Balance Score Card

Inventory Control & Balanced Score Card for Store Operations

To Integrate the food distribution system by integrating the procurement and distribution system

Inventory & inventory system • Inventory is the set of items that an organization holds for later use by the organization. An inventory system is a set of policies that monitors and controls inventory. It determines how much of each item should be kept, when low items should be replenished, and how many items should be ordered or made when replenishment is needed.

Basic types of inventory • independent demand, • dependent demand, and • supplies.

Independent Demand • Independent demand items are those items that we sell to customers. • Dependent demand items are those items whose demand is determined by other items. Demand for a car translates into demand for four tires, one engine, one transmission, and so on. The items used in the production of that car (the independent demand item) are the dependent demand items. • Supplies are items such as copier paper, cleaning materials, and pens that are not used directly in the production of independent demand items

WHY INVENTORIES ARE NEEDED • To maintain independence of operations • To meet variations in demand • To allow production schedule flexibility • To provide a safeguard for variations in raw materials deliveries • To take advantage of economic purchase order size

INVENTORY COSTS YOU • Holding or carrying costs • Ordering costs • Shortage and/or wrong inventory costs

• INVENTORY MODELS – Independent versus Dependent Demand – Holding, Ordering, and Setup Costs

• INVENTORY MODELS FOR INDEPENDENT DEMAND – Basic Economic Order Quantity (EOQ) Model – Minimizing Costs – Reorder Points

CAN YOU …. Identify or Define: – Record accuracy – Cycle counting – Independent and dependent demand – Holding, Ordering, and Setup Costs

Describe or Explain: – The functions of inventory and basic inventory models

What is Inventory? • Stock of materials • Stored capacity • Examples

The Functions of Inventory • To provide a stock of goods that will provide a “selection” for customers • To take advantage of quantity discounts • To hedge against inflation and upward price changes

Types of Inventory • • • •

Raw material Work-in-progress Maintenance/repair/operating supply Finished goods

Disadvantages of Inventory • Higher costs – Item cost (if purchased) – Ordering (or setup) cost • Costs of forms, clerks’ wages etc.

– Holding (or carrying) cost • Building lease, insurance, taxes etc.

• Difficult to control • Hides production problems

Cycle Counting • Physically counting a sample of total inventory on a regular basis

Advantages of Cycle Counting • Eliminates annual inventory adjustments • Provides trained personnel to audit the accuracy of inventory • Allows the cause of errors to be identified and remedial action to be taken • Maintains accurate inventory records

Techniques for Controlling Service Inventory Include: • Good personnel selection, training, and discipline • Tight control of incoming shipments • Effective control of all goods leaving the facility

Independent versus Dependent Demand • Independent demand - demand for item is independent of demand for any other item • Dependent demand - demand for item is dependent upon the demand for some other item

Inventory Costs • Holding costs - associated with holding or “carrying” inventory over time • Ordering costs - associated with costs of placing order and receiving goods • Setup costs - cost to prepare a machine or process for manufacturing an order

Holding (Carrying) Costs • • • • • • • •

Obsolescence Insurance Extra staffing Interest Pilferage Damage Warehousing Etc.

Ordering Costs • • • • •

Supplies Forms Order processing Clerical support Etc.

Setup Costs • • • •

Clean-up costs Re-tooling costs Adjustment costs Etc.

Inventory Models • Fixed order-quantity models – Economic order quantity – Production order quantity – Quantity discount

• Probabilistic models • Fixed order-period models

EOQ Assumptions • • • • •

Known and constant demand Known and constant lead time Instantaneous receipt of material No quantity discounts Only order (setup) cost and holding cost • No stockouts

Inventory Usage Over Time

Inventory Level

Order quantity =Q (maximum inventory level)

Minimum inventory 0

Usage Rate

Average Inventory (Q*/2)

Time

EOQ Model How Much to Order? Annual Cost

Minimu m total cost

ve r u tC s o ve r C l u a C t Tot s Co g in d l Ho

Order (Setup) Cost Curve Optimal Order Quantity (Q*)

Order quantity

Why Holding Costs Increase • More units must be stored if more are ordered

Purchase Order Descriptio Qty. n Microwave 1

Order quantity

Purchase Order Descriptio Qty. n Microwave 1000

Order quantity

Deriving an EOQ 1. Develop an expression for setup or ordering costs 2. Develop an expression for holding cost 3. Set setup cost equal to holding cost 4. Solve the resulting equation for the best order quantity

EOQ Model When To Order Inventory Level

Average Inventory (Q*/2)

Optimal Order Quantit y (Q*) Reorder Point (ROP)

Time

Lead Time

EOQ Model Equations

Optimal Order Quantity= Q* = 2×D×S

H

Expected Number of Orders =N =

D Q*

Working Days /Year xpected Time Between Orders=T =

N

d=

D

Working Days /Year

ROP = d ×L

D = Demand per year S = Setup (order) cost per order H = Holding (carrying) cost d = Demand per day L = Lead time in days

The Reorder Point (ROP) Curve Inventory level (units)

Q*

Slope = units/day =d

ROP (Units )

Lead time = L

Time (days)

Production Order Quantity Model

• Answers how much to order and when to order • Allows partial receipt of material – Other EOQ assumptions apply

• Suited for production environment – Material produced, used immediately – Provides production lot size

• Lower holding cost than EOQ model

Quantity Discount Model • Answers how much to order & when to order • Allows quantity discounts – Reduced price when item is purchased in larger quantities – Other EOQ assumptions apply

• Trade-off is between lower price & increased holding cost

Probabilistic Models • Answer how much & when to order • Allow demand to vary – Follows normal distribution – Other EOQ assumptions apply

• Consider service level & safety stock – Service level = 1 - Probability of stockout – Higher service level means more safety stock • More safety stock means higher ROP

Probabilistic Models When to Order? Inventory Level

Frequen cy

Optimal Order Quantit y Reorder Point (ROP)

Service Level

P(Stockout)

SS

X

ROP

Safety Stock (SS) Place order

Lead Time

Receive order

Time

Fixed Period Model • Answers how much to order • Orders placed at fixed intervals – Inventory brought up to target amount – Amount ordered varies

• No continuous inventory count – Possibility of stockout between intervals

• Useful when vendors visit routinely – Example: P&G representative calls every 2 weeks

The Balanced Scorecard The scorecard measures an organization’s performance from four perspectives: 1. Financial 2. Customer 3. Internal business processes 4. Learning and growth

Perspectives of Performance 1. Financial 2. Customer 3. Internal business process 4. Learning and growth

Aligning the Balanced Scorecard to Strategy Different strategies call for different scorecards. What are some of the financial perspective measures? Operating income Revenue growth Cost reduction is some areas Return on investment

Aligning the Balanced Scorecard to Strategy What are some of the customer perspective measures? Market share Customer satisfaction Customer retention percentage Time taken to fulfill customers requests

Aligning the Balanced Scorecard to Strategy What are some of the internal business perspective measures? Innovation Process: Manufacturing capabilities Number of new products or services New product development time Number of new patents

Aligning the Balanced Scorecard to Strategy Operations Process: Yield Defect rates Time taken to deliver product to customers Percentage of on-time delivery Setup time Manufacturing downtime

Aligning the Balanced Scorecard to Strategy Post-sales service: Time taken to replace or repair defective products Hours of customer training for using the product

Aligning the Balanced Scorecard to Strategy What are some of the learning and growth perspective measures? Employee education and skill level Employee satisfaction scores Employee turnover rates Information system availability Percentage of processes with advanced controls

Pitfalls When Implementing a Balanced Scorecard What pitfalls should be avoided when implementing a balanced scorecard? 1. Don’t assume the cause-and-effect linkages to be precise. 2. Don’t seek improvements across all measures all the time. 3. Don’t use only objective measures on the scorecard.

Pitfalls When Implementing a Balanced Scorecard 4. Don’t fail to consider both costs and benefits of initiatives such as spending on information technology and research and development.

5. Don’t ignore nonfinancial measures when evaluating managers and employees. 6. Don’t use too many measures.

Financial perspective – includes measures such as operating income, return on capital employed and economic value added Customer perspective – includes measures such as customer satisfaction, customer retention and market share in target segments Business process perspective – includes measures such as cost, throughput and quality. These are for business processes such as procurement, production and order fulfillment. Learning & growth perspective – includes measures such as employee satisfaction, employee retention, skill sets, etc. Objectives – major objectives to be achieved for example , profitable growth Measures – the observable parameters that will be used to measure progress towards reaching the objective. For example, the objective of profitable growth might be measured by growth in net margin Targets – the specific target values for the measures, for example, +2% growth in net margin Initiatives – action programs to be initiated in order to meet the objective

Theses can be organized for each perspective in a table as below:

Financial Customer Process Learning

Objectiv es

Measure Targets s

Initiativ es