inventory management in logistics

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

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TYPES OF MCS

Target level replenishment systemOptional 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 areFair 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

DISTRIBUTION CENTRE 1

Inventory 50 unitsDaily use 10 units

Inventory 75 unitsDaily use 15 units

DISTRIBUTION CENTRE 3

Inventy 100 unutsDaily use 50 units

DISTRIBUTION CENTRE 2

Plant WarehouseInventory Units 600 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

Finished Assembly

Regional Warehouse

Plant Warehouse

Regional Warehouse

Distribution Centre

Distribution Centre

Distribution Centre

Distribution Centre

Distribution Centre

Distribution Centre

Customer

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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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 includes1. 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 refinement2. Information integration, and3. 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 appropriate1. 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