Advanced Supply Chain Planning Lab

Inventory Planning From theory to practice

Miragliotta Giovanni
giovanni.miragliotta@polimi.it

Advanced Supply Chain Planning Lab

Giovanni Miragliotta
 Agenda

The (real) inventory planning cycle

Recommended readings

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 Course contents
1. Operations Planning:
ground zero
2. IT tools for SC Planning:
Current state-of-the-art
Industry 4.0 and the
Smart Supply Chain
3. The planning process:
Process mapping
Complexity management 4. Extended Enterprise:
Internet of Things technologies
Using IoT to collect data
Benefits evaluation
5. Inventory planning
The inventory planning cycle
Luxury industry
6. Data science for planning:
Learning "r"
Data driven company

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 Materials Planning

Why do I need stocks?

To offer great service ("I want it and I want it now")

To save money (quantity discount, speculative stocks)
To optimize (production and logistics) costs
To dampen uncertainty (demand, production, transportation)
To buffer / decouple operations phases
To accomplish process transformation (e.g. wine, rubber)
To show off
To transfer information
Inventory level
livello delle scorte / wip

To hide problems

Setup time
Alti tempi di setup
Difettosit
Defects
del prodotto o
del processo Fornitori
Unbalanced flow
Flusso non ben bilanciato Unreliable
inaffidabili

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 Materials Planning

Why do I (really) need stocks?

Yes: go on
No: go on the same

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 Materials Planning

Production / purchase orders can be issued according to two different logics:

Replenishment (t) Consumption (t)

Inventory (t)

Requirements based:
Replenishment (t) = f (inventory (t), consumption (t)), where t>t

Stock management:
Replenishment (t) = f (inventory (t) )

Advanced Supply Chain Planning Lab

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 Materials Planning

When to use stock management (pull)?

Inventory keeping is not risky:

Stable demand
Items not perishable / subject to depreciation

Inventory keeping is cheap:

Cheap items
Cheap money
Cheap warehousing operations

Inventory replenishment is easy:

Suppliers' lead time is short
Upstream phase is highly flexible
Quality of supply is certain

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 Materials Planning

Risky, expensive, hard-to-replenish?

Yes
No
Replenishment based (push) Stock management (pull)
Forecast driven: Demand driven:
Cycle stock = f (planning frequency, Cycle stock = f (demand, del. Lead
demand, del. Lead Time) Time)
Safety stock = g (forecast accuracy) Safety stock = g (demand variability)

NB: this holds true at every level of the BOM

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 What should be decided

1. Products categorization

First step is good product characterization in-order to have good

inventory management. (so called clusterization)

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 1. Categorization

Products / SKUs have to be categorized according to:

Demand features: Product features:

Demand stability: Physical
Continuous demand: Volume / weight
Steady stochastic process Fragility, etc.
Irregular / erratic demand

Economic
Intermittent demand:
item value
Lumpy
Slow movers logistics costs
Demand quantity
High Customer "connection":
Low Product positioning (flagship,
Demand commonality: standard)
Few customers Lifecycle positioning (newly
introduced, mature, decline)
Multiple customers

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 1. Categorization
Products / SKUs categorization is at the heart of proper materials
(inventory) management problems

Not just demand and product features, but every feature influencing
the selection of the management model (see step 2) should be
considered, e.g.
Trade channel features which may influence the customer reaction, e.g.
in large POS vs. small POS

Categorization schemes, therefore, may be quite complex; for

example in the smartphone industry the following
categorization is used:
Flagship vs. non flagship
Introduction vs. Mature vs. Decline
Large shop vs. Small shop

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 What should be decided

1. Products categorization

2. For each category, definition of the Stock positioning

and of the proper IM model

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 2.1 Stock positioning
Where to put the stock in the system

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 2.1 Stock positioning

Total costs

Warehousing
Inventories

Stock-out
Transportation

N opt # of echelons

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 2.2 Definition of the IM model
IM Models deal with a complex Multidimensional trade-off among:
Monetary costs After looking at costs
Operations (purchase / manuf) that need to be
Transportation consider, look for
what are models
Reverse logistics / disposal available, generally a
Shrinkage / thefts lot,

NB: some of these costs
Inventory control

may be negligible in
Opportunity costs: some situations
Running capital
Obsolescence
Stockout

Available models can be categorized in:

Models which aim at a complete optimization of the relevant cost items
Models which optimize a subset of targets:
Some targets are neglected
Some targets are considered as constraints (e.g. 95% service level)

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 2.2 Definition of the IM model

Available models:

Traditional models

Innovative models
Newsvendor (cf. Luxury game)

Advanced contracts
Sales protection
Profit sharing
Cf. Cachon, 2000

Even more complex procedures / algorithms

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 What should be decided

1. Products categorization

2. For each category, definition of the Stock positioning

and of the proper IM model

3. For each SKU within a given category, definition of the

model's parameters

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 3. Parameters definition

Typical parameters to be defined:

Cycle stock:
Ordering frequency
Order quantity
Safety stock:
SS Level
SS replenishment policy

In most advanced IM models / procedures, other parameters

could be needed:
% of free stock at the beginning of the season
% of stock protection costs

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 What should be decided

1. Products categorization

2. For each category, definition of the Stock positioning

and of the proper IM model

3. For each SKU within a given category, definition of the

model's parameters

4. Everyday management:
Data collection (e.g. actual sales vs. forecast)
Stock priority and assignment
Continuous category updating procedure

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 4.2 Everyday management

LONG TERM MID-SHORT TERM

number of echelons
number of warehouses for each echelon warehouse management (layout,
warehouse location product allocation)
Network typology, dimensions, automation storage/handling systems
in-house vs. outsourcing order making and picking
trade channels IT & connections

transportation mode delivery lots sizing

Transportation in-house vs. outsourcing shipment management & routing (full
fleet design truckload, local distribution)

demand forecasting
Inventories / order management (front, back)
inventory management approach
Flow mngmt stock sizing (cycle, transit, safety)
stock positioning (centralized /
Stock allocation
decentralized)
(to channel / to customer / to store)

This task is NOT going to be

automated so soon
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 4.3 Everyday management

How often a SKU should be checked for category

reassignment:
Periodically
Triggered by some event

Which criteria should be used for category reassignment

From scratch
Category-proximity

How to manage the transient period, e.g.

Excess inventories
Communication to business partners

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 The (real) inventory planning cycle

1. Products categorization

2. For each category, definition of the Stock positioning

and of the proper IM model

3. For each SKU within a given category, definition of the

model's parameters

4. Everyday management:
Data collection (e.g. actual sales vs. forecast)
Stock priority and assignment
Continuous category updating procedure
NB: this one is
maybe the most
important task of all
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 Q&A

Q&A

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 Agenda

The (real) inventory planning cycle

Recommended readings

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 Recommended readings

About advanced contracts design in Supply Chain Management

Cachon, 2002, Supply Chain Coordination with Contracts

About. Intermittend demand foracasting and inv. Management:

Syntetos, Boylan, 2010, On the variance of intermittent demand estimates

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