BASIC INVENTORY PLANNING AND MANAGEMENT

Shirley Eje Maranan

Decisions regarding the amount of inventory that a company should hold and its location

within a company’s logistics network are crucial in order to meet customer service

requirements and expectations.

REASONS TO HOLD STOCKS• To keep down production costs.• To accommodate variations in demand.• To take account of variable supply lead times.• Buying costs.• To take advantage of quantity discounts.• To account for seasonal fluctuations.• To allow for price fluctuations/speculations.• To help the production and distribution operations run

more smoothly.• To provide customer with immediate service.• To minimize production delays caused by lack of parts.• Work – in – progress.

TYPES OF STOCK HOLDING/INVENTORY

• Raw materials, components and packaging stocks

• In-process stocks• Finished products• Pipeline stocks• General stores• Spare parts

MAJOR CLASSIFICATIONS OF STOCKS

• Working stock• Cycle stock• Safety stock• Speculative stock• Seasonal stock

THE IMPLICATIONS FOR OTHER LOGISTICS FUNCTION

• Number of distribution centers (DC)• Size and operation of DCs• Policy decisions

MAIN PATTERNS THAT AFFECT DISTRIBUTION STRUCTURES

• Direct system – have a centralized inventory from which the customer are supplied directly.

• Echelon systems – involve a flow of products through a series of locations from the point of origin to the final destination.

• Mixed and flexible system – they link together the direct and echelon system for different products, the key element being the demand characteristics of these products.

ELEMENTS OF INVENTORY HOLDING COSTS

• Capital cost – cost of physical stock.• Service cost – cost of stock management and insurance.• Storage cost – cost of space, handling and associated

warehousing with the actual storage of the product. • Risk cost – this occurs as a consequence of pilferage,

deterioration of stock, damage and stock obsolescence.• Reorder cost – cost of actually placing in order with a

company for the product in question.• Set up cost – additional costs that may be incurred if the

goods are produced specifically for a company.• Shortage cost – cost of not satisfying a customer’s order.

INVENTORY REPLENISHMENT SYSTEM

• Low stock levels• High stock levels• Periodic review system

ECONOMIC ORDER QUANTITY

• EOQ• The EOQ method is an attempt to estimate the best

order quantity by balancing the conflicting costs of holding stock and placing replenishment orders.• The effect of order quantity on stock holding costs is

that, the larger the order quantity for a given item, the longer will be the average time in stock and the greater will be the storage costs.

FACTORS INVOLVED IN EOQ

• New product lines• Promotional lines• Test marketing• Basic lines• Range reviews• Centralized buying

• Outstanding orders• Minimum order

quantities• Pallet quantities• Seasonality

DEMAND FORECASTING

• It estimates what the future requirements of a product to meet customer demands as closely as possible.

• It is often said that “all mistakes in forecasting end up as an inventory problem – whether too much or too little!”

FORECASTING APPROACHES

• Judgemental methods – subjective assessments based on experts opinions.

• Causal methods – regression analysis, where a line of “best fit” is statistically derived to identify any correlation of the product demand with other factors (internal/external).

• Projective methods – uses historic demand data to identify any trends in demand and project these into the future.

ELEMENTS OF A DEMAND PATTERN

Good forecasting system

Seasonal allowances

Provide sufficient buffer stock

STEPS IN A METHODICAL APPROACH TO DEMAND FORECASTING

PLAN CHECK CATEGORIZE METRICS CONTROL

INVENTORY AND THESUPPLY CHAIN

PROBLEMS WITH TRADITIONAL APPROACHES TO INVENTORY PLANNING

• Demand is not as predictable as it may once have been.• Lead times are not constant and they can vary for the

same product at different order times.• Cost can be variable.• Production capacity can be at a premium; it may not

always be feasible to supply a given product as and when required.

• Individual products are closely linked to others and need to be supplied with them, so that complete order fulfillment is achieved.

DIFFERENT INVENTORY REQUIREMENTS

Dependent Demand- Demand of a

product is related to another product.- Vertical- Horizontal

Independent Demand- Demand of a

product is not related to the demand of another product.- Consumer

demand

THE LEAD TIME GAP

INVENTORY AND TIME

WAYS TO ACHIEVED LEAD-TIME REDUCTION

• Manage the supply chain as one complete pipeline.

• Use information better.• Achieve better visibility of stock throughout the

supply chain for all participants. • Concentrate on key processes.• Use JIT techniques to speed up the flow of

products through the supply chain.• Use faster transport.• Develop supply chain partnership.

ANALYZING TIME AND INVENTORY

• Supply chain mapping– This technique enables a company to map the

amount of inventory it is holding in terms of length of time that the stock is held.

EXAMPLE OF SC MAPPING

INVENTORY PLANNING FOR MANUFACTURING

• Time compression – planned reduction in manufacturing and work in progress inventory. Typical approaches of time compression are:– the need to take a complete SC perspective in planning;– to need to undertake appropriate analysis;– the identification of unnecessary inventory and steps in

key processes;– working towards customer service requirements;– designing products to be compatible with SCM; and– designing production processes to be compatible with

SCM

TIME-BASED PROCESS MAPPING

THE VIRTUOUS CIRCLE OF TIME COMPRESSION

INVENTORY PLANNING TECHNIQUES FOR RETAILING

• Vendor-managed inventory (VMI) – this is where the manufacturer is given the responsibility for monitoring and controlling inventory levels.

• Continuous replenishment (CRP) – develop free-flowing order fulfillment and delivery system.

• Quick response (QR) – a development of JIT and closely link with the actual demand and retail level.

INVENTORY PLANNING TECHNIQUES FOR RETAILING

• Efficient customer response (ECR) – develop a customer driven system that works with SC through information technology

• Category management (CM) - provide greater support for product and inventory control and management.

• Collaborative planning, forecasting and replenishment (CPFR) - combines multiple trading partners in the planning and fulfillment of customer demands

BASIC TENETS OF ECR

• A heavy use of EDI for exchanging information with suppliers.

• An extremely efficient SC using cross-docking and direct store deliveries.

• The use of sales-based ordering.• Much greater cooperation with suppliers,

using CMI and VMI.

KEY STRATEGIES OF ECR

Replenishment

Store Assortment

Promotion

New Product Introduction

BENEFITS OF REPLENISHMENT AND STORE ASSORTMENT

• Automated system reduce labor and administrative cost.

• Sharing information leads to more deliveries.• Concentrating on fewer suppliers reduces

transactions and administration costs.• Offering the right products to the right customer.• Customer needs are more fully addressed.• The ability to tailor the products and services on

offer• Rapid replenishment can reduce stock-outs.

ECR PROCESS FLOWPre-distribution identification

Automated cross-docking

A disciplined appointment scheduling procedure

New facility design

Floor ready merchandize

EXAMPLES OF CATEGORY MANAGEMENT

Vital and expensive

Desirable and expensive

Vital and inexpensive

Desirable and cheap

Common usage spares

CPFR MODEL