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
MANZOO
R

 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.
RAHIL
A

 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

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TYPES OF MCS
Target level replenishment system
Optional replenishment system

REACTIVE METHODS
It responds to a channel members
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
centres 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)
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r

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

DISTRIBUTIO
N CENTRE 1

DISTRIBUTIO
N CENTRE 2

DISTRIBUTIO
N CENTRE 3

Inventory 50
units
Daily use 10
units

Inventy 100
unuts
Daily use 50
units

Inventory 75
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
Distributi
on Centre

Distributi
on Centre

Distributi
on Centre

Distributi
on Centre

Regional
Warehous
e
Plant
Warehouse
Finished
Assembly

Regional
Warehous
e

Distributi
on Centre

Distributi
on Centre

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.

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h

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..
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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

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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