Chapter 2: Inventory Management and Risk Pooling
2-1 Chapter 2:Inventory Management and Risk Pooling
CASE: Steel Works Background of case and intent o Overview of business o What does data tell you about Specialty? o How much inventory might you expect? o What opportunities are there for Custom? ● Wrap up
2-2 CASE: Steel Works ⚫ Background of case and intent ⚫ Overview of business ⚫ What does data tell you about Specialty? ⚫ How much inventory might you expect? ⚫ What opportunities are there for Custom? ⚫ Wrap up
Background Intent Abstraction from summer consulting job o Intent is to examine a realistic, but simplified inventory context and perform a diagnosis of problem-poor service and too much inventory
2-3 Background & Intent ⚫ Abstraction from summer consulting job ⚫ Intent is to examine a realistic, but simplified inventory context and perform a diagnosis of problem – poor service and too much inventory
Custom Products Rapid growth, 1/3 of total sales($133 MM) e One customer per product ● Very high margins ● High service leve 3 plants, co-located with R&D center o Each product produced at a single plant
2-4 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
Specialty Products Rapid growth, 2/3 of total sales($267 MM) o 6 product families 3 plants, each producing 2 product families 130 customers, 120 products ● Few big customers ● Highly volatile demand High service level 2-5
2-5 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 ⚫ Highly volatile demand ⚫ High service level
Consultant Recommendation Drop low volume products ● mprove forecasts o Consolidate warehouses
2-6 Consultant Recommendation ⚫ Drop low volume products ⚫ Improve forecasts ⚫ Consolidate warehouses
What Does data Tell You? CV DB R10 155 132 0.85 DB R12 1008 256 0.25 DB R15 2464 494 0.20 DF R10 97 92.5 0.95 DE R12 18.5 114 0.62 DE R15 55 80 146 DE R23 35.5 459 1.29
2-7 What Does Data Tell You? m s cv DB R10 15.5 13.2 0.85 DB R12 1008 256 0.25 DB R15 2464 494 0.20 DF R10 97 92.5 0.95 DF R12 18.5 11.4 0.62 DF R15 55 80 1.46 DF R23 35.5 45.9 1.29
What does data Tell You? Durabend r12: One customer accounts for 97% of demand 7 products High volume(2) is not very volatile Low volume (5)is very volatile 2-8
2-8 What Does Data Tell You? ⚫ Durabend R12: ⚫ One customer accounts for 97% of demand ⚫ 7 products: ⚫ High volume (2) is not very volatile ⚫ Low volume (5) is very volatile
How Much Inventory Should You Expect? Assume base stock model with periodic review ● Review period=r=? o Lead time =L=? E[]=r2+z+L 2-9
2-9 How Much Inventory Should You Expect? ⚫ Assume base stock model with periodic review ⚫ Review period = r = ? ⚫ Lead time = L = ? 2 E I r z r L m = + + s
Cycle Saf. E[]Act stock stock Iny DBR10155132 26 34 72 DBR121008256 504 510 1014 740 DBR152464494 1232 990 2222 1875 DFR1097925 49 185 234 604 DFR218.5114 9 23 32 55 DF R15 55 80 28 160 188 388 DFR23355459 18 92 110 190 s 1848 1986 834 824 Assumes r=1; L=0.25 5;andz=1.8 Cycle stock=r u/2 Safety stock=z o Vr+L 2-10
2-10 m s Cycle stock Saf. stock E[I] Act. Inv. DB R10 15.5 13.2 8 26 34 72 DB R12 1008 256 504 510 1014 740 DB R15 2464 494 1232 990 2222 1875 DF R10 97 92.5 49 185 234 604 DF R12 18.5 11.4 9 23 32 55 DF R15 55 80 28 160 188 388 DF R23 35.5 45.9 18 92 110 190 S 1848 1986 3834 3824 Assumes r = 1; L=0.25; and z = 1.8 Cycle stock = r m/2 Safety stock = z s r+L