Inventory

Management

STOCK, STOCK, BEAUTIFUL STOCK

:PILES ON THE SHOP FLOOR and the

WARE-HOUSE and MORE IN THE DOCK.

:SOME OF IT ANICIENT, SOME OF IT NEW
:ALAS and TOMORROW ANOTHER LOT IS DUE.
-- UNKNOWN AUTHOR

TYPES OF INVENTORY

Broadly there are three types of inventory

Manufacturing inventory

Wholesale inventory seasonal problems,

product line expansions.

Retail inventory - variety

FUNCTIONS UNDERLYING
INVENTORY COMMITMENTS
A. Geographical Specialization :
- production facilities located near the source
of materials
- goods from various locations are collected at
a single warehouse and then combined as a
consolidated/ assorted shipment.

B. Decoupling :
-

- by stockpiling WIP between production

operations.

- enables economic lot sizes ensuring large

sized shipments with minimum freight cost.

- permits products manufactured over a

period of time to be sold as an assortment.

C. Balancing Supply and Demand :

-

- useful in linking variations of consumption

with
manufacturing in case of seasonal
products.

- critical question is how much inventory to

stockpile to enjoy max sales while
minimizing risk of carryover to next season

D. Buffer Uncertainties :

Safety stock protects against two types of

uncertainties: - variation in demand or
replenishment.

INVENTORY CONTROL METHODS

Continuous
Periodic

or Perpetual Review Fixed Qty

Review Fixed time period

INVENTORY PLANNING METHODS

Fair Share
allocation

Distribution
Requirement
Planning

FAIR SHARE ALLOCATION

Plant Warehouse
Inventory- 600 units
Distribution
Centre-1

Distribution
Centre-2

Distribution
Centre-3

Inventory= 50 units
Daily use= 10 units

Inventory= 100 units

Daily use= 50 units

Inventory= 75 units
Daily use= 15 units

Assuming that from a total inventory units of 600 it

is desirable to retain 100 units at plant warehouse;
500 units are available for allocation.
First we need to determine the number of days
supply.

DS = (A + Ij ) / Dj ,
-

where
DS= no. of days supply for distribution centre inventories.
A= inventory units to be allocated from the warehouse
Ij= inventory in units for distribution centre j.
Dj = daily demand for distribution centre j

DS = {500 + ( 50+100+75)} / (10+50+ 15)

DS= {500 + 225} /75 = 9.67 days

The amount to be allocated to each

distribution centre is determined as under:
Aj = (DS Ij /Dj ) x Dj,

where
- Aj = amount allocated to distribution centre j
- DS= number of days supply that each
distribution centre is brought upto.
- Ij = inventory in units for distribution centre j
- Dj= daily demand for distribution centre j

Thus, the amount allocated to distribution centers will be

A1= (9.67- 50/10) x 10 = 4.67x 10 = 46.7 or 47 units.

A2= (9.67-100/50)x50=(9.67-2.00)x50 = 383.5 or 384.00
A3= (9.67-75/15)x15=(9.67-5.00)x15=70 units.

However, does not consider site specific factors.

Difference in performance cycle.
Economic order quantity.
Safety stock requirements.

DISTRIBUTION REQUIREMENT
PLANNING

Operates in an independent environment

where uncertain customer demand determines
inventory requirements.
Requires forecast for each distribution centre
and SKU as well as adequate lead-time to
allow product movement.
Errors may creep in because of prediction of
demand at wrong location or at wrong time.
Requires consistent and reliable performance
cycles for movement between distribution
facilities.

C USTOMERS
Distribution centre

Distribution
centre
Distribution
centre

Distribution Distribution
centre
centre

Regional warehouse

Distrib
ution
centre

Regional warehouse

Plant Warehouse

BENEFITS OF DRP

Improved service levels, better planning of new product

launches.
Improved ability to anticipate shortages.
Reduced distribution centre freight costs resulting from
coordinated shipments.
Reduced warehousing space requirements because of
inventory reductions.

FORECAST APPROACHES
A. Top-Down Approach

Plant Distribution Centre

Field
Field
Field
Field
Distribution Distribution Distribution Distribution
Centre#2
Centre#3
Centre#4
Centre# 1
Forecast
Forecast
Forecast
Forecast
2000 units 1000 units
4000 units 3000 units

In top-down approach a national level SKU forecast is

developed and then the forecasted volume is spread
across locations on the basis of historical sales pattern.

B. Bottom-up Approach

Decentralized approach since each distribution

centre forecast is developed independently.
Results into more accurate forecast as it tracks
and considers demand fluctuations within
specific markets.
Requires more detailed record keeping and is
more difficult to incorporate demand factors such
as impact of promotion.

ABC
Inventory
Controlitems
It separates
most significant
from
less important ones
Small number of items will have
significant
value
- 10 % of items account for 70 % of
total inventory
value
- 20 30 % items account for 20 % value
- 60-70 % items account for 10 % of
value

It decides the degree and level of

controls
on different categories of items

Inventory Performance Cycle

Order
Placement

Order
Arrival

Average stocks

Inventor
y
Level

Reorder
stocks
Safety
stocks
0

20
60

40

Days

EOQ Model
Q=

2 DS
HC

Q= Ordered quantity in units

S=Cost of placing an order in Rs
D=Average annual consumption in units
H= Percentage of inventory cost vis-a-vis unit
cost
C= cost per unit