Inventory Control

Group 5

INVENTORY CONTROL
A short recap..

Economic Order Quantity Effects of high, low and medium inventory levels

Re-order Time, Ordering Costs, Holding costs.

ZEBRA SHOES
A Shoe line at San Francisco, United States. Products: Zebra print shoes, zebra high heel shoes, sandals, pumps, sneakers in the lowest price in United States. Services: Overseas shipping at the lowest cost.

Total weekly production: 6,500 pairs of shoes The company uses a chase strategy for purchasing raw materials. chase
Raw materials required Polyvinyl chloride (PVC) Fabric Shoelaces Iron Holes

Problem statement

PROBLEMS
- No methodology for inventory tracking. As a result many a times large quantities of shoes are stuck for an uncertain period of time. Sometimes reducing amount of inventory goes unreported. - Production rate and inventory levels are based on intuition, with the objective of avoiding stock-outs during the demand period. - Purchase and production varies according to the demand . - Low efficiency level. In many cases they dont complete the entire orders on time. - Due to all this, the company is also facing a major space optimization issue in its inventory storage areas.

Solution to Inventory Tracking Issues:

What is RFID?
RFID = Radio Frequency IDentification. Uses a small chip or a tag that reads radio-frequency waves to transfer data between a reader and a movable item to identify, categorize, track etc. Is fast and does not require physical sight or contact between reader/ scanner and the tagged item. Attempts to provide unique identification and backend integration that allows for wide range of applications.

RFID

How does RFID work?

Tags (or chips) consist of two parts: 1) Antennae 2) Processor/Storage Receives signal from reader and gives a return signal with ID number (which is unique for every item). Reader sends the unique ID number to database or server for storage.

RFID today
Its everywhere! Credit cards Car & home keys Passports Retail Outlets Packaged foods Clothes Asset Tracking in airlines etc

The benefits reaped by Zebra Shoes

Improved on inventory visibility and accuracy . Allowed stores to track the location and count of inventories in real time. Bringing about better monitoring of demand for certain products and place orders to prevent an out-of-stock situation. Each item is assigned a unique ID, therefore each item has the capability of reporting its own unique history of transactions. This allows for quicker resolution for missing or forgotten items. Increase in efficiency: The system replaced time consuming manual typing of inventory data with quick scanning of trays of inventory in bulk. Gaps between recorded inventories and physical inventories were eliminated. Since the system is software enabled, all associated risks of human error is completely eradicated.

Production Rate Correction: EPQ Model

What is EPQ? Economic Production Quantity model determines the quantity a company or retailer should order to minimize the total inventory costs by balancing the inventory holding cost and average fixed ordering cost. The EPQ model was developed by E.W. Taft in 1918. This method is an extension of the Economic Order Quantity model.

Implementing EPQ and deciding the production rate

Assumptions: Constant and uniform demand. Objective: EPQ analysis to determine the optimal quantities of shoes that Zebra Shoes must produce in order to satisfy the demand.
Variables Unitary cost (C) Annual cost for maintaining inventory (i) Annual cost for maintaining inventory per unit ( h = ic) Preparing production cost (A) Demand = D Production rate = P Value 50 $ 15% per year 7.5 $/pair-year 55$/order 300 000 pairs/year 312000 pairs/year

Hence, Zebra Shoes must produce 10695 pairs in 13 days approximately to meet customer demands timely.

Optimizing Inventory Levels: EOQ Model

Optimal quantities of raw materials to order

Assumptions: Constant and uniform demand Objective: EPQ analysis to determine the optimal quantities of shoes that Zebra Shoes must produce in order to satisfy the demand. Polyvinyl chloride Unitary cost = C = 10700 $/ton ; Demand = D = 18 ton/year Annual cost for maintaining inventory = i = 5% per year Annual cost for maintaining inventory per unit = h = ic = 535 $/ton-year Cost per order = A = 500 $/order

Hence, Zebra Shoes should purchase 5.8 ton of PVC every 114 days.

Fabric
Unitary cost = C = 30 $/m2 Annual cost for maintaining inventory = i = 5% per year Annual cost for maintaining inventory per unit = h = ic = 1.5 $/m2-year Cost per order = A = 150 $/order Demand = D = 19200 m2/year

Hence, Zebra Shoes should purchase 1959 m2 of fabric every 37 days.

Shoelaces boxes
Unitary cost = C = 37 $/box Annual cost for maintaining inventory = i = 1% per year Annual cost for maintaining inventory per unit = h = ic = 0.37 $/box-year Cost per order = A = 5 $/order Demand = D = 1092 box/year

Hence, Zebra Shoes should purchase 172 boxes of shoelaces every 54 days.

Iron holes
Unitary cost = C = 0.3 $/ piece Annual cost for maintaining inventory = i = 1% per year Annual cost for maintaining inventory per unit = h = ic = 0.003 $/piece-year Cost per order = A = 5 $/order Demand = D = 1560 000 pieces/year

Hence, Zebra Shoes should purchase 72111 iron holes every 17 days.

Optimizing Inventory Big Problem

What is a Demand Pull Replenishment System?

 This is a system where processes are based on demand, the production processes are designed to produce only what is deliverable and the business becomes leaner.  So, the communication of demand is in the form of daily consumer purchases and this demand data drives replenishment and production.  It concentrates on the speed of replenishment and ordering smaller batches more frequently.

So how does this system help?

 Improves flexibility to respond to customer demand  Empower employees to produce on customer demand  Improve production scheduling  Simplify the procurement process  Eliminate overproduction  Reduce inventory for finished goods, raw material and sub assemblies

Case of VF Corporation
VF corporation is a leader in branded lifestyle apparel which includes jeans wear, outdoor products, sportswear etc. It is a global powerhouse with its presence in more than 150 countries through 47,000 retailers. Sourcing and manufacturing are managed through a global supply chain organisation It has a simple strategy to continuously strengthen brands and products to improve their competitive position and financial performance. VFC had annual sales of 7 billion with billion in annual net profit. Six billion of the annual sales are to Retail Partners and 1 billion comes from Big Brands own retail stores.

About VFC Manufacturing Strategy

To remain competitive, manufacturing moved to third world countries to take advantage of low cost labor. Manufacturing lead time is between 2 and 4 months and transportation lead time is between 4 and 6 weeks. Today Big Brand orders inventory 5 to 9 months before the inventory is introduced to the public.

VF Corporation & associated brands

Approach to a Better Inventory Management

RESULTS First Phase Roll Out -Got daily point of sale data -Monitored inventory buffers for all SKUs in each store every day Many fewer store shortages Less surpluses too Sales went up and discounting was curtailed

Calculation of Inventory to Stock

Days of Week Lead Time (LT) 7 Days 1 Actual Demand Calculation Week 1 Week 2 Week 3 Week 4 Week 5 5 5 7 7 6 2 4 3 11 11 8 3 2 4 4 5 6 4 6 7 8 8 7 5 7 6 4 10 10 6 1 2 4 6 12 7 3 4 5 2 5 28 31 43 49 54 41 11.24722188 Demand During LT

Average Demand in LT (Average of the Numbers in Weeks 1-5) Demand Variability (Standard Deviation of Numbers in Weeks 1-5)
Note:Assume that the demand is Normally Distributed over the time period

Scenario 1 Customer Service Level Z-Score (Service Level Factor Safety Stock (Demand Variability*Z-Score Rounding Off Total Inventory (Average Demand in LT + Safety Stock 0.95 1.65 18.50 19 59.50168

Scenario 2 0.97 1.88 21.16 21 62.156024

Scenario 3 0.99 2.33 26.16 26 67.161038

Second Phase Roll Out

Picking a central DC for the retail stores

BENEFITS
        A better picture was seen of what should be replenished from manufacturing. Costs incurred transferring inventory between locations were reduced Replenishment was reduced More inventory was held at the DC and less at the store level Overall inventory dropped inventory turns increased Merchandisers had the ability to increase supply to areas that were selling and restrict replenishment where sales were slow or non existent Better availability allowed sales to rise

Lets see the Real Results

Results: Facts & Figures

 Same store sales doubled.  Inventory levels were of what was typical.  Inventory shortages were reduced to 1.5% which is 20 times less than the beginning benchmark.  The initial rollout alone resulted in a 4 million profit increase.  Net profits increased to 30% of sales, a level previously regarded as impossible.