OM Final Ppt_Inventory Control

8/3/2019 OM Final Ppt_Inventory Control

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Inventory Control Group 5


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INVENTORY CONTROL

A short recap..

Effects of high,low andmediuminventory levels

EconomicOrder

Quantity

Re-orderTime,OrderingCosts,

Holdingcosts.


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ZEBRA SHOES

A Shoe line at San Francisco, United States. Products: Zebra print shoes, zebra high heel shoes, sandals, pumps,

sneakers in the lowest price in United States. Services: Overseas shipping at the lowest cost.

Total weekly production: 6,500 pairs of shoes The company uses a chase strategychase strategyfor purchasing raw materials.

Raw materials required

Polyvinyl chloride (PVC)

Fabric

Shoelaces

Iron Holes


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Problem statement

- No methodology forinventory tracking.As a result many a times large

quantities of shoes are stuck for an uncertain period of time. Sometimesreducing amount of inventory goes unreported.

- Production rate andinventory levels are based on intuition, with the

objective of avoiding stock-outs during the demand period.

- Purchase and production varies according to the demand.

- Low efficiency level. In many cases theydont complete the entire

orders on time.

- Due to all this, the company is also facing a majorspace optimization

issue in its inventory storage areas

.

PROBLEMSPROBLEMS


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Solution to Inventory Tracking Issues: RFID

What is RFID?What is RFID?

RFID = RadioFrequencyIDentification.

Uses a smallchiporatagthatreads

radio-frequency waves totransferdata

betweenareaderanda movableitem

toidentify,categorize,tracketc.

Is fastanddoes notrequirephysical

sight

or

contact

bet

ween

reader/

scannerandthetaggeditem.

Attempts toprovideunique

identificationand backendintegration

thatallows forwiderangeof

applications.


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How does RFID work?

Tags (or chips) consist of two

parts:

1) Antennae

2) Processor/Storage Receives signal from reader

and gives a return signal with

ID number (which is unique

for every item). Reader sends the unique ID

number to database or server

for storage.


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RFID today

Its everywhere!Its everywhere!

Credit cards

Car & home keys

Passports

Retail Outlets

Packaged foods

Clothes

Asset Tracking in

airlines etc


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The benefits reaped by Zebra Shoes

Improved on inventory visibility and accuracy .

Allowed stores to track the location and count of

inventories in real time. Bringing about better

monitoring of demand for certain products and place

orders to prevent an out-of-stock situation.

Each item is assigned a unique ID, therefore each

item has the capability of reporting its own unique

history of transactions. This allows for quicker

resolution for missing or forgotten items.

Increase in efficiency: The system replaced time

consuming manual typing of inventory data with

quick scanning of trays of inventory in bulk. Gaps between recorded inventories and physical

inventories were eliminated.

Since the system is software enabled, all associated

risks of human error is completely eradicated.


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Production Rate Correction: EPQ Model

What is EPQ?

Economic Production Quantity

model determines the quantity a

company or retailer should order

to minimize the total inventorycosts by balancing the inventory

holding cost and average fixed

ordering cost.

The EPQ model was developed

by E.W. Taft in 1918.

This method is an extension of

the Economic Order Quantity

model.


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Implementing EPQ and deciding the

production rateAssumptions: Constant and uniform demand.

Objective: EPQ analysis to determine the optimal quantities of shoes that

Zebra Shoes must produce in order to satisfy the demand.

Variables Value

Unitary cost (C) 50 $

Annual cost for maintaining inventory (i) 15% per year

Annual cost for maintaining inventoryper unit ( h = ic)

7.5 $/pair-year

Preparing production cost (A) 55$/order

Demand = D 300 000 pairs/year

Production rate = P 312000 pairs/year


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Hence, ZebraHence, Zebra Shoes must produce 10695 pairs in 13Shoes must produce 10695 pairs in 13

daysdays approximately to meet customer demands timely.approximately to meet customer demands timely.


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Optimizing Inventory Levels: EOQ Model


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Assumptions: Constant and uniform demand

Objective: EPQ analysis to determine the optimal quantities of shoes that Zebra

Shoes must produce in order to satisfy the demand.

Polyvinyl chloride

Unitary cost = C = 10700 $/ton ; Demand = D = 18 ton/year

Annual cost for maintaining inventory = i = 5% per yearAnnual cost for maintaining inventory per unit = h = ic = 535 $/ton-yearCost per order = A = 500 $/order

Optimalquantities ofraw materials toorder

Hence, Zebra ShoesHence, Zebra Shoes should purchase 5.8 ton of PVCshould purchase 5.8 ton of PVC

ev

ery 114ev

ery 114 days.days.


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Fabric

Unitary cost = C = 30 $/m2Annual cost for maintaining inventory = i = 5% per yearAnnual cost for maintaining inventory per unit = h = ic = 1.5 $/m2-yearCost per order = A = 150 $/orderDemand = D = 19200 m2/year

Hence, Zebra ShoesHence, Zebra Shoes shouldshould purchase purchase 1959 m2 of fabric1959 m2 of fabric

every 37every 37 days.days.


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Shoelaces boxes

Unitary cost = C = 37 $/boxAnnual cost for maintaining inventory = i = 1% per yearAnnual cost for maintaining inventory per unit = h = ic = 0.37 $/box-yearCost per order = A = 5 $/orderDemand = D = 1092 box/year

Hence, Zebra ShoesHence, Zebra Shoes shouldshould purchasepurchase 172 boxes of172 boxes of

shoelaces every 54 days.shoelaces every 54 days.


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Iron holes

Unitary cost = C = 0.3 $/ pieceAnnual cost for maintaining inventory = i = 1% per yearAnnual cost for maintaining inventory per unit = h = ic = 0.003 $/piece-yearCost per order = A = 5 $/orderDemand = D = 1560 000 pieces/year

Hence, Zebra ShoesHence, Zebra Shoes shouldshould purchasepurchase 72111 iron holes72111 iron holes

every 17 days.every 17 days.


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Optimizing Inventory Big Problem


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What is a Demand Pull Replenishment

System?

This is a system where processes are based on demand, the production

processes are designed to produce only what is deliverable and the

business becomes leaner.

So, the communication of demand is in the form of daily consumer

purchases and this demand data drives replenishment and production.

It concentrates on the speed of replenishment and ordering smaller

batches more frequently.


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So how does this system help?

Improves flexibility to respond tocustomer demand

Empower employees to produce on

customer demand

Improve production scheduling

Simplify the procurement process

Eliminate overproduction

Reduce inventory for finishedgoods, raw material and subassemblies


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Case of VF Corporation

VF corporation is a leader in branded lifestyle apparel which includes jeanswear, outdoor products, sportswear etc.

It is a global powerhouse with its presence in more than 150 countries through

47,000 retailers.

Sourcing and manufacturing are managed through a global supply chainorganisation

It has a simple strategy to continuously strengthen brands and products toimprove their competitive position and financial performance.

VFC had annual sales of 7 billion with billion in annual net profit. Six billionof the annual sales are to Retail Partners and 1 billion comes from Big Brandsown retail stores.


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About VFC Manufacturing Strategy

To remain competitive, manufacturing

moved to third world countries to take

advantage of low cost labor.

Manufacturing lead time is between 2

and 4 months and transportation lead

time is between 4 and 6 weeks.

Today Big Brand orders inventory 5

to 9 months before the inventory is

introduced

to the public.


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VF Corporation & associated brands


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Approach to a Better Inventory

Management

First Phase Roll Out

-Got daily point of saledata

-Monitored inventorybuffers for all SKUs in

each store every day

RESULTS

Many fewer storeshortages

Less surpluses too

Sales went up and

discounting wascurtailed


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Lead Time

(LT) 7 Days

Days of Week

Demand During LT

1 2 3 4 5 6 7

A

ctualDemand

Calculation

Week 1 5 4 2 6 7 1 3 28

Week 2 5 3 4 7 6 2 4 31

Week 3 7 11 4 8 4 4 5 43

Week 4 7 11 5 8 10 6 2 49

Week 5 6 8 6 7 10 12 5 54

Average Demand in LT (Average of the Numbers in Weeks 1-5) 41

Demand Variability (Standard Deviation of Numbers in Weeks 1-5)Note:Assume that the demand is Normally Distributed over the time period 11.24722188

Calculation of Inventory to Stock

Scenario 1 Scenario 2 Scenario 3

Customer Service Level 0.95 0.97 0.99

Z-Score (Service Level Factor 1.65 1.88 2.33

Safety Stock (Demand Variability*Z-Score 18.50 21.16 26.16

Rounding Off 19 21 26

Total Inventory (Average Demand in LT + Safety Stock 59.50168 62.156024 67.161038


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Second Phase Roll Out

Picking a central DC for the retail stores

BENEFITS

A better picture was seen of what should be replenished from manufacturing. Costs incurred transferring inventory between locations were reduced Replenishment was reduced

More inventory was held at the DC and less at the store level Overall inventory dropped inventory turns increased Merchandisers had the ability to increase supply to areas that were selling and restrict replenishment where sales were slow or non existent Better availability allowed sales to rise


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Lets see the Real Results


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Results: Facts & Figures

Same store sales doubled.

Inventory levels were of what was typical.

Inventory shortages were reduced to 1.5% which is 20 times less than

the beginning benchmark.

The initial rollout alone resulted in a 4 million profit increase.

Net profits increased to 30% of sales, a level previously regarded as

impossible.


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OM Final Ppt_Inventory Control

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