LOGISTICS MANAGEMENT SEMINAR

INVENTORY
MANAGEMENT
 Inventory Management

•Inventory management is primarily about

specifying the size and placement of stocked
goods.
•Definition:
Systems and processes that identify
inventory requirements, set targets, provide
replenishment techniques and report actual and
projected inventory status

MANZOOR
• Inventory management is an important because inventories
are usually the largest expense incurred from business
operations

• Most companies will use an inventory management system

that will track and maintain the inventory required to meet
customer demand.

• A truly effective inventory management system will minimize

the complexities involved in planning, executing and
controlling a supply chain network which is critical to
business success.
 SCOPE
• CARRYING COSTS OF INVENTORY,
• ASSET MANAGEMENT,
• INVENTORY FORECASTING,
• INVENTORY VALUATION,
• INVENTORY VISIBILITY,
• FUTURE INVENTORY PRICE FORECASTING,
• PHYSICAL INVENTORY,
• AVAILABLE PHYSICAL SPACE FOR INVENTORY,
• QUALITY MANAGEMENT,
• REPLENISHMENT,
• RETURNS AND DEFECTIVE GOODS AND DEMAND
FORECASTING.
 FUNCTION
• Make scheduling and shop loading more efficient
• Narrow the gap between sales and stock replacement
• Fine-tune record-keeping accuracy for better
inventory management
• Determine exact material status and inventory dollar
burden
• Reduce cost of inventory obsolescence
• Become truly responsive to your customers’ real needs
 INVENTORY CONTROL
• Mechanical procedure for implementing an
inventory policy.

• Control procedures must be devised

• It defines how often inventory levels are reviewed

and compared against the inventory parameters
defining when to order and how much to order.

RAHILA
• Inventory control procedures are two:

1. Perpetual Review

2. Periodic review
 Perpetual Review
• It reviews inventory status daily to determine
replenishment needs

• In order to utilize this type of inventory control,

accurate accountability is necessary for all stock
keeping units.

• This control system can be reviewed through a re-order

point
and order quantity.
 Periodic Review
• It reviews the inventory status of an item at regular
intervals such as weekly or monthly

• For periodic review, the basic reorder point must be

adjusted to consider the extended intervals between
reviews.

• Since inventory status counts are completed only at a

specific time, any item could fall below the desired
reorder point prior to review period.
• Therefore the assumptions is made that the
inventory will fall below ideal reorder status
prior to the periodic count approximately one
half of the review times.
MODIFIED CONTROL SYSTEMS
• To accommodate specific variations and
combinations of the basic periodic and
perpetual control systems have been
developed

Vinu
 TYPES OF MCS
 Target level replenishment system
 Optional replenishment system
 REACTIVE METHODS
• It responds to a channel member’s inventory
needs by drawing the product through the
distribution channel
 ASSUMPTIONS
• It assumes infinite availability at the source
• It assumes infinite availability at the location/
there are no constraints of inventory
availability
• It operates best when customer demand
patterns are relatively stable and consistent
Contd……
• It determine each distribution centre’s timing
and quantity of replenishment orders
independently of all other sites, including the
supply source.
• The performance –cycle length should not be
correlated with demand.
 INVENTORY PLANNING METHODS

• Inventory planning methods use a common

information base to coordinate inventory
requirements across multiple locations or
stages in the value-added chain
• Two inventory planning methods are
 Fair share allocation
 Distribution Requirements Planning (DRP)

azhar
 Fair share allocation
• Provides each distribution facility with an equitable
or fair share of available inventory from a common
source.
• Inventory planner determines the amount of
inventory that can be allocated to each distribution
centre from available inventory
 FSA example
Plant Warehouse
Inventory Units 600 units

DISTRIBUTION DISTRIBUTION DISTRIBUTION

CENTRE 1 CENTRE 2 CENTRE 3
Inventory 50 units Inventy 100 unuts Inventory 75 units
Daily use 10 units Daily use 50 units Daily use 15 units
Distribution Requirement Planning (DRP)

• DRP is a more sophisticated planning approach that

considers multiple distribution stages
• It is an extension of Manufacturing requirement
planning (MRP)
• DRP is guided by customer demand
• MRP controls inventory until manufacturing or
assembly is completed
• DRP then takes the coordination responsibility
• The fundamental DPR planning tool is the
schedule
• The schedules are developed using weekly
time increment known as buckets
• For each site Schedule reports current on
hand, safety stock, performance cycle length
etc
 Customer

Distribution Distribution Distribution Distribution

Centre Centre Centre Centre

Distribution Distribution
Centre Centre

Regional Regional
Warehouse Warehouse

Plant Warehouse

Finished Assembly
 BENEFITS OF DRP
• Marketing Benefits
• Increased service levels that increase on time deliveries and
decrease custom complaints.
• Improved and more effective promotional and new product
introduction plans.
• Enhanced ability to offer customer a coordinated inventory
management system.
• Improved inventory coordination with other enterprise
functions.
• Logistic Benefits
• Reduce distribution centre freight
• Reduce inventory level
• Decreased warehouse space requirement
• Reduce customers freight cost
• Reduce inventory visibility
 ADAPTIVE INVENTORY MANAGEMENT
SYSTEM
• Combines reactive and inventory planning logistics.
• Rationale of this is that customer demand must usually be
treated as independent.
• Uniqueness of this is that it changes as environmental
condition change.
• Must adjust in terms of location and time.
• Primary difficulty in implementing this system is determining
the decision rules that should be used for making adjustment.

sadath
 ADAPTIVE DECISION FACTORS
• Inventory mgt should consider the relative contribution or
profitability of individual market segments.
• Appropriate decision rule is to push inventory to the market
since there is little risk of poor allocation.
• Rule overcomes 2 limitations....
• Inventories can be moved upstream facilities, that provide
transport scale economies.
• An adaptive and selective logic does not push slow or
inconsistent movers.
• The difference between independent and dependent demand
is the second factor that influences the selection of an
appropriate inventory mgt logic.
• 3 uncertainty of in the channel...
• Supply
• Demand
• Performance cycle
• To determine which type of system is appropriate, the
combination of 3 uncertainties must be investigated for each
location.
• Decision rules for system:
• For supply uncertainty- planning based system
• Planning approach – manage shipments to markets.
• For performance cycle time- reactive inventory system
 INVENTORY MGT ADJUSTMENT
CATEGORIES
• Temporal : the system must have ability to adapt over time.
• Spatial: Ability to adapt by location. The modification process
is called spatial adjustment
• Product: product availability or demand changes, the system
should be able to switch from one approach to the other in
order to provide most efficient means for distributor.
 Inventory management process
Strategy development process
it includes
1. product/market classification
• Objective is to focus and refine inventory management effort
• Also called fine- line or ABC classification
• Groups the product or market with similar characteristics to
facilitate inventory management
• Classification based on measures such as sales, profit
contribution, inventory value, usage rate, nature of the item
etc..

napi
2. Segment strategy definition
• It includes specification for all aspects of
inventory management process including
service objective, forecasting method,
management technique and review cycle.
3. Operationalized policies and parameters
• It defines the detailed procedure and parameter
• The Procedure define data requirements,
software applications, performance objective,
and decision guide lines.
• The Parameter include actual numeric values
such as review period length, service objective,
inventory carrying cost percentage, order
quantities and reorder period.
 Methods for improved inventory management

• Some firms use additional initiatives to improve

inventory effectiveness
• The initiatives include :
1. Policy definition and refinement
2. Information integration, and
3. Expert systems application

fahim
 1.Policy definition and refinement

• Inventory management incorporates a number of

policies and procedures that guide inventory related
decisions.
• These involve performance measures and training

a) Performance measures:
Clear and consistent performance measures for
inventory planners are key ingredients in the inventory
management process. These measures must reflect the
trade-off between service and inventory level.
b) Training:
• Inventory management is a very complex discipline
because of the number of factors involved in the process.
• It is also important to understand the nature and dynamics
of the interfaces between enterprise inventory management
and other entities within the value chain
• Two types of training are appropriate
1. Planners should understand how inventory parameters
such as service objective, review periods, order quantity
and safety stock influence inventory operations and
performance
2. Planners should understand how their inventory
management decisions affect other members of the
value chain. Inventory planners must also consider the
impact of demand declines and surges on the
resources of other value chain partners
2. Information integration

• Inventory effectiveness and performance can be substantially

increased and uncertainty decreased by integrating
requirements information across the enterprise and among
channel partners.
• Current technology facilitates information exchange using
global networks, electronic data interchange and satellite
communication
3. Expert Systems Application

• Expert systems use a computerized knowledge base to share

inventory management expertise across the enterprise. This
shared expertise can supplement the training and awareness
• Expert systems may provide insight into the review period,
inventory management logic and strategies to employ with
each product/market group
• Results indicate that expert systems can provide substantial
improvements in productivity and inventory performance
INVENTORY CONTROLLING METHOD
• ABC ANALYSIS
• VED ANALYSIS