《供应链系统设计与管理》课程授课教案（讲义）Chapter 02（Lecture 2）Introduction to Inventory management

全英文课《DesigningandManagingSupplyChainSystem》授课教案Chapter 2(Lecture 2)Introduction to Inventory managementOBJECTIVES() Understanding inventory in a supply chain(2) Understanding the importance of inventory(3)LearningtheeffectiveinventorymanagementpolicyTEACHINGCONTENTCASE: Steel WorksGary Lemming sat in his new corner office and tapped his pencil on the deskLemming had just been named head of Steel Works, Inc's new centralized logisticsgroup.After a decade of experience implementing MRP (Materials RequirementsPlanning)systems throughout the company's manufacturingfacilities, Lemming wasconfident he couldhandlethe job.Until this morning.“Our inventory levels are ridiculous!"barked Jean Du Blanc, the company'sChief Financial Officer.“Our customer service is the worst in the industry, andgetting worse,"grumbledKirk Callow,the CEO.Lemming started to explain,“Yousee, I've already set up a team to look at all of that."But before he could finish,Callow stood up.“Sales are down 30 percent and expenses are up25 percent. Ourbest customers are calling me and telling me they're going to our competitors, and atthe rate we're losing market share we won't be in business in a year. I don't want tohear about teams; I want you back in here in a week telling me how you're going tofix this thing."Lemming looked over the list of people he'd asked to meet with him this week.He shook his head-how doI lower expenses and improve performance?HowwillIever find the right answer?(1)BackgroundSteel Works, Inc., is a manufacturer of custom and specialty use steels withannual sales of $400 million in 1993.Founded in 1980 by three brilliant materialscientistsfromMIT,thecompanynowemploysmorethan2500peopleat5differentlocations.With its first product,DuraBend,the companyearned a reputation asahigh technology provider and quickly established a niche position in what is typicallyregarded as a commoditymarket.Its two divisions,SpecialtyProducts and CustomProducts, are very separate and distinct businesses.(2) Custom ProductsLemming'sfirst interviewof themorning was with Stephanie Williams,President of the Custom division.“Our motto is“The Customer Comes First,Second,andThird,ButNeverLast,"explainedMs.Williams.“TheCustomdivision develops most of its products under contract for a single customer,for saleexclusivelytothat customer, and worksvery closelywiththemfrom beforea productis invented until our product is a part of their product. We have the best scientists and

全英文课《Designing and Managin1g Supply Chain System》 授课教案 Chapter 2(Lecture 2)Introduction to Inventory management OBJECTIVES (1) Understanding inventory in a supply chain. (2) Understanding the importance of inventory (3) Learning the effective inventory management policy. TEACHING CONTENT CASE: Steel Works Gary Lemming sat in his new corner office and tapped his pencil on the desk. Lemming had just been named head of Steel Works, Inc.'s new centralized logistics group. After a decade of experience implementing MRP (Materials Requirements Planning) systems throughout the company's manufacturing facilities, Lemming was confident he could handle the job. Until this morning. “Our inventory levels are ridiculous!” barked Jean Du Blanc, the company's Chief Financial Officer. “Our customer service is the worst in the industry, and getting worse,” grumbled Kirk Callow, the CEO. Lemming started to explain, “You see, I've already set up a team to look at all of that.” But before he could finish, Callow stood up. “Sales are down 30 percent and expenses are up 25 percent. Our best customers are calling me and telling me they're going to our competitors, and at the rate we're losing market share we won't be in business in a year. I don't want to hear about teams; I want you back in here in a week telling me how you're going to fix this thing.” Lemming looked over the list of people he'd asked to meet with him this week. He shook his head—how do I lower expenses and improve performance? How will I ever find the right answer? (1) Background Steel Works, Inc., is a manufacturer of custom and specialty use steels with annual sales of $400 million in 1993. Founded in 1980 by three brilliant material scientists from MIT, the company now employs more than 2500 people at 5 different locations. With its first product, DuraBend™, the company earned a reputation as a high technology provider and quickly established a niche position in what is typically regarded as a commodity market. Its two divisions, Specialty Products and Custom Products, are very separate and distinct businesses. (2) Custom Products Lemming's first interview of the morning was with Stephanie Williams, President of the Custom division. “Our motto is ‘The Customer Comes First, Second, and Third, But Never Last,’” explained Ms. Williams. “The Custom division develops most of its products under contract for a single customer, for sale exclusively to that customer, and works very closely with them from before a product is invented until our product is a part of their product. We have the best scientists and

全英文课《DesigningandManagingSupplyChainSystem》授课教案engineers in the world, and that is whythe biggest companies in the U.S.cometo us.We've designed the metals that make our customers'products work great. That's whywe typically aren't allowed to sell our products to anyone but the original customer-ourcustomerscompetitorswould lovetobuyfromus.'Williams went on to explain that eventually when a product is no longerleading-edge,the Customdivisionwill negotiatewiththe customer to allowSteelWorksto sell the product to anyone.“Such discussions are an art form,"explainsStephanie,“but it can make a huge difference in sales revenues for us.“TakeDuraFlexMR23,forexample.Wedevelopedthatundercontractforoneof the big three auto companies. It took us over a year to develop, and there is still noproduct like it in themarketplace.Yet we were able to convince our customerto allowus to sell it openlyon themarket at a 30 percent premium overwhat we charge themWe still sell in large volumes to our customer, and Specialty Products makes a smallfortune manufacturing the exact same steel and selling it at a higher price to four otherautomanufacturersandacopiercompany.Williams displayed a schematic of Custom Products'manufacturing system.Thethreemanufacturing siteswere eachlocated withina fewmiles of oneof CustomProducts'three R&Dcenters, which served the West, Midwest, and Eastern regions ofthe U.S.Customers and their products were each assigned to a specific plant andR&D center.Steel Works operated several warehouseslocated near theplants.The only question on Lemming's mind was why the inventory levels were sohigh. The reply was direct and blunt:"We've got to keep our customers happy.Customers aren't satisfied when you tell them that they have to wait three weeks fordelivery! We listened to that corporate inventory reduction mandate in 1991 and cutour inventories back 20percent and we wererunning outof product everyweek!(3)SpecialtyProducts“Let me tell you something,"Barry White said as he stormed into the room,“we are nothing like Custom."Mr. White was President of the Specialty division,whosesaleshavebeenthemosthardhitinrecentmonths.“That Custom division has nothing to do all day but play in laboratories. We'retheonesout inthemarketplacesellingeverydayandbringing in67percentof thiscompany's revenue. I've got the best sales force around, and they are what makes thisbusinesswork.“"Custom thinks they're so special because they'vegot some big customers, wellguess what, so do we.Our largest customer in Specialtybrings in 10 percent oftherevenueforthis company,and it is withblood,sweatandtearsthatwekeepthemandeveryone else as our customer.You want to solve some problems? Manufacturing iswhere the problems are, you should talk to them. I've got my plant managersscreaming at me every day that the CsR's [customer service representatives] arescreaming at them because the customers are screaming at the CSR's for not havingany steel in the warehouse to ship. And that's not the CSR's fault, it's manufacturing'sfault."“Last week theIS department comesknocking on mydoor tellingme how greatit would be if all of Steel Works was on a common computer system, and wants me to

全英文课《Designing and Managin2g Supply Chain System》 授课教案 engineers in the world, and that is why the biggest companies in the U.S. come to us. We've designed the metals that make our customers' products work great. That's why we typically aren't allowed to sell our products to anyone but the original customer— our customers' competitors would love to buy from us.” Williams went on to explain that eventually when a product is no longer leading-edge, the Custom division will negotiate with the customer to allow Steel Works to sell the product to anyone. “Such discussions are an art form,” explains Stephanie, “but it can make a huge difference in sales revenues for us.” “Take DuraFlex™ R23, for example. We developed that under contract for one of the big three auto companies. It took us over a year to develop, and there is still no product like it in the marketplace. Yet we were able to convince our customer to allow us to sell it openly on the market at a 30 percent premium over what we charge them. We still sell in large volumes to our customer, and Specialty Products makes a small fortune manufacturing the exact same steel and selling it at a higher price to four other auto manufacturers and a copier company.” Williams displayed a schematic of Custom Products' manufacturing system. The three manufacturing sites were each located within a few miles of one of Custom Products' three R&D centers, which served the West, Midwest, and Eastern regions of the U.S. Customers and their products were each assigned to a specific plant and R&D center. Steel Works operated several warehouses located near the plants. The only question on Lemming's mind was why the inventory levels were so high. The reply was direct and blunt: “We've got to keep our customers happy. Customers aren't satisfied when you tell them that they have to wait three weeks for delivery! We listened to that corporate inventory reduction mandate in 1991 and cut our inventories back 20 percent and we were running out of product every week!” (3) Specialty Products “Let me tell you something,” Barry White said as he stormed into the room, “we are nothing like Custom.” Mr. White was President of the Specialty division, whose sales have been the most hard hit in recent months. “That Custom division has nothing to do all day but play in laboratories. We're the ones out in the marketplace selling every day and bringing in 67 percent of this company's revenue. I've got the best sales force around, and they are what makes this business work.” “Custom thinks they're so special because they've got some big customers; well guess what, so do we. Our largest customer in Specialty brings in 10 percent of the revenue for this company, and it is with blood, sweat and tears that we keep them and everyone else as our customer. You want to solve some problems? Manufacturing is where the problems are; you should talk to them. I've got my plant managers screaming at me every day that the CSR's [customer service representatives] are screaming at them because the customers are screaming at the CSR's for not having any steel in the warehouse to ship. And that's not the CSR's fault, it's manufacturing's fault.” “Last week the IS department comes knocking on my door telling me how great it would be if all of Steel Works was on a common computer system, and wants me to

全英文课《DesigningandManagingSupplyChainSystem》授课教案pay$12mmformydivision.Theythinkthey understand ourbusinessbuttheydon'tWedon't need centralized computer systems, we need tofixmanufacturing!"White explained that like the Custom Products division, Specialty attempted tomanufacture its products in a single plant. The division operated three plants thatmanufactured 6 different product lines.The division's general strategy was to exploiteconomiesof scaleinproductionandtorelyonthelogisticsnetworktodistributetheproduct nationwide.To achieve further efficiency,product families were almostalwaysmanufactured inthe sameplantto savemanufacturing costs:thechange-overcosts betweenproducts inthesamefamilywereoftenconsiderablylowerthanacrossdifferent families. Products were produced in a rotating sequence.For example,DuraFlexiM R23 is always produced during the first week of the month.And before Lemmingknew it, White had stormed out of theroom.(4) AnalysisIt was now Tuesday and 20 percent of the week was gone. Debby Klein, a seniorlogistics analyst, sat across from Lemming.FIGURE2-1ProfileofSpecialtyProductscustomers5Bigcustomers(>$25mm)107Smallcustomers (<simm)18AllothersTotal130" Well it's just like you said it would be. Custom has a lot of products, andsomethinglike90percent of them aresoldtoonlyonecustomer.OntheotherhandSpecialtyhas something like 130 customersfor some120 products.They've got somanyproductsI can'tevenkeeptrack!Debby then related the grim news about customer service levels.“Based on datacollected by our order entry systems, approximately 70 percent of the orders enteredintothesystemarescheduledtobeshippedfromstockwithin48hours.Therestoftheorders(30percent)areeithercanceledbythecustomeratthetimeofentryorplaced in a backorder file.I couldn't find out how many of the backorders arecanceled, and I wasn't sure if we needed toknow that."Lemming then asked about the big customer.“Yep, they're big all right. They'relike15percentoftheSpecialtysalesfor1993buttheybuyalotofdifferentproductsThereareotherbigcustomers,though.And small ones,andmedium-sized onestoo"(see Figure 2-1)“Thanks Debby,"said Lemming,feeling more confused than ever.After lunch, Lemminghad the production planfor Specialty's Ohioplant faxedto him.The Ohioplant manufactured theDuraBendm and DuraFlex productfamilies.Production at the plant followed a regular rotating schedule, producing eachfamily about once per month.The plan seemed consistent with Barry White's accountof the division's manufacturing strategy.At the end of the day, a young forecasting expert named Maria stopped by,looking quite upset.“I looked at all the products like you asked. It's a mess just like

全英文课《Designing and Managin3g Supply Chain System》 授课教案 pay $12mm for my division. They think they understand our business but they don't. We don't need centralized computer systems, we need to fix manufacturing!” White explained that like the Custom Products division, Specialty attempted to manufacture its products in a single plant. The division operated three plants that manufactured 6 different product lines. The division's general strategy was to exploit economies of scale in production and to rely on the logistics network to distribute the product nationwide. To achieve further efficiency, product families were almost always manufactured in the same plant to save manufacturing costs: the change-over costs between products in the same family were often considerably lower than across different families. Products were produced in a rotating sequence. For example, DuraFlex™ R23 is always produced during the first week of the month. And before Lemming knew it, White had stormed out of the room. (4) Analysis It was now Tuesday and 20 percent of the week was gone. Debby Klein, a senior logistics analyst, sat across from Lemming. FIGURE 2-1 Profile of Specialty Products customers. “Well it's just like you said it would be. Custom has a lot of products, and something like 90 percent of them are sold to only one customer. On the other hand, Specialty has something like 130 customers for some 120 products. They've got so many products I can't even keep track!” Debby then related the grim news about customer service levels. “Based on data collected by our order entry systems, approximately 70 percent of the orders entered into the system are scheduled to be shipped from stock within 48 hours. The rest of the orders (30 percent) are either canceled by the customer at the time of entry or placed in a backorder file. I couldn't find out how many of the backorders are canceled, and I wasn't sure if we needed to know that.” Lemming then asked about the big customer. “Yep, they're big all right. They're like 15 percent of the Specialty sales for 1993 but they buy a lot of different products. There are other big customers, though. And small ones, and medium-sized ones too” (see Figure 2-1) “Thanks Debby,” said Lemming, feeling more confused than ever. After lunch, Lemming had the production plan for Specialty's Ohio plant faxed to him. The Ohio plant manufactured the DuraBend™ and DuraFlex™ product families. Production at the plant followed a regular rotating schedule, producing each family about once per month. The plan seemed consistent with Barry White's account of the division's manufacturing strategy. At the end of the day, a young forecasting expert named Maria stopped by, looking quite upset. “I looked at all the products like you asked. It's a mess just like

全英文课《DesigningandManagingSupplyChainSystem》授课教案you said, 80percentoftheproductsfall inthis“highlyvolatile'category(seeFigure2-2).With standard deviations that large,I don't think a demand forecasting tool isgoingto helpyou very much."(5)ConsultingBright and early on Wednesday morning,Fred Chow,a logistics consultantwalksintoLemming'soffice.“From what you described onthe phone,the answers areall very simpleTherearethreethingsyou needtodoFIGURE2-2DemandvariationinSpecialtyProductsSpecialty Products20%ofproductsC.V.0.51. Get rid of all those products. You've probably got products that have annualsales of a few thousand dollars, and probably have products that aren't selling at allDiscontinue them and focus on your high margin, high volume products to maximizeyourrevenue2. Use a statistical forecasting package to predict your demand and this willlower the amount of inventory you need.You see,the inventory levels you need tohold will be a function of the least squares regression and the resulting standarddeviation of error in demand in the leadtime. So reduce that and you've reduced yourinventory.Viola!3.You've probably got too many warehouses.Everybodyknows thatfewerwarehousesmeanless inventory."Lemming was now excited.Although he didn't understand about the leastsquares-thing, and although Maria said yesterday that forecasting wouldn't work, nowhe was getting somewhere.Accidentally calling the consultant“Jonah"at one point.Lemming was forevergrateful.(6)Reality Sets InThe businesses completely rejected the idea of discontinuing the slow-movingproducts.“Wecan't do that!Ourmost important customers buythoseproducts!Somuch for that idea.If that weren't bad enough, Debbyhappens to stop back in.“Reduce ourwarehouses?What areyoutalkingabout?If wehavetoshipfromfewer warehouses.it will takelonger,costmoreand that will reallymakethedivisionsmad.Plus, justbecause you combine two warehouses doesn't mean you're going to save that muchmoney. Some fixed costs certainly, but that won't make up for those added

全英文课《Designing and Managin4g Supply Chain System》 授课教案 you said, 80 percent of the products fall in this‘highly volatile’category (see Figure 2-2). With standard deviations that large, I don't think a demand forecasting tool is going to help you very much.” (5) Consulting Bright and early on Wednesday morning, Fred Chow, a logistics consultant, walks into Lemming's office. “From what you described on the phone, the answers are all very simple. There are three things you need to do: FIGURE 2-2 Demand variation in Specialty Products. 1. Get rid of all those products. You've probably got products that have annual sales of a few thousand dollars, and probably have products that aren't selling at all. Discontinue them and focus on your high margin, high volume products to maximize your revenue. 2. Use a statistical forecasting package to predict your demand and this will lower the amount of inventory you need. You see, the inventory levels you need to hold will be a function of the least squares regression and the resulting standard deviation of error in demand in the leadtime. So reduce that and you've reduced your inventory. Violá! 3. You've probably got too many warehouses. Everybody knows that fewer warehouses mean less inventory.” Lemming was now excited. Although he didn't understand about the least squares-thing, and although Maria said yesterday that forecasting wouldn't work, now he was getting somewhere. Accidentally calling the consultant “Jonah” at one point, Lemming was forever grateful. (6) Reality Sets In The businesses completely rejected the idea of discontinuing the slow-moving products. “We can't do that! Our most important customers buy those products!” So much for that idea. If that weren't bad enough, Debby happens to stop back in. “Reduce our warehouses? What are you talking about? If we have to ship from fewer warehouses, it will take longer, cost more and that will really make the divisions mad. Plus, just because you combine two warehouses doesn't mean you're going to save that much money. Some fixed costs certainly, but that won't make up for those added

全英文课《DesigningandManagingSupplyChainSystem》授课教案transportation costs you're going to have to swallow."Lemming didn't believe this, so he mounted an effort to get to the bottom of thewarehouseconsolidation issue.Several hours and several hundred sheets ofpaperlater, Lemming realized that he had underestimated the data collection andnumber-crunching involved with this type of analysis.Although the idea had thepotential to reduce costs, his team did not have enough time to look at it this week.(7) The Clock Chines ElevenIt'sThursday,closetomidnight,and Lemming is now sweating.Debby,Maria,and John Thompson, a recent Sloan graduate, are all gathered in the corner office.They've listed a dozen ideas on the blackboard: ABC analysis, customersegmentations, EOQs, and many more ... and crossed them all off. Lemming can seeCallow's angry face nowhis career is slipping away.Nowwhatdoyoudo,JohnThompson?2.1Introduction2.1.1 Inventory of the supply chainIn many industries and supply chains, inventory is one of the dominant costs. Inthe United States, for example, over a trillion dollars is invested in inventory.Formanymanagers,effective supplychain management is synonymous with reducinginventory levels in the supply chain.Of course,this is a very simplistic view of supplychain managementinfact, the goal of effective inventorymanagement in the supplychain is to havethe correct inventory at the right place at theright time to minimizesystem costs while satisfying customer servicerequirements.Unfortunately,managinginventory in complex supply chains is typically difficult, and inventory-relateddecisionscanhaveasignificantimpactonthecustomerservicelevelandsupplychainsystemwidecost.A typical supply chain consists of suppliers and manufacturers, who convert rawmaterials into finished products, and distribution centers and warehouses, from whichfinished products are distributed to customers. Inventory can appear in many places inthe supply chain, and in several forms:Raw material inventory.Work-in-process (WIP) inventoryFinished product inventory.Eachofthese needs its own inventorycontrol mechanism orapproachUnfortunately,determiningthesemechanisms isdifficultbecauseefficientproduction,distribution,and inventory control strategies that reduce systemwide costs andimprove service levels must take into account the interactions of the various levels inthe supply chain. Nevertheless, the benefits of determining these inventory controlmechanismscanbeenormous2.1.2The Reason forInventoryHolding1.Unexpectedchangesincustomerdemand.Customerdemandhasalwaysbeerhard to predict, and uncertainty in customer demand has increased in thelastfewyearsdueto

全英文课《Designing and Managin5g Supply Chain System》 授课教案 transportation costs you're going to have to swallow.” Lemming didn't believe this, so he mounted an effort to get to the bottom of the warehouse consolidation issue. Several hours and several hundred sheets of paper later, Lemming realized that he had underestimated the data collection and number-crunching involved with this type of analysis. Although the idea had the potential to reduce costs, his team did not have enough time to look at it this week. (7) The Clock Chines Eleven It's Thursday, close to midnight, and Lemming is now sweating. Debby, Maria, and John Thompson, a recent Sloan graduate, are all gathered in the corner office. They've listed a dozen ideas on the blackboard: ABC analysis, customer segmentations, EOQs, and many more . and crossed them all off. Lemming can see Callow's angry face now—his career is slipping away. Now what do you do, John Thompson? 2.1 Introduction 2.1.1 Inventory of the supply chain In many industries and supply chains, inventory is one of the dominant costs. In the United States, for example, over a trillion dollars is invested in inventory. For many managers, effective supply chain management is synonymous with reducing inventory levels in the supply chain. Of course, this is a very simplistic view of supply chain management—in fact, the goal of effective inventory management in the supply chain is to have the correct inventory at the right place at the right time to minimize system costs while satisfying customer service requirements. Unfortunately, managing inventory in complex supply chains is typically difficult, and inventory-related decisions can have a significant impact on the customer service level and supply chain systemwide cost. A typical supply chain consists of suppliers and manufacturers, who convert raw materials into finished products, and distribution centers and warehouses, from which finished products are distributed to customers. Inventory can appear in many places in the supply chain, and in several forms: Raw material inventory. Work-in-process (WIP) inventory. Finished product inventory. Each of these needs its own inventory control mechanism or approach. Unfortunately, determining these mechanisms is difficult because efficient production, distribution, and inventory control strategies that reduce systemwide costs and improve service levels must take into account the interactions of the various levels in the supply chain. Nevertheless, the benefits of determining these inventory control mechanisms can be enormous. 2.1.2 The Reason for Inventory Holding 1 . Unexpected changes in customer demand. Customer demand has always been hard to predict, and uncertainty in customer demand has increased in the last few years due to

全英文课《DesigningandManagingSupplyChainSystem》授课教案a.The short life cycle of an increasing number of products.This implies thathistorical data about customer demand may not be available or may be quite limited .b. The presence of many competing products in the marketplace. Thisproliferation of products makes it increasingly difficult to predict demand for aspecific model, Indeed, while it is relatively easy to forecast demand across productgroups-that is,toforecastdemandfor all products competinginthesamemarketitismuch moredifficult to estimate demand for individual products.2.The presence in many situations of a significant uncertainty in thequantity andquality of thesupply,supplier costs, and deliverytimes.3. Lead times. Even if there is no uncertainty in demand or supply, there is aneed to hold inventory due todelivery lead times.4.Economiesof scaleofferedbytransportation companiesthatencouragefirmsto transport large quantities of items, and therefore hold large inventories. Indeed,many of the transportation providers try to encourage large-size shipments by offeringall sorts of discounts to shippers.Similarly,incentives provided bymanufacturers todistributors and retailers motivate buyers to purchase large quantities duringmanufacturers'promotionalperiodsandhenceleadtohighinventorylevels2.1.3 Difficulty to Hold a Right InventoryUnfortunately,although it is clear why inventory is held, holding the rightamount at the right time in the appropriate place is frequently difficult:In 1993, Dell Computer's stock plunged after the company predicted a loss.Dellacknowledged that the company was sharply off in its forecast of demand, resulting ininventorywrite-downs[218]In 1993, Liz Claiborne experienced an unexpected earnings decline, as aconsequence of higher-thananticipated excess inventoriesIn 1994, IBM struggled with shortages in the ThinkPad line due to ineffectiveinventory management.In 2001, Cisco took a $ 2.25 billion excess inventory charge due to decliningsales.These examples raise two critical issues in inventory management and demandforecasting. Since demand is uncertain in most situations, the demand forecast iscritical for determining what to order, and when to order it. But what is therelationship between forecast demand and the optimal order quantity? Should theorder quantitybeequalto,greaterthan,orsmallerthanforecastdemand?And,iforderquantityisdifferentthanforecastdemandbyhowmuch?2.1.4EffectiveInventoryPolicyTo decide on an effective inventory policy,managers haveto take manycharacteristics of the supply chain intoaccount:1. First and foremost is customer demand, which may be known in advance ormay be random. In the latter case, forecasting tools may be used in situations in whichhistorical data are available to estimate the average customer demand, as well as theamount of variability in customer demand (often measured as the standard deviation)

全英文课《Designing and Managin6g Supply Chain System》 授课教案 a. The short life cycle of an increasing number of products. This implies that historical data about customer demand may not be available or may be quite limited . b. The presence of many competing products in the marketplace. This proliferation of products makes it increasingly difficult to predict demand for a specific model. Indeed, while it is relatively easy to forecast demand across product groups—that is, to forecast demand for all products competing in the same market—it is much more difficult to estimate demand for individual products. 2. The presence in many situations of a significant uncertainty in the quantity and quality of the supply, supplier costs, and delivery times. 3. Lead times. Even if there is no uncertainty in demand or supply, there is a need to hold inventory due to delivery lead times. 4. Economies of scale offered by transportation companies that encourage firms to transport large quantities of items, and therefore hold large inventories. Indeed, many of the transportation providers try to encourage large-size shipments by offering all sorts of discounts to shippers. Similarly, incentives provided by manufacturers to distributors and retailers motivate buyers to purchase large quantities during manufacturers' promotional periods and hence lead to high inventory levels. 2.1.3 Difficulty to Hold a Right Inventory Unfortunately, although it is clear why inventory is held, holding the right amount at the right time in the appropriate place is frequently difficult: In 1993, Dell Computer's stock plunged after the company predicted a loss. Dell acknowledged that the company was sharply off in its forecast of demand, resulting in inventory write-downs [218]. In 1993, Liz Claiborne experienced an unexpected earnings decline, as a consequence of higher-thananticipated excess inventories. In 1994, IBM struggled with shortages in the ThinkPad line due to ineffective inventory management. In 2001, Cisco took a $ 2.25 billion excess inventory charge due to declining sales.These examples raise two critical issues in inventory management and demand forecasting. Since demand is uncertain in most situations, the demand forecast is critical for determining what to order, and when to order it. But what is the relationship between forecast demand and the optimal order quantity? Should the order quantity be equal to, greater than, or smaller than forecast demand? And, if order quantity is different than forecast demand, by how much? 2.1.4 Effective Inventory Policy To decide on an effective inventory policy, managers have to take many characteristics of the supply chain into account: 1. First and foremost is customer demand, which may be known in advance or may be random. In the latter case, forecasting tools may be used in situations in which historical data are available to estimate the average customer demand, as well as the amount of variability in customer demand (often measured as the standard deviation).

全英文课《DesigningandManagingSupplyChainSystem》授课教案2. Replenishment lead time, which may be known at the time the order is placed.or may be uncertain.3. The number of different products being considered. These products competeon budget or space and hence the inventory policy of one product affects the others4.The length of the planning horizon.5.Costs, including order cost and inventory holding costa.Typically,ordercost consists oftwo components:thecost oftheproduct andthe transportation cost. The product cost may exhibit economies of scale, that is, thelarger the order quantity,the smaller the per-unit priceb. Inventory holding cost, or inventory carrying cost, consists ofi.State taxes,propertytaxes, and insurance on inventories.i.Maintenance costs.iii.Obsolescencecost,whichderivesfromtheriskthatanitemwill losesomeofits value because ofchanges in the market.iv. Opportunity costs, which represent the return on investment that one wouldreceive had money been invested in something else (e.g., the stock market) instead ofinventory.6. Service level requirements. In situations where customer demand is uncertain,it is often impossible to meet customer orders 100 percent of the time, so managementneeds to specify an acceptablelevel of serviceQUESTIONS1.What Is Inventory of the supply chain2.Why Is Inventory management Important?3.Why Is Inventory Required?4.How to decide on an effective inventory policy

全英文课《Designing and Managin7g Supply Chain System》 授课教案 2. Replenishment lead time, which may be known at the time the order is placed, or may be uncertain. 3. The number of different products being considered. These products compete on budget or space and hence the inventory policy of one product affects the others. 4. The length of the planning horizon. 5. Costs, including order cost and inventory holding cost. a. Typically, order cost consists of two components: the cost of the product and the transportation cost. The product cost may exhibit economies of scale; that is, the larger the order quantity, the smaller the per-unit price. b. Inventory holding cost, or inventory carrying cost, consists of i. State taxes, property taxes, and insurance on inventories. ii. Maintenance costs. iii. Obsolescence cost, which derives from the risk that an item will lose some of its value because of changes in the market. iv. Opportunity costs, which represent the return on investment that one would receive had money been invested in something else (e.g., the stock market) instead of inventory. 6. Service level requirements. In situations where customer demand is uncertain, it is often impossible to meet customer orders 100 percent of the time, so management needs to specify an acceptable level of service. QUESTIONS 1.What Is Inventory of the supply chain 2.Why Is Inventory management Important? 3.Why Is Inventory Required? 4.How to decide on an effective inventory policy