Module 2: Supply Chain

Planning and Execution

Section A and Chapter 1 Introduction

Key Processes for Section A:
• Performing S&OP
• Developing supply chain personnel’s knowledge, skills, and abilities
• Developing supply chain infrastructure
• Performing short-term planning and scheduling
• Identifying logistical requirements
• Developing logistical capabilities to support delivery of goods and services
• Executing the plans
Key Concepts for Chapter 1:
• Defining demand and demand management
• Understanding principles of qualitative and quantitative demand forecasting
• CPFR® for demand management
Demand Management

Demand management is the

art of synchronizing supply
and demand plans:
Planning demand
• Long-term strategic needs
• Medium-term aggregate
demand forecasting and Managing and
master planning Communicating
prioritizing
demand
demand
• Short-term demand
forecasting and item-level
master scheduling Influencing
demand

Planning Demand: The Demand Plan

Demand plan is
Demand
plan for action plan inputs: Forecasting
based on
• Forecasts
Product/
Business
• Planned demand plan/strategy
brand
management
generation Demand
activities. Plan

Sales Marketing
 Communicating Demand

Structure
communications
to ensure that
they occur.

Communicate Focus
soon to minimize communications
surprises. to fit audience.

Good
Communications

Influencing Demand Using Plan, Do, Check, Action

• Brand, marketing, and sales activities to

convince customers to purchase
products and services so that business Plan
objectives are met or exceeded
• Influencing product development and
supply sides of organization Action Iteration Do

Check
Situations for Managing and Prioritizing
Demand• Find ways to • Use time fences
better use current to delay
capacity. Supply Demand production as
organization plan overstates long as feasible.
cannot meet actual demand;
demand plan changes will
without changes. impact sales and
costs.

Large one-time Demand plan

sales opportunity understates actual
would impact demand; changes
other orders, will impact sales
• Establish costs, • Extend planning
process for profit. and costs. horizon.
unusual demand • Add incentives
evaluation. for substitutes.

Sharing Data Among Trading Partners

Vendor-
Distributor Quick Response Continuous
Managed
Integration Program Replenishment
Inventory
Customer • N/A • Provide POS • Notify suppliers • Sell.
Role data to supplier. of actual daily • Do joint forecast.
• Submit individual sales or ware-
house shipments. • Manage
orders. relationship.
• Support logistics.
Supplier • Integrate IS to • Synchronize • Commit to • Display, store,
Role share: supply with replenish without deliver, receive,
– Inventory data demand. receiving orders. stock, and count.

– Expertise • Forecast. • Prevent • Schedule

stockouts. replenishment.
– Inventory-related
DI • Reduce • Keep inventory
inventory. records.
– Service-related
DI. • Improve turnover. • Represent (e.g.,
auto plant).
 VMI and Consignment Combinations
Supplier decides on Traditional: Firm owns and
No replenishment. Goods are manages inventory or sells it
immediately invoiced. Buyer to independent distributors.
Consignment?

owns inventory.

Supplier decides on Seller wants items on site

replenishment but only sold but may not be fast-selling,
Yes e.g., hospital manages
inventory is invoiced.
Supplier employs restockers. pacemakers, supplier
invoices when used.

Yes No
VMI?

Principles of Demand Forecasting

Forecasts are:
• Necessary (sometimes) Monthly
Demand
• Wrong (almost always, and they should
include an estimate of error)
• More accurate for groups than for
single items
• More accurate for near term than for
long term.
Forecast
Actual
 Demand Components
Trend

Cycle Seasonality

Random
variation

Forecasting Process

1. Specify purpose, 8. Forecast.

2. Aggregation, units, and 9. Perform S&OP.
3. Time horizon. 10. Review and improve.
4. Visualize data. Raw Data
40
5. Chose forecasting method or model.
35

6. Prepare data.
30

25

7. Test (historical data). 20

15

10

0
Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov
 Qualitative Approaches to Forecasting Demand
• Estimates Optimistic + 4 × Most Likely + Pessimistic
• Judgmental/ 6
expert judgment
• Delphi method When to use qualitative
forecasting methods:
• Anonymous to avoid:
• “Groupthink” For new products
• “Stake in the ground” When hard data are
lacking

Deseasonalizing
1. Calculate month average for each month: e.g.,
(Jan-2013 + Jan-2014 + Jan-2015)/3
2. Calculate year average: Sum month averages and divide by 12.
3. Calculate seasonal index: Divide each month average by the year average.
 Deseasonalizing

Naïve; Simple or Weighted Moving Average

• Naïve: Last’s months actual is this month’s forecast
• Simple moving average:

• Smooths out irregular demand, but lags trend

• Weighted moving average:

• Also smooths, but lags trend less

 Exponential Smoothing
• Inputs: last period’s forecast, last period’s demand, and alpha
New Forecast = (α ×Last Period’s Demand) + [(1 − α) ×Last Period’s Forecast]

• Alpha, α, a smoothing constant between 0 and 1

• Example: 0.3, 30% weight on demand, 70% on forecast, (0.3 × 14.92) + [(0.7) ×
17.71] = 16.87
• Typically between 0.05 and 0.5
• Experience, trial and error, and historical testing
• Can minimize lag even more, but not eliminate

Comparison of Time-Series Forecasts

Forecasting Forecasting
month-to- over longer
month works periods results
well. in same value
repeated.
 Reseasonalizing

0.786 × 14.84 = 11.66 0.071 × 18.47 = 1.32

Leading and Lagging Economic Indicators

Lagging indicators Leading indicators

• Unemployment rate • Building permits
• Outstanding business and commercial • Initial unemployment claims
loans
• Orders for plant equipment
• Inventory to sales
• Manufacturers’ orders for durable
• Changes in company profits goods and materials
• Spending by businesses • Changes in money supply
• Consumer price index (CPI) • S&P 500
• Average duration of unemployment • Long- vs. short-term interest rates
The GRI compiles data on lagging • Consumer optimism
indicators.

Past and current trends Future trends

 Comparison of Roofing Sales and Housing
Starts over Time

Associative Forecasting USD 1,600,000

USD 1,400,000
USD 1,200,000
160
140
120
USD 1,000,000 100
USD 800,000 80
USD 600,000 60
USD 400,000 40
USD 200,000 20
USD 0 0
Oct-12 May-13 Nov-13 Jun-14 Dec-14 Jul-15 Jan-16

Roofing Sales Housing Starts

Service Sector Forecasting

Service businesses, such as Some restaurant
restaurants, may track variables
“seasonal” demand in units  Workers per shift
as short as minutes.
 Registers in operation
20%
Lunchtime Dinnertime
 Number of available
% of
tables
15%
demand
by hour  Space requirements
of day 10%
5%
 Amount and types of
foods
11-12 12-1 1-2 2-3 3-4 4-5 5-6 6-7 7-8 8-9 9-10
Hour of day
Measures of Forecast Error

Where: NOTE:
A = Actual demand Absolute = | |.
F = Forecast demand
An absolute value has no +/– sign,
and so, in this case, it measures the
size of the error, not the direction.

Measures of Forecast Error

Where:
A = Actual demand
F = Forecast demand
Mean Absolute Deviation (MAD)

The Greek uppercase letter

∑ stands for
“the sum of.”
Where:
|A – F| = Total of absolute forecast errors for the periods
n = Number of periods

Mean Absolute Deviation (MAD) with

Smoothing
Distribution Curve for MAD of 1.68 Units

Other Measures of Forecast Error

MAD, Tracking Signal, and MSE

MAPE
 Distribution Curve for Standard Deviation

MPS and MRP

Production Plan Resource Planning

Master
Demand Production RCCP
Management Schedule

Material
CRP
Requirements
Planning

Purchasing PAC Input/Output Control

Master Scheduling Grid and Time Fences
Time fences balance need to maintain schedules/control costs
against need to be flexible.
Frozen Zone Slushy Zone Liquid Zone
Period 1 2 3 4 5 6 7 8 9 10
Forecast 20 22 21 25 24 23 21 21 25 25
Customer orders 19 17 15 11 9 5 2 1 0 0
PAB 50
ATP
MPS

Demand Time Planning Time

Fence (DTF) Fence (PTF)

Planning Horizon
Planning horizon
 Amount of time plan extends into future
 At least equal to cumulative lead time for product

Wk 1 Wk 2 Wk 3 Wk 4 Wk 5 Wk 6 Wk 7 Wk 8

Raw material Component

lead time lead time (1)

Raw material Component

lead time lead time (2)
Projected Available Balance (PAB)

Period 1 2 3 4 5 6 7 8 9 10
Forecast 20 22 21 25 24 23 21 21 25 25
Customer orders 19 17 15 11 9 5 2 1 0 0
PAB 50 31 14 49 24 0 27 6 35 10 35
ATP
MPS 50 50 50 50

Available-to-Promise (ATP)

Period 1 2 3 4 5 6 7 8 9 10
Forecast 20 22 21 25 24 23 21 21 25 25
Customer orders 19 17 15 11 9 5 2 1 0 0
PAB 50 31 14 49 24 0 27 6 35 10 35
ATP 14 15 43 49 50
MPS 50 50 50 50

DTF PTF
Measures of Customer Service Levels

• Is cost of achieving a given service level • Lead time monitoring

a sound investment? • Speed of performance
• Fill rates: • Consistency
• Unit fill rate • Flexibility
• Line item fill rate • Malfunction recovery
• Monetary value fill rate • Order status reporting
• Stockout frequency • Customer satisfaction
• Establish, then fulfill expectations

Demand Management
Represent
Product Long-term
demand-side development
Operations
interests in and brand Seek value
management
operations added
terms Demand
management:
helps parties
understand Medium to
each other
Daily short term
Sufficient Sales Marketing Tailoring
inventory demand to
capacity
Time to market
Key Concepts:
• Define, identify, understand, and execute:
• Master plan
• Master scheduling (MS)
• Sales and operations planning (S&OP)
• Master production schedules (MPS)
• Material requirements planning (MRP)
• Distribution requirements planning (DRP)
• Capacity requirements planning (CRP)
• Production activity control (PAC).

Operations Planning and Control

Strategic Planning
Forecasting
Business Planning

S&OP: Consensus
Demand
Demand Plan and Resource Planning
Management
Production Plan

Master Scheduling
DRP RCCP
(MS): MPS

MRP CRP

Capacity
Purchasing PAC FAS
Control
 Strategic and Business Planning
• Strategic plan
• Mission and the resources needed to get there
• Goals: Market share, revenue, profits, and growth
• Objectives: Value to customers, owners
• Business plan
• Inputs: demand plan and long-term forecasts
• Explicit vision to achieve strategy over 1-3 years
• In dollars and grouped by product family
• Point of reference for S&OP
• Guidance for tactical production and sales plans

Master Planning and Resource Planning

Master Planning Resource Planning

• Long-term resource plan • 15- to 18-month capacity planning

• Near-medium-term sales and • Capacity at business and production
operations plan plan level
• Available capacity (S&OP) plus • Resources that take long to acquire
investments in capacity (resource
planning) • Lead time to get equipment, install it,
and get it producing
• Satisfy stakeholders including ROI
 Sales and Operations Planning (S&OP) S&OP
• S&OP steps (Wallace and Stahl): meetings
1. Data gathering
2. Demand planning Product
Review
3. Supply planning Demand
Planning Replanning
4. Pre-meeting
Supply
5. Executive meeting Planning

Financial
Review
Pre-
Meeting

Executive
Meeting

Monthly Sales and Operations Planning

Process
Step 1 Data gathering Statistical forecast updated.

Step 2 Demand planning Statistical forecast reviewed by

phase product/brand, marketing, sales.

Step 3 Supply planning Supply management team may alter

phase operations plan if necessary.
Step 4 Pre-meeting Key players review data, set executive
meeting agenda.
Step 5 Executive VPs meet monthly to review decisions
meeting and strategy.
Demand Planning Phase Meeting

• Highest-ranking demand-side • Meeting brevity:

professional chairs. • Product family level, subfamilies by
• Demand manager prepares dashboards. exception.
• Consolidates product and brand • What changed since last meeting
management, marketing, sales (replanning).
plans. • Validating assumptions.
• Demand plan in units and in dollars. • Strategies to close gaps between
• Metrics, assumptions, events, demand plan and business plan.
opportunities, risks, and decisions.
• Success of demand plan depends on
quality of communications.

Demand Plan Dashboard----Units

 Supply Planning Phase Meeting

Supply/Demand Supply/Demand
Match Mismatch

• Production plan will match • Supply develops alternative plans:

demand plan. − Produce above demand for
certain periods to meet later
spikes in demand.
− Increase capacity by hiring,
adding shift, planning
overtime, leasing equipment,
or outsourcing (or opposite).
− Reducing demand plan (as
last resort).

Executive Meeting
• Participants: CEO and demand, supply, and financial executives and other direct reports to CEO.
• Goal: consensus demand plan.
• Review metrics, changes, new risks and opportunities, and other events.

• Executives will want to know:

• Are plans on budget, schedule, and scope?
• How are product mixes performing?
• Do current strategies need modifying and when do decisions need to be made?

• Communication of agreed-upon plan to all internal participants is critical.

• Depends on quality of internal communications process.
Operations Strategies Level

Production
Chase

Demand

Hybrid

Supply-Demand
Allocation:
Strategies
 Assign items to specific orders but still in inventory
 Process to distribute materials in short supply

Supply-Demand Option MPS Focus

Make-to-stock (MTS)
(Few items made from many components; Schedule finished goods.
integral design)

Make-to-order (MTO)
(Many items made from few components; Schedule raw materials.
e.g., custom products)

Assemble-to-order (ATO)
(Many end items, few components; e.g., Schedule module production.
computers assembled at or near point-of-sale)
Controlling Priorities: Master Scheduling
Master scheduling (MS) grid
Period 1 2 3 4 5 6 7 8 9
Forecast 20 22 21 25 24 23 21 21 25
Customer orders 19 17 15 11 9 5 2 1 0
PAB 50
ATP
MPS
DTF PTF

Weekly Dates for Specific Products

Months July August
Aggregate production
plan (S&OP) 1,000 1,200

Weeks 1 2 3 4 1 2 3 4
MPS–Weekly
production numbers for
specific products

LX30 — 30-ppm 50 50 50 75 75 75 50 100

LX21 — 21-ppm 75 25 100 75 100 100 100 100
LX15 — 15-ppm 50 150 150 150 75 125 150 150
 Purposes of the Master Production Schedule
• Provide sales-operations “contract.”
• Assure sales force of product availability.
• Assure operations of sales force commitment.
• Balance supply with demand for:
• Low inventory costs
• Fewer stockouts
• More efficient production.

Supply Demand

Stages of Verifying Capacity

First draft of MPS

RCCP

Master scheduler
revises plan or
capacity.
 CHAPTER 2: OPERATIONS PLANNING
AND CONTROL

• Topic 4: Materials and Inventory

Materials Requirements Planning

• MRP plans production/

purchase orders for dependent demand Independent demand
items.
• Dependent demand doesn’t require
estimation, only calculation.
• Some items can have both independent
and dependent demand.
 Bill of Material
• Complete list of components for a manufactured or assembled item.
• Multilevel BOMs can
be “exploded” or
expanded to drill
down into details.
• Modular (planning)
BOMs are used for
planning modular
components.

Routing File
Map of component’s journey from work center to work center

Operation Operation 10 Operation 20 Operation 30

number

Operation
description and Mix Fill Package
(1 hour/batch) (100 bottles/minute)
standards
Blending Fill line Package
Work centers

Ingredients Bottles, caps, Boxes, etc.

and labels
Lot-for-Lot and FOQ Replenishment
Lot-for-lot: Exact number needed for production is number to make/buy;
thus it is often used for dependent demand items.

Fixed order quantity (FOQ): Used in MRP when operations require fixed batch
sizes and order quantities.

Offsetting
Must have D and E
completed here to
One week begin production on B
Start production of D D
Two weeks to produce
B
Two weeks
E One week A
Two weeks E
Two weeks
G One week
C
Three weeks
F
One week
D

0 1 2 3 4 5 6 7
Time in Weeks
Managing MRP

• Avoiding system “nervousness”

• Net change (not plan regeneration)
Business
• Time fences (rescheduling Planning

only with authorization)

S&OP
• Pegging components to end
products in bill of material Demand
MPS RCCP
Mgmt.

• Is nervousness a red flag?

DRP MRP CRP
• Reconciling JIT/lean with MRP
• Small bucket or bucketless PAC FAS
Capacity
Control

• Balanced flow

Evolution of MRP Software

MRP Closed-Loop MRP II
MRP
• Automates BOM • Refinement of MRP: • Includes financials
• Improves on-time provides feedback (crosses boundaries)
delivery; frees up time on capacity • Makes capacity more
to plan available visible
• Assumes infinite • Tradeoff: installation • Translates detailed
capacity—hence, and training costs information to financial
impossible schedules statements
• Helps realign with plan
Distribution Requirements Planning
Push Hybrid systems Pull
systems (e.g., DRP) systems
Forecasts and schedules Push to given Each partner
centrally coordinated. echelon, pull from determines own orders.
there, use demand
data from retail Drawbacks
Drawbacks end. May contribute to bullwhip effect
Customers don’t if partners are not collaborating
determine own orders. across the chain.
Coordination
Doesn’t account for local and control. Doesn’t account for needs of
conditions. other SC partners.
Responsive to
local demand. Ignores supplier’s ability.

Capacity Management, Planning, and Control

Capacity Management
Balance demand and supply for
cost-effective service.

Capacity Planning Capacity Control

Identify and deploy necessary Monitor daily input/output and

resources at all planning levels. balance with plan.
Capacity Objectives

Too Much Just the Right Amount Too Little

Supply > Demand Supply = Demand Demand > Supply
Layoffs, idle • On-time fulfillment Stockouts, broken
machines, unused orders, overtime,
storage, etc., or • Quality items temps, work shifts,
excess inventory • Optimal use of resources etc.

Time Horizons of Capacity Management

Capacity Planning
Priority Planning and Control

S&OP/production Long
Resource planning
planning range

Plan Master scheduling

Rough-cut Med.
capacity planning range

Material requirements Capacity requirements Short

planning planning range

Implement/
Production activity Capacity
control control control
Short
range
 Four Ways to Stage Capacity Growth
One-step lead strategy Stepwise lead strategy
New Expected New Expected
capacity demand capacity demand
Demand

Demand
Stepwise lag strategy Stepwise overlapping strategy
New Expected New Expected
demand
Demand

Demand
capacity demand capacity

Time (Years) Time (Years)

Rough-Cut Capacity Planning

• Process of converting MPS into key resource requirements.
• Comparison of load vs. available or demonstrated capacity for each key
resource.
• Medium-term.
• Bottlenecks, gateway work centers, critical suppliers only.
 Measuring Capacity
Hours of Numbers of Workers
Available Time = 
Operation or Equipment

Hours Available
Utilization = ÷  100
Worked Hours

Efficiency = Standard ÷ Hours  100

Hours of Work Worked

Rated Capacity = Available Time  Utilization  Efficiency

Output for n Periods

Demonstrated Capacity =
n

When Load and Capacity Are Out of Balance

• Change capacity to match load:

• Add or reduce work hours.
S&OP Resource • Hire or lay off workers.
planning
• Shift workers to
MPS RCCP
understaffed sites.
MRP CRP • Change routings.

Capacity
• Hire subcontractors or
PAC
control temporary workers.
Levels of capacity • Change load to match capacity:
planning and control
• Change lot sizes or
schedule.
Strategies Employed to Speed Up Manufacturing

Concentrate on constraints.
S&OP Resource
planning
Use visual signals.
MPS RCCP
Develop pull partnerships.
MRP CRP Learn to be lean.
Capacity
PAC
control

Levels of capacity
planning and control

Key Concepts:
• Inventory and inventory management basics
• Key supply chain performance indicators
• Types of inventory and cost categories
• Understanding the purpose of inventory in the supply chain
• The effects of inventory on financial statements
The Need for Inventory

Inventory

Production Customer Service

 Raw materials Supporting Activities  Finished goods

 Work-in-process  Spare parts
items  Maintenance
 Repair
 Operating supplies

Types of Inventory
(1) Raw (2) Work-in- (3) Finished
materials process (WIP) goods (FG)

(4) MRO

Raw
Component End
materials Manufacturer Distributor
supplier customer
supplier

(5) In-transit
Why Have Inventory?
Anticipation inventory

Decoupling Safety stock

Inventory
Buffer inventory
functions
Lot-size or cycle stock

Hedge inventory

Inventory Management KPIs

Hit customer service
targets

Reduce Quality
inventory costs Availability
On-time delivery
Holding
Ordering
Transporting
 Aggregate Inventory Management
Ways to aggregate inventory
 Demand pattern
 Production process
 Stage of production flow
 Relative value to organization
 Product or SKU family or type
 Distribution pattern

Item Inventory Management

• Goal is to enable planners to translate strategic inventory goals into
measurable results (proper production and distribution of each SKU).
• Inventory rules
• When to order inventory
• How to determine order size per order
• Relative importance of each inventory item
• Inventory control procedures for individual items
 ABC Inventory Classification: Pareto Analysis
A B C
80 80% of 15% of 5% of
Percentage
of Annual
70
A revenue revenue revenue
Revenue
60 Items comes from comes from comes from
Generation 50 20% of 30% of 50% of
40 inventory inventory inventory
30 items. items. items.
20
10
0 B Items C Items
10 20 30 40 50 60 70 80 90 100

Percentage of inventory items

Inventory Costs
• Acquisition costs: order quantity × unit cost
• Landed costs: product cost plus logistics costs
• Carrying (holding) costs:
• Storage costs: rent, depreciation, operating cost, taxes, material-handling
expenses, equipment leases, power, operating costs
• Capital costs: interest, financing, payments to creditors and investors
• Risk costs: insurance, inventory value reductions and write-offs
Effects of Inventory on Financial Statements
Balance Sheet Income Statement Cash Flows

• Unsold inventory is • COGS: Product • Decrease in inventory

current asset. expenses booked increases cash
when units sold. position.
• Only profit margin
portion contributes to • Operating expenses: • Inventory write-offs
net income when Period expenses reduce owners’ equity
sold. booked when and may require
incurred. reducing debts to
• Can determine
maintain covenants.
average inventory • Reducing costs is
from balance sheet. more effective than
increasing sales
volume.

Balance Sheet for Two Years

Financial value at Unsold inventory on the books at the given date
point in time is a current asset on the balance sheet.

Average Inventory =
(400 + 437)/2 =
$418.5

Direct materials, direct labor, and

overhead costs of these assets will
Assets = Liabilities +
become an expense on the income
Owners’ Equity
statement when sold.
Income Statement for Two Years
Profit or loss over period
of time

Product expenses: These

expenses are booked
when the related units of
inventory are sold.

Period expenses: These

expenses are recorded in
the period in which they
are incurred.
The
“bottom
line”

Statement of Cash Flows for Two Years

Change in cash
balance over
Increase in inventory or accounts period
receivable reduces cash; decreases in
either increase cash.

Extra cash from financing means Getting extra capacity

more debt or equity investments reduces cash.
were issued; reduced cash means
debt was paid down or dividends
were paid to owners.

Net Income
+/− Change in (Δ) Operating
+/ − Δ Investing
+/ − Δ Financing
+ Beginning Cash
= Ending Cash
Inventory Planning
Centralized inventory planning
Systemwide inventory
optimization
Control Push Push Push
Suppliers Manufacturer Distributors Wholesalers Retailers Customers

Decentralized inventory planning

Autonomy
Suppliers Manufacturer Distributors Wholesalers Retailers and local
Pull Pull Pull expertise

Hybrid systems Push

Suppliers Manufacturer Distributors Wholesalers Retailers Customers
Point of push/pull moved to Pull Pull
another point in SC

Echelons and Echelon Inventory

Suppliers’ Consolidation Manufacturing
DCs Wholesalers Retailers
warehouses warehouses warehouses

Each column is
one echelon.
Echelons Echelon inventory
• Add costs. • Considers inventory at a node to
• Provide a buffer for later echelons. include all inventory at that echelon
• May provide a consolidation or plus all inventory at later points in SC
break-bulk service that may reduce and in transit.
total inventory/costs. • Aggregates demand for more
accurate order calculation.
Lot-for-Lot versus Fixed Order Quantity (FOQ)
Fixed Order Quantity Lot-for-Lot

Quantity sold in period Quantity sold in period

Quantity shipped Quantity shipped

Economic Order Quantity (EOQ)

Annual EOQ—an FOQ order model
cost
Total
Minimum cost occurs when
cost
carrying costs = ordering costs
total cost
Minimum

Carrying
costs
Ordering (or
setup) costs
Order
Optimal order quantity
quantity

Basic EOQ model assumes known demand, lead time; no discounts.

Ordering Systems: Order Point System

Order received
Order lead
300 Order quantity is
time
Units in inventory

fixed (e.g., EOQ)

200
Order
point
100

Order intervals can vary Safety stock

0
2 4 6 8 10 12 14 16
Time (weeks)

Ordering Systems: Periodic Review System

Order point Order received Maximum-level inventory

300
Units in inventory

Order
quantity
200
varies

100
Order lead Safety stock
time
Order intervals are fixed
0
2 4 6 8 10 12 14 16
Time (weeks)
Safety Stock

• Inventory retained to protect against demand and 100%

lead time variations. 98%
• Set target frequency for use; ± this frequency is 95% Diminishing
reviewed. returns
• Methods for setting level: fixed amount, coverage,

Customer
statistical.

Service
• Need to balance cost of safety stock and cost of
stockouts.
• To decrease: less frequent orders, less demand
variability, shorter lead time, more accurate
forecasts. Safety Stock
• Organizational, regulatory, or industry requirements Beware of diminishing returns.
may mandate a minimum level of safety stock.

Safety Lead Time

• Replenishment orders placed before (or after) normal order point.
• Could result in overstocks.
• Can impact bullwhip effect.
• Large orders with long lead times, e.g., on container ships, could result in
significant overstocks (or stockouts).
Methods of Tracking Inventory
Inventory tracking system Improving tracking
Order of steps is important: • Keep it secure.
1. Identify the item by SKU. • Keep it neat.
2. Verify the quantity. • Make labels easily visible
3. Request and get approval and put on everything.
for move or get order. • Use bins and arrangements
4. Execute the inventory to ease counting.
movement. • Treat A, B, C items suitably.
5. Create a record of the • Use technology.
transaction completion.

Methods of Assessing Inventory Accuracy

Periodic Traditional method, requires store shutdown.
Count Annual count of all items.
Often done by temporary employees.
Disruptive, expensive, error-prone.
Necessary for, e.g., retail.

May Jun July Aug Sep Oct Nov Dec Jan Feb Mar Apr

Cycle Count Count some items each day.

Count all items a set number of times annually.
Count A items more often than B or C items.
Timely correction of errors, no store shutdown.