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Lecture7 OverviewofInventory&NetworkDesignLecture7 OverviewofInventory&NetworkDesign
BM0472InternationalTradeManagement
Inventory Appreciatetheimplicationsofinventoryonbusinesss
profitabilityandcashflow
Explainthemajorreasonsforcarryinginventory
DistributionNetworks Understandtheroleoffacilitydecisions Identifythefactorsinfluencingnetworkdesign
LessonObjectives
Appreciatetheimplicationsofinventoryonbusinesssprofitabilityandcashflow
Explainthemajorreasonsforcarryinginventory
Inventory
Profitthroughinventorymanagement
4
TightLtd SlackLtd
Sales=5million
Employment=85staff
Sales=5million
Employment=85staff
FixedAssets=2.5million FixedAssets=2.5million
TightLtd SlackLtd
Independentcompany Apartofamultinationalgroup
Inventory=0.5million Inventory=2.5million
TightLtd SlackLtd
Inventory=0.5million Inventory=2.5million
Costofinventory=2millionInterests=300000Holdingcosts=23000
EXTRA COSTS
ExtracostsofSlack
8
H
o
l
d
i
n
g
c
o
s
t
ComparehowwellTightandSlackaredoing
TightLtd SlackLtd Remarks
Returnonsales
ProfitSales
250k5,000 k
5%
(73 k)5,000k
(1.46%)
Slackhasadditionalcosts
of323k
Returnonassets
Profit
Assetsemployed
250k3,000 k
8.3%
(73k)5,000 k
(1.46%)
Slackhasadditional stock
of2million
Freeoutcashflowtoo,forinvestment,wagesetc.9
Inventoryhidesproblems!
Inventoryhideswastes!
Wheninventoryisreduced,
problemsareexposed
ReasonsforInventory
12
Batchingeconomiesorcyclestocks Arisesfromthreesources
procurement
production
transportation
Scaleeconomiesareoftenassociatedwithallthree,whichcanresultintheaccumulationofinventorythatwillnotbeusedorsoldimmediately
13
Allorganizationsarefacedwithuncertainty.
Onthedemandside,thereisusuallyuncertaintyinhowmuchcustomerswillbuyandwhentheywillbuyit.
Onthesupplyside,theremightbeuncertaintyaboutobtainingwhatisneededfromsuppliersandhowlongitwilltakeforthefulfillmentoftheorder.
Uncertainty/SafetyStocks
Thetimeassociatedwithtransportationmeansthatevenwhilegoodsareinmotion,aninventorycostisassociatedwiththetimeperiod.Thelongerthetime,thehigherthecost.
WIPinventories,associatedwithmanufacturing,canbesignificantwhilethelengthoftimetheinventorysitsinamanufacturingfacilitywaitingandshouldbecarefullyevaluatedinrelationshiptoschedulingtechniquesandtheactualmanufacturing/assemblytechnology.
Time/InTransitandWorkinProcessStocks
15
SeasonalStocks Seasonalitycanoccurinthesupplyofrawmaterials,inthedemandforfinishedproduct,orinboth.
Thosefacedwithseasonalityissuesareconstantlychallengedwhendetermininghowmuchinventorytoaccumulate.
Seasonalitycanimpacttransportation.
16
AnticipatoryStocks
Whenanorganizationanticipatesthatanunusualeventmightoccurthatwillnegativelyimpactitssourceofsupplyorproductioncycle.
E.g.politicalunrest,badweather,labour strikes,pricehikes
17
Understandtheroleoffacilitydecisions Identifythefactorsinfluencingnetworkdesign Describeaframeworkfornetworkdesigndecisions
Distribution Networks
Responseme:1weekRequire:1facility
CustomersFacility
Responseme:5daysRequire:2facilies
CustomersFacility
Responseme:3daysRequire:5facilies
CustomersFacility
Responseme:nextdayRequire:13facilies
CustomersFacility
Responseme:samedayRequire:26facilies
CustomersFacility
ServiceandNumberofFacilities
NumberofFacilities
ResponseTime
Atthehighestlevel,performanceofadistributionnetworkisevaluatedalongtwodimensions:
Customersneedsthataremet Costofmeetingcustomerneeds
Changingthedistributionnetworkaffectsthecostofinventories,transportation,facilitiesand`information
FactorsAffectingNetworkDesign
CostsandNumberofFacilities
Cost
Numberoffacilities
Inventory
Transportation
Facility
5-27
Movetothelastslide!
FactorsInfluencingNetworkDesignDecisions
Strategic
Competitive
Technological
Macroeconomic
Political
Infrastructure
Logisticsandfacilitycost
Efficiencyvs Responsiveness
Efficiency Lowestcostlocationformanufacturingfacilities,evenif
locationisveryfarfrommarketsserved
Responsiveness Locatefacilitiesclosertothemarketandmayselectahigh
costlocationifthechoiceallowsthefirmtoreactquicklytochangingmarketneeds
Conveniencevs Discountstores Manysmallconveniencestoresinthesamearea Onelargediscountstorestoservethewholearea
StrategicFactorCompetitiveStrategy
StrategicFactorStrategicRolesofFacilities
Offshorefacility Lowcostfacilityforexportproduction Sourcefacility Lowcostfacilityforglobalproduction Serverfacility Regionalproductionfacilitytomeetspecificrequirement Contributorfacility Regionalproductionfacilitywithdevelopmentskills
(e.g.localcustomisation)
Outpostfacility Regionalproductionfacilitybuilttogainlocalskills Leadfacility Facilitythatleadsindevelopmentandprocesstechnologies
CompetitiveFactors
PositiveexternalitiesbetweenfirmsLocatefacilitiesclosetocompetitorstoreapbenefitsforall
LocatingtosplitthemarketWhenfirmsdonotcontrolprice,theylocatecloseto
competitorstogainlargermarketshare
CustomerresponsetimeandlocalpresenceShortresponsetime nearercustomer
TechnologicalFactorsCharacteristicsofavailableproductiontechnologies
Highfixedcosto Fewhighcapacitylocations
SignificanteconomiesofscaleLowfixedcost
o ManylocalfacilitiesLowertransportationcosts
FlexibilityofproductiontechnologyInflexibleproductiontechnology
o ManylocalfacilitiestoservelocalmarketsFlexibleproductiontechnology
o Consolidatemanufacturinginafewlargefacilities
MacroeconomicFactorsTariffsandTaxIncentives
Stronginfluenceonlocationdecisionso Hightariffs
o Taxincentivesforareaoflowereconomicdevelopment
o FTZ(FreeTradeZone)
ExchangeRateandDemandRiskFluctuationsinexchangerate
o Significantimpactonprofits
Fluctuationsindemando Excesscapacityinfactoryservingthatmarket,whichneedsto
bedivertedtoanothermarket
PoliticalFactors
PoliticalstabilityIncludinggovernmentstability,corruptionlevel,relationshipwithothercountries,policiestowardsforeigninvestors
LegalsystemsBusinesslawsmustbeclearandindependentofthegoverningparty
o Firmsfeelthattheyhaverecoursewhenthereisaproblemo e.g.enforcementofIPlaws
InfrastructureFactorsAvailabilityofgoodinfrastructure
Prerequisitetofacilitydecisions
KeyinfrastructureelementsAvailabilityofsitesAvailabilityofskilledlabourProximitytotransportationterminals
o Railstationso Airportso Seaports
HighwayaccessandtrafficcongestionLocalutilities
LogisticsandFacilityCosts
InventorycostsDecentralizedfacilities higherinventorycosts
TransportationcostsInboundtransportationcosts
o LowerbecauseinboundshipmentsarebiggerOutboundtransportationcosts
o Higherbecauseoutboundshipmentsrequirehighresponsiveness
FacilitycostsSetupcost
o FixedcostwhichincreaseswithmorefacilitiesOperatingcosts
o Variablecostswhichchangesaccordingtothelevelofproduction
CostsandNumberofFacilities
Cost
Numberoffacilities
Inventory
Transportation
Facility
5-38
Reference
Chapter9 ManagingInventoryintheSupplyChainManagingSupplyChains:ALogisticsApproach,InternationalEdition;9thed,JohnJ.Coyle,C.JohnLangley,Jr.,RobertA.Novack,BrianJ.Gibson;Cengage Learning;2013
Chapter5 NetworkDesignintheSupplyChainSupplyChainManagement Strategy,Planning,andOperation,2ndEdition,SunilChopra&PeterMeindl,PrenticeHall,2004