M5 Assignment: Inventory Management

Instructions

Text Resources for Inventory Models

I suggest that you take a look at the text beginning where the discussion of safety stock begins...this continues into the next few pages to explain how the ROP (the book calls it R - it's the same thing) can be evaluated based on average demand over lead time and the standard deviation of demand. In the text, examples illustrate the application of the safety stock concept based on demand distribution and lead time.

If you look back to the chapter on MRP, you will find additional discussion of EOQ, and the idea of least total cost and least unit cost as dynamic lot sizing techniques. An important distinction to make in applying these concepts in this context is that we are dealing with a buyer-supplier context in other words ETPI is the buyer, and the supplier is a different entity. The batch size is mostly likely a constraint on the supplier size, so ETPI doesnt have complete and direct control over that parameter.

Inventory Models Are Starting Points

All inventory models are starting points for inventory decisions. No single inventory model will incorporate all aspects of costs or other considerations. When we make inventory decisions we often start with independent demand (individual products as given in this assignment), and later take into considerations our overall portfolio of products in inventory.

The EOQ balances two types of cost holding and ordering (or setup). The safety stock calculation probabilistically estimates how much extra to keep on hand to buffer the organization against demand variability. Finally, the batch size is an indication of the producer/distributors (ETPIs supplier) constraints and capacity flexibility. When this assignment asks you to discuss options it is asking for you to consider these different elements of the inventory problem on an individual product basis. This is not a question of finding one optimal answer, but rather discussing relative advantages and disadvantages.

Assignment Scenario

For this assignment the context is the ETPI case from M4. You will calculate the EOQ and reorder point for each of the book types. Lead time for any type of book is 5 weeks. Assume ETPI targets a fill rate of 95%.

Assume the demand data given in the Excel template file Download Excel template fileis normally distributed. The accounting department estimates the average costs for A, B, and C books to be $5.05, $7.39, and $10.25, respectively, for a single copy. It costs 45% per year, per unit, for annual holding costs. The batch size is 3,500 for an A book, 1,000 for a B book, and 500 for a C book. The administrative cost for ordering a batch of a book has been estimated to be $125.

example 11.4 - Order Quantity and Reorder Point OBJECTIVE: This template can be used to calculate different values for an EOQ model. It can also be used for models involving stochastic demand patterns. INPUT: Annual Demand: D/year D 21900 Cost per Unit C $0.00 Holding cost: H (if not given,H = i*C) H $0.50 Ordering Cost S $10.00 Length of year: N(months,weeks,days) N 365 demand per (month,week,day) d 60 Std. Deviation/(month,week,day) d 7 Lead TimeL L(months,weeks,days)) L 6 Lead-time Standard Deviation: L 17.15 Service Level P 95% OUTPUT: Optimal Order Quantity (Qopt) = 936 Safety Factor - z = 1.645 Number of Orders per year = 23 Safety Stock = 28 Reorder Point, R = 388 Annual Inventory Holding Cost = Annual Ordering Cost = Annual Unit Cost = Total Cost = Enter the values for your problem in the blue cells in the INPUT table. The resulting values will be displayed in the OUTPUT table.

Demand Week A Books B Books C Books 1 525 154 75 2 517 147 151 3 562 134 77 4 455 145 78 5 399 108 79 6 526 139 80 7 584 203 81 8 542 154 231 9 511 132 82 10 602 168 233 11 289 177 159 12 602 212 84 13 355 172 160 14 329 154 237 15 535 140 87 16 571 154 163 17 384 147 164 18 641 269 90 19 382 220 90 20 655 253 241 21 581 187 92 22 435 243 243 23 447 232 169 24 399 202 95 25 367 206 171 26 487 273 96 27 579 239 172 28 545 203 248 29 617 219 99 30 364 292 249 31 582 251 175 32 499 289 102 33 568 246 102 34 486 238 103 35 323 286 254 36 623 216 180 37 459 248 255 38 452 326 256 39 728 275 107 40 631 336 183 41 483 315 259 42 619 318 185 43 393 289 186 44 421 359 111 45 636 278 112 46 600 347 113 47 462 299 264 48 683 368 114 49 659 271 265 50 431 346 117 51 501 391 267 52 494 308 118

Context: Other Industries

Inventory policies vary tremendously depending on industry. A retailer managing thousands of SKUs will have a different approach than a manufacturer that delivers a few different products. A retailer with highly perishable inventory (such as a grocery store) will use different inventory models and assumptions than a retailer that stocks home appliances. In practice, fill rates would be selected based on a number of factors specific to the industry, product, and customers. So pharmaceutical finished goods, for example, typically have very high fill rates based on the criticality of the drug and available alternatives.

Questions

1. Using the demand data given in the Excel file, calculate the EOQ, ROP, and safety stock for each book individually and show your work and answers in the designated tab of the template file.
2. Given these calculations, now consider the batch size dictated by the supplier for each book. Taking both your inventory models into account, as well as the batch size, what is your recommendation for each type of book in terms of order quantities, ROP, and safety stock? Explain your logic considering the tradeoffs between batch size and optimal EOQ.
3. What is the total cost of your recommendation? The final total cost answer should reflect all products, on an annual basis, as well as safety stock based on your recommendations for each product. The text explains how total costs are based on average inventory over the year including safety stock.

A set of considerations Download set of considerationsis available for you to review as you complete these questions. You are strongly encouraged to use the information provided in the considerations document to complete this assignment.