Lecture 2Introduction to InventoryManagementWang BhanggiongWHUTApril.2017
Lecture 2 Introduction to Inventory Management 1 Wang Zhangqiong WHUT April, 2017
ObjectivesUnderstandinginventoryina supplychainWhyinventory is important?How to manage it?SingleStageInventoryControl- Economic Lot Size Model-DemandUncertainty,safestockMultipleOrderOpportunities:RiskPooling(Centralizedsystem)
Objectives • Understanding inventory in a supply chain Why inventory is important? How to manage it? • Single Stage Inventory Control - Economic Lot Size Model - Demand Uncertainty, safe stock • Multiple Order Opportunities: • Risk Pooling (Centralized system) 2
(P19)CASE: Steel WorksRequirement:to read the case materials in advanceand think about the issues for the company.Whyinventoryisimportant?Howtomanageit?Whatarethemainproblems?-- too much inventory--poorservice
CASE: Steel Works （P19） Requirement: to read the case materials in advance, and think about the issues for the company. • Why inventory is important? How to manage it? • What are the main problems? - too much inventory - poor service 3
Custom ProductsRapid growth, 1/3 of total sales ($133 MM)OnecustomerperproductVeryhigh marginsHigh service level 3 plants, co-located with R&D centerEachproductproducedatasingleplant
Custom Products • Rapid growth, 1/3 of total sales ($133 MM) • One customer per product • Very high margins • High service level • 3 plants, co-located with R&D center • Each product produced at a single plant 4
Specialty ProductsRapid growth, 2/3 of total sales ($267 MM)·6 product families3 plants, eachproducing 2 product families130 customers, 120 productsFew big customers: 5Highly volatile demand:Highservicelevel5
Specialty Products • Rapid growth, 2/3 of total sales ($267 MM) • 6 product families • 3 plants, each producing 2 product families • 130 customers, 120 products • Few big customers: 5 • Highly volatile demand: • High service level 5
Howtosolvetheseproblems?-lowerexpenses-improveperformanceConsultant RecommendationDroplowvolumeproductsImproveforecastsConsolidate warehouses6
Consultant Recommendation • Drop low volume products • Improve forecasts • Consolidate warehouses 6 •How to solve these problems? -lower expenses -improve performance
Introduction to inventoryWhat Is Inventory of the supply chain?Where ?·Raw material inventory:Work-in-process(WiP) inventory·Finished product inventoryDuality:requiredcost money
Introduction to inventory What Is Inventory of the supply chain? Where ? • Raw material inventory • Work-in-process(WIP) inventory • Finished product inventory Duality: cost money - required 7
Why Is Inventory management Important?GM's production and distribution network are complex-20,000supplierplants-133partsplantsand31assemblyplants- 11,000 dealerstransportation costs: $4.1 billion (60% for material shipments)inventory valued at $7.4 billion (70%WiP; Rest FinishedVehicles)Decision tool to reduce:- combined corporate cost of inventory andtransportation.26% annual cost reduction by adjusting- Shipment sizes (inventory policy)-Routes (transportation strategy)
Why Is Inventory management Important? • GM’s production and distribution network are complex – 20,000 supplier plants – 133 parts plants and 31 assembly plants – 11,000 dealers • transportation costs: $4.1 billion (60% for material shipments) • inventory valued at $7.4 billion (70%WIP; Rest Finished Vehicles) • Decision tool to reduce: – combined corporate cost of inventory and transportation. • 26% annual cost reduction by adjusting: – Shipment sizes (inventory policy) – Routes (transportation strategy) 8
WhyIsInventoryRequired? Uncertainty in customer demand- Shorter product lifecycles- More competing products. Uncertainty in supplies-Quality/Quantity/Costs/DeliveryTimes·DeliveryleadtimesIncentives for larger shipments (economy ofscale)
Why Is Inventory Required? • Uncertainty in customer demand – Shorter product lifecycles – More competing products • Uncertainty in supplies – Quality/Quantity/Costs/Delivery Times • Delivery lead times • Incentives for larger shipments (economy of scale) 9
Holding the right amount at theright time is difficult!Uncertainty of demand and supplyPrediction is always wrongRelationship between forecast demand andthe optimal order quantity10
Holding the right amount at the right time is difficult! 10 • Uncertainty of demand and supply • Prediction is always wrong • Relationship between forecast demand and the optimal order quantity