InventoryManagementChapter7ChapterOutlineConceptofInventoryPurposesofInventoryTypesofInventoryPartI

ConceptandTypesofInventoryPartII

InventoryManagementStrategies

MaterialRequirementsPlanning(MRP)DistributionRequirementsPlanning(DRP)Vendor-ManagedInventory(VMI)Just-In-TimeInventoryManagementPartIII

SupplementaryReading:Casestudy:JITintheSmogCo.ProductionSystemPerformanceMeasureforProductionSystemChangestoCustomerRequirementsTraditionalReactiontoCustomerDemandsforBetterServicePartI

ConceptandTypesofInventory

ConceptofInventoryInventoryisalargeandcostlyinvestment.Bettermanagementoffirminventoriescanimprovecashflowandreturnoninvestment.Theinventoryrequirementsofafirmdependonthenetworkstructureandthedesiredlevelofcustomerservice.Theoretically,afirmcouldstockeveryitemsoldinafacilitydedicatedtoserveeachcustomer.Fewbusinessoperationscouldaffordsuchalargeinventorycommitmentbecausetheriskandtotalcostwouldbeprohibitive.Theobjectiveistoachievethedesiredcustomerservicewiththeminimuminventory,consistentwithlowesttotalcost.PurposesofInventory

Facilitateseconomiesofscale.Managementmaydecide,forexample,topurchaselargequantitiesofaniteminordertoqualifyforadiscount.Orlowertransportationcostsmayberealizedbyshippinglargerquantitiesatonetime.Similarly,alongproductionrunmaysignificantlyreducemanufacturingcosts.Ineverycase,inventoryisbeingutilizedasawaytoobtainsavingsinotherpartsofthelogisticssystem.Offersameansofbalancingsupplyanddemand.Somefirmscanonlyselltheirproductsatcertaintimesoftheyear.Inordertoutilizetheirfixedinvestmentinbuildingsandequipmentandmaintainaskilledlaborforce,managersmaydecidedtoproduceallyearandstorethefinishedgoodsuntilthesellingseasonarrives.Providesprotectionfromuncertaindemand.Despitemanagement’sbestforecastingefforts,demandcanneverbeknownwithabsolutelycertainty.Similarly,transportvehiclesbreakdown,rawmaterialsmaysuddenlybeunavailable.Andmanufacturinglinesmaystop.Forallofthesereasons,inventoryisutilizedtoensurethatcustomerneedsaremetevenwhentheproductionprocessitselfisinterrupted.Specialization.Inventorymakesitpossibleforafirm’splantstospecializeintheproductsthatitmanufactures.Thefinishedproductscanbeshippedtofieldwarehouseswheretheyaremixedtofillcustomerorders.Theeconomiesthatresultfromthelongerproductionrunsandfromsavingsintransportationcostmorethanoffsetsthecostofadditionalhandling.Inventoryasabuffer.Inventoryisheldthroughoutthesupplychaintoactasabufferforthefollowingcriticalinterfaces:

Supplies-procurement(purchasing)

Procurement-production

Production-marketing

Marketing-distribution

Distribution-intermediary

Intermediary-consumer/userExcessiveinventory.Excessiveinventoriesmaycompensatefordeficienciesinbasicdesignofalogisticsnetworkandtosomedegreeinferiormanagement.However,excessiveinventoryusedasacrutchwillultimatelyresultinhigherthannecessarytotallogisticscost.Symptomsofpoorinventorymanagementaredescribedasfollowing:

Lossofcustomers

Increasingnumberofback-orders

Increasinginvestmentininventorywithback-ordersremainingconstant

Increasingnumberoforderscanceled

Periodiclackofsufficientstoragespace

Deterioratingrelationshipswithintermediaries,astypifiedbydealercancellationsanddecliningorders

LargequantitiesofobsoleteitemsTypesofInventoryForamanufacturer,inventoryriskislongterm.Themanufacturer’sinventorycommitmentstartswithrawmaterialandcomponentparts,includeswork-in-process,andendswithfinishedgoods.Inaddition,finishedgoodsareoftenpositionedinwarehousesinanticipationofcustomerdemand.Insomesituations,manufacturersarerequiredtoconsigninventorytocustomerfacilities.Ineffect,thispracticeshiftsallinventoryrisktothemanufacturer.Althoughamanufacturertypicallyhasanarrowerproductlinethanaretailerorwholesaler,themanufacturer’sinventorycommitmentisdeepandoflongduration.Awholesalerpurchaseslargequantitiesfrommanufacturersandsellssmallerquantitiestoretailers.Theeconomicfunctionofawholesaleristhecapabilitytoprovideretailcustomerswithassortedmerchandisefromdifferentmanufacturersinspecificquantities.Whenproductsareseasonal,thewholesalermayberequiredtotakeaninventorypositionfarinadvanceofthesellingseason,thusincreasingdepthanddurationofrisk.Oneofthegreatestchallengesofwholesalingisproduct-lineexpansiontothepointwherethewidthofinventoryriskapproachestheretailers,whiledepthanddurationofriskremaintraditionalforthewholesalers.Inrecentyears,retailclientshavealsoforcedalargeincreaseindepthanddurationbyshiftinginventoryresponsibilitybacktowholesalers.Facedwiththiswidthofinventory,retailersattempttoreduceriskbypressingmanufacturersandwholesalerstoassumegreaterandgreaterinventoryresponsibility.Specialtyretailers,incontrasttomassmerchandisers,normallyexperiencelesswidthofinventoryriskasaresultofhandlingnarrowerassortments;however,theymustassumegreaterriskwithrespecttodepthanddurationofinventoryholding.Ifabusinessplanstooperateatmorethanonelevelofthedistributionchannel,itmustbepreparedtoassumerelatedinventoryrisk.Forexample,thefoodchainthatoperatesaregionalwarehouseassumesriskrelatedtothewholesaleroperationoverandabovethenormalretailoperations.Foraretailer,inventorymanagementisaboutbuyingandsellingspeed.Theretailerpurchasesawidevarietyofproductsandassumesasubstantialriskinthemarketingprocess.Retailerinventoryriskcanbeviewedaswidebutnotdeep.Duetothehighcostofstorelocation,retailersplaceprimeemphasisoninventoryturnoveranddirectproductprofitability.Inventoryturnoverisameasureofinventoryvelocityandiscalculatedastheratioofannualsalesdividedbyaverageinventory.Althoughretailersassumeapositionofriskonavarietyofproducts,theirpositiononanyoneproductisnotdeep.Riskisspreadacrossmorethan30,000StockKeepingUnits(SKUs)inatypicalsupermarket.Adiscountstoreofferinggeneralmerchandiseandfoodoftenexceeds25,000SKUs.Afull-linedepartmentstoremayhaveasmanyas50,000SKUs.dedicatedto/?ded?ke?t?d/adjprohibitive/pr??h?b?t?v/adjtransportvehiclesspecialization/?spe??la??ze???n/n.buffer/?b?f?/n.procurement/pr??kj??m?ntpro??kj?r-/n.

intermediary/??nt??mi?di?ri/n.excessive/?k?ses?v/adj.deficiency/d??f???nsi/n.compensatefor/?k?mp?nse?t/v.crutch/kr?t?/n.symptom/?s?mpt?m/n.backorderperiodic/?p??ri??d?k/adj.deteriorate/d??t??ri?re?t/v.obsolete/??bs?li?t/adj.inventoryturnoverinventoryvelocitystockkeepingunits(SKUs)專用于禁止的，抑制的，太貴的運輸工具專門化，專業(yè)化緩沖器獲得，采購中間人，中間商過量的短缺，缺少補償，彌補拐杖，支撐癥狀，象征遲延訂單周期性的惡化過期的，過時的，已廢棄的庫存周轉(zhuǎn)率庫存周轉(zhuǎn)速度存貨單位NewWordsandExpressionsPartII

InventoryManagementStrategies

MaterialRequirementsPlanning(MRP)MRPdealsspecificallywithsupplyingmaterialsandcomponentpartswhosedemanddependsuponthedemandforaspecificendproduct.Essentially,MRPbeginsbydetermininghowmuchofthefinalproductcustomersdesire,andwhentheyneedit.ThenMRPbreaksdownthetimingandneedforcomponents(allofwhichcouldhavedifferentleadtimes)baseduponthatscheduledend-productneed.AnMRPsystemconsistsofasetoflogicallyrelatedprocedures,decisionrules,andrecords,whicharedesignedtotranslateamasterproductionscheduleintotime-phasednetinventoryalsore-plansnetrequirementsasaresultofchanges.MRPminimizesinventorytotheextentthatthemasterproductionscheduleaccuratelyreflectswhatisneededtosatisfycustomerdemand.Iftheproductionscheduledoesnotmatchdemand,thecompanywillhavetoomuchofsomeitemsandtoolittleofothers.Becausethemasterproductionscheduledrivestheneedforparts,MRPissaidtobeapullsystem.Inotherwords,theproductionschedule“pulls”componentsthroughthesysteminordertomeetmanufacturingneeds.DistributionRequirementsPlanning(DRP)

DRPisamoresophisticatedplanningapproachthatconsidersmultipledistributionstagesandthecharacteristicsofeachstage.DRPisthelogicalextensionofmanufacturingrequirementsplanning,althoughthereisonefundamentaldifferencebetweenthetwotechniques.MRPisdeterminedbyaproductionschedulethatisdefinedandcontrolledbytheenterprise.Ontheotherhand,DRPisguidedbycustomerdemand,whichisnotcontrollablebytheenterprise.So,whileMRPgenerallyoperatesinadependentdemandsituation,DRPoperatesinanindependentenvironmentwhereuncertaincustomerdemanddeterminesinventoryrequirements.Themanufacturingrequirementsplanningcomponentcoordinatestheschedulingandintegrationofmaterialsintofinishedgoods.MRPcontrolsinventoryuntilmanufacturingorassemblyiscompleted.DRPthentakescoordinationresponsibilityoncefinishedgoodsarereceivedintheplantwarehouse.Vendor-ManagedInventory(VMI)

Vendor-ManagedInventory(VMI)isanapproachtoinventoryandorderfulfillmentwherebythesupplier,notthecustomer,isresponsibleformanagingandreplenishinginventory.Thisappearsatfirstsighttocountertheprincipleofpullscheduling,becausetheprecedingprocess(themanufacturer)isdecidinghowmanyandwhentosendtothenextprocess(theretailer).Inpractice,thebasisonwhichdecisionswillbemadeisagreedwiththeretailerbeforehand,andisbasedontheretailer’ssalesinformation.UnderVMI,thesupplierassumesresponsibilityformonitoringsalesandinventory,andusesthisinformationtotriggerreplenishmentorders.Ineffect,supplierstakeoverthetaskofstockreplenishment.TheimmediatebenefitofVMIisaccesstodataon:

customersales;

inventorylevelsatthecustomers.Ononeside,thismayhelpthesuppliertoprovidebettercontrolofthesupplychainandsodeliverbenefitsforboththecustomerandthemselves.Ontheotherside,havingthesuppliertakethedecisiononthereplenishmentaimstominimizetheimpactofdemandamplification.Inthelongerterm,suppliersshouldintegratedemandinformationintotheirorganizationanddevelopthecapabilitytodriveproductionwithit.Thishelpstoreplacethetraditionalpushschedulingwithpullscheduling,basedonmeetingknowndemandinstantaneouslyoutofmanufacturing.OtherthanthepracticaldifficultiesofsettingupaVMIsystem,anumberofproblemscanpreventtheabovebenefit:

Unwillingnesstosharedata.Retailersmaybeunwillingtosharetheirmarketingplansandproductrangestrategieswithmanufacturers.

Seasonalproducts.ThebenefitsofVMIarequicklyawayinfashionandseasonalproducts,especiallyapparel.

Investmentandrestructuringcosts.AdoptingaVMIapproachincursahighinvestmentbythecustomerandsupplier,andalsotakestimeandeffort.

Retailervulnerability.VMIwillmaketheretailermoredependentonthem.

Lackofstandardprocedures.Customersmayaskfordifferenttaggingmethodsorlabeling.Withmanyindustrialproductsthereisnobar-codestandard.

Systemmaintenance.Itneedsalotmaintenancetotheinventoryrecorderrorsduetoincorrectpartcounts,mislabeling,damage,lossandtheft.

JustInTimeInventoryManagement

Intheearly1970s,ToyotaMotorManufacturingadoptedJITsystem,anewproductionstrategythatusedlittleinventory,shortenedcycletimes,improvedquality,andeliminatedwasteandcostsinthesupplychain.ItwasalsoadoptedbyAmericanandEuropeanautomakersinresponsetothegrowingsuccessoftheirJapanesecompetitors.LaterJITconceptspreadtootherindustriessuchascomputers,andbecamepopularinmanufacturingstrategiesaroundtheworld.Just-In-Timeisaphilosophyofcontinuousandforcedproblemsolving.WithJIT,suppliesandcomponentsare“pulled”throughasystemtoarrivewheretheyareneededwhentheyareneeded.Whengoodunitsdonotarrivejustasneeded,a“problem”hasbeenidentified.ThismakesJITanexcellenttooltohelpoperationsmanagersaddvaluebydrivingoutwasteandunwantedvariability.BecausethereisnoexcessinventoryorexcesstimeinaJITsystem,costsfromunneededinventoryareeliminatedandthroughputimproved.Consequently,thebenefitsofJITareparticularlyhelpfulinsupportingstrategiesofrapidresponseandlowcost.Moreinventoryturns.Becausethereislessstockonhand,theinventorythatismaintainedstaysforashorterperiodoftime.Betterquality.HighqualityproductsmustbereceivedwithaJITsystem,otherwisetheentirebenefitproductionprocesscollapses.DisadvantagesofJITLesswarehousespace.Whenthereislessinventory,fewerand/orsmallerwarehousesarerequired.AdvantagesofJITRiskofstock-outs.Whenfirmseliminateinventory,theriskofstockingoutcanrise.Increasedpurchasingcosts.Theoretically,JITmeansobtainingsmalleramountsmorefrequently,whichgenerallywillnotgetpurchasingdiscountsassociatedwithbuyinglargequantitiesatonetime.Smallchannelmembersmaysuffer.JITmayallowstrongorganizationstoshifttheirinventorytosmallerfirmsinthechannel.Environmentalissues.JITcanleadtohigherlevelsoftrafficcongestionandairpollutionbecauseofadditionaltransportationrequired.JITisalsoestablishedpracticeinrestaurants,wherecustomersexpectit,andanecessityintheproducebusiness,wherethereislittlechoice.PacificPre-CutProduce,a$14millionfruitandvegetableprocessingcompanyinTracy,California,holdsinventorytozero.Buyersareinactionintheveryearlyhoursofthemorning.At6a.m.,productioncrewsshowup.Ordersforveryspecificcutsandmixturesoffruitandvegetablesaladsandstir-fryingredientsforsupermarkets,restaurants,andinstitutionalkitchenspourinfrom8a.m.until4p.m.Shippingbeginsat10p.m.andcontinuesuntilthelastorderisfilledandloadedat5a.m.thenextmorning.Inventoriesareonceagainzero,thingsarerelativelyquiet,andthentheroutinestartsagain.PacificPre-CutProducehasaccomplishedacompletecycleofpurchase,manufacture,andshippinginabout24hours.VPBobBorzonecallstheprocesstheultimateinmass-customization.“Webuyeverythingasabulkcommodity,thensliceanddiceittofittheexactrequirementsoftheenduser.Thereare20differentstir-frymixes.Somecustomerswantthesnowpeasclippedonbothends,somejustonone.Somewantonlyredbellpeppersinthemix,someonlyyellow.Youtailortheproducttothecustomer’srequirements.You’retryingtomeettheneedofalotofendusers,andeachrestaurantandretailerwantstolookdifferent.”MaterialRequirementsPlanning(MRP)物料需求計劃DistributionRequirementsPlanning(DRP)分銷需求計劃，配送需要計劃plantwarehouse工廠倉庫hybrid/?ha?br?d/n混合物assumption/??s?mp??n/n假設(shè)eliminate/??l?m?ne?t/v.automaker/???t???me?k?/n.throughput/?θru?p?t/n.stock/st?k/n.replenishment/r??plen??/n.trafficcongestionmasscustomizationtactics/?t?kt?ks/n.bulk/b?lk/n.slice/sla?s/v.dice/da?s/v.stir-fry/st??-fra?/n.clip/kl?p/n.消除，消滅汽車制造商產(chǎn)量，生產(chǎn)能力存貨補給交通堵塞大量定制化策略，戰(zhàn)術(shù)大量，大塊切成薄片切成小方塊用旺火炒，煎炒修剪NewWordsandExpressionsPartIII

SupplementaryReading:

Casestudy:JITintheSmogCo.ProductionSystemPerformanceMeasureforProductionSystem

SmogCo.isasmallsupplierofwell-engineeredcomponents.Itproducesarangeofproductsgroupedintofamilies.Productionofoneofthehighervolumeproductfamilieshasbeenorganizedintoaflowprocessmadeupoffoursteps,whichfollowoneaftertheotherinsequence.Changeoverfromoneproducttoanotherissimple,buttakesaround10minutespermachine.Tominimizedelayscausedbychangeovers,productstendtobemadeinbatches.Thesebatchesmovefromonesteptothenext,wheretheyqueueonafirstin,firstoutbasistobeworkedon,afterwhichtheymovetothenextstep.Keymeasuresoftheperformanceofthisprocessaretheutilizationofpeopleandofmachines.Theobjectiveistokeeputilizationofbothashighaspossible.FredHollis,theSmogproductionmanager,feltpleasedwithperformanceashelookedoutacrossthefactory.Hewaspleasedbecausehismachinesandpeoplewerebusy,therewereplentyoffinishedgoodsonhand,whichthesalesteamcouldusetosupplycustomers,andtherewasstocktocalluponifproductdemandincreased.Everythingseemedtobeundercontrol.ChangestoCustomerRequirementsThemotivationtochangefromthecurrentsystemhasbeenlowinthepast,astheprocessatSmogCo.isareliableone,whichhasworkedwellforthecompany.Thebigthreecustomers,whotakethree-quartersofsales,tendtoorderthesamethingsinsimilarquantitiesoneweekinadvanceofdelivery.Withaproductionleadtimeofthreeweeks,SmogCo.usesaforecasttoscheduleproductionandmakesurethatfinishedgoodsstockswillbeavailabletomeetpredicteddemand.Consistentdemandmeansthatforecastsareoftenclosetorealdemand,sostockoutsarerare.Infacttheonlytimethisoccurredwasanincidentacoupleofyearsago,whenakeymachinewentdownandaspareparttookalongtimetosource.Currentinventorylevelsnowincludesafetystocktoprovidecoveragainstasimilarprobleminthefuture.Whenthecompanyfoundthatcertainfinishedgoodsweresellingslowly,thesalesteamwasparticularlygoodatfindingawaytomovethem.Sometimespriceswerecut;atothertimessalesusedspecialpromotions.Ifproductionwastoohigh,ortheforecastwasabitoptimistic,thentherewerewaysofsellingsurplusstock,andthesalesteamseemedtoenjoythechallenge.Recently,however,thiswell-understoodpositionbegantochange.Themaincustomersstartedtouseanumberofnewstrategiestocompetewitheachother.Firstoneandthenasecondofthemannouncedthatitwillbereducingthecall-offtimeforitsproductsfromoneweektotwoworkingdays.Atthesametimetheyarealllookingfora5percentcostreduction,andaredemandingqualityimprovement.TraditionalReactiontoCustomerDemandsforBetterService

ThecombinationofdemandsforbetterservicescausedSmogmanagementsomeconcern.Theobviousresponsetothechangesinorderingpatternswastoincreasestocklevelstocaterforunexpectedvariationsindemand.Thisapproachhadworkedbefore,whenitwasusedtojustifythesafetystocksthatcoveredproductionproblems.Itseemedworthtryingagain,sostockswereincreased.Thingswentwelloverthefirstfewmonths,duringwhichtimedeliveryperformanceremainedgoods,whilethecustomerswentaheadwiththeirplantoreducetheorderleadtime.Keepingupwiththeseordersprovidedtheproducti