Lecture Eight N

12.
Chapter 12
Inventory planning and control
Photodisc. Kim Steele
12.1
Slack, Chambers and Johnston, Operations Management, 6th Edition,

Nigel Slack, Stuart Chambers, and Robert Johnston 2010
12.2
Inventory planning and control

Operations
strategy
Design
Inventory planning
and control
Improvement
Planning and
control
The market requires

a quantity of products
and services at a
particular time
The operation supplies
the delivery of a
quantity of products and
services when required
12.2

12.3
Key operations questions

In Chapter 12 Inventory planning and control Slack
et al. identify the following key questions:
What is inventory?
Why is inventory necessary?
What are the disadvantages of holding inventory?
How much inventory should an operation hold?
When should an operation replenish its inventory?
How can inventory be controlled?
12.3

12.4
What is Inventory?
Inventory (stock) is stored accumulation of
material resources in a transformation system.
A manufacturing company will hold stocks of
materials.
Inventory exists because of the difference in the
timing or rate of supply and demand.
When the rate of supply exceeds the rate of
demand, inventory increases.
When the rate of demand exceeds the rate of
supply, inventory decreases
12.4

12.5
Inventory is created to compensate for the differences in

timing between supply and demand
Rate of supply from
input process
Inventory
Rate of demand from

output process
Input
process
Output
process
Inventory
12.5

12.6
Types of Inventory
The various reasons for imbalance between
the rates of supply and demand at different
points in any operation lead to the different
types of inventory.
There are five (5) types;
Buffer inventory
Cycle inventory
De-coupling inventory
Anticipation inventory
Pipeline inventory
12.6

12.7
Types of Inventory (contd)

Buffer inventory (safety)
Its purpose is to compensate for the unexpected
fluctuations in supply and demand.
A retail store will order goods from its suppliers such
that there is always a certain amount of most items in
stock because demand might be greater than expected.
Cycle inventory
Occurs when one or more stages in the process cannot
supply all the items it produces simultaneously.
Results from producing in batches to satisfy demand
between the times when each batch is ready for sale.
12.7

12.8
Types of Inventory (contd)

De-coupling inventory
When transformed resources move intermittently b/n
departments that comprise similar operations.
Anticipation inventory
Used to cope with seasonal demand.
It is used when demand fluctuations are large but
relatively predictable.
Pipeline inventory
It exists because materials (allocated to a customer)
cannot be transported instantaneously between the
point of supply and the point of demand.
12.8

12.9
Disadvantages of holding inventories

Although inventory plays an important role,
it also has disadvantages such as;
It ties up money
It incurs storage costs
Materials may become obsolete
Materials may be damaged or deteriorate
Materials may be lost
It might be hazardous to store
It uses up valuable space
It involves administrative and insurance costs
12.9

12.10
The position of inventory

Supply demand imbalances also exists between
different stages in the operation.
The simplest level is the single stage inventory system
such as a retail store which will only have one stock of
goods to manage.
An auto motive parts distribution operation will have a
central depot and various local distribution points
which contain inventories- two-stage inventory system.
A television manufacturer will have a multi stage
inventory system.
A more complicated system is the multi echelon
inventory system
12.10

12.11
Single-stage and two-stage inventory systems
Single-stage
inventory system
Stock
Sales
operation
Suppliers
e.g. Local retail store
12.11
Two-stage inventory
system
Central
depot
Distribution
Local
distribution
point
Sales
operation
Suppliers
e.g. Automotive parts

distributor
12.12
A multi-stage inventory system
Input
stock
Stage
1
WIP
Stage
2
WIP
Stage
3
Finished
goods
stock
Suppliers
e.g. Television manufacturer
12.12

12.13
A multi-echelon inventory system
Garment
manufacturers
Cloth
manufacturers
Yarn
producers
12.13
Regional
warehouses
Retail
stores

12.14
Day to day inventory decisions
In managing day to day tasks of running the

inventory system, operations managers are
involved in three major types of decision;
How much to order? (volume decision)
Every time a replenishment is placed, how big should it be?
When to order? (time dimension)

At what point in time, or at what level of stock, should the
replenishment order be placed?
How to control the system?

What procedures and routines should be installed to help
make those decisions? Should priorities be allocated to
different stock items? How should stock info be stored?
12.14

12.15
Several types of costs are directly associated with

order size.
Inventory costs
Cost of placing the order (transaction costs)

Price discount costs (discounts on price for large quantities)
Stock-out costs (incurred for failing to supply customers)
Working capital costs
Storage costs
Obsolescence costs
Operating inefficiently costs
Inventory profiles
A visual representation of the inventory level over time.
12.15

12.17
The economic order quantity (EOQ)

formula
The most common approach
to deciding how much of
any particular item to order when stock needs
replenishing.
This approach attempts to find the best balance between

the advantages and disadvantages of holding stock.
To find out the best plan (order quantity policies) that
minimizes the total cost of stocking the item Total cost of holding one unit in stock for a period of time
Working capital, storage and obsolescence risk costs
and the total cost of placing an order.

Cost of placing the order and price discount costs
12.17

12.18
Two alternative inventory plans with different

order quantities (Q)
Inventory level
Demand (D) = 1000 items per year

400
Plan A
Q = 400
Average inventory
for plan A = 200
Plan B
100 Q = 100
Average inventory
for plan B = 50
Time
0.1 yr
12.18
0.4 yr
12.19
The timing decision- when to place the order

When we assume that orders arrive instantaneously and
demand is steady and predictable, the decision on when
to place a replenishment order is self evident.
If replenishment orders do not arrive instantaneously, but
have a lag between the order being placed and it arriving
in the inventory, we can calculate the timing of the
replacement order i.e. when the demand and order lead
time are perfectly predictable- not so in most cases.
Therefore the earlier the replacement order is placed, the
higher will be the expected level of buffer or safety stock
when the replenishment order arrives.
12.19

12.20
The re-order point
Demand (D) = 100 items per week
Inventory level
400
Re-order level
300
Re-order point
200
100
0
0
Order lead time
12.20
Time

The timing decision- when to place the order (contd)
12.21
We can calculate how much safety stock to allow by

using the lead-time usage.
The lead time usage distribution is a combination of the
distributions which describe lead-time variations and the
demand rate during the lead time
Continuous review approach

Review stock level of each item continuously and place order
when stock level reaches its re-order level.
Periodic review approach

Sacrifices the use of a fixed order quantity
Instead of ordering at a predetermined re-order level, the
periodic approach orders at a fixed and regular time interval.
12.21

12.22
Inventory analysis and control systems

Inventory priorities In an inventory which contains more than one stocked
item, some items will be more important to the
organisation than others.
One common way of discriminating between different stock
items is to rank them by the usage value (usage rate x
individual value)
Pareto Law- 80/20 rule

Generally, a relatively small proportion of the total
range of items contained in an inventory will account
for a large proportion of the total usage value i.e.
80% of an operations sales are accounted for by only 20% of all stocked
types.
12.22

12.23
ABC inventory control system
This allows inventory managers to concentrate

their efforts on controlling the more significant
items of stock using monetary value.
Class A items are those 20% or so of the high-usagevalue items which account for 80% of the total usage
value.
Class B items are those of medium usage, usually next
30% of items which account for around 10% of total
usage value
Class C are those low-usage-value items which
although comprises around 50% of the total types of
items stocked account for around 10% of the total.
12.23

12.24
Inventory classifications and measures
Class A items the

20% or so of highvalue items which
account for around
80% of the total
stock value.
Class B items the

next 30% or so of
medium-value items
which account for
around 10% of the
total stock value.
Class C items the

remaining 50% or so
of low-value items
which account for
around the last 10%
of the total stock
value.
12.24

12.26
Other criteria used in classification of an item:

Consequences of stock out
High priority might be given to items that will seriously
delay or disrupt other operations or the customers when
not in stock.
Uncertainty of supply
Some items, although of low value, might warrant more
attention if their supply is erratic or uncertain.
High obsolescence or deterioration risk

Items which could lose value through obsolescence or
deterioration might need extra attention and monitoring.
12.26

12.27
Measuring Inventory
Monetary value can also be used to measure
the absolute level of inventory at any point in
time.
Taking the number of each item in stock,
multiplying it by its value and summing the
value of all the individual items stored.
12.27

12.28
Inventory Information system

Most inventories of any significant size are
managed by computerized systems.
Data capture has been made more convenient
through the use of bar-code readers and the point of
sale recording of sales transactions.
Common functions of commercial systems
12.28
Updating stock records

Generating orders
Generating inventory reports
forecasting

12.29
Common problems with inventory systems

Majority of inventory records might not be
accurate because of the following;
Keying errors
Quantity errors
Damaged inventory not recorded as such
The wrong item being taken out of stock but
records not being corrected
Delays between transactions being made and
records being updated.
Items stolen from inventory.
12.29

12.30
Chapter 13
Supply chain planning and control
Pearson Education Ltd. Arnos Design
12.30

12.31

Operations
strategy
Design
Supply chain
planning and control
Improvement
Planning and
control
The market requires

specified time, quantity and
quality of products and
services
The operation supplies
the coordinated delivery of
products and services
12.31

12.32
Key operations questions

In Chapter 13 Supply chain planning and control Slack
et al. identify the following key questions:
What is supply chain management?
What are the activities of supply chain management?
What are the types of relationship between operations
in supply chains?
How do supply chains behave in practice?
How can supply chains be improved?
12.32

12.33
What is supply chain management?
Supply chain management is the management of

the interconnection of organizations that relate to
each other through upstream and downstream
linkages between the processes that produce
value to the ultimate consumer in the form of
products and services.
12.33

12.34
On going flow of goods and services

through the supply network along the
individual channels or strands of that
network.
Supply chain refers to the strand of linked
operations.
Supply chain management coordinates all
the operations on the supply side and the
demand side.
12.34

12.35
Supply chain management objective

All supply chain management shares one
common and central objective to satisfy the
end customer.
Each operation in the chain should be satisfying
its own customers, but also making sure that
eventually the end-customer is also satisfied.
Meeting the requirements of the end customer
requires the supply chain to achieve appropriate
levels the five operations performance
objectives.
12.35

12.36
is concerned with managing the flow of materials and information between a

string of operations, that form the strands or chains of a supply network
Flow between processes
Supply network
management concerns
flow between operations
Supply chain
management concerns
flow between a string of
operations
12.36

12.37
Supply chains management is concerned with the flow of

information and the flow of products and services
Upstream flow of
customer
Requirements
Flow between
processes
Flow between
processes
Long-term plans and requirements

Market research information
Individual orders
Payment
Potential new products and services.
Flow between
processes
Consumer
Operation 1
Operation 2
Products and services

New products and
services
Delivery information
Payment request/Credit.
12.37
Operation 3
Downstream flow of
products and services for
customer
Fulfilment

12.38
Some terms used
Physical distribution management may mean

supplying immediate customers
Logistics is an extension that often refers to
materials and information flow down through a
distribution channel, to the retail store or
consumers.
Third party logistics (TPL) indicates outsourcing to
a specialist logistics company.
Materials management refers to the flow of
materials and information only through the
immediate supply chain.
12.38

12.39

Second tier
supplier
First tier
supplier
First tier
customer
Supply side
Information
flow
Physical
flow
Purchasing and
supply
management
Second tier
customer
End
customer
Demand
side
Physical distribution
management
Logistics
Materials management
Supply chain management
12.39

12.40
The activities of supply chain management

Purchasing (procurement) and supply
management
At the supply end of the business, purchasing
(procurement) buys in materials and services from
suppliers. Purchasing managers provide a vital link
b/n the operation itself and its suppliers.
They must understand the requirements of all the
processes within the operation and the capabilities of
their potential suppliers.
Purchasing can have a significant impact on an
operations cost and therefore profits.
Purchase costs are a large proportion of total costs.
12.40

12.41
The purchasing function brings together the operation

and its suppliers
Suppliers
Purchasing function
Prepare
Requests
quotation for
specification,
price, delivery,
etc.
Request
for
quotations
Select
supplier(s)
Quotations
Produce
products and
services
Order
The operation
Request for
products and
services
Demand
from
customers
Liaison
between
purchasing
and the
operation
Prepare
purchase
order
Receive
products and
services
Supply to
customers
Deliver
12.41

12.42
Supplier selection
Choosing appropriate suppliers should involve trading
off attributes.
Most businesses find it best to adopt some kind of
supplier scoring or assessment procedure capable of
rating alternative suppliers against certain
criteria/factors.
Single and multi-sourcing

An important decision facing most purchasing
managers is whether to source each individual product
or service from one supplier (single sourcing) or more
than one supplier (multi-sourcing)
12.42

12.43
Factors for rating alternative suppliers

Short-term ability to supply
Longer-term ability to supply
Range of products or services

provided
Potential for innovation
Quality of products or services

Responsiveness
Ease of doing business

Willingness to share risk
Dependability of supply
Delivery and volume flexibility
Long-term commitment to supply

Ability to transfer knowledge as
well as products and services
Total cost of being supplied

Ability to supply in the required
quantity
Technical capability
Operations capability
Financial capability
Managerial capability
12.43

12.44
Weighted supplier selection criteria for a hotel chain

Factor
Weight
Supplier A score Supplier B score
Cost performance
10
8 (8 x 10 = 80)
5 (5 x 10 = 50)
Quality record
10
7 (7 x 10 = 70)
9 (9 x 10 = 90)
Delivery speed
promised
5 (5 x 7 = 35)
5 (5 x 7 = 35)
Delivery speed
achieved
4 (4 x 7 = 28)
8 (8 x 7 = 56)
Dependability record
6 (6 x 8 = 48)
8 (8 x 8 = 64)
Range provided
8 (8 x 5 = 40)
5 (5 x 5 = 25)
Innovation capability
6 (6 x 4 = 24)
9 (9 x 4 = 36)
325
356
Total weighted score
12.44

12.45
Purchasing, the internet and e-procurement

For some years, electronic means have been used by
businesses to confirm purchased orders and ensure
payment to suppliers.
The internet has opened up the potential for far more
fundamental changes in purchasing behaviour- supplier
information made available through the internet.
E- procurement is the generic term used to describe the
use of electronic methods in every stage of the
purchasing process from identification of requirement
through to payment, and potentially to contract
management.
12.45

12.46
Benefits of e-procurement
It promotes efficiency improvements in purchasing

processes.
It improves commercial relationships with
suppliers.
It reduces the transaction costs of doing business
for suppliers.
It opens up the marketplace to increased
competition and therefore keeps prices
competitive
It improves a businesss ability to manage their
chain more efficiently
12.46

12.47
Global sourcing
The expansion in the proportion of products and
(occasionally) services which businesses are willing
to source from outside their home country.
It is the process of identifying, evaluating,
negotiating and configuring supply across multiple
geographies.
Factors promoting global sourcing
Transportation infrastructure are more sophisticated and
cheaper than they once were.
Companies now source from wherever is cheapest because
competition is forcing companies to reduce total cost.
12.47

12.48
Global sourcing
Some factors that must be understood and
included in evaluating global sourcing are
Purchase price
Transportation costs
Inventory carrying costs
Cross-border taxes, tariffs and duty costs
Amongst others
12.48

12.49
Physical distribution management (PDM) and the

internet
Transporting tangible products to customers.
One of the major effects of internet communication
on PDM is;
To make information available more readily along the
distribution chain- share knowledge of where goods are in
the chain (transport companies, warehouses, suppliers etc.)
12.49

12.50
Types of relationships in supply chain
Business or consumer relationships

Business to business (B2B)
Most common in supply chain context
Business to customer (B2C)

Relationship includes retailers and online retailers.
Customer to business (C2B

Relationships involve consumers posting their needs on the
web and companies then deciding whether to offer.
Customer to customer (C2B) or peer to peer (P2P)

Relationships include the online exchange and auction
services and file sharing services.
12.50

12.51
Supply chain relationships

To
Business
Business to business (B2B)

Most common, all but the
last link in the supply chain
Business
E-commerce examples:
EDI networks
Business information
exchanges.
Consumer
Business to consumer (B2C)
Retail operations
Catalogue operations, etc.
Internet retailers
Amazon.com, etc.
From
Consumer to consumer (C2B)
or peer to peer (P2P)
Consumer
Consumers offer,
business responds
Some airline ticket operators
Priceline.com, etc.
12.51
Consumer to business (C2B)

Trading swap and
auction transactions
Specialist collector sites
Ebay.com, etc.

12.52
Traditional market supply relationship

Purchasing goods and services, often seeking the best
supplier every time it is necessary to purchase instead of
performing the operation in-house.
Each transaction effectively becomes a separate decision.
(short term transactional relationship)
12.52

12.53
Some advantages
They maintain competition b/n alternative competitors
Customers can simply change the number and type of
suppliers if demand changes.
They help operations to concentrate on their core
activities.
Disadvantages in buying free market manner

There may be supply uncertainties
Choosing who to buy from takes time and effort
There are risks in subcontracting activities to other
businesses.
12.53

12.54
Virtual operations
It is an extreme form of outsourcing operational
activities
Virtual operations do relatively very little themselves,
but rely on a network of suppliers that can provide
products and services on demand.
A network may be formed for only one project and
disbanded once that project ends.
The advantage of virtual operations is their flexibility
and the fact that the risks of investing in production
facilities are far lower than in a conventional operation.
12.54

12.55
Partnership supply relationships

They are relatively enduring inter-firm cooperative
agreements, involving flows and linkages that use
resources and/or governance structures from
autonomous organisations, for the joint accomplishment
of individual goals linked to the corporate mission of
each sponsoring firm.
Suppliers and consumers are expected to cooperate, even
to the extent of sharing skills and resources, to achieve
joint benefits beyond those they could have achieved by
acting alone.
Sometimes seen as a compromise b/n vertical integration
and pure market relationships.
12.55

12.56
Partnerships are close relationships, the

degree of which is influenced by a number
of factors such as;
Sharing success
Long term expectations/ commitments
Joint learning
Joint coordination of activities
Information transparency
Joint problem solving
Trust
12.56

12.57
Elements of process partnership relationships

Attitudes
Trust
Sharing
success
Long-term
expectations
Multiple
points of
contact
Joint
learning
Joint coordination of
activities
Joint problem
solving
12.57
Closeness of
relationship
Few
relationships
Information
transparency
Dedicated
assets
Actions

Customer relationship management
12.58
It is a method of learning more about customers needs

and behaviour in order to develop stronger relationships
with them.
It helps to understand and meet customers needs while
maximizing profitability.
It helps to increase revenue by
12.58
Providing products/services exactly what customers want

Retaining existing customers and discovering new ones
Offering better customer service
Cross-selling products more effectively

12.59
The Bullwhip effect

This describes how a small disturbance at the
downstream end of a supply chain causes
increasingly large disturbances, errors,
inaccuracies and volatility as it works its way
upstream.
12.59

2nd LEVEL
SUPPLIER
1st LEVEL
SUPPLIER
ORIGINAL
EQUIPMENT
MFG.
Prodn. Stock
Prodn. Stock
Prodn. Stock
Prodn. Stock
1
2
100
3
4
180
60
100
100
100
60
60
120
120
90
100
95
20
90
100
100
100
80
80
100
100
95
90
95
95
95
95
95
100
60
120
95
100
100
100
90
90
95
95
95
95
95
95
95
95
95
100
100
100
95
95
95
95
95
95
95
95
95
95
95
95
95
95
95
100
80
100
100
90
95
95
OEM
DE
M
PE
RI
O
3rd LEVEL
SUPPLIER
AN
D
The bullwhip effect

D
12.60
100
95
95
95
95
95
MARKET
ALL OPERATIONS HOLD ONE PERIODS STOCK
12.60

2nd LEVEL
SUPPLIER
1st LEVEL
SUPPLIER
ORIGINAL
EQUIPMENT
MFG.
Prodn. Stock
Prodn. Stock
Prodn. Stock
Prodn. Stock
100
100
100
100
100
100
100
100
100
100
100
100
DE
M
PE
RI
O
1
2
3rd LEVEL
SUPPLIER
AN
D
The bullwhip effect (Continued)

D
12.61
100
95
3
4
105
95
105
95
3
OEM
MARKET
ALL OPERATIONS HOLD ONE PERIODS STOCK
12.61

The bullwhip effect (Continued)
Supplier
12.62
Time
Stores orders to
wholesaler
Manuf
acturer
Time
Whole
saler
Sales from
store
Orders
Wholesalers
orders to
manufacturer
Orders
Orders
Manufacturers
orders to its
suppliers
Orders
12.62
Time
Retail
store
Time
Consumers

12.63
Miscommunication in the supply chain

There is the potential for misunderstanding
and miscommunication in the supply chain.
This may be caused by
Not being sufficiently clear about what a customer
expects or what a supplier is capable of delivering
Differences in perception of seemingly clear
agreements.
12.63


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12.

Slack, Chambers and Johnston, Operations Management, 6th Edition,

Inventory planning and control

The market requires

Slack, Chambers and Johnston, Operations Management, 6th Edition,

Key operations questions

Slack, Chambers and Johnston, Operations Management, 6th Edition,

Slack, Chambers and Johnston, Operations Management, 6th Edition,

Inventory is created to compensate for the differences in

Rate of demand from

Slack, Chambers and Johnston, Operations Management, 6th Edition,

Slack, Chambers and Johnston, Operations Management, 6th Edition,

Types of Inventory (contd)

Slack, Chambers and Johnston, Operations Management, 6th Edition,

Types of Inventory (contd)

Slack, Chambers and Johnston, Operations Management, 6th Edition,

Disadvantages of holding inventories

Slack, Chambers and Johnston, Operations Management, 6th Edition,

The position of inventory

Slack, Chambers and Johnston, Operations Management, 6th Edition,

Single-stage and two-stage inventory systems

e.g. Local retail store

e.g. Automotive parts

A multi-stage inventory system

e.g. Television manufacturer

Slack, Chambers and Johnston, Operations Management, 6th Edition,

A multi-echelon inventory system

Slack, Chambers and Johnston, Operations Management, 6th Edition,

Day to day inventory decisions

In managing day to day tasks of running the

When to order? (time dimension)

How to control the system?

Slack, Chambers and Johnston, Operations Management, 6th Edition,

Several types of costs are directly associated with

Cost of placing the order (transaction costs)

Slack, Chambers and Johnston, Operations Management, 6th Edition,

The economic order quantity (EOQ)

This approach attempts to find the best balance between

and the total cost of placing an order.

Slack, Chambers and Johnston, Operations Management, 6th Edition,

Two alternative inventory plans with different

Demand (D) = 1000 items per year

The timing decision- when to place the order

Slack, Chambers and Johnston, Operations Management, 6th Edition,

The re-order point

Demand (D) = 100 items per week

Order lead time

Slack, Chambers and Johnston, Operations Management, 6th Edition,

The timing decision- when to place the order (contd)

We can calculate how much safety stock to allow by

Continuous review approach

Periodic review approach

Slack, Chambers and Johnston, Operations Management, 6th Edition,

Inventory analysis and control systems

Pareto Law- 80/20 rule

Slack, Chambers and Johnston, Operations Management, 6th Edition,

ABC inventory control system

This allows inventory managers to concentrate

Slack, Chambers and Johnston, Operations Management, 6th Edition,

Inventory classifications and measures

Class A items the

Class B items the

Class C items the