Inventory Management Flashcards
Definition (Slack et al 2016)
Describes the accumulations of materials, customers or information as they flow through processes or networks. Managing these accumulations is Inventory Management.
National Health Service Blood and Transplant
Manages a blood supply chain in the UK. Each year approximately 2 million blood donations are received. 3 main stages; collection (recruit and retain), processing (breaks blood down), distribution (transportation to hospitals). Less than 10% of donated red blood cells are lost within the supply chain. Very perishable item, platelets shelf life of 5 days.
Material Inventories (Fluidity)
Material inventories in a factory can represent a substantial proportion of cash tied up in working capital. Minimising them can release large quantities of cash. However, too much reduction can lead to customers’ orders not being fulfilled.
National Grid (TV Pickup)
Had to plan and control electricity supply and demand with popular tv airings such as Eastenders or the World Cup. Misconception that kettles create a shortage, when in fact it is opening the fridge door. The NG even have their own The National Grid Energy Balancing Team responsible for ensuring an adequate supply of electricity to customers. NG cannot easily ‘store’ electricity, and instead utilise ‘fast reserves’ to meet short term fluctuations by harnessing power generators with short lead times (e.g. Dinorwig Power Station, 12 seconds to produce 1320 MW).
Inventory Benefits
An insurance against uncertainty such as fluctuations in supply and demand
Counteract a lack of flexibility, cycle inventory to compensate for the intermittent supply
Short-term opportunities (reduced cost from suppliers)
Anticipation inventory (chocolate Easter Eggs, 80m sold annually in the UK, cultivate, processed and manufactured months in advance)
Reduce overall costs as large inventories may bring savings greater than the cost of holding the inventory
Increase of value therefore inventory can be an investment e.g. fine wine
Fills the processing ‘pipeline’, items cannot be moved instantaneously from point of supply to point of demand.
Queues can help balance capacity and demand, enable prioritisation (walk-in clinic), gives customers time to choose (fast-food restaurant), efficient use of resources (batch customers for more efficient use of resources)
Databases provide multi-level access (from doctor’s receptionist to the doctor and then pharmacist), allow single data capture reducing the need for further capturing, speeds the process (store credit card, last purchase etc)
Reducing Inventory
Reason: Insurance - improve demand forecasting or tighten supply
Reason: Lack of flexibility - increase process flexibility pr use parallel processes to produce output simultaneously
Reason: Short-term opportunities - persuade suppliers to provide ‘every-day’ low prices
Reason: Anticipate - increase volume flexibility, adopt ‘chase demand’ plan
Reason: Reduce costs - reduce admin costs through purchasing process efficiency gains or investigate alternative delivery channel that reduce transport costs
Reason: Pipeline - reduce process time between customer request and dispatch or reduce throughput time in the downstream supply chain
Working Capital
Current Assets / Current Liabilities
the capital of a business which is used in its day-to-day trading operations
Treasury Wine Estates
Poured £20m of wine away due to deterioration, demand was not as high as expected and there anticipation inventory was too large.
Inventory Decisions
How much to order (volume decision)
When to order (timing decision)
How to control the system (procedures and routines to help make the above decisions)
Inventory Costs
Cost of placing the order
Price discount costs
Stockout costs (opportunity cost, failure to supply)
Working capital costs (opportunity, payment lag)
Storage costs
Obsolescence costs (fidget spinners, peaked late April to early May - major retailers ordered tens of thousands however the fad was finished by late June)
Operating efficiency costs - obscures problems within the operation network
Consignment Stock
Supplier provides large quantities of inventory to their customers to store but only charge for the goods as and when they are used, in the meantime they remain the suppliers property. So technically the customer is providing storage whilst having stock volume control.
SMED (Inventory Management) Lean Production LINK
Businesses attempt to reduce changeover times on machines to reduce the effective cost of placing an order. This means that less time is taken changing over from one product to the other, and therefore less operating capacity is lost, which in turn reduces the cost of the changeover. Under these circumstances, the order cost curve in the EOQ formula reduces and, in turn, reduces the effectiveness of EOQ.
EOQ Criticisms
The model does not address how an organisation may be concerned to maximise the use of space by seeking to maximise the profit earned per square metre.
Similarly for products that deteriorate or go out of fashion, the EOQ model can result in excess inventory of slow moving items.
Additionally the EOQ model depends on stable demand, and an organisation may have regular and stable items alongside highly erratic, volatile items. If the same supplier is used for the above items then under such conditions EOQ would be unsuitable.
Four Types of Materials
Raw Material (not processed) Work-in-Progress (some change but not complete) Finished Goods (complete, awaiting shipment) Maintenance/Repair/Operating MRO (machinery/process)
Types of Inventory (CHAPSS)
Cycle (components or products sent downstream and replenished upstream - active stock)
Hedge (disruption e.g. Brexit)
Anticipation (e.g. seasonal)
Pipeline/Transportation (in transit)
Safety/Buffer (compensate against unexpected fluctuations in supply and demand)
Smoothing (counters Bullwhip effect)
