SUPLLY CHAIN

MANAGEMENT
KELOMPOK III:

Inventory Management
Policies
Inventory management is the process that
implements inventory policy. The reactive or pull
inventory approach uses customer demand to pull
product through the distribution channel.

Inventory Control
Inventory control is the managerial procedure for
implementing
an
inventory
policy.
The
accountability aspect of control measures units on
hand at a specific location and tracks additions and
deletions.

Perpetual Review
A perpetual inventory control process reviews inventory status
daily to determine inventory replenishment needs.
ROP=D x T + SS,

where
ROP = Reorder point in units;
D = Average daily demand in units;
T = Average performance cycle length in days; and
SS = Safety or buffer stock in units

TABLE 10 -17
Sample Demand, Performance Cycle,
and Order Quantity Characteristics
Average daily demand

20 units

Performance cycle

10 days

Order quantity

200 units

The perpetual review compares on-hand and on-order

inventory to the item's reorder point.
Mathematically, the process is:
If I + Qo ROP, then order Q,
where
I = Inventory on hand;
Qo = Inventory on order from suppliers;
ROP = Reorder point in units; and
Q = Order quantity in units.

Periodic Review
The average inventory level for
a perpetual review
system is:
lavg = Q/2 + SS,
where
Iavg = Average inventory in
units;
Q = Order quantity units; and
SS = Safety stock units.

The formula for calculating the

periodic review reorder point is:
ROP = D(T + P/2) + SS,
where
ROP = Reorder point;
D = Average daily demand;
T = Average performance cycle
length;
P = Review period in days; and
SS = Safety stock.

Reactive Methods

The reactive or pull inventory system, as the name implies,

responds to a channel member's inventory needs by drawing the
product through the distribution channel.
Figur 10-11
A Reactive inventory environtment
I
ROP
OQ
D
I
ROP
OQ

250
200
400

Manufacturers Warehouse

45
50
200
5

Wholesaler A

I
ROP
OQ
D

80
75
200
14

Wholesaler B

Classical Reactive Inventory Logic is

Rooted in the Following Assumtions
First,

the system is founded on the basic assumption

that all customers, market areas, and products
contribute equally to profits.
Second, a reactive system assumes infinite capacity
at the source.
Third, reactive inventory logic assumes infinite
inventory availability at the supply location.

 Fourth,

reactive decision rules assume that

performance cycle time can be predicted and that cycle
lengths are independent.
Fifth, reactive inventory logic operates best when
customer demand patterns are relatively stable and
consistent.
Sixth, reactive inventory systems determine each
distribution center's timing and quantity of
replenishment orders independently of all other sites,
including the supply source.
The final assumption characteristic of reactive
inventory systems is lhat performance cycle length
cannot be correlated with demand.

Planning Methods
Inventory planing methods use a common
information
base
to
coordinate
inventory
requirements across multiple locations or stages in
the supply chain. Planning activities may occur at
the plant warehouse level to coordinate inventory
allocation and delivery to multiple destination.

Fair Share Allocation

Fair share allocation is a simplified inventory management
planning method that provides each distribution facility with
an equitable or "fair share" of available inventory from a
common source such as a plant warehouse.
Plant warehouse
Inventory 600 units

Distribution center
I

Distribution center
II

Distribution center
III

Inventory 50 units
Daily use 10 units

Inventory 100 units

Daily use 50 units

Inventory 75 units
Daily use 15 units

 The

calculation to determine the commondays

supply is:

Where,
DS = Common days supply for warehouse inventories;
AQ = lnventory units to be allocated from plant warehouse;
Ij = Inventory in units for warehouse j; and
Dj = Daily demand for warehouse j.

The amount to be allocated to each warehouse is

determined by:

where
Aj = Amount allocated to warehouse j;
DS = Days supply that each warehouse is brought up to;
Ij = lnventory in units for warehouse j; and
Dj = Daily demand for warehouse j.

Distribution Requirements
Planing
DRP is a more sophisticated planning approach that
considers multiple distribution stages and their
unique characteristics. DRP is the logical extension
of Manufacturing Requirements Planning (MRP),
although there is one fundamental difference
between the two techniques.

DRP Process.

Figure 10-13 illustrates the conceptual

design of a combined DRPMRP system that integrates
finished goods, work-in-process, and materials planning.

Conceptual design of integrated DRP/MRP

system

Distribution
Resource
PLaning
Material
Requirment
PLaning

Figure 10-14, the gross requirements of the central

supply facility reflect the cascading demands of the
Boston, Chicago, and San Diego warehouses.
Scheduled receipts are the replenishment shipments
planned for arrival at the distribution warehouse.
Projected on-hand inventory refers to the
anticipated week-ending level. It is equal to the
prior week's on-hand inventory level less the current
week's gross requirements plus any scheduled
receipts.

FIGURE 10- 14
DRP planning process

While planning approaches to inventory management offer

significant benefits, there are some constraints to their effectiveness.
First,

inventory planning systems require

accurate and coordinated forecasts for each
warehouse.
Second, inventory planning requires consistent
and reliable product for movement between
warehouse facilities.
Third, integrated planning systems are subject to
system nervousness, or frequent rescheduling,
because of production breakdowns or delivery
delays.

Collaborative Inventory Planning

Replenishment programs are designed to streamline
the flow of goods within the distribution channel. There
are several specific techniques for collaborative
replenishment, all of which build on the common
denominator
of
rapidly
replenishing
inventory
according to actual sales experience. The intent is to
reduce reliance on forecasting when and where
inventory will need to be positioned to meet consumer
or end-user demand and instead allow suppliers to
respond to demand on a just-in-time basis.

Specific techniques for

automatic replenishment
Quick

Response (QR) is a cooperative

effort between retailers and suppliers to
improve inventory velocity while providing
merchandise supply closely matched to
consumer buying patterns.

 Continuous

Replenishment (CR) and VendorManaged Inventory (VMI) are modifications of

QR that eliminate the need for replenishment
orders.
Profile Replenishment (PR). The PR strategy
extends QR and VMI by giving suppliers the right
to anticipate future requirements according to
their overall knowledge of a merchandise
category.

Comparative Service and Inventory Characteristics for

Anticipatory versus responsive Inventory Systems
Low
Uncertainty
Anticipatory

Low
Uncertainty
Responsive

Low
Uncertainty
Anticipatory

Low
Uncertainty
Responsive

Fill Rate percent

97.69

99.66

99.44

99.29

Suplier inventory

12.88

13.24

14.82

13.61

Manufacturer Inventory

6.05

6.12

7.03

6.09

Distributor inventory

5.38

5.86

5.04

5.63

Retailer Inventory

30.84

15.79

32.86

20.30

System Inventory

55.15

41.01

59.76

45.81

Customer Service

Inventories

Collaborative planning effectively shares inventory requirements and

availability between supply chain partners, thus reducing uncertainty.

Adaptive Logic
A combined inventory management system may be
used to overcome some of the problems inherent in
using either a reactive or a planning method. The factors
that might make a reactive system better in one
situation may change over time to favor the use of an
inventory planning system. Thus, the ideal approach is
an adaptive inventory management system that
incorporates elements of both types of logic and allows
different strategies to be used with specific customer or
product segments.