9 -managing_inventory

Alex Hill and Terry Hill

Managing inventoryAlex Hill and Terry Hill

Learning objectives

• Explain the ROLES of different types of inventory

• Identify the TYPES of inventory used in different delivery systems

• Understand the LEVEL of inventory to hold:- What ITEMS to hold- How MUCH to hold- How much and when to ORDER

• Understand how a company should to best MANAGE its inventory

• Understand how to analyse and REDUCE inventory

Lecture outline

• INTRODUCTION

• What is INVENTORY?

• Models and approaches for MANAGING inventory

• Inventory ANALYSIS and REDUCTION

• Critical REFLECTIONS

• SUMMARY

WITHIN A DELIVERY SYSTEM

What is inventory?

•INPUTS into system- Raw materials- Components•WORK-IN-PROGRESS within the

system- Part-finished services and products•FINISHED goods- Waiting to be delivered to

customers

What is inventory?

UNCOUPLESphases of a delivery

systemso they can workINDEPENDENTLY

of each other

The role of inventory

> KEY IDEA

The underlying PURPOSE of inventory is to UNCOUPLE the various steps of the delivery system to enable them to work independently of each other

What is inventory?The role of inventory

What is inventory?Types of inventory

•PROCESS inventory- Used in systems delivering

services and products to customers

•SUPPORT inventory- E.g. maintenance and office

supplies

> KEY IDEA

There are three CATEGORIES of PROCESS inventory:• Raw materials and/or components• Work-in-progress• Finished goods

What is inventory?Functions of inventory

Process stage

Inventory type

InputsRaw

materials

Operations process

Work-in-progress

OutputsFinished goods


Process stage

Inventory type

Function

Process-related Support

InputsRaw

materials

Inputs into the delivery system used to provide the service or product. Include raw materials, services and components

Supplies that are not central to the services or products being provided. Include maintenance and office supplies

Operations process

Work-in-progress

Partly completed items in the delivery system waiting to go to the next stage. Such as food waiting to be cooked

OutputsFinished goods

Outputs of the delivery system waiting to be sold. include items in a retail store, baked bread and pastries in a bakery


To support a BUSINESS decision

CORPORATE OPERATIONSTo enable services and

products to be DELIVERED in line with

customer REQUIREMENTS


•Usually 20-25% total value•Functions include:- Sales supporting CUSTOMER

AGREEMENTS- Sales supporting service or product

LAUNCH- Purchasing BULK BUYING

CORPORATE

> KEY IDEACORPORATE inventory typically accounts for 20-25% of the total value of inventory


OPERATIONS•Usually 80-75% total value•Functions include:- DECOUPLING so stages can work

independently- CYCLE to reduce number of set ups- PIPELINE in the delivery system- CAPACITY-RELATED to meet demand in a

different time period- BUFFER against demand or capacity

fluctuations

> KEY IDEA

The five FUNCTIONS ofOPERATIONS inventory are:• Decoupling• Cycle• Pipeline• Capacity-related• Buffer

Car assemblyMail room Blue letter

Managing inventoryTypes, categories and functions

The Hudsucker Proxy(1994)

Gung Ho(1986)

The Hudsucker Proxy(1994)

Film clip Mail room

FilmTitleDirector (year)

The Hudsucker ProxyCoen and Coen (1994)

ClipStartFinish

00:13:0400:16:16

What clip showsThe mail room operation within a large organisation

Key learning objective

The types, categories and functions of inventory used in a repeat high volume service delivery system



Film clip Car assembly


Gung HoRon Howard (1986)

ClipStartFinish

01:33:1301:34:31

What clip shows Cars being manufactured on a production line


The types, categories and functions of inventory used in a line manufacturing process

Film clip Blue letter


The Hudsucker ProxyCoen and Coen (1994)

ClipStartFinish

00:16:1700:19:29

What clip showsA special ‘Blue Letter’ being delivered to the CEO of the organisation


The types, categories and functions of inventory used in a repeat low volume service delivery system


Low VOLUME High

Hig

hV

AR

IETY

Low

Process type

Managing inventory

Managing inventory

Inventory Mail roomCar

assemblyBlue letter

Type

Category

Advantages

Disadvantages

Types, categories and functions

Process type

Managing inventory

Inventory Mail roomCar

assemblyBlue letter

Type

Category

Advantages

Disadvantages

Managing inventory

•Raw materials•Work-in progress

•Decoupling•Capacity-related

•High utilisation

•Finished goods

•Capacity-related•Buffer

•Cash tied up•Long process

lead-time

•High utilisation•Short delivery

lead-time•Meet demand

fluctuations

•Cash tied up•Holding cost

•None

•None

•Short process lead-time

•Lower utilisation

Types, categories and functions

Models and approaches for managing inventory

•PARETO analysis•ECONOMIC order quantity•Determining the RE-ORDER level and

point

Background issues and approaches

Models and approaches for managing inventoryPareto analysis

> KEY IDEA

The PARETO principle (or 80/20 rule) highlights that:• 20% of ITEMS typically account for• 80% of the total VALUE of inventory

Models and approaches for managing inventoryEconomic order quantity

Models and approaches for managing inventoryDetermining the re-order level and point

CASE 9.1 ROLE OF INVENTORY

CASE 9.1

Question

Answer

Retail outlet

Household items

• MAKE-TO-STOCK items:- Made ahead of demand to meet sales- Used for inexpensive items- Reduces supply lead-time• MAKE-TO-ORDER items:- Made on receipt of customer order- Used for items with lower demand- Results in longer lead-time

• Meet immediate CUSTOMER REQUIREMENTS

• Display PRODUCT RANGE• Encourage IMPULSE customer purchases

ROLE OF INVENTORY

Inventory analysis and reduction

•CATEGORISE inventory by cause:- CORPORATE - e.g. sales,

purchasing- OPERATIONS - decoupling, cycle,

pipeline, capacity-related, buffer

Challenge and change RULES and PROCEDURES

that create inventory

REDUCE INVENTORY

DETERMINE CAUSE

> KEY IDEA

CAUSAL analysis determines why inventory EXISTSThese insights can be used to reduce it

CASE 9.2 REDUCING INVENTORY

CASE 9.2

Question

Answer

Corporate inventory

Operations inventory

• CAUSAL analysis:- Holding MORE than 3 weeks sales- Caused by FALL in sales- Now reduced RISK of running out of stock• Inventory REDUCED by:- Changing RULES within the computer

system

REDUCING INVENTORY

• CAUSAL analysis:- High level of WIP- Caused by BOTTLENECK in process• Inventory REDUCED by:- Removing capacity CONSTRAINT

Shoe factory

Analysis and reduction

Managing inventory

The Efficiency Expert (aka Spotswood)

(1992)


Managing inventory

•What kind of ORGANISATION is presented?

•What type of ISSUES result?•How would you IMPROVE the

business?

Film clip Shoe factory (before change)


The Efficiency Expert (aka Spotswood)Joffe (1992)

ClipStartFinish

00:03:3100:13:35

What clip showsA management consultant arriving at a shoe factory and being shown around


The causes of inventory within a businessThe problems that result from holding this inventoryIdentifying ways to reduce inventory

Managing inventoryAnalysis and reduction

Managing inventory

Question Answer

TYPE of organisation

Resulting ISSUES

How to IMPROVE

• TRADITIONAL• PRODUCTION-led

• Poor LAYOUT• High INVENTORY• High WASTE

• Involve EVERYONE• Identify and eliminate

WASTE• CONTINUOUSLY improve



Managing inventory

•What APPROACH has been taken to improve the business?

•What are the BENEFITS of this approach?

•What are the ISSUES with this approach?

Film clip Shoe factory (after change)


The Efficiency Expert (aka Spotswood)Joffe (1992)

ClipStartFinish

00:27:4300:30:54

What clip showsThe changes that have been made in the business at the request of the management consultant


The issues associated with certain approaches to improving businesses and trying to reduce inventory

Managing inventoryAnalysis and reduction

Managing inventory

Question Answer

Improvement APPROACH

BENEFITS of approach

ISSUES with approach

• Reduced MOVEMENT• Reduced NON-PRODUCTIVE time• Increased EFFICIENCY

• INDIVIDUAL decision• NO INVOLVEMENT of employees• NO EXPLANATION of why change required

• RESISTANCE to change• NO UNDERSTANDING of need for change• Changes are not SUSTAINABLE


Critical reflections• Inventory is a significant ASSET in most

organisations- Ties up a significant amount of CASH- Managing it is a key operations and business TASK

• Inventory results from a complex set of DECISIONS

- Made both by OPERATIONS - And other business FUNCTIONS

• Key STRATEGIC decision is working what to hold and how much to hold

- To support MARKETS - And meet BUSINESS requirements

• Regular CAUSAL ANALYSIS is required- To MINIMISE inventory levels

Summary

• INVENTORY is- A LARGE asset that is- DIFFICULT to manage and control

• Holding inventory RESULTS in- ADVANTAGES - e.g. improved market support - DISADVANTAGES - e.g. ties up cash and incurs

costs

• TYPES of inventory- Raw material, work-in-progress, finished goods

• CAUSES of inventory- CORPORATE - e.g. sales and purchasing- OPERATIONS - decoupling, cycle, pipeline,

capacity-related, buffer

Revision questions

1 The level of inventory in an organisation reflects:a) The rate of supply

b) The rate of demand

c) Both a) and b)

Revision questions

2 The underlying purpose of inventory is to:

a) Uncouple the various phases of a service delivery system or manufacturing process

b) Provide overall support for a service delivery system or manufacturing process

c) Neither a) or b)

Revision questions

3 The Pareto principle is used to:

a) Reduce inventory

b) Indicate areas of high value inventory where the most effort in managing inventory should be concentrated

c) Calculate economic order quantities

Revision questions

4 If a company decided to hold additional inventory to safeguard the business from uncertainty of supply, this inventory would be classed as:a) Pipeline inventory

b) Corporate inventory

c) Consignment stock

Revision questions

5 Special services and products are usually:

a) Made-to-order

b) Assembled-to-order

c) Made-to-stock

Revision questions

6 Inventory is reduced by:

a) Redesigning services and products

b) Redesigning delivery systems and manufacturing processes

c) Challenging and changing the rules and procedures that created it

CASE FOR TUTORIAL

DELL

9 -managing_inventory

Business

revisionquestions5

raw materials

clip startfinish00

functions

efficiency

redesigning

servicedelivery

underlying