inventory in supply chain process

◦ This presentation is just a compilation of details

expressed by experts in the field and compilation

of details from the web / Google Search / Network.

◦ This presentation is just to re-fresh, Supply Chain

Fraternity on this subject (inventory)

In the Western World Inventory is always seen as

Asset

Inventory was considered as hedge against

uncertainties.

To make up for wrong forecasts, set up times,

machine breakdowns or quality problems, inventory

was considered “JUST- IN- CASE” inventory.

◦ Nations food reserve

◦ Water reservoirs (dams / lakes / river)

◦ Nations defense forces (fighter planes, warships, army)

◦ Nations natural resources (minerals etc.,)

◦ Finished Goods, To meet customer demand

◦ Competitive environment, Powerful business promotion tool

(if controlled and monitored)

◦ Inventory is life-blood of any supply chain

In Japan inventory is seen as liability

Just in Time – philosophy considered - inventory as

an excuse for bad management performance

Inventory Carrying Cost of Inventory is highly

influencing factor in business profitability.

Inventory Carrying Cost include

◦ Employee Cost

◦ Opportunity Cost

◦ Cost of Capital

◦ Risk of obsolescence

Although the Japanese approach has merit, it is still believed that inventories are inevitable. Listening to the “Just-in-Time” proponents, one might get that impression that business can run without inventory. However this is not true. Only under hypothetical conditions where every production facility in a supply chain has an infinite production capacity, can supply chain work without inventory. Otherwise one always needs Finished Goods Inventory, one will always carry Work-in-Process, and one will need Raw Material inventories. Businesses, which demand Just-in-Time deliveries from their suppliers, tend to forget that these suppliers usually need some inventory to react to the customers’ demand. Although collaborative planning can reduce inventory levels considerably throughout the supply chain, inflexibility in production capacity (capacity constraints) will result in certain inventories. So in general that production environments cannot operate without stock

Nature◦ Seasonal◦ Geographical

Non unit flow◦ Various process with varied process time

High Volume Productions with intensive automation Conflicting objectives even within a single firm

◦ Marketing/Sales wants: more FGI inventory, fast delivery, many package types, special wishes/promotions

◦ Production wants: bigger batch size, depots at factory, latest ship date, decrease changeovers, stable production plan

◦ Distribution wants: full truckload, low depot costs, low distribution costs, small # of SKUs, stable distribution plan

Sun light available in Day

Dams / Water Reservoir gets filled up during Rain

Season

Demand for wool cloth in Winter

Cotton grown in Egypt

Coffee grown in Brazil

Bauxites (aluminium ore) available in Brazil, Russia,

Australia and India

Lead available in China & Australia

Diamonds available in Africa

In Engineering Industries various processes are with varied process time. Heat Treatment and Surface finishing process such as painting / plating / anodizing requires bulk quantities.

Even various machining process like milling, turning, grinding etc., are with different cycle time of manufacturing.

Natural Gases / Petroleum Products can be transported in bulk containers

Lead Mine Production in Europe – 200MT Lead Metal Production in Europe – 1500MT

There is a gap of 1300MT, which need to be procured from rest of the world in varying lots.

High Inventory Leads to

•Risk of obsolescence•deterioration

•Theft•Occupying more storage space

•Poor turn over ratio

Hence, having optimum stock level is important.

Stocks in the form of raw materials and finished goods often represent a significant investment.

The business needs enough stocks to satisfy customer demands in terms of volume, range and delivery lead times.

High stock levels increase the risk of

Obsolescence

Deterioration

& Theft• Hence business should aim for high stock

turnover with systematic ordering in line with economic batch quantities.

Good Stock Control minimizes the risk either holding too much or too low of stocks

ABC Analysis / Paretto Analysis Standardization Uniform Codification – popularly used for on-line sales Multi Echelon Inventory JIT / Kanban Product Mix Networking / Better Communication Serviceability (Repairs) Logistics Solutions

Developed by Mr.Vilfredo Pareto, Italian Economist Vital Few, Trivial Many Classic way of giving importance to High

Value (in terms of consumption) and thus

controlling inventory levels.

Reduction in varieties Better availability Serviceability Reduced cost of procurement Shorter Lead time Less Inventory

To have delivery centre close to the customer Avoid / Manage “Bull Whip” effect To look at inventory as whole instead of looking

individually at every delivery centre

Demand flow

Supplier Manufacturer RetailerDistributor

Product flow

Timely, accurate information flow

Supplier Manufacture Distributor Retainer

Smooth, continual product flow matched to demand

Kanban: A Japanese term. The actual term means "signal".

It is one of the primary tools of JIT system.

It signals a cycle of replenishment for production and materials.

It maintains an orderly and efficient flow of materials

throughout the entire manufacturing process.

It is usually a printed card that contains specific information

such as part name, description, quantity, etc.

Japanese philosophy – “JUST IN TIME” Inventory

Having right product mix will ensure inventory levels at controllable levels.

Today with on-line sales through various platforms important to uniform codes / part numbers for the products to monitor stock levels.

An important element that cannot be ignored to-day. Entering into 4th industrial revolution, Digitalization

and Communication Networking highly Essential Information technology and ERP Systems should be

used extensively so that stock at different places are exchanged and utilized.

Providing good service (minor repairs) / providing knowledge on right use of products will reduce panic with customer and thus reduces warranty replacements.

With increased on-line sales products need to be installed through service centers in a short period to avoid returns.

Shorter Lead time by Logistics provides customer confidence on getting materials on right time.

This avoids extra ordering / canceling.

Right selection of freight carrier is an important exercise.

Between the countries and within the country Natural Gas / LPG pipe lines are laid for continuous flow of materials and with lesser cost (Initial investment is high).

Measuring Inventory levels can be compared to measuring the blood pressure of a supply chain.

Inventory is measured in standard measurable units

◦ Reservoir Level – 100 feet / 30 Metres◦ Food Stock - Wheat – 50 million tons◦ ABC India Stock – Rs.150 million

• Inventory Turnover: how often the company replenishes inventory. High value of inventory turnover means that the inventory was not sitting around a long time.

• Weeks of Supply: how many weeks worth of inventory does the company have on hand. High value of weeks of supply means that the firm has a lot of inventory sitting around.

Inventory is evaluated by its consumption value

◦ Reservoir will provide water for 15 days / for 10 million hectare land

◦ Food reserve sufficient for 9 months / 1mn persons◦ ABC India inventory will take care of 2 months

invoice value.

What it is:

This ratio tells how often a business' inventory turns over during the course of the year. Because inventories are the least liquid form of asset, a high inventory turnover ratio is generally positive. On the other hand, an unusually high ratio compared to the average for your industry could mean a business is losing sales because of inadequate stock on hand.

When to use it:If your business has significant assets tied up in inventory, tracking your turnover is critical to successful financial planning. If inventory is turning too slowly, it could indicate that it may be hampering your cash flow. Because this ratio judges annual inventory turns, it is usually conducted once a year.

The formula: Cost of goods sold divided by the average value of inventory.

Raw Material Stores inventory is expressed as DOC (Days Of Consumption for production)

Stores Inventory = Stock Value on a given date / Stock Value required for making one day production

Finished Products Stores inventory is expressed as DOS (Days Of Sales)

Finished Products Stores Inventory = Stock Value on a given date / Sales (Invoices Value) Value Per Day.

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