Chapter 2
Inventory: Quantity of goods that is available on hand or in stock (raw material, work in
progress, finished goods).
- Inventory is held to protect against uncertainty. Cost reduction through inventory is
achieved when stock is held close to the customer. Example: IKEA holds their
furniture in stores.
Reasons for holding inventory:
- Protect against uncertainty
- Cost reduction
- Protect against defects
- Stabilize manufacturing
- Anticipation stock
- Balancing supply and demand
Inventory is to protect against quality defects. A faulty can be substituted quickly when
inventory is held. It can also be used to stabilise manufacturing.
- Anticipation stock: Ice cream demand increases in summer, ice cream is produced
throughout the ear and kept in stock. Before the launch of the Iphone, demand is
unknown. Apple decided to build up pre launch anticipation stock to buffer against
demand uncertainty.
,Types of inventory:
◆ Cycle stock - the inventory expected to be sold based on demand forecasts, while safety
stock is extra or buffer stock to meet excess demand or protect against delayed shipments
from your suppliers.
◆ Safety stock - S afety stock is an additional quantity of an item held by a company in
inventory in order to reduce the risk that the item will be out of stock. Safety stock acts as a
buffer in case the sales of an item are greater than planned and/or the company's supplier is
unable to deliver additional units at the expected time.
◆ In transit stock - Goods that have departed from the dispatch, loading, or shipping point
but have not yet arrived at the receipt, offloading, or delivery point.
◆ Seasonal stock - stock which is in high demand during particular times of the year, such
as during Christmas or Halloween. These periods of time often coincide with the different
seasons, and managers need to be proactive in preparing for the waxing and waning of
demand during these key times.
◆ Promotional stock - i ssued in a newly-formed corporation and given to a promoter
(organizer) of the corporation in payment for his/her efforts in putting the company together
and locating shareholders or other funding.
◆ Speculative stock - a stock that a trader uses to speculate.
◆ Dead or obsolete stock - s tock that can no longer be sold because the product has
reached the end of its life cycle. This inventory will not sell for a long period of time and is not
expected to sell in the future. Holding on to this stock can be very costly, taking up space.
Two important cycle stock concepts:
◆ Average cycle stockholding: the average cycle stock held during a particular time frame;
◆ Average cycle stock investment.
Average cycle stock holding = Typical quantity of the orders/2
Average cycle stock investment = Average cycle stockholding x product cost
Order Quantity (purchased is 1000/2 = 500 = ACS
- To reduce cycle stock, a company can order more often ( 500/2= 250<)
Safety Stock
, - Covers stock supply that covers unplanned production and delivery delays.
- Demand that covers unplanned changes in demand.
Safety stock = (A) supply + (B) demand
(A) Safety stock supply = Av. Daily Demand X number of time periods
500 X 2days =1000
(B) Safety stock demand = standard deviation of demand X service level Forecast error x
service. Level factor X Lead Time + supply. Uncertainty. = ..
Demand distribution = normal distribution
Reducing inventory (safety stock)
1. Reduce lead-time ( less safe.stock needed to safeguard supply)
2. Reduce supplier uncertainty ( the same as above)
3. Reduce forecast error (demand uncerty. reduced, less safety stock. needed)
4. Reduce service level ( positively impact your safety stock position)
Describing Demand
● Level of demand - Depends on if the demand of a certain product in a certain
country is high or low. ( Asia , rice has a very high demand)
● Frequency of demand - Fast demand is when products are ordered on a regular
basis also knowns as a normal distribution and slow demand has a les frequent
demant pattern and have a number of periods with zero demand.
● Patterns of demand -
○ Stable – varies around a constant average over time
○ Trend – average demand can be described as an upward or downward
slowing line. (Demand increases or decreases over time)
○ Seasonality – Market forces Christmas and Easter sales or factors like
weather can be a major influence for a seasonal demand (ice-cream)
● Product life cycle positioning -
, ○ Launch - Building up stock prior to the launch date ( e.g. Iphone)
○ Emerging - Demand building of the product, depends on the growth rate
○ Established - D emand increases and decreases but they will less sudden and
heavy
○ Decline - Demand needs close monitoring to ensure that inventory levels are
sufficient to meet ongoing demand
○ Withdrawal - Demand is zero, product needs a good phase-out strategy to
minimise risk of obsolescence
● Product classification - Looks at product segmentation through the 80/20 rule.
Segment the product portfolio into various product categories depending on their
percentage turnover.
Forecasting Methods:
1. Qualitative forecasting
➢ Simple process of guessing future demand, making guesses based on intuition and
experience.
2. Quantitative or statistical forecasting
➢ Comprises statistical models that can have causal nature (e.g. ice-cream sales with
hot weather) or a historical date. Time series method is the most common form of
statistical forecasting.
Time series method is a statistical forecasting method based on the assumption that
historical patterns of demand are a good indicator for future demand. It is also called the
assumption of continuity.
Error (%) = Actual – Forecast / Actual
FA(%) = 1-Error (%)
Supply Planning Improvements
Means deciding when and how much to order:
◆ Deciding when to order: Order cycle management.
◆ Deciding how much to order: Calculating economic order quantity.
When a stock drops below a certain point it's called the reorder point.
Min-Max policy – the stock planner tries to keep inventory between a minimum and a
maximum stock level.
Order cycle management: two approaches to timing of orders:
◆ Continuous review (fixed order quantity);
◆ Periodic review (fixed order cycle).
Inventory: Quantity of goods that is available on hand or in stock (raw material, work in
progress, finished goods).
- Inventory is held to protect against uncertainty. Cost reduction through inventory is
achieved when stock is held close to the customer. Example: IKEA holds their
furniture in stores.
Reasons for holding inventory:
- Protect against uncertainty
- Cost reduction
- Protect against defects
- Stabilize manufacturing
- Anticipation stock
- Balancing supply and demand
Inventory is to protect against quality defects. A faulty can be substituted quickly when
inventory is held. It can also be used to stabilise manufacturing.
- Anticipation stock: Ice cream demand increases in summer, ice cream is produced
throughout the ear and kept in stock. Before the launch of the Iphone, demand is
unknown. Apple decided to build up pre launch anticipation stock to buffer against
demand uncertainty.
,Types of inventory:
◆ Cycle stock - the inventory expected to be sold based on demand forecasts, while safety
stock is extra or buffer stock to meet excess demand or protect against delayed shipments
from your suppliers.
◆ Safety stock - S afety stock is an additional quantity of an item held by a company in
inventory in order to reduce the risk that the item will be out of stock. Safety stock acts as a
buffer in case the sales of an item are greater than planned and/or the company's supplier is
unable to deliver additional units at the expected time.
◆ In transit stock - Goods that have departed from the dispatch, loading, or shipping point
but have not yet arrived at the receipt, offloading, or delivery point.
◆ Seasonal stock - stock which is in high demand during particular times of the year, such
as during Christmas or Halloween. These periods of time often coincide with the different
seasons, and managers need to be proactive in preparing for the waxing and waning of
demand during these key times.
◆ Promotional stock - i ssued in a newly-formed corporation and given to a promoter
(organizer) of the corporation in payment for his/her efforts in putting the company together
and locating shareholders or other funding.
◆ Speculative stock - a stock that a trader uses to speculate.
◆ Dead or obsolete stock - s tock that can no longer be sold because the product has
reached the end of its life cycle. This inventory will not sell for a long period of time and is not
expected to sell in the future. Holding on to this stock can be very costly, taking up space.
Two important cycle stock concepts:
◆ Average cycle stockholding: the average cycle stock held during a particular time frame;
◆ Average cycle stock investment.
Average cycle stock holding = Typical quantity of the orders/2
Average cycle stock investment = Average cycle stockholding x product cost
Order Quantity (purchased is 1000/2 = 500 = ACS
- To reduce cycle stock, a company can order more often ( 500/2= 250<)
Safety Stock
, - Covers stock supply that covers unplanned production and delivery delays.
- Demand that covers unplanned changes in demand.
Safety stock = (A) supply + (B) demand
(A) Safety stock supply = Av. Daily Demand X number of time periods
500 X 2days =1000
(B) Safety stock demand = standard deviation of demand X service level Forecast error x
service. Level factor X Lead Time + supply. Uncertainty. = ..
Demand distribution = normal distribution
Reducing inventory (safety stock)
1. Reduce lead-time ( less safe.stock needed to safeguard supply)
2. Reduce supplier uncertainty ( the same as above)
3. Reduce forecast error (demand uncerty. reduced, less safety stock. needed)
4. Reduce service level ( positively impact your safety stock position)
Describing Demand
● Level of demand - Depends on if the demand of a certain product in a certain
country is high or low. ( Asia , rice has a very high demand)
● Frequency of demand - Fast demand is when products are ordered on a regular
basis also knowns as a normal distribution and slow demand has a les frequent
demant pattern and have a number of periods with zero demand.
● Patterns of demand -
○ Stable – varies around a constant average over time
○ Trend – average demand can be described as an upward or downward
slowing line. (Demand increases or decreases over time)
○ Seasonality – Market forces Christmas and Easter sales or factors like
weather can be a major influence for a seasonal demand (ice-cream)
● Product life cycle positioning -
, ○ Launch - Building up stock prior to the launch date ( e.g. Iphone)
○ Emerging - Demand building of the product, depends on the growth rate
○ Established - D emand increases and decreases but they will less sudden and
heavy
○ Decline - Demand needs close monitoring to ensure that inventory levels are
sufficient to meet ongoing demand
○ Withdrawal - Demand is zero, product needs a good phase-out strategy to
minimise risk of obsolescence
● Product classification - Looks at product segmentation through the 80/20 rule.
Segment the product portfolio into various product categories depending on their
percentage turnover.
Forecasting Methods:
1. Qualitative forecasting
➢ Simple process of guessing future demand, making guesses based on intuition and
experience.
2. Quantitative or statistical forecasting
➢ Comprises statistical models that can have causal nature (e.g. ice-cream sales with
hot weather) or a historical date. Time series method is the most common form of
statistical forecasting.
Time series method is a statistical forecasting method based on the assumption that
historical patterns of demand are a good indicator for future demand. It is also called the
assumption of continuity.
Error (%) = Actual – Forecast / Actual
FA(%) = 1-Error (%)
Supply Planning Improvements
Means deciding when and how much to order:
◆ Deciding when to order: Order cycle management.
◆ Deciding how much to order: Calculating economic order quantity.
When a stock drops below a certain point it's called the reorder point.
Min-Max policy – the stock planner tries to keep inventory between a minimum and a
maximum stock level.
Order cycle management: two approaches to timing of orders:
◆ Continuous review (fixed order quantity);
◆ Periodic review (fixed order cycle).
