BMN 201 Managing Business Operations Inventory Management

Week 5

Hilary Paveley
University of Gloucestershire Business School
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Inventory Planning and Control

Inventory 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

Operations strategy Operations management Improvement Planning and control

Design

BMN 201 10-11 HP Invent v 0.2.ppt

Source: Slack et al (2007) Pearson

Inventory is created to compensate for differences in timing between supply and demand
Rate of supply from input process

Source: Alamy/Van Hilversum

Inventory
Input process

Rate of demand from output process

Output process

BMN 201 10-11 HP Invent v 0.2.ppt

Inventory
Source: Slack et al (2007) Pearson

Single-stage and two-stage inventory systems

Single-stage inventory system Two-stage inventory system

Stock

Sales operation

Central depot

Distribution

Sales Local distribution operation point

Suppliers

Suppliers

e.g. Local retail store

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e.g. Automotive parts distributor

Source: Slack et al (2007) Pearson

Inventory Management

How much to order :

Balance

cost of holding stock and cost of purchasing items

When to order :
Balance

early delivery / cost of stock holding and late delivery / cost of stock-out

BMN 201 10-11 HP Invent v 0.2.ppt

Hilary Paveley

Traditional view of Inventory-related costs

40 0 35 0 30 0 25 0 20 0 15 0 10 0 50 50
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Total costs

Costs

Holding costs Order costs

Economic order quantity (EOQ) 100 150 200 250 Order quantity
Hilary Paveley

300

350

400
6

Source: Slack et al (2007) Pearson

Traditional Manufacturing

Finished goods produced to forecasts with minimal options Henry Ford approach Machines and facilities run to economically produce batch quantities in long production runs Stock seen as essential part of production process Stock held just in case including spares Business processes focused on doing everything to reduce production process cost

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Hilary Paveley

Source: CIPS Study Guide (2006:157)

A multi-stage Inventory System

Input stock

Stage 1

Work In Progress WIP

Stage 2

WIP

Stage 3

Finished goods stock

Suppliers

e.g. Television manufacturer

BMN 201 10-11 HP Invent v 0.2.ppt

Source: Slack et al (2007) Pearson

What is Just In Time ?

JIT production is:

Making what the customer needs When it is needed In the quantity needed Using minimum resources of people, material and machinery

Just In Time is a Business Philosophy Just --In -- Time is a Business Philosophy

BMN 201 10-11 HP Invent v 0.2.ppt Hilary Paveley
Source : CIPS Study Guide P 247

9 9

JIT Approach
Traditional approach
focus on high capacity utilisation lower capacity utilisation, but

focus on producing only when needed

fewer stoppages

more stoppages because of problems more production at each stage

low inventory so problems are exposed and solved

high inventory means less chance of problems being exposed and solved

no surplus production goes into inventory

extra production goes into inventory because of continuing stoppages at stages

JIT and capacity utilisation

Hilary Paveley Source: Slack et al (2007) Pearson 10

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and Traditional Systems

Just in Time Systems
Inventories are reduced or eliminated

Traditional Systems
Safety stocks and operating stocks are held as a matter of policy Production runs are long, and relate to a single product, so reducing set-up and changeover costs

Production runs are short, and switch quickly from one product to another

Lead-times for both supply and production Long lead times are expected and built into are consistently short calculation of order quantities A target is set of zero quality defects as the A certain level of defects is expected and system is so finely tuned built in to order quantities and stock levels Relationships with suppliers are close and Relationships with suppliers often based on committed, with mutual benefit adversarial tactics, where one party seeks to gain benefit at expense of other
BMN 201 10-11 HP Invent v 0.2.ppt Hilary Paveley
Source Profex Study Text Table 4.1 P 38

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Lean Manufacturing

Elimination of waste, including stock Produce only when customer orders goods Focus on customer value Remove layers within organisation Continuous Improvement Batch quantities as low as one Quality and right first time approach
Hilary Paveley
Source: CIPS Study Guide (2006:157) 12

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Not all Activities add Value

Operation Inspection Storage Add Cost - Not Value Delay Transport
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Transformation - Adds Value

Value Stream of an Aluminium Can

Source: Lean Thinking, J Womack & D Jones 1996
Incoming Storage Mine 0 Processing Time 20 min 30 min 2 hours < 1min 1 min 1 min 1 min 0 0 5 min Finished Storage 2 weeks 2 weeks 2 weeks 4 weeks 4 weeks 4 weeks 5 weeks 3 days 2 days 10 ft/min 2,000 ft/min 2,000 / min 1,500 / min Process Rate 1,000 t/hr Cumulative Days 319 305 277 173 131 89 47 8 5 3

Reduction Mill 2 weeks Smelter 3 months

Hot Rolling Mill2 weeks Cold Rolling Mill Can Maker Bottler Tesco RDC Tesco Store Home 2 weeks 2 weeks 4 days 0 0 3 days

Total

5 months

3 hours

6 months
Hilary Paveley

319
Source : CIPS Study Guide P 88 14

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Some Disadvantages of Lean Production

Lean enterprises are fragile - only have limited capabilities to handle change and uncertainty Continuous improvement can be achieved in many ways Requires employee responsibility at lower organisational levels and implies reward changes Requires virtually identical daily production schedules Not well suited to speciality items requiring frequent layout changes and new equipment

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Hilary Paveley

Source : CIPS Study Guide P 335

15

Agile Production

Customer Focus Meeting customers need quickly Repositioning organisation and its products as customer need develops Ability to respond to changing volumes and product mix quickly
Hilary Paveley
Source: CIPS Study Guide (2006:157) 16

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The Decoupling Point

Martin Christopher

Lean

Agile

Forecast at generic level Economic Batch Quantities Maximise Efficiencies

Demand Driven Localised Configuration Maximise Effectiveness

Strategic Inventory
BMN 201 10-11 HP Invent v 0.2.ppt Hilary Paveley
Source: Christopher, M. Logistics & SCM (2005:121) 17

Agile Supply

Driver is shortening product life cycles and changing customer needs Includes late customisation and postponement Stock held at appropriate levels in bill of materials Utilises collaborative working and extensive supplier networks with strong relationships
Hilary Paveley
Source: CIPS Slide Set (2006)

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