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Inventory Case Essay

3779 words - 15 pages

McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 2
Inventory Management and Risk Pooling
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
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
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

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
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
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
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
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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