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Inventory Management Final
Inventory Management Final
Inventory Management Final
•Improved product
availability
•Higher return on
investment
Strategic Importance of
Supply Chain Management
•Opportunity to Increase Sales by Making the
Right Merchandise is in the Right Place at the
Right Time
– Fewer Stock-outs
– Greater Assortment with Less Inventory
•Opportunity to Reduce Costs
– Transportation Costs
– Inventory Holding Costs
•Improved ROI
Strategic Advantage: ZARA
• Timely information from store
mangers with handheld devices
to the corporate office
• Shorter cycle time from design to
production to delivery to stores
• Shorter lead time – own
production, small quantity
production in close proximity,
efficient logistics, premium
transportation, frequent delivery
• No discounts necessary
Strategic Advantage:
Wal-Mart
•Wal-Mart’s success is from its information
and supply chain management systems
•Why are competitor’s lagging behind?
– Made a substantial investment in developing its
systems and has the scale economies
– Through experience and learning, changes are
always made to improve the system
– Coordinated effort of employees and functional
areas throughout the company
Improved Product
Availability
These benefits translate into greater
• Benefits of Efficient sales, lower costs, higher inventory
Supply Chain turnover, and lower markdowns for
retailers
Management to
Customers:
– Reduced stockouts –
merchandise will be
available when the
customer wants them
– Tailoring assortments –
the right merchandise is
available at the right store
Higher Return on Investment
Return on assets = Net profit margin x Asset turnover
Higher profit
Why do we care?
Each of Solectron’s big customers, which include Cisco,
Ericsson, and Lucent was expecting explosive growth for
wireless phones and networking gear….when the bottom
finally fell out, it was too late for Solectron to halt orders
from all of its 4,000 suppliers. Now, Solectron has $4.7
billion in inventory. (BW, March 19, 2001)
• Soda
• Milk
• Toilet paper
• Gas
• Cereal
• Cash
What Do you Consider?
Supplier
Retail
Warehouse
Home Depot
orders
On-hand
inventory
Supply
The average
inventory for
each period is…
Period over which demand for Q has occurred Time
Q
2
Total Time
Finding the optimal quantity to order…
Purchasing cost = D x C
D
Ordering cost = x S
Q
Q
Inventory cost = x H
2
So what is the total cost?
D Q
TC = DC + S + H
Q 2
Which one is
the decision
variable?
Economic Order Quantity - EOQ
2SD
Q =
*
H
Example:
Assume a car dealer that faces demand for 5,000 cars per year, and
that it costs $15,000 to have the cars shipped to the dealership.
Holding cost is estimated at $500 per car per year. How many
times should the dealer order, and what should be the order size?
2(15,000)(5,000)
Q
*
548
500
If delivery is not instantaneous, but there is a lead
time L:
When to order? How much to order?
Order
Quantity
Q
Inventory
Lead Time
Time
Place Receive
order order
If demand is known exactly, place an order when
inventory equals demand during lead time.
A: Q = EOQ
Reorder
Point
(ROP)
ROP = LxD
Lead Time
Time
D: demand per period
Place Receive
L: Lead time in periods
order order
Example (continued)…
10 10
R = D = 5000 = 137
365 365
Place Receive
order Lead Time order
If Actual Demand > Expected, we Stock Out
Order
Quantity
Stockout
Point
Inventory
Time