Inventory Management

1. Inventory Management DSC 335

2. DSC 335 Roadmap Operations Strategy Process Management Process strategy/analysis Capacity analysis/planning Quality management Lean systems Supply Chain Mgmt. Supply chain dynamics Inventory management Case: Kristen’s Cookie Case: Blanchard Littlefield Game 1 Littlefield Game 2 Case: A Pain in Chain Beer game Decision Making Tools

4. Inventory Example – a PC Manufacturer

6. Inventory in Balance Sheets data from finance.yahoo.com Inventory ($million) % in Current Assets % in Total Assets Wal-Mart 32,191 73.46% 23.30% Target 7,797 50.80% 20.59% Bestbuy 3,338 41.80% 28.14% Amazon 877 26.00% 20.10% Exxon Mobil 9,321 12.71% 4.47% Boeing 8,105 35.27% 15.65% GM 21,394 34.44% 4.56% Ford 10,271 16.32% 3.72% Toyota 13,799 15.10% 5.64% Cisco 1,371 5.34% 3.17% Solectron 1,516 34.84% 28.22% Dell 576 3.25% 2.49% Apple 270 1.86% 1.57% HP 7,750 16.06% 9.45%

7. Pressure to Cut Inventory Days of Inventory

9. Why Hold Inventory?

10. Why Not to Hold Inventory?

13. Economic Order Quantity (EOQ) Model

16. How Much Should We Order? Time Inventory Inventory Large order size Small order size Time Slope = Demand rate High Low Low High Same Same Holding cost Order setup cost Purchase cost Large order size Small order size

20. The South Face

21. The South Face

22. The South Face

23. The South Face

24. The South Face

25. Finding the Optimal Q (EOQ) Ordering Cost Q OPT (optimal order quantity) Q Holding cost Cost Lowest Cost

31. Managerial Insights – Sensitivity Analysis TABLE 12.1 | SENSITIVITY ANALYSIS OF THE EOQ Parameter EOQ Parameter Change EOQ Change Comments Demand ↑ ↑ Increase in lot size is in proportion to the square root of D . Order/Setup Costs ↓ ↓ Weeks of supply decreases and inventory turnover increases because the lot size decreases. Holding Costs ↓ ↑ Larger lots are justified when holding costs decrease. 2 D S H 2 D S H 2 DS H

32. What Happens When Lead Time > 0? Slope = D (units/yr) = d (units/day) Q Time Reorder Point (ROP) Receive order Place order Receive order Lead time: L (days) Reorder Point: ROP = d  L Reminder: Keep time units consistent!