Inventory Management Basics.ppt

8/10/2019 Inventory Management Basics.ppt

http://slidepdf.com/reader/full/inventory-management-basicsppt 1/22

Inventory Management - Basics

Rohit Kapoor



Outline

• Introduction• Inventory Turns• Inventory Costs• Review of Various Inventory Models



Introduction

• To keep pace with demands, retail chainoutlets – Shoppers’ Stop

• Staggering 300,000 SKUs at each outlet – Ensuring the availability of each SKU across 21 stores!

» Supply chain challenge» 4 regional distribution centres at Delhi, Mumbai,

Bengaluru and Kolkatta – entire network» Over 400 vendors supply the regional distribution

centres!



Possible Options

• Given – Supply chain design

• Changing the structure – Optimal number of stock points

• Improving integration – By changing supply – demand parameters

• Improvising the individual stock point performance – Inventory management



Some Basics

• Aggregation – 1000 units of paper clips and 1000 units of

computers? – Way out?

• Example, K-Mart – large U. S. retailer



Excerpts from FinancialStatements of Kmart and Wal-

Mart (All Numbers in Millions)28-Jan-07 27-Jan-08 26-Jan-09 31-Jan-10 29-Jan-11

Kmart Corp.Inventory $6,367 $6,536 $6,350 $5,796 $4,825

IncomeTotal Operating Revenue $33,674 $35,925 $37,028 $36,151 $30,762Cost of Goods Sold $26,319 $28,161 $29,732 $29,853 $26,258

Net Income $518 $364 ($268) ($2,446) ($3,219)

28-Jan-07 27-Jan-08 26-Jan-09 31-Jan-10 29-Jan-11Wal-Mart Stores, Inc.Inventory $16,497 $17,076 $19,793 $21,644 $22,749IncomeTotal Operating Revenue $119,299 $139,208 $166,809 $193,295 $219,812

Cost of Goods Sold $93,438 $108,725 $129,664 $150,255 $171,562Net Income $3,526 $4,430 $5,377 $6,295 $6,671



Inventory Turns and Margins for

Selected Retail Segments

Retail Segment Examples

AnnualInventory

TurnsGross

Margin

Apparel and Accessory Ann Taylor, GAP 4.57 37%Catalog, Mail-Order Spiegel, Land End, L. L. Bean 8.6 39%Department Stores Sears, JCPenny 3.87 34%Drug and Proprietary Stores Rite Aid, CVS 5.26 28%Food Stores Albertson's, Safeway 10.78 26%Hobby, Toy/Game Stores Toys R Us 2.99 35%

Home Furniture Equipments Bed Bath & Beyond, Linens N' Things 5.44 40%Jewelry Tiffany 1.68 42%Radio, TV, Consumer Electronics Best Buy, Circuit City, CompUSA 4.1 31%Variety Stores Kmart, Wal-Mart, Target 4.45 29%

Source : Based on Gaur, Fisher and Raman 2002



Relationship Between Inventory

Turns and Gross Margin

Relationship between Inventory Turns and Gross Margins

0

1

2

3

4

5

6

7

8

9

10

0% 10% 20% 30% 40% 50%

Gross Margin (%)

I n v e n

t o r y

T u r n s

Retailer A

Retailer B

Source : Based on Gaur, Fisher and Raman 2002



Performance of the Top 10 Indian

Manufacturing Companies[Source : Prowess (CMIE)]

0

2

4

6

8

1012

14

16

Indian OilCorpn Ltd.

RelianceIndustries

Ltd.

BharatPetroleumCorpn Ltd.

HindustanPetroleumCorpn Ltd.

Steel Authority of

India Ltd.

ChennaiPetroleumCorpn Ltd.

Tata MotorsLtd.

Tata SteelLtd.

Bharat HeavyElectricals

Ltd.

Maruti UdyogLtd.

I n v e n

t o r y

T u r n o v e r

R a

t i o

2000

2010



Performance on Inventory Turnover

Ratio of Indian Industry: Sector-wise

Food andBeverages Chemical Textile Machinery Transport Non-MetallicMetal andMetal ProductsWorst 1.2 1.2 1.9 1.2 2.1 2.0 2.5 Average 4.0 8.5 5.3 5.5 5.1 5.1 5.5Best 31.0 32.5 45.2 17.1 78.1 44.0 42.5

Source : Prowess, CMIE



Analytical Aspects

• When demand is known – Deterministic scenario

• When demand is random – Probabilistic scenario

• Objective/Output of Inventory Models – When to order? – How much to order?



Costs Involved in Inventory

Models• Ordering Costs

– Administrative costs• Cost to enter orders• Procurement process approval

– Transportation costs – Receiving costs

• Processing after receipts – Quality checking – Invoice checking and payment

• Holding or Carrying Costs – Financing costs – Storage & handling cost – Investment cost

• Stock-out or Shortage Cost



EOQ Model

• Repetitive Ordering• Constant Demand• Continuous Ordering



EOQ Model

• Indian Airlines uses 500 tail-lights per year.Each time an order is placed, an ordering

cost of Rs. 300 is incurred. Each light costsRs. 24, and the holding cost is Rs.4.8/light/year. Assume that demand occursat a constant rate and shortages are notallowed. What is the EOQ? How manyorders will be placed each year? How muchtime will be elapsed between the placementof orders?





Sensitivity Analysisq HC (q) OC (q) HC (q) + OC (q)

50 120.0 3000.00 3120.00

100 240.0 1500.00 1740.00

150 360.0 1000.00 1360.00

200 480.0 750.00 1230.00

250 600.0 600.00 1200.00

300 720.0 500.00 1220.00

350 840.0 428.57 1268.57400 960.0 375.00 1335.00

0.00

500.00

1000.00

1500.00

2000.00

2500.00

3000.00

3500.00

50 100 150 200 250 300 350 400

H C ( q ) + O C ( q )

q

HC (q) + OC (q) for Indian Airlines Example

HC (q) + OC (q)



Learning

• The curve is flat around Q*• Even a moderate error in the determination

of Q* will only increase cost by a slightamount



Effect of Non – Zero Lead Time

• Case 1: Demand during LT <= Q* – Suppose it takes one month for a shipment of

tail lights to arrive – Reorder point (L * D)

• Case 2: Demand during LT > Q*

– If L = 15 months



EOQ with Uncertain Demand





Answers

• Q* = 100• P(X>=r) = 0.05• Z = 1.645• r = 51.66• r-E(X) = 13.20



Variable Lead Time

• Suppose the lead time has mean of 2 weeksand std. dev. of 1 week. Find the reorder

level and safety stock level.• r = 72.83• SS = 34.37

Documents

Inventory Management Basics.ppt