BASIC INVENTORY PLANNING
AND MANAGEMENT
Shirley Eje Maranan
Decisions regarding the amount of inventory
that a company should hold and its location
within a company’s logistics network are
crucial in order to meet customer service
requirements and expectations.
REASONS TO HOLD STOCKS
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To keep down production costs.
To accommodate variations in demand.
To take account of variable supply lead times.
Buying costs.
To take advantage of quantity discounts.
To account for seasonal fluctuations.
To allow for price fluctuations/speculations.
To help the production and distribution operations run
more smoothly.
• To provide customer with immediate service.
• To minimize production delays caused by lack of parts.
• Work – in – progress.
TYPES OF STOCK HOLDING/INVENTORY
• Raw materials, components and packaging
stocks
• In-process stocks
• Finished products
• Pipeline stocks
• General stores
• Spare parts
MAJOR CLASSIFICATIONS OF STOCKS
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Working stock
Cycle stock
Safety stock
Speculative stock
Seasonal stock
THE IMPLICATIONS FOR OTHER
LOGISTICS FUNCTION
• Number of distribution centers (DC)
• Size and operation of DCs
• Policy decisions
MAIN PATTERNS THAT AFFECT
DISTRIBUTION STRUCTURES
• Direct system – have a centralized inventory
from which the customer are supplied directly.
• Echelon systems – involve a flow of products
through a series of locations from the point of
origin to the final destination.
• Mixed and flexible system – they link together
the direct and echelon system for different
products, the key element being the demand
characteristics of these products.
ELEMENTS OF INVENTORY HOLDING
COSTS
• Capital cost – cost of physical stock.
• Service cost – cost of stock management and insurance.
• Storage cost – cost of space, handling and associated
warehousing with the actual storage of the product.
• Risk cost – this occurs as a consequence of pilferage,
deterioration of stock, damage and stock obsolescence.
• Reorder cost – cost of actually placing in order with a
company for the product in question.
• Set up cost – additional costs that may be incurred if the
goods are produced specifically for a company.
• Shortage cost – cost of not satisfying a customer’s order.
INVENTORY REPLENISHMENT SYSTEM
• Low stock levels
• High stock levels
• Periodic review system
ECONOMIC ORDER QUANTITY
• EOQ
• The EOQ method is an attempt to estimate the best
order quantity by balancing the conflicting costs of
holding stock and placing replenishment orders.
• The effect of order quantity on stock holding costs is
that, the larger the order quantity for a given item, the
longer will be the average time in stock and the greater
will be the storage costs.
FACTORS INVOLVED IN EOQ
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New product lines
Promotional lines
Test marketing
Basic lines
Range reviews
Centralized buying
• Outstanding orders
• Minimum order
quantities
• Pallet quantities
• Seasonality
DEMAND FORECASTING
• It estimates what the future requirements of a
product to meet customer demands as closely
as possible.
• It is often said that “all mistakes in forecasting
end up as an inventory problem – whether too
much or too little!”
FORECASTING APPROACHES
• Judgemental
methods
–
subjective
assessments based on experts opinions.
• Causal methods – regression analysis, where a
line of “best fit” is statistically derived to
identify any correlation of the product
demand with other factors (internal/external).
• Projective methods – uses historic demand
data to identify any trends in demand and
project these into the future.
ELEMENTS OF A DEMAND PATTERN
Good forecasting
system
Seasonal
allowances
Provide sufficient
buffer stock
STEPS IN A METHODICAL APPROACH
TO DEMAND FORECASTING
PLAN
CHECK
CATEGORIZE
METRICS
CONTROL
INVENTORY AND THE
SUPPLY CHAIN
PROBLEMS WITH TRADITIONAL
APPROACHES TO INVENTORY PLANNING
• Demand is not as predictable as it may once have
been.
• Lead times are not constant and they can vary for
the same product at different order times.
• Cost can be variable.
• Production capacity can be at a premium; it may
not always be feasible to supply a given product
as and when required.
• Individual products are closely linked to others
and need to be supplied with them, so that
complete order fulfillment is achieved.
DIFFERENT INVENTORY
REQUIREMENTS
Dependent Demand
- Demand
of
a
product is related to
another product.
- Vertical
- Horizontal
Independent Demand
- Demand
of
a
product
is
not
related
to
the
demand of another
product.
- Consumer
demand
THE LEAD TIME GAP
INVENTORY AND TIME
WAYS TO ACHIEVED LEAD-TIME
REDUCTION
• Manage the supply chain as one complete
pipeline.
• Use information better.
• Achieve better visibility of stock throughout the
supply chain for all participants.
• Concentrate on key processes.
• Use JIT techniques to speed up the flow of
products through the supply chain.
• Use faster transport.
• Develop supply chain partnership.
ANALYZING TIME AND INVENTORY
• Supply chain mapping
– This technique enables a company to map the
amount of inventory it is holding in terms of
length of time that the stock is held.
EXAMPLE OF SC MAPPING
INVENTORY PLANNING FOR
MANUFACTURING
• Time compression – planned reduction in
manufacturing and work in progress inventory.
Typical approaches of time compression are:
– the need to take a complete SC perspective in
planning;
– to need to undertake appropriate analysis;
– the identification of unnecessary inventory and steps
in key processes;
– working towards customer service requirements;
– designing products to be compatible with SCM; and
– designing production processes to be compatible with
SCM
TIME-BASED PROCESS MAPPING
THE VIRTUOUS CIRCLE OF TIME
COMPRESSION
INVENTORY PLANNING TECHNIQUES
FOR RETAILING
• Vendor-managed inventory (VMI) – this is where
the manufacturer is given the responsibility for
monitoring and controlling inventory levels.
• Continuous replenishment (CRP) – develop freeflowing order fulfillment and delivery system.
• Quick response (QR) – a development of JIT and
closely link with the actual demand and retail
level.
INVENTORY PLANNING TECHNIQUES
FOR RETAILING
• Efficient customer response (ECR) – develop a
customer driven system that works with SC
through information technology
• Category management (CM) - provide greater
support for product and inventory control and
management.
• Collaborative
planning,
forecasting
and
replenishment (CPFR) - combines multiple trading
partners in the planning and fulfillment of
customer demands
BASIC TENETS OF ECR
• A heavy use of EDI for exchanging information
with suppliers.
• An extremely efficient SC using cross-docking
and direct store deliveries.
• The use of sales-based ordering.
• Much greater cooperation with suppliers,
using CMI and VMI.
KEY STRATEGIES OF ECR
Replenishment
Store Assortment
Promotion
New Product Introduction
BENEFITS OF REPLENISHMENT AND
STORE ASSORTMENT
• Automated
system
reduce
labor
and
administrative cost.
• Sharing information leads to more deliveries.
• Concentrating on fewer suppliers reduces
transactions and administration costs.
• Offering the right products to the right customer.
• Customer needs are more fully addressed.
• The ability to tailor the products and services on
offer
• Rapid replenishment can reduce stock-outs.
ECR PROCESS FLOW
Pre-distribution identification
Automated cross-docking
A disciplined appointment scheduling procedure
New facility design
Floor ready merchandize
EXAMPLES OF CATEGORY
MANAGEMENT
Vital and
expensive
Common
usage spares
Desirable and
cheap
Desirable and
expensive
Vital and
inexpensive
CPFR MODEL