Chapter 10

Chapter 10
Inventory

Chapter Overview

Chapter 10 provides an exploration of inventory, the first of five resource groups used to create value. Inventory is an interesting place to start because it can play a dual role in a business. It is clearly an asset that has value. It provides the company with the ability to decouple itself from direct dependencies on suppliers and provides customers with immediate gratification. However, in excess inventory can play a very destructive role. Too much inventory adds to response time, inhibits flexibility, increases costs, and reduces levels of quality. The management of inventory levels is a difficult balancing act that can have a profound impact on business success.

Chapter Resources

Esources
Esource 10.1	UPS provides the largest delivery system in the world and is used by every type of company imaginable to transport goods to customers. Its success is due in large part to speed and dependability, both of which provide improved customer service, reduce the cash-to-cash cycle, and reduce levels of pipeline inventory. UPS provides a concise description of how online technology contributes to its capabilities at its web site.
Esource 10.2	Crisplant is a provider of sorting machines and systems used when high volumes of inventory must be sorted to meet customer orders. Examples of applications include distribution centers, shipping services, and airport luggage handling.
Esource 10.3	Material Requirements Planning has become a foundation for good inventory management practices in manufacturing. MRP software providers abound. Two typical examples of MRP providers are Enhanced Systems and Services, Inc. and Concept Computer Systems.

Reel Operations Streaming Video
Reel Operations 10.1	In addition to the inventory we typically think of as being critical for manufacturers, many must also manage inventories of repair parts for products in the field. In Management of Manufacturing and Service Parts Inventory, Navistar provides and example of how dependent and independent inventories are managed.

Interactive Models
Interactive Model 10.1	The Reorder Point Interactive Model The Reorder Point Interactive Model provides an interactive environment for examining the impact that service level, demand variability, and replenishment lead time have on the reorder point.
Interactive Model 10.2	Economic Order Quantity Interactive Model The Economic Order Quantity Interactive Model provides an interactive experience for examining the EOQ formula. By changing H, D, or S the user can immediately see the impact on the total cost curve.

Excel Tutors note: network users may see a dialog box requesting "Please enter your authorization information." Just click "cancel" and your browser will automatically load Excel.
Excel Tutor 10.1	Excel Tutor 10.1 Using Excel Spreadsheets for the Days-of-Supply Calculation
Excel Tutor 10.2	Excel Tutor 10.2 Using Excel Spreadsheets for the Reorder Point Calculation
Excel Tutor 10.3	Excel Tutor 10.3 Using Excel Spreadsheets for the Economic Order Point Calculation
Excel Tutor 10.4	Excel Tutor 10.4 Using Excel Spreadsheets for the Quantity Discount Model Calculation
Excel Tutor 10.5	Excel Tutor 10.5 Using Excel Spreadsheets for the Periodic Review Model Calculation
Excel Tutor 10.6	Excel Tutor 10.6 Using Excel Spreadsheets for MRP Logic
Excel Tutor 10.7	Excel Tutor 10.7 Using Excel Spreadsheets for the Dollar Day Calculation

Supplementary Readings
Supplementary Reading 10.1	All businesses desire to minimize inventory levels, but maintain appropriate service levels. Ultimately, the faster inventory moves from one point to the next, the lower the levels at each point in the system. Technology has made it possible to speed up the flow of inventory through closer communication links among suppliers and customers. In How Speed Changes The Game, Midrange Enterprise, 2001, the use of technology is discussed and its impact on inventory levels and inventory accuracy examined.
Supplementary Reading 10.2	If the Shoe Fits (iSource, February, 2002) describes how Nordstrom.com is able to offer 30 million pairs of shoes on line, without drowning in inventory.

Links to Operations On Site Companies
Operations On Site 10.1	Nissan is striving to reduce time associated with customized automobile production.
Operations On Site 10.2	Logistics.com provides logistics services for a broad range of businesses.

OM Exploration

Check it out: Internet Reference Sites
Virtually all product- and service-oriented businesses strive to minimize inventory levels while maintaining acceptable service levels. The following list contains general references for additional investigation into inventory management.
Center for Inventory Management	Inventory Management Links
Big Dog's Inventory Control Page	Logistics World

OM in Action
OM in Action 10 .1	Merlin and Cannondale offer two very different approaches to meeting the needs of mountain bike customers. Explore each site. a. From their web sites, how do you think their business strategies differ? b. What evidence is present to indicate how these differences have resulted in different decisions and management practices regarding inventory?

Online Business Tours

Online Business Tour 10.1

Fox Valley Springs produces a variety of springs used be other manufacturers. In addition to the manufacture of the springs, Fox Valley offers to "manage" the inventory of springs for their customers. Take the brief tour of the Fox Valley Spring Company.
a. Does the "Warehousing and JIT" service offered by Fox Valley result in the reduction of inventory for the customer? What affect would such a practice have on the reduction of inventory in the supply chain?
b. Beyond the inventory reduction issue, what advantages might be gained by a company outsourcing the warehousing of raw materials?

Letters from the Top

Letter from the Top 10.1

FedEx depends on the need for delivery of documents and products quickly and efficiently for it's business. In the CEO's 2001 letter to shareholders, Frederick W. Smith describes five growth strategies that FedEx continues to focus on.
a. How will the success of each of these strategies depend on the increasing tendencies for businesses to reduce inventory and increase response time?
b. As a service supplier in any supply chain, FedEx must add value. How will each of FedEx's strategies affect the value created in the supply chains in which it participates?

Putting It All Together: Virtual Case Studies

Putting It all Together 10.1:

Pipeline inventories are a substantial investment for many businesses. Reduction in delivery times have the immediate effect of reducing pipeline inventory levels. UPS is an enormous supplier of delivery services for businesses that must manage pipeline inventories. As a supplier in the supply chain of any business that utilizes its services, UPS adds value. Page down at the UPS Company History description and read about "How UPS Works". To find out about how technology has contributed to UPS capabilities, read about the various technology-based tools that enable UPS to track deliveries and automate pickup services.

UPS's competitive future may lie in its increasing involvement in providing supply chain management services instead of just delivery services. In The Man Who's Repackaging UPS, Business Week, June 3, 2002 and in UPS Is Constructively Dissatisfied, Business Week, May 13, 2002, we learn what CEO Michael Eskew has in mind.

a. How has UPS embraced the trend in businesses to speed up reaction time, increase flexibility, and reduce inventory? How will this effort continue as UPS becomes more involved in supply chain management?
b. For a business that has been traditionally focusing on U.S. markets, but wishes to expand globally, how could UPS help?

Additional Reading
Additional Reading 10.1	The Marines Learn New Tactics--from Wal-Mart, Business Week, Dec. 24, 2001, describes logistics techniques extended from Wal-Mart to the military.