Inventory Management - minimize but never run out

JWI 550 Operations Management, week8 summary, 3/2/13

It was a pleasure to read the LL Bean case and the UV case study on managing inventories. My spouse and I went to Maine as part of our honeymoon several years ago and stopped by the LL Bean store en route to Bar Harbor. To our pleasant surprise we discovered this store is open 24 hours a day 365 days a year. It was the first time we learned of a 24x7 operation and it came across as a paradigm shift. I bought the LL Bean biography book at this store and learned what it took to build this business. So reading more about LL Bean through the case brought pleasant memories.

While the LL Bean case made up think about inventory management questions, the UV case came in with a structured framework to tackle the uncertainty in demand. Together, learning from these two cases equips us with a powerful tool to make informed inventory management decisions.

this was yet another memorable week of learning.
Dr DP

JWI 550 Operations Management, week8 summary,3/2/13

I. L.L. Bean Case (Schleifer, 1992)
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Inventory management objectives are:
Marketing view - never run out of supplies; max out customer service
Finance view - minimize inventory

There is uncertainty in Demand
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(i) Customer behavior affects demand (unpredictable)
- runaway hit and demand (customers turned away)
- far exceed demand forecasts
- new trend begins
- dog item sells below expectations
- Customer demands specific items
will walk out if not there (understocking risk)
will cancel order over mail/phone
- Customer willing to substitute demand
Customer visiting a store - supply of different items generates demand

Leads to two types of risk: Cost of Lost sales vs Cost of wrong inventory
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forecasting vs liquidating risk
tough to accurately match demand and supply
forecast errors - f (competition, weather, economy)

Key inventory strategy questions are
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What is the appropriate order quantity ?
Replenishment rate of items consumed ?
Order more than needed to get volume discount?
large lot size to lower cost ?
raw materials
Smaller lot size - shorter lead time, better customer service
time to change-over from production of one product to another - reduce lead time

II. Managing Inventories: Fundamentals (UV Case, 2009)
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(i) Inventory types by function are:
Pipeline, Cycle lot size, Buffer, Anticipation, Speculation

1. Cycle stock inventories: to allow batching of purchased or manufactured goods
It is the average inventory carried between reordering cycles
Key decision: Lot size vs forecast usage units per week

2. Pipeline inventories: to provide for transit of inventory
It is the inventory moving from one point to another
Key decision: minimize transit times eg. flight shipment instead of ground transport

3. Safety stock inventories: to protect against uncertainties in supply or demand

4. Seasonal inventories: to smooth a mismatch between demand and supply
Build seasonal inventory in anticipation of large demands in specific months
Alter production workforce during year to match seasonal low to high swings in demand
f(seasonal demands, promos, plant vacations, planned shut downs)

5. Speculation inventories: to deal with special buying circumstances

(ii) Right inventory choice involves costs and tradeoffs among various factors
Use ABC inventory classification by value of product to firm and the 80/20 Pareto principle
Manage A items more closely than other classes

Inventory choices must provide economic benefits significantly greater than carrying costs:
capital costs - interest tied up in inventory
possession costs - insurance, property taxes, spoilage, deterioration, pilferage, warehouse labor and info record keeping
facility costs - property taxes, insurance, rental fees, maintenance, equipment and labor