Essential

Supply Chain Management

AMIT CHANCHAL

Key Issues in Supply Chain

Distribution Network Configuration Inventory Control Production Sourcing Supply Contracts Distribution Strategies Supply Chain Integration and Strategic Partnering Outsourcing and Offshoring Strategies Product design Information technology and Desicion-Support Systems Customer Value Smart pricing Issues Distribution Network Configuration Inventory Control Production Sourcing Supply Contracts Distribution Strategies Supply Chain Integration and Strategic Partnering Outsourcing and Offshoring Strategies Product design Information technology and Desicion-Support Systems Customer Value Smart pricing Chain Supply Supply Supply Both Supply Development Development Development Supply Both Supply

Inventory Management and Risk Pooling

In many industries, inventory is one of the most dominant costs. Inventory can appear in many places in supply chain and in several forms: Raw material inventory Work in progress (WIP) Finished products inventory

Why hold inventory?

1. 2. 3. 4. Unexpected change in customer demands Presence of many situations of significant uncertainty Lead times Economies of scale offered by transportation companies

Inventory Policy
The strategy or set of techniques to manage the levels of inventory is called firms inventory policy. To decide an effective inventory policy one has to take many considerations into account such as: 1. 2. 3. 4. 5. Customer demand Replenishment Lead time Number of different products being considered Length of planning horizon Costs (including order costs and inventory holding costs) a. Order cost = cost of product+ transportation costs b. Inventory holding costs i. State taxes, property taxes and insurance ii. Maintenance costs iii. Obsolescence costs iv. Opportunity costs 6. Service level requirements

Single stage inventory control

The Economic Lot Size Model The ELS model illustrates the trade-off between ordering and storage costs. Consider a warehouse facing constant demand for a single product and it has a single supplier with infinite quantity. The model assumes the following: Demand is constant at D items/day Order quantities are fixed at Q items/day A fixed cost (setup cost) K is incurred every time warehouse places an order Inventory carrying cost h is accrued for every unit product held each day Lead time is zero Initial inventory is zero Planning horizon is long

Our goal is to find out optimal order policy that minimizes annual purchases and carrying costs while meeting all the demands. It is easy to see that for an optimal policy for the model, orders should be received at the warehouse precisely when inventory level drops to zero, known as zero inventory ordering property Now, to determine the optimal ordering policy in ELS model, we consider inventory as a function of time. Time T which is the time duration between two successive replenishments is called cycle. Thus, total inventory cost in a cycle length T is ......................1.1

1.2 1 0.8 0.6 0.4 0.2 0 1 2 3 4 Time 5 6 7

Since inventory changes from Q to 0 during time T then the demand remains constant at D units per unit time. Then, ......................1.2 ......................1.3 Now for average cost per unit time we divide 1.1 by 1.3

Inventory

Minimizing the average cost/time