Академический Документы
Профессиональный Документы
Культура Документы
Issues
Inventory Management The Effect of Demand Uncertainty
(s,S) Policy Periodic Review Policy Supply Contracts Risk Pooling
Supply
Inventory & warehousing costs Production/ purchase costs Transportation costs Inventory & warehousing costs Transportation costs
Inventory
Where do we hold inventory?
Suppliers and manufacturers warehouses and distribution centers retailers
Types of Inventory
WIP raw materials finished goods
Understanding Inventory
The inventory policy is affected by:
Demand Characteristics Lead Time Number of Products Objectives
Service level Minimize costs
Cost Structure
Cost Structure
Order costs
Fixed Variable
Holding Costs
Insurance Maintenance and Handling Taxes Opportunity Costs Obsolescence
Question
How many, when to order?
EOQ:Total Cost*
160 140 120 100
Total Cost
Holding Cost
Cost
80 60 40 20 0 0 500
Order Cost
1000
1500
Order Quantity
Demand Forecast
The three principles of all forecasting techniques:
Forecasting is always wrong The longer the forecast horizon the worst is the forecast Aggregate forecasts are more accurate
Jan 02 Retailing
Production
Probability
00 0
00 0
00 0
00 0 16
80
10
12
14
Sales
18
00 0
00
SnowTime Costs
Production cost per unit (C): $80 Selling price per unit (S): $125 Salvage value per unit (V): $20 Fixed production cost (F): $100,000 Q is production quantity, D demand
SnowTime Scenarios
Scenario One:
Suppose you make 12,000 jackets and demand ends up being 13,000 jackets. Profit = 125(12,000) - 80(12,000) - 100,000 = $440,000
Scenario Two:
Suppose you make 12,000 jackets and demand ends up being 11,000 jackets. Profit = 125(11,000) - 80(12,000) - 100,000 + 20(1000) = $ 335,000
What to Make?
Question: Will this quantity be less than, equal to, or greater than average demand? Average demand is 13,100 Look at marginal cost Vs. marginal profit
if extra jacket sold, profit is 125-80 = 45 if not sold, cost is 80-20 = 60
12000
16000
20000
Order Quantity
12000
16000
20000
Order Quantity
Profit
12000
16000
20000
Order Quantity
Probability of Outcomes
100%
Probability
Q=9000 Q=16000
Revenue
Profit =
Revenue - Variable Cost - Fixed Cost + Salvage
Profit
12000
16000
20000
Order Quantity
Initial Inventory
Suppose that one of the jacket designs is a model produced last year. Some inventory is left from last year Assume the same demand pattern as before If only old inventory is sold, no setup cost Question: If there are 7000 units remaining, what should SnowTime do? What should they do if there are 10,000 remaining?
500000
Profit
Production Quantity
500000
Profit
Production Quantity
500000
Profit
Production Quantity
Production Quantity
Supply Contracts
Fixed Production Cost =$100,000 Variable Production Cost=$35
Manufacturer DC
Retail DC
Stores
Demand Scenarios
Demand Scenarios
30% 25% 20% 15% 10% 5% 0%
Probability
80 00 10 00 0 12 00 0 14 00 0 16 00 0 18 00 0
Sales
8000
10000
12000
14000
16000
18000
20000
Order Quantity
8000
10000
12000
14000
16000
18000
20000
Order Quantity
Supply Contracts
Fixed Production Cost =$100,000 Variable Production Cost=$35
Manufacturer DC
Retail DC
Stores
Retailer Profit
60 00 70 00 80 00 90 00 10 00 0 11 00 0 12 00 0 13 00 0 14 00 0 15 00 0 16 00 0 17 00 0 18 00 0
Order Quantity
$513,800
Retailer Profit
60 00 70 00 80 00 90 00 10 00 0 11 00 0 12 00 0 13 00 0 14 00 0 15 00 0 16 00 0 17 00 0 18 00 0
Order Quantity
Manufacturer Profit
60 00 70 00 80 00 90 00 10 00 0 11 00 0 12 00 0 13 00 0 14 00 0 15 00 0 16 00 0 17 00 0 18 00 0
Production Quantity
Manufacturer Profit
$471,900
60 00 70 00 80 00 90 00 10 00 0 11 00 0 12 00 0 13 00 0 14 00 0 15 00 0 16 00 0 17 00 0 18 00 0
Production Quantity
Supply Contracts
Fixed Production Cost =$100,000 Variable Production Cost=$35
Manufacturer DC
Retail DC
Stores
Retailer Profit
60 00 70 00 80 00 90 00 10 00 0 11 00 0 12 00 0 13 00 0 14 00 0 15 00 0 16 00 0 17 00 0 18 00 0
Order Quantity
$504,325
Retailer Profit
60 00 70 00 80 00 90 00 10 00 0 11 00 0 12 00 0 13 00 0 14 00 0 15 00 0 16 00 0 17 00 0 18 00 0
Order Quantity
Manufacturer Profit
60 00 70 00 80 00 90 00 10 00 0 11 00 0 12 00 0 13 00 0 14 00 0 15 00 0 16 00 0 17 00 0 18 00 0
Production Quantity
Manufacturer Profit
$481,375
60 00 70 00 80 00 90 00 10 00 0 11 00 0 12 00 0 13 00 0 14 00 0 15 00 0 16 00 0 17 00 0 18 00 0
Production Quantity
Supply Contracts
Supply Contracts
Fixed Production Cost =$100,000 Variable Production Cost=$35
Manufacturer DC
Retail DC
Stores
60 00 70 00 80 00 90 00 10 00 0 11 00 0 12 00 0 13 00 0 14 00 0 15 00 0 16 00 0 17 00 0 18 00 0
Production Quantity
$1,014,500
60 00 70 00 80 00 90 00 10 00 0 11 00 0 12 00 0 13 00 0 14 00 0 15 00 0 16 00 0 17 00 0 18 00 0
Production Quantity
Supply Contracts
Strategy Sequential Optimization Buyback Revenue Sharing Global Optimization Retailer Manufacturer 470,700 440,000 513,800 471,900 504,325 481,375 Total 910,700 985,700 985,700 1,014,500
Contracts to Coordinate Supply Chain Costs Contracts to Increase Agent Effort Contracts to Induce Performance Improvement
Contracts for Product Availability and Supply Chain Profits: Buyback Contracts
Allows a retailer to return unsold inventory up to a specified amount at an agreed upon price Increases the optimal order quantity for the retailer, resulting in higher product availability and higher profits for both the retailer and the supplier Most effective for products with low variable cost, such as music, software, books, magazines, and newspapers Downside is that buyback contract results in surplus inventory that must be disposed of, which increases supply chain costs Can also increase information distortion through the supply chain because the supply chain reacts to retail orders, not actual customer demand
Contracts for Product Availability and Supply Chain Profits: Revenue Sharing Contracts The buyer pays a minimal amount for each unit purchased from the supplier but shares a fraction of the revenue for each unit sold Decreases the cost per unit charged to the retailer, which effectively decreases the cost of overstocking Can result in supply chain information distortion, however, just as in the case of buyback contracts
Contracts for Product Availability and Supply Chain Profits: Quantity Flexibility Contracts
Allows the buyer to modify the order (within limits) as demand visibility increases closer to the point of sale Better matching of supply and demand Increased overall supply chain profits if the supplier has flexible capacity Lower levels of information distortion than either buyback contracts or revenue sharing contracts
Blockbuster purchases a copy from a studio for $65 and rent for $3
Hence, retailer must rent the tape at least 22 times before earning profit
Even if Blockbuster keeps only half of the rental income, the breakeven point is 6 rental per copy The impact of revenue sharing on Blockbuster was dramatic
Rentals increased by 75% in test markets Market share increased from 25% to 31% (The 2nd largest retailer, Hollywood Entertainment Corp has 5% market share)
(s, S) Policies
For some starting inventory levels, it is better to not start production If we start, we always produce to the same level Thus, we use an (s,S) policy. If the inventory level is below s, we produce up to S. s is the reorder point, and S is the order-up-to level The difference between the two levels is driven by the fixed costs associated with ordering, transportation, or manufacturing
Reminder:
Standard Deviation = 10
Average = 30
0 10 20 30 40 50 60
Satisfy demand during lead time Protect against demand uncertainty Balance fixed costs and holding costs
Normally distributed random demand Fixed order cost plus a cost proportional to amount ordered. Inventory cost is charged per item per unit time If an order arrives and there is no inventory, the order is lost The distributor has a required service level. This is expressed as the the likelihood that the distributor will not stock out during lead time. Intuitively, how will this effect our policy?
Inventory Level
Lead Time
s 0 Time
Notation
AVG = average daily demand STD = standard deviation of daily demand LT = replenishment lead time in days h = holding cost of one unit for one day K = fixed cost SL = service level (for example, 95%). This implies that the probability of stocking out is 100%-SL (for example, 5%) Also, the Inventory Position at any time is the actual inventory plus items already ordered, but not yet delivered.
Analysis
The reorder point (s) has two components:
To account for average demand during lead time: LTAVG To account for deviations from average (we call this safety stock) z STD LT where z is chosen from statistical tables to ensure that the probability of stockouts during leadtime is 100%-SL.
Since there is a fixed cost, we order more than up to the reorder point: Q=(2 K AVG)/h The total order-up-to level is: S=Q+s
Example
The distributor has historically observed weekly demand of: AVG = 44.6 STD = 32.1 Replenishment lead time is 2 weeks, and desired service level SL = 97% Average demand during lead time is: 44.6 2 = 89.2 Safety Stock is: 1.88 32.1 2 = 85.3 Reorder point is thus 175, or about 3.9 = (175/44.6) weeks of supply at warehouse and in the pipeline
Example, Cont.
Weekly inventory holding cost: 0.87= (0.18x250/52)
Therefore, Q=679
Periodic Review
Suppose the distributor places orders every month What policy should the distributor use? What about the fixed cost?
Base-Stock Policy
r r
L
Inventory Position
Inventory Level
Base-stock Level
0 Time
Risk Pooling
Consider these two systems:
Warehouse One
Supplier Warehouse Two Market Two Market One
Risk Pooling
For the same service level, which system will require more inventory? Why? For the same total inventory level, which system will have better service? Why? What are the factors that affect these answers?
1 33 46 0 2
2 45 35 2 4
3 37 41 3 0
4 38 40 0 0
5 55 26 0 3
6 30 48 1 1
7 18 18 3 0
8 58 55 0 0
Market 1 Market 2
B B
1.125 1.25
1.36 1.58
1.21 1.26
1.125 1.36 1.21 4 1.58 1.26 5 77.9 20.7 .27 2.375 1.9 .81
118 304 6 39
Centralized Systems*
Supplier
Warehouse
Retailers
Centralized Decision
Forecasting
Recall the three rules Nevertheless, forecast is critical General Overview:
Judgment methods Market research methods Time Series methods Causal methods
Judgment Methods
Assemble the opinion of experts Sales-force composite combines salespeoples estimates Panels of experts internal, external, both Delphi method
Each member surveyed Opinions are compiled Each member is given the opportunity to change his opinion
Market surveys
Data gathered from potential customers Interviews, phone-surveys, written surveys, etc.
Causal Methods
Forecasts are generated based on data other than the data being predicted Examples include:
Inflation rates GNP Unemployment rates Weather Sales of other products
How important is the past in estimating the future? Different approaches may be appropriate for different stages of the product lifecycle:
Testing and intro: market research methods, judgment methods Rapid growth: time series methods Mature: time series, causal methods (particularly for long-range planning)