Inventory Management and Customer Service

Safety Stock: Planned quantity of stock to protect against fluctuation in demand or supply

· Required when:

o Demand for a product is uncertain

o Timely resupply of product is uncertain

· Higher the SS the less of a chance of stock outs and better service

· Higher the SS the higher the cost to provide this good service

· If permanent SS is not desired, Safety lead times can be used (causes receipts to be earlier than required)

Safety Stock for Dependent demand items:

· SS needed if supply is variable (production scrap/yields or supplier delivery)

· MRP keeps safety stock for independent demand and dependant demand separate

Customer Service

· Traditional: Shipping a customer order on a committed date

· Measurement

o Order shipped on committed date

o Line items of orders shipped on committed date

o Dollar volume shipped on committed date

o Ordering periods without stock-out

o Backorders

· Expanded Customer Service

o Cycle time from order placement to delivery at customer’s location

o Focus on request date by customer, not committed date. Competition can take our customers if they want it in 2 and we commit 4.

o Cycle time of response to customer requests (e.g. schedule change or material change)

o Total units delivered compared to returned materials authorizations (RMAs) – Dead on arrival, mis-entered, mis-shipped product.

o Total customer experience – responsiveness, design suggestions, service and warranty

Customer Service and Order Quantity

· Small order quantities = Risk of short, frequent stock outs

· Large order quantities = Risk of long, seldom stock outs

Standard Deviation and MAD

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o clip_image006

o clip_image008

· clip_image010

o Data points < 30? Use clip_image012

o Data points > 30? Use clip_image014

Tracking Signal

· Used to monitor deviation trend or Bias in a forecast

· When tracking signal calculates to be outside a specified range, the item is flagged for review

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· A negative tracking signal value means the forecast is consistently higher than actual.

Safety Factors

· The Table of Safety Factors

o Provides some level of service and converts the standard deviation into a specific amount of safety stock


o Always round up to safety stock quantity

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Lead Time Deviation

· Forecast frequency upon with standard deviation is based ≠ the item’s lead time

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§ clip_image024 typically in range of .5 to .7 (this value will be give in the exam)

Time Period Safety Stock

· Allows even amount of safety stock, equal to the usage, over a designated time frame

· Varies with change in independent and dependant demand (NOT on deviation from demand)

· Protects against the following situations

1. End of month reviews that do not indicate reorder

2. The next day material falls below reorder point

o No review until next month, safety stock must buffer this delay

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· *Remember to convert the SS time period into a monthly period (e.g. 2 weeks = .5 months)

Fixed Safety Stock

· Used for items that need special oversight or that should have zero safety stock

· Applied in the following situations

o New part phase in

o Part phase out with long usage history

o Dependant demand parts with no unplanned usage and completely planned by MPS and MRP systems

Inventory Valuation

· Definition

o Determined using either cost or market value…some recognition of inventory age distribution (e.g. old inventory may be worth less)

· Purpose

o Considered short-term asset

o Includes raw materials, work in process, and finished goods

o Maintenance, Repair, and Operating Supplies (MRO) not included

· Types of Inventory Valuation

o FIFO: First-in, First-out

o LIFO: Last-in, First-out

o Transfer

o Standard Cost:

§ single value for an inventory item,

§ difference between actual costs incurred and standard costs reported as a variance from the standard

§ typically reviewed annually

o Actual Cost

§ Lot control to trace a load back to a PO

§ Not used often except for government contracts or for warranty or safety reasons

o Project Cost

o Process Cost

§ Collect costs by time period and averaged over all units produced during period

Data Accuracy

· Accurate

· Timely

· Fix Root Causes

· Eliminate “informal systems” created to correct erros

Inventory Accuracy

· Accounting: Dollars

· Planning: Acceptable Percentage Range

· Production: Absolute Count Accuracy

Costs of inaccurate Records

· Shortages

· Missed schedules

· Late Deliveries

· Lost Sales

· Excess Production

· Excessive expediting

· High inventory levels

· Low productivity

· Excess freight costs

· High obsolescence levels

Goal of inventory accuracy program

· 100% inventory accuracy

· 100% of the parts

· 100% of the time

Cycle Count Analysis

· Operating cost

· Cost avoidance

· Infrastructure investment

*Each contain tradeoffs

ABC analysis to classify/analyze inventory

· Pareto Principle: 80/20

· Focus on the “costly few” as opposed to the “trivial many”

· Uses of ABC Classification

o Cycle-Counting Frequency: A items verified more frequently than C items

o Customer Service

o Engineering Priorities: improvement efforts better spent on A items (high usage/cost)

o Replenishment Systems

o Investment Decisions

· ABC Calculation

o Calculate annual dollar usage

o Rank items from highest to lowest by annual dollar usage

o Assign ABC categories

Types of Inventory Accuracy Methodologies

· Cycle Counting: Efficient use of few experienced people throughout year

· Periodic Inventory: Inefficient use of many inexperienced people in a short period once a year

Cycle Counting

Periodic Inventory

Fewer Mistakes

Many Mistakes

Minimal loss of production time

Plant/Warehouse shutdown for inventory

Timely detection/correction of error causes

No correction of error causes

Systematic improvement of accuracy

One-time improvement of accuracy

Inventory Objectives

· Maximize Customer Service

· Minimize Plant Costs

· Minimize Aggregate Investment

· Efficient Operations

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