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Table of Contents

1. The Basics and the Big Picture 1


What is inventory management? 5
What is inventory? 7
Finished goods.  8
Unfinished goods.  9
Maintenance, repair, and operating (MRO) inventory.  10
Work-in-process (WIP).  10
Why do we carry inventory? 12
Current-demand inventory.  12
Safety stock.  12
Lot-size inventory.  12
Anticipation inventory.  12
Transportation inventory.  12
Distribution inventory.  13
Hedge inventory.  13
Manufacturing and procurement strategies. 13
Make-to-stock/procure-to-stock.  14
Make-to-order/procure-to-order.  14
Configure-to-order.  15
Engineer-to-order.  15
Direct shipping.  15
Consignment and vendor-managed inventory.  17
Inventory tracking methods. 17
Periodic review system.  17
Perpetual inventory system.  18
II Inventory Management Explained

Inventory management tasks. 18


Forecasting.  18
Calculating safety stock.  19
Lot sizing.  19
Ordering/Replenishment.  19
Transactional control.  19
Inventory analysis.  20
Hype, history and the real deal.  20
The Big Picture. 22

2. Tools of the Trade 25


Computer systems. 25
ERP systems / software suites: a little history lesson.  26
Generic or industry specific? 29
Best of breed.  31
Software specific to inventory management.  32
Basic inventory management.  32
A little better inventory management.  32
Demand planning / inventory optimization.  32
Material requirements planning (MRP).  32
Manufacturing resource planning (MRPII).  32
Multi-plant planning.  33
Advanced planning and scheduling.  33
Supply-chain optimization.  33
Desktop software.  33
Spreadsheet modeling.  34
Spreadsheet modeling with optimization.  35
Spreadsheet statistical tools.  37
Data analysis tools.  37
A note on zeros.  39
What’s good enough? 39
A note on “cheats”.  41
The changing role of inventory managers... 41
The scope of this book. 43
Table of Contents III

3. Forecasting Part 1: Basic Concepts and Techniques 45


Forecasting terminology. 46
Forecast period.  46
Forecast interval.  46
Forecast horizon.  46
Forecast basis.  46
Forecast consumption.  47
Trend.  47
Seasonality.  47
Noise.  47
Level (also known as normalized demand or base demand).  47
Forecasting generalizations. 48
Mathematical forecasting methods.  49
Last-period demand.  49
Last-relative-period demand.  50
Moving average.  50
Weighted moving average.  51
Exponential smoothing.  52
Seasonality and seasonality indexes.  54
Trend adjustments.  59
Forecast error measurement.  60
Multi-period forecast error amplitude measurements.  61
Forecast bias measurements.  62
Tracking signal.  62
A common mistake in forecast error measurement. 65
Regression analysis. 65
Bullwhip effect?  71

4. Forecasting Part 2: Now It Gets Complicated 75


Trend revisited.  75
Separating trend elements. 77
When trends collide.  82
Exponential smoothing revisited.  86
Adaptive smoothing. 93
Black-box forecasting.  94
Human input. 96
IV Inventory Management Explained

5. Forecasting Part 3: Putting It All Together 99


Setting up a forecasting system. 99
Selecting a forecast interval.  99
Creating your seasonality index(es).  101
De-seasonalizing your demand. 105
Smoothing your de-seasonalized demand.  106
Calculating and smoothing trend. 107
Adjusting for trend lag. 108
Adjusting for seasonality. 108
Extending the forecast. 109
Promotions and other events. 111
Overrides and adjustments. 113
More Forecasting Stuff. 115
Group forecasting logic. 115
Dependent demand and forecasts. 116
Managing demand history. 117
Managing demand variability. 119
Forecast consumption. 120
Treating negative trends differently from positive trends.  122
Composite forecasts. 122
Running multiple forecasts. 123
Summary. 123

6. Safety Stock 125


How do we go about calculating safety stock? 126
Keep-it-simple methods? 127
Oversimplified use of statistical methods.  129
Appropriate use of statistical methods.  129
Incorporating the forecast. 136
Incorporating lead time.  137
Incorporating order cycle.  141
Relative history, seasonality, and trend. 145
Biased forecasts and negative variability. 147
Are we there yet? 150
Where do I get my fill rate targets? 153
A quick note on safety stock and dependent demand items. 154
Table of Contents 

7. Order Quantities / Lot Sizes  157


Answering the question: How much to make or order? 157
Economic order quantity (EOQ). 159
A quick history lesson and the basic EOQ calculation. 160
Order costs and carrying costs. Getting them right. 163
Order cost. 163
Carrying cost. 167
Gray areas: when is a cost, not a cost? 170
Incorporating quantity discounts. 175
Seasonality and trend. 178
Using period order quantity (POQ). 178
Using optimization. 180
My experience with advanced optimization programs. 184
More lot-sizing stuff. 187
Lot-for-lot lot sizing? 187
Fair-share distribution. 187
Overrides.  187
Case quantities.  188
To complicate things further.  189
Inventory reduction strategies.  191
My closing argument. 192

8. Ordering Systems 195


Knowing how much you have.  195
Understanding allocations. 196
Understanding lead time. 199
Safety lead time.  199
Ordering systems. 201
Periodic review.  201
Fixed reorder point.  201
Min-Max. 203
Kanban, Two-bin, and that whole Push-Pull thing.  204
The Push/Pull argument.  206
Now for a little more on calculating Kanban quantities.  209
Ordering systems that directly utilize the forecast. 209
A quick intro to planned orders.  211
VI Inventory Management Explained

More advanced periodic review.  212


Optional reorder point.  214
A quick note on requisitions and approval processes. 214

9. MRP, Multi-plant MRP, and DRP 217


The basic MRP calculations. 217
Multi-level BOMs. 223
Master Production Schedule (MPS). 226
Finite versus infinite capacity scheduling. 229
More MRP stuff. 230
Nervousness in MRP.  230
Time Fences. 232
Regenerative MRP and Net Change MRP. 233
Scrap and yield rates.  233
Consumables and packaging materials on BOMs. 234
Special types of BOMs. 235
The difference between BOMs and Parts Lists. 237
Effective Dates. 237
Relationships between BOMs and Routings. 238
Lot sizing in MRP. 238
What’s wrong with MRP?  238
DRP and Multi-plant MRP. 241
Why DRP? 242
Multi-directional DRP? 243
Multi-plant MRP. 244
Lot sizing in a multi-location distribution network.  245
Fair-share distribution. 247

10. Measurement and Analysis  251


Why analysis? 251
Service Levels.  252
Fill rates. 252
On-time delivery (OTD). 254
Out-of-stock analysis. 255
Inventory turns. 258
Table of Contents VII

ABC stratification. 262


Determining the break points. 265
The calculation itself.  267
Gross Margin Return on Inventory Investment (GMROII).  269
Excess and obsolete inventory. 271
Fun with ratios. 276
Dock-to-stock cycle measurement.  277
Forecast error/accuracy recap.  278
Measuring supplier performance. 279
Product data management.  281

11. Wrapping Things Up 285


Vendor managed inventory.  285
Consignment inventory. 287
Collaborative planning. 290
Postponement. 291
Lean, TPS, JIT, TOC, QRM, TQM, Six Sigma . . .  292
The make-or-buy decision. 293
Implications of overseas sourcing.  294
The purchasing function. 297
Quick recap and tips. 301
Final comments. 306

G. Glossary 309
I. Index 333
On the web 341
VIII Inventory Management Explained

Go to http://inventoryexplained.com

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