price: $
• Ordering cost: $30/order
• Holding cost:

0.25 × 150/365 = $0.1/unit-day

• Inventory policy
  • Order 80 when inventory position ≤ 60
  • Inventory position = inv. on hand + inv. in transit
  • Lead time: 5 days

Order 80 when inventory pos. ≤ 60

Lead time: 5 days

1. Inventory POSITION includes inventory in transit.
2. Example 1 - the Distribution Game
3. Example 2 - Today is 21 Aug. 1997, and there are 50 units in stock. The last two orders were placed on 9 Aug. and 18 Aug. Should Jane order today?

I = 50 + 80 = 130 > 60, do not order today (Aug 18 order in transit)

Finding Good Inventory Policies

• Approach 1: Simulation
  • We will use historical sales (instead of generating random future sales)
  • We will assume demand = sales (an approximation)
  • Experiment with different values of Q and ROP
• Approach 2: EOQ + LTD
  • An approximate model
  • Simpler to use
  • More abstract

to ExcelDocsity.com

Acquisition Costs (pg. 142)

• Total units sold per year ≈

(10.12 VCRs/day)(365 days/year) = 3695 VCRs/year

• Total acquisition costs per year ≈

($150/VCR)(3695 VCRs/year) = $554,350/year

• Total acquisition costs per year if order size

were changed to 90 ≈

$554,350 / year Acquisition costs are not affected by inventory policy, as long as demand is satisfied and there are no volume discounts

Time

Inventory

Simulated inventory profile

Time

Inventory

Approximation 1: constant demand

Holding Costs (pg. 143)

• Minimum inventory ≈ ROP – LTD = 60 VCRs – (5 days)(10.12 VCRs/day) = 9.4 units
• Maximum inventory ≈ Min. inv. + Q = 9.4 + 80 = 89.4 VCRs
• Average inventory ≈ (min + max)/2 = (9.4 + 89.4)/2 = 49.4 VCRs
• Total VCR-years of inventory per year ≈ (49.4 VCRs)(1 year) = 49.4 VCR-years
• Total holding cost per year ≈ (49.4 VCR-years)($37.5 / VCR / year) = $1852.50 / year

Time

Inventory

Avg. inventory

VCR

2 VCRs

1 year

1 VCR-year of inventory

1 VCR-year of inventory

1 VCR-year of inventory

1 VCR-year of inventory

1 VCR-year of inventory

Total inventory for the year: 5 VCR-years

What is a “VCR-year” of inventory?

3 VCRs

4 VCRs

5 VCRs