Inventory Case Essay

3779 words - 15 pages

1
McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 2
Inventory Management and Risk Pooling
2-2
CASE: Steel Works
z Background of case and intent z Overview of business z What does data tell you about Specialty? z How much inventory might you expect? z What opportunities are there for Custom? z Wrap up
Stephen C. Graves Copyright 2003 All Rights Reserved
2-3
Background & Intent
z Abstraction from summer consulting job z Intent is to examine a realistic, but
simplified inventory context and perform a diagnosis of problem - poor service and too much inventory
Stephen C. Graves Copyright 2003 All Rights Reserved 2-4
Custom Products
z Rapid growth, 1/3 of total sales ($133 MM) z One customer per product z Very high margins z High service level z 3 plants, co-located with R&D center z Each product produced at a single plant
Stephen C. Graves Copyright 2003 All Rights Reserved
2-5
Specialty Products
z Rapid growth, 2/3 of total sales ($267 MM) z 6 product families z 3 plants, each producing 2 product families z 130 customers, 120 products z Few big customers z Highly volatile demand z High service level
Stephen C. Graves Copyright 2003 All Rights Reserved 2-6
Consultant Recommendation
z Drop low volume products z Improve forecasts z Consolidate warehouses
Stephen C. Graves Copyright 2003 All Rights Reserved

2
2-7
What Does Data Tell You?
1.2945.935.5DF R23 1.468055DF R15 0.6211.418.5DF R12 0.9592.597DF R10 0.204942464DB R15 0.252561008DB R12 0.8513.215.5DB R10
cvσμ
Stephen C. Graves Copyright 2003 All Rights Reserved 2-8
What Does Data Tell You?
z Durabend R12: z One customer accounts for 97% of demand
z 7 products: z High volume (2) is not very volatile z Low volume (5) is very volatile
Stephen C. Graves Copyright 2003 All Rights Reserved
2-9
How Much Inventory Should You Expect?
z Assume base stock model with periodic review
z Review period = r = ? z Lead time = L = ?
[ ] 2
E I r z r Lμ σ= + +
Stephen C. Graves Copyright 2003 All Rights Reserved 2-10
38243834198618486 190110921845.935.5DF R23
388188160288055DF R15
553223911.418.5DF R12
6042341854992.597DF R10
1875222299012324942464DB R15
74010145105042561008DB R12
723426813.215.5DB R10
Act. Inv.
E[I]Saf. stock
Cycle stock
σμ
Assumes r = 1; L=0.25; and z = 1.8
Cycle stock = r μ/2 Safety stock = z σ √r+L Stephen C. Graves Copyright 2003
All Rights Reserved
2-11
What Are the Opportunities at Custom?
z Combine production and inventory for common items, e. g. DF R23
z Produce monthly: reduce setups by half and pool safety stocks
z Produce twice a month: same number of setups but cut cycle stock and review period in half
Stephen C. Graves Copyright 2003 All Rights Reserved 2-12
Wrap Up
z Realistic diagnostic exercise z In real life: not as clean, more data and
more considerations z Yet simple models and principles can
provide valuable guidance
Stephen C. Graves Copyright 2003 All Rights Reserved

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