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Inventory Management Basics
Inventory Management Basics
Inventory Management Basics
Rohit Kapoor
Outline
Introduction
Inventory Turns
Inventory Costs
Review of Various Inventory Models
Introduction
To keep pace with demands, retail chain
outlets
Shoppers Stop
Staggering 300,000 SKUs at each outlet
Ensuring the availability of each SKU across 21 stores!
Supply chain challenge
4 regional distribution centres at Delhi, Mumbai,
Bengaluru and Kolkatta entire network
Over 400 vendors supply the regional distribution
centres!
Possible Options
Given
Supply chain design
Changing the structure
Optimal number of stock points
Improving integration
By changing supply demand parameters
Some Basics
Aggregation
1000 units of paper clips and 1000 units of
computers?
Way out?
Example, K-Mart large U. S. retailer
$6,536
$6,350
$5,796
$4,825
$35,925
$28,161
$364
$37,028
$29,732
($268)
$36,151
$29,853
($2,446)
$30,762
$26,258
($3,219)
Examples
Ann Taylor, GAP
Spiegel, Land End, L. L. Bean
Sears, JCPenny
Rite Aid, CVS
Albertson's, Safeway
Toys R Us
Bed Bath & Beyond, Linens N' Things
Tiffany
Best Buy, Circuit City, CompUSA
Kmart, Wal-Mart, Target
Annual
Inventory
Turns
4.57
8.6
3.87
5.26
10.78
2.99
5.44
1.68
4.1
4.45
Gross
Margin
37%
39%
34%
28%
26%
35%
40%
42%
31%
29%
Retailer B
Inventory Turns
8
7
6
5
4
Retailer A
3
2
1
0
0%
10%
20%
30%
40%
50%
16
14
12
10
2000
2010
6
4
2
0
Indian Oil
Corpn Ltd.
Reliance
Industries
Ltd.
Bharat
Petroleum
Corpn Ltd.
Hindustan
Petroleum
Corpn Ltd.
Steel
Authority of
India Ltd.
Chennai
Petroleum
Corpn Ltd.
Tata Motors
Ltd.
Food and
Metal and
Beverages Chemical Textile Machinery Transport Non-Metallic Metal Products
Worst
1.2
1.2
1.9
1.2
2.1
2.0
2.5
Average
4.0
8.5
5.3
5.5
5.1
5.1
5.5
Best
31.0
32.5
45.2
17.1
78.1
44.0
42.5
Source: Prowess, CMIE
Analytical Aspects
When demand is known
Deterministic scenario
Transportation costs
Receiving costs
Processing after receipts
Quality checking
Invoice checking and payment
EOQ Model
Repetitive Ordering
Constant Demand
Continuous Ordering
EOQ Model
Indian Airlines uses 500 tail-lights per year.
Each time an order is placed, an ordering
cost of Rs. 300 is incurred. Each light costs
Rs. 24, and the holding cost is Rs.
4.8/light/year. Assume that demand occurs
at a constant rate and shortages are not
allowed. What is the EOQ? How many
orders will be placed each year? How much
time will be elapsed between the placement
of orders?
Answers
Q* = 250
No. of orders = 2
Time between orders = year
Issues:
It is difficult to estimate holding & ordering
cost
Sensitivity analysis
Sensitivity Analysis
q
50
100
150
200
250
300
350
400
HC (q)
120.0
240.0
360.0
480.0
600.0
720.0
840.0
960.0
OC (q)
3000.00
1500.00
1000.00
750.00
600.00
500.00
428.57
375.00
HC (q) + OC (q)
3120.00
1740.00
1360.00
1230.00
1200.00
1220.00
1268.57
1335.00
3000.00
2500.00
2000.00
HC (q) + OC (q)
1500.00
1000.00
500.00
0.00
50
Learning
The curve is flat around Q*
Even a moderate error in the determination
of Q* will only increase cost by a slight
amount
Illustrative Example
Each year, a computer sells an average of 1000 boxes of
disks. Annual demand for boxes of disks is normally
distributed with a standard dev. of 40.8 boxes. The store
orders disks from a regional distributor. Each order is filled
in 2 weeks. The cost of placing an order $50 and the
annual cost of holding one box of disk in the inventory is
$10. The per-unit stockout cost (because of loss of
goodwill and the cost of placing a special order) is
assumed to be $20. The store is willing to assume that all
the demand is backlogged. Find the inventory policy
parameters.
Answers
Q* = 100
P(X>=r) = 0.05
Z = 1.645
r = 51.66
r-E(X) = 13.20