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Logistics Management LSM 730 Lecture 26 Dr. Khurrum S. Mughal 1-1 Inventory Management Philosophies • Pull - Draws inventory into the stocking location - Each stocking location is considered independent - Maximizes local control of inventories • Push - Allocates production to stocking locations based on overall demand - Encourages economies of scale in production • Just-in-time - Attempts to synchronize stock flows so as to just meet demand as it occurs - Minimizes the need for inventory CR (2004) Prentice Hall, Inc. 9-2 Inventory Management Philosophies (Cont’d) • Supply-Driven - Extensive Forecasting needed - All supply must be accepted and processed - Inventories are controlled through demand • Aggregate Control - Classification of items: › Groups items according to their sales level based on the 80-20 principle › Allows different control policies for 3 or more broad product groups CR (2004) Prentice Hall, Inc. 9-3 Costs Relevant to Inventory Management • Procurement Costs • Carrying costs • Out-of-stock costs CR (2004) Prentice Hall, Inc. 9-4 Relevant Costs (Cont’d) • Procurement costs (A significant economic force that determines the reorder quantities) - Cost of preparing the order - Cost of order transmission - Cost of production setup if appropriate - Cost of materials handling or processing at the receiving dock - Price of the goods CR (2004) Prentice Hall, Inc. 9-5 Costs Relevant to Inventory Management • Carrying costs - Cost for holding the inventory over time - The primary cost is the cost of money tied up in inventory, but also includes obsolescence, insurance, personal property taxes, risk costs, space costs, and storage costs CR (2004) Prentice Hall, Inc. 9-6 Relevant Costs (Cont’d) • Out-of-stock costs - Lost sales cost › Profit immediately foregone › Future profits foregone through loss of goodwill - Backorder cost › When order not lost but delayed › Costs of extra order handling › Additional transportation and handling costs › Possibly additional setup costs CR (2004) Prentice Hall, Inc. 9-7 Inventory Management Objectives Good inventory management is a careful balancing act between stock availability and the cost of holding inventory. Customer Service, i.e., Stock Availability Inventory Holding costs • Service objectives - Setting stocking levels so that there is only a specified probability of running out of stock • Cost objectives - Balancing conflicting costs to find the most economical replenishment quantities and timing CR (2004) Prentice Hall, Inc. 9-8 Inventory’s Conflicting Cost Patterns Minimum cost reorder quantity Cost Total cost C yin r r a ost c g Procurement cost Stockout cost CR (2004) Prentice Hall, Inc. Replenishment quantity 9-16