HOC 3 Inventory management and Capacity planning

VUB Mobilise

Analyzing Sustainability: Focuses on mobilizing resources and engaging people within the context of sustainable practices. Emphasizes the importance of sustainability in operational strategy and how community involvement can enhance these practices, highlighting case studies of successful implementation in local communities.

Supply Chain Management: The core subject matter of the lecture, emphasizing strategic approaches to logistics in sustainability. Highlights contemporary issues in supply chain practices that impact environmental and social factors, including ethical sourcing, sustainable transportation methods, and the role of technology in enhancing transparency.

Lecture Details:

• Date: February 24/28, 2025

• Instructor: Prof. dr. Nicolas Brusselaers

Inventory Management

• Page 2: Introduction to Inventory Management at VUB, covering essential practices and theories relevant to inventory handling in sustainable supply chains, including the significance of accurate data tracking and forecasting.

Product Design Processes

• Page 3: Characteristics of the production process and design strategies that are vital in determining inventory types. Discusses eco-design principles that reduce waste and improve lifecycle management of products, encouraging the use of sustainable materials and innovative design techniques.

Inventory Strategies

Make-to-Stock Strategy

• Definition: Produces standardized products for immediate sale, enabling quicker customer response times.

• Functionality: Utilizes storage areas (buffers) to ensure different stages of the production process can operate independently, enhancing production efficiency and minimizing bottlenecks.

• Considerations: Balancing holding costs and demand forecasting is crucial to minimize waste and optimize profits.

Assemble-to-Order Strategy

• Definition: Standard components are combined based on customer specifications, allowing for customization without the need for excessive inventory.

• Challenge: Must maintain a work-in-progress inventory to prevent bottlenecks in assembly, necessitating careful monitoring of component availability and assembly line efficiency.

Make-to-Order Strategy

• Definition: Tailors products specifically to customer orders produced after receipt, offering high flexibility and personalization options for the consumer.

• Example: The pizza production process is outlined in detail, demonstrating a flow from ingredient preparation to final delivery, emphasizing quick turnaround times and customization.

Types of Inventory

1. Raw Materials: Essential materials purchased for transformation into finished goods, often sourced with sustainability in mind, highlighting the importance of responsible sourcing and supplier certifications.

2. Components: Parts utilized within final products, which should be environmentally friendly and ethically sourced wherever possible, fostering a sustainable supply chain.

3. Work-in-Process (WIP): Unfinished products that remain in the manufacturing process, requiring effective management techniques to ensure a smooth production flow and reduce lead time.

4. Finished Goods: Products ready for sale; managing these efficiently helps to reduce waste and optimize storage costs, incorporating just-in-time principles.

5. Distribution Inventory: Finished goods within the distribution system; implementing green logistics can enhance sustainability by minimizing carbon footprints during transport.

6. Maintenance, Repair, and Operating Inventory: Supplies used in production that do not become part of the final product, crucial for operational efficiency and must be managed to reduce downtime.

Inventory Purposes

1. Anticipation Inventory: Built to meet future demand fluctuations, essential for maintaining service levels during peak periods while factoring in seasonal demand variations.

2. Fluctuation Inventory: Acts as safety stock to navigate demand variability and ensure continuity of supply in uncertain markets.

3. Lot-size Inventory: Results from actual order/purchase quantities to optimize unit costs, while carefully balancing purchase frequency and holding costs.

4. Transportation Inventory: Items currently in-transit, requiring detailed tracking and efficient route planning to minimize costs and ensure timely delivery.

5. Speculative Inventory: Stock held to guard against future uncertainties (e.g., price increases or supply chain disruptions), implying a strategic risk management approach.

Inventory Management Objectives

• Achieve a desired customer service level that meets market expectations, enhancing overall customer satisfaction and brand loyalty.

• Ensure cost-effective operations through lean management principles, focusing on efficiency and waste reduction through better resource allocation.

• Minimize inventory-related investments to free capital for other operational needs, emphasizing the need for accurate forecasting and demand planning.

• Function Metrics: Performance measured by the percentage of orders shipped as scheduled, tracking idle times due to shortages to improve reliability and responsiveness in the supply chain.

Costs Associated with Inventory Management

• Item Costs: Comprised of purchase prices plus associated handling expenses, necessitating careful sourcing and supplier relationship management to maintain cost-effectiveness.

• Holding Costs: Ongoing expenses related to the storage of inventory, emphasizing the importance of just-in-time methodologies to minimize excess stock and reduce waste.

• Ordering Costs: Fixed costs incurred per order, requiring strategic ordering practices to enhance cost efficiency and prevent stockouts.

• Shortage Costs: Costs that arise due to unmet demand, negatively impacting customer satisfaction and potential future sales, necessitating proactive inventory management to mitigate risks.

ABC Classification

• Purpose: Aids in determining inventory control levels based on dollar volume in line with Pareto’s Law (80/20 principle), allowing for targeted inventory management efforts and resource allocation.

• Categories:

  • A Items: High value, requiring frequent review and tighter control to maintain optimal inventory levels.

  • B Items: Medium value, periodically reviewed to balance costs and service levels effectively.

  • C Items: Low value, reviewed less frequently, focusing management resources on higher-impact items to streamline operations.

Economic Order Quantity (EOQ)

• Objective: Aims to minimize total costs by calculating the optimal order quantity that balances ordering and holding costs, which is critical for efficient supply chain management.

• Assumptions: Consistent demand and lead time, fixed ordering and holding costs, with no backorders allowed, ensuring a predictable inventory management framework.

Practical Examples

• Coach Motor Home Company: Illustrates effective calculation of inventory turnover and weeks of supply based on sales figures and average inventory, demonstrating real-world application of theoretical concepts in the industry and providing lessons on best practices.

Economic Production Quantity (EPQ)

• Difference from EOQ: Understood as inventory being replenished gradually rather than all at once, facilitating immediate usage of production quantities and optimizing operational workflows.

• Conditions: Requires that the production rate exceeds the depletion rate, optimizing inventory turnover and ensuring sufficient stock availability.

Quantity Discount Models**

• Procedure: Involves evaluating total costs based on supplier quantity breaks, allowing firms to determine the most cost-effective ordering size through data analysis and comparison of cost versus inventory turnover.

Demand Uncertainty and Safety Stock

• Strategies: Implementing safety stock levels when uncertainty exists in demand to manage service levels effectively and mitigate risks of stockouts, using predictive analytics to gauge fluctuations.

Capacity Planning**

• Definitions: Involves establishing maximum output rates with close coordination of strategic and tactical resource planning, aligning workforce capabilities with production needs.

Measuring Capacity**

• Focus Areas: Examines input versus output measures affecting calculations and evaluations, ensuring that capacity meets operational goals while maximizing efficiency and minimizing downtimes.

Decision Trees in Capacity Planning**

• Purpose: Evaluate potential capacity expansions versus maintaining current capacity based on estimated profits and possible losses, utilizing decision trees as visual aids for analyzing various scenarios for informed decision-making.