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 customers 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 or o o o Data points < 30? Use o Data points > 30? Use

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 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

o Lead Time Deviation Forecast frequency upon with standard deviation is based the items lead time 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
*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 valuesome 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 Plant/Warehouse production time shutdown for inventory Timely No correction of error detection/correction of causes error causes Systematic improvement One-time improvement of accuracy of accuracy Inventory Objectives Maximize Customer Service Minimize Plant Costs Minimize Aggregate Investment Efficient Operations