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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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