lecture 8 Flashcards
inventory management
or supply change management or logistics –> the sourcing and flow of products, information, and finances
why is inventory management important?
- we can work there after graduation
- logistics is crucial to many companies
- logistic could help you climb to the top
inventory
- consumables or stock
- definition : materials consumed by the company to produce or serve customers
- inventory needs to be ordered frequently, that is the difference between inventory and assets
- overstock –> too much inventory
- stock out / out-of-stock –> too little inventory
types of inventory
- raw materials/component parts : inventory received from suppliers that will be used to produce products
- work in process inventory : inventory that is in the production process
- finished goods inventory : products that are ready to be purchased and consumed by consumers
- MRO inventory : maintanence, repair, and operating supplies inventory that are not required in producing the firm’s primary products but are indirectly required
benefit of inventory
- balancing supply and demand
- economies of scale in production, purchasing, and transportation
- lead time of supply
- uncertainty in supply and demand
- appreciation of value
costs of inventory
- holding/carrying costs
- transportation costs
- order costs
- setup costs
- shortage/stockout costs
measuring supply chain performance
- service level –> measuring the proportion of time a product is in stock (percentage)
= total of time a product is in stock / total selling duration
total time a product is in stock –> total selling duration - total time the product is out of stock - inventory turnover –> the amount of time an inventory was used or sold in a time period
= the amount of inventory sold in a year / the average amount of units in an inventory
distribution strategies
- direct shipping
- traditional warehousing
- cross-docking
- retail transshipment
direct shipping
- suppliers directly ships the products to retailers (supplier –> store 1/store2/store3)
- commonly used for perishable goods (baked goods, fresh produce) to minimize the rate of spoilage
- pros = minimize lead time from supplier to stores and no warehouse costs
- cons = higher transportation costs (few large shipments are cheaper than frequent small shipments –> economies of scale)
traditional warehousing
- supplier ships products to warehouse
- warehouse holds inventory then ships them to stores (supplier –> warehouse –> store 1/store 2/store 3)
- if there are 5 suppliers and 5 stores –> direct shipping makes 25 small shipments while traditional warehousing just makes 10 large shipments
pros =
- reduced transportation costs as they make large shipments
- reduced lead times (lead time from warehouse to stores < lead time from suppliers to stores)
- reduced lead times –> reduced inventory levels and costs
cons =
- expenses of operating a warehouse
cross-docking
- cross-docking facility is not used for storage location unlike traditional warehousing
- inbound and outbound time is very short (less than 12 hours)
- every shipment has an intended destination
pros :
- short lead time from supplier to store (almost as short as direct shipping)
- low transportation cost (large shipments like traditional warehousing)
- less inventory space than traditional warehousing –> reduced inventory holding costs
cons :
- hard to execute correctly (suppliers and stores must be linked with advanced information systems) (transportation system must be fast and reliable)
retail transhipment
- ships product from one retail store to another retail store
- pros : reduced inventory level from inventory pooling
- cons : require customers to make a repeat visit to the retail store
situations faced by newspaper vendors
- how many copies of newspaper to stock?
- demand is uncertain
- the unsold copies will be worthless at the end of the day
newsvendor model inputs
- selling price (p)
- production/procurement cost (c)
- salvage value (s)
salvage value
- money you can get back from unsold products (e.g. unsold newspaper you can sell it for food packaging)
- always salvage value (s) < production cost (c)
newsvendor model output
- underage cost (cu)
- overage cost (co)
- target service level/critical fractile (a*)
- optimal order quantity (q*)
sequence of events (newsvendor model)
submit order, receive inventory –> sell products during sales period –> salvage any leftover inventory
assumptions (newsvendor model)
- demand is random –> i it is deterministic –> just set the order quantity to the demand
- no inventory replenishment –> if there is –> just order a little bit then order a bit more when the inventory run out
