2009. Fall
1
2
3
4
5 Midterm
6
7
8
7
8
9
Final
7-Sep-09
14-Sep-09Cancelled
21-Sep-09
28-Sep-09
5-Oct-09
12-Oct-09Conf.
19-Oct-09
26-Oct-09Holiday
2-Nov-09
9-Nov-09
16-Nov-09
23-Nov-09
30-Nov-09
7-Dec-09
14-Dec-09
21-Dec-09
28-Dec-09
4-Jan-10
Option 1
a. Midterm?
b. 2 Sat.
afternoons:
Oct. 17, Nov.
7/14
• Assignment 1 has been released
• Due date: Oct 12th – 9pm.
• Submit to the course email account!
Inventory Models: Planning and
Managing Inventories in a Supply Chain
SCM centers around INVENTORY.
Where to keep, how much, how to ship?
How to reduce it, trade it off?
Inventory models provide foundation for
understanding SCM concepts.
Read: 10.1 upto p281, 10.6; 12.1 12.2.
A Macro-view of Supply Chain -- Flows
Web
Information
VISA
®
Mat'l Flow
Supplier
Credit Flow
Mfg.
Retailer
Consumer
Wholesaler
Retailer
Warehouse
Supplier
Schedules
Order
Flow
Cash
Flow
After sales support
List of Issues
•
•
•
•
The diversity of stock-keeping units
Functional classifications of inventories
Periodic review & continuous review models
Newsboy model
What Is Inventory?
• Stock to be sold or transformed into a more
valuable state
• Stock in transit/storage - all materials in
transit or in storage
Previously, inventory is flow unit!
What Is Inventory?
• Stock in transit/storage - all materials in
transit or in storage
• Examples
Companies hold inventories for
the following reasons:
1.
2.
3.
4.
5.
Pipeline inventory
Seasonal inventory
Cycle inventory
Decoupling inventory/buffers
Safety inventory
Pipeline inventory
• An item (a flow unit) that has to spend in the
process in order to be transformed from input
to output
• Pipeline inventory also refers to as an item in
the up-stream supply chain that is designated
to coming to you
E.g., you order today, then it takes 1 wk for order preparation,
then 3 wks shipping =4 wks
Zero inventory?
• If one states “we need to achieve zero
inventory in our process”, how will you
respond?
• By Little’s Law, Inv = flow rate * flow
time
5 Reasons for inventory
1) Seasonal demand
Economy of scale
Christmas, Chinese
NY, etc.
e.g., transportation,
2) Seasonal supplyto take adv. of
1. Harvests
Pipeline inventory
quant. discounts
2.
3.
4.
5.
Seasonal inventory
Cycle inventory
Decoupling inventory/buffers
Safety inventory
Central DC -> Regional DC -> Retailers
HK VendorDemand
-> US OEM
(brand owner)
uncertainty
=) To maintain
independence
Supply
uncertainty of operations
Reasons against Holding
Inventory
• Interest/Opportunity costs
• Holding (or carrying) cost
• Building lease, insurance, etc.
• Depreciation of inventory value
• Damages while in-hold
• Hides production/operations problems
Lowering Inventory Reduces
Waste
Unreliable
Vendors
Scrap
Capacity
Imbalances
Lowering Inventory Reduces
Waste
Unreliable
Vendors
Scrap
Capacity
Imbalances
Lowering Inventory Reduces
Waste
Unreliable
Vendors
Scrap
Capacity
Imbalances
Lowering Inventory Reduces
Waste
Unreliable
Vendors
Scrap
Capacity
Imbalances
Lowering Inventory Reduces
Waste
Unreliable
Vendors
Scrap
Capacity
Imbalances
Lowering Inventory Reduces
Waste
Work in process inventory level
(hides problems)
Unreliable
Vendors
Scrap
Capacity
Imbalances
Lowering Inventory Reduces
Waste
Work in process inventory level
(hides problems)
Unreliable
Vendors
Scrap
Capacity
Imbalances
Lowering Inventory Reduces
Waste
Work in process inventory level
(hides problems)
Unreliable
Vendors
Scrap
Capacity
Imbalances
Lowering Inventory Reduces
Waste
Reducing inventory reveals
problems so they can be solved.
Unreliable
Vendors
WIP
Scrap
Capacity
Imbalances
Lowering Inventory Reduces
Waste
Reducing inventory reveals
problems so they can be solved.
Unreliable
Vendors
WIP
Scrap
Capacity
Imbalances
Lowering Inventory Reduces
Waste
Reducing inventory reveals
problems so they can be solved.
Unreliable
Vendors
Scrap
WIP
Capacity
Imbalances
Lowering Inventory Reduces
Waste
Reducing inventory reveals
problems so they can be solved.
Therefore, quality is pre-requisite for low
inventory. The core of JIT is of low
inventory. Then, Total quality mgmt & JIT
are interdependent.
Unreliable
Vendors
Scrap
WIP
Capacity
Imbalances
“Japanese Style of Mgmt”
Japanese Mgmt
Four CEOs, one English, one French, one Japanese and one American, were
on their way to an international buz conference when they were kidnaped
by terrorists and taken to a secret hideout.
"You, your companies and your countries are enemies of the Revolution,"
screamed the terrorist leader,
"and you're going to be executed! Do you have any last requests?"
The Englishman spoke first.
"Before I die, I want to honor my contry and ……” // "That can be
arranged," said the terrorist.
The Frenchman said,
"And I want to honor MY country before I die by singing " La Marseilles"
to your men."
http://www.youtube.com/watch?v=-NzXGqEgq8Q&feature=related
Japanese Mgmt
The Japanese said, "Before I die, I wish to honor MY country by
giving the lecture I was going to present on the Japanese style
of management."
The terrorist turned finally to the American.
"What is YOUR last request?"
The American replied, "I want you to kill me right now so I
don't have to listen to another lecture on the Japanese style of
management!"
JIT
SKU
• Managerial decisions regarding inventories ultimately
made at the level of an individual item or product
– SKU - specific unit of stock - item of stock that is
completely defined as to function, style, size, &
colour.
The Diversity of Stock-Keeping Units
SKU: an item of stock that is completely specified
as to function, style, size, colour.
• Facts
– Large retailers carry about 100,00 SKUs
– A typical medium-sized MNC mfg concern keeps in
inventory about 10,000 types of raw materials, parts, and
finished goods
– Some large mfg companies & defence org. stock
more than 500,000 distinct items
– May be perishable -- deterioration, obsolescence
– Goods also arrive by diff. transport. modes & in
quant.
ABC Classification
Do forecasting manually? Manage them by managers?
The ABC Classification
• Close examination of multi-SKU inventory systems
reveals a statistical regularity in the usage rate of diff
items ($)
– A class, B class, C class: 80/20 rule
• Policies based on ABC analysis
– Develop class A suppliers more ...
– Give tighter physical control of A items
– Forecast A items more carefully
总销量 $
90％
80％
20%
40%
100%
32
累积存货
单元数
ABC Classification Solution*
Stock #
Vol.
Cost
$ Vol.
Z-206
Z-019
W-105
13,000 $ 22 $286,000
1,700
25
42,500
75 200
15,000
P-144
K-207
12,000
3,000
Total
1
2
12,000
6,000
%
ABC
79.1
11.8
4.1
A
B
B
3.3
1.7
C
C
$361,500 100.0
Note: Example is for illustration only; too few items.
More about 80/20 Principle
• The 80/20 principle asserts that a minority of causes,
inputs or effort usually lead to a majority of the results,
outputs or rewards.
• In business: 20% products - 80% revenue *
• In society, 20% criminals - 80% value; 20% motorists 80% accidents *
• In home, 20% clothes - worn 80% time
• In bars, 20% drinkers – 80% sales
• IBM found 80% computer time spent executing about
20% of routines/codes
• Winner takes all: 5% families - 75% equity
More about 80/20 Principle
Input
Output
Causes
Consequences
Effort
Results
65/35, 75/25, 80/20, 90/10, 95/5, 85/10
More about 80/20 Principle
• “50/50 fallacy” - effort and results are not generally
equally balanced
• Resources that have weak effects in any
particular use are not used, or are used sparingly
– If course grades depend entirely on Finals ?
– 80% of work done by 20% workers
– 80% total beer was drunk by 28% drinkers
•A typical refrigerator has its “freezer compartment” on the
top and “cool store” in the lower part. So you would bend
over to pick up fruits and so on.
But people 80% of time use “cold store”,, whearea only
20% of their time “freezer
。 compartment”. The standard
structure make a lot of housewives back-pains!
• One dept director could only work for 3-4 hours due to hart
problems recently。To his surprise, he found
No thing much he missed for his work quality-wise, as
compared with his work of 0-12 hours per day before.
37
•
•
•
•
•
•
•
•
•
•
•
•
•
•
(1) 80%的外出吃飯都前往20%的餐館；
(2) 80%的生產量是源自20%的生產量；
(3) 80%的病假是由20%的員工所佔用；
(4) 80%的檔案使用量集中於20%的檔案；
(5) 80%的討論都是出自20%的討論者
(6) 80%的垃圾是源自20%的地方；
(7) 80%的檔案使用量集中於20%的檔案；
(8) 80%的看電視時間都花在20%的節目；
(9) 80%的閱讀的書籍都是取自書架上20%的書籍；
(10) 80%的看報時間都花在20%的版面；
(11) 80%的電話都是來自20%的發話人；
(12) 80%的教師輔導時間都被20%的學生所佔用；
(13) 80%的菜是重複20%的菜色；
(14) 80%上課時間只學到 20％的…。
Time management class
One day a time mgmt expert was speaking to a group
of business students. As this man stood in front of
the group of high-powered overachievers he said,
"Okay, time for a quiz."
Then he pulled out a one-gallon, wide-mouthed mason
jar and set it on a table in front of him. Then he
produced about a dozen fist-sized rocks and carefully
placed them, one at a time, into the jar.
When the jar was filled to the top and no more rocks
would fit inside, he asked, "Is this jar full?"
Everyone in the class said, "Yes."
Then he said, "Really?" He reached under the table and
pulled out a bucket of gravel. Then he dumped some
gravel in and shook the jar causing pieces of gravel to
work themselves down into the spaces between the big
rocks.
Then he asked the group once more, "Is the jar full?"
By this time the class was onto him. "Probably not,"
one of them answered. "Good!" he replied.
He reached under the table and brought out a
bucket of sand. He started dumping the sand
in and it went into all the spaces left between
the rocks and the gravel. Once more he
asked the question, "Is this jar full?"
"No!" the class shouted. Once again he said,
"Good!" Then he grabbed a pitcher of water
and began to pour it in until the jar was filled
to the brim. Then he looked up at the class
and asked, "What is the point of this
illustration?"
One eager beaver raised his hand and said, "The
point is, no matter how full your schedule is, if you
try really hard, you can always fit some more
things into it! – drink beers, …”
"No," the speaker replied, "that's not the point. The
truth this illustration teaches us is: If you don't put
the big rocks in first, you'll never get them in at all."
What’s the moral of this story?
Put the rocks in first.
The Long Tail
• Originated from Statistics: dinosaur’s long
tail
– <Wired>magazine editor, Chris Anderson,
2004 coined it: so long as storage and channel
are big enough, the sales of low demand items
all together can match those of the hit products
• 80-20： minority vs. majority
• Long tail look at the 80% of trivial items
43
Amazon.com found among millions of books
that it sold online, hundreds count for a half
of its revenue, the other half from the rest of
millions.
Other Inventory Classifications
Inventory
Other Inventory Classifications
Inventory
Process
Stage
Inventory Classifications
Inventory
Process
Stage
Raw Mat'l
WIP
Fin. Goods
Inventory Classifications
A
Inventory
Process
Stage
Number
& Value
B
C
Raw Mat'l
WIP
Fin. Goods
A Items
B Items
C Items
Inventory Classifications
Inventory
Independent
Process
Stage
Number
& Value
Demand
Type
Raw Mat'l
WIP
Fin. Goods
A Items
B Items
C Items
Independent
Dependent
Dependent
Independent vs. Dependent
Demand
Independent Demand
(Demand not related to other items)
Dependent Demand
(Derived)
E(1)
Inventory Classifications
Inventory
Process
Stage
Number
& Value
Demand
Type
Other
Raw Mat'l
WIP
Fin. Goods
A Items
B Items
C Items
Independent
Dependent
Mainten.
Repair
Operating
Inventories are typically measured in
three ways
Average aggregate inventory value: used to
accumulate total value of all items held in inventory on the
average, over some time period.
Weeks (months) of supply: computed by dividing
average aggregate inventory held, by sales per week
(month) at cost.
Inventory turns: computed by dividing annual sales at
cost, by average aggregate inventory value maintained
during the year.
The last two are essentially equivalent:
Annual Inventory turns = 1 / years of supply
Little’s law
Flow time /cycle time:T
is the time it takes a “unit of
flow” (a job) to traverse
the system
Flow/Throughput rate: R
Average number of jobs that
pass thru the system per unit
of time
Inventory: I
The number of jobs within
the system boundaries at a
particular point in time
Little’s Law
I= R*T
Inventory (I) = Flow Rate (R) * Flow Time (T)
Examples
Berger King
• R: Throughput: 5000kg/week
• I: Inventory: 2500kg
Berger King
• R: Throughput: 1500
customers/day (15 hrs)
• I: Inventory: 25 customers
T = I/R = 0.5 week
T = I/R = 1/60 days = 15 min
Travel Insurance
• Processes 10,000 claims per yr
• Average process time = 3 wks
• How many in processing/wait?
(50 wks per yr)
I = 10000*3/50 = 600 jobs
Cash flow
• Nokia sells 300M$ worth phones
per yr
• Average receivables = 45M$
T = 45/300 =0.15 yr = 1.8 mos
More examples
• Inventory turns: compute right from financial data
Cost of Goods sold:
20,000 mill $/year
Inventory: 391 mill $
T = 391*365/20000 = 5.4 days
Inv. Turns: 65.5 times/yr
Cost of Goods sold:
25,263 mill $/year
Inventory: 2,003 mill $
T=2003*395/25263
= 29 days
Inv. Turns: 12.6 times/yr
Hutchison-Whampoa’s Retailing: Cost of goods sold: US$mil 9484,
Inventory: 2692, Turns= 3.52. (2007)
Park n Shop, AS Watson, 3, …
Li & Fung Limited (trading)
Trading: Code 494.hk
(in HK$ mil)
2007/2006: Cost of inventories: 82,692/60,674
Inventory: 2,059/1,331
Inventory turns: 40/45
IDS
Li & Fung Retail
Trading: Code 8052.hk
(in HK$ mil)
2007/2006: Cost of inventories: 2,059/1,678
Inventory: 110/82
Inventory turns: 18/20
Circle K, …
120 Days = 3 turns
Dairy Farm Int’l: 7.5 times/yr
(2007)
Importance of Inventory Mgt
• Inventory x Turns = Cost of goods sold
(COGS, “turnover” at cost)
• Inventory = (1 /Turns) x COGS
• Earnings = Margin x COGS
An example:
– Margin = 12%
– Turns = 10, or (1/Turns) = 10%
– Holding cost rate = 30%
– Net margin rate = 9% ( =12 - 30/10 )
Two PC Makers
• PC Industry (U.S.):
– Margin rate = 8%
– Inventory costs = 50%
• Dell: Turns = 50, Net margin = 7% (= 8 - 50/50)
• Compaq: Turns = 10, Net margin = 3% (= 8 - 50/10)
• Dell has more cash
Dell vs. Compaq
• 2Q/2000, Dell & Compaq: the same revenue. Thus,
Dell earnings is at least Compaq’s 2.33 times (7/3)
• Suppose that the two companies’ P/E ratios the
same. Then Dell’s market capitalization was about
Compaq’s 2.33
– In fact, at the time, Dell = US$76B, Cpq = US$19B
Out of stock for Christmas
Believe it or not, there is actually a product out of
stock this Holiday season - Amazon’s Kindle. Oprah
announced that she loves her Kindle and sales have
exceeded Amazon’s expectations. The forecast is that
they will not be in stock until February. The key
question is how many unit sales will they lose because
they are not available in the peak month of the year?
Probably more than they want. Even if those sales are
deferred to the next holiday season, it is a costly
situation for the company. Of course, there is no way
to know if they are just the victim of bad luck (or too
much good luck) or bad planning, but it does illustrate
that challenges of meeting highly uncertain demand.
Wall Street Journal Dec 4, 2008 - Better Scratch That
Kindle Off Your List
Just read this from macintouch.com
"I know from friends in Hong Kong that there may be
an iPod shortage - they tried searching for iPods at
more than 4 local computer shops but they were all
out of stock. -Derek Tsang"
Interesting....
Newspaper Clips
• WSJ (10/1994) about IBM:
– Oversupply of the PS/1 model in the 4 th Q of 1993
strained relations with some retail chains, which were
stuck with unsold m/c
– Thru 1993-94, it struggled with high shortages in
ThinkPad line, meanwhile burned by overly agg.
forecasts for the ValuePoint line ( with $700 mil unsold
PCs) and forced to resort to steep discounts
– Just 3 wks after announcing its new Aptiva home PC
line, IBM was sold out thru year end and can’t fill all of
its holiday orders (due to conservative forec.)
Newspaper Clips (cont’d)
• Apple fared no better (Business Wk, 1996):
– when mkt boomed, Apple could not keep up. 3/4 of
product shortages peaked last September with a $1 b
backlog.
– Component supply was eased but Apple had the wrong
mix at retail: too many low end models and too few of
the powhouses were snapping up … Apple was left with
$80 mil inventory write-off, while IBM, Compaq & HP
had cleaned up