Inventory Management

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Symptoms of Poor Inventory Management1. Increasing number oI back orders2. Increasing investment in inventory with backorders remaining constant3. High customer turnover rate4. Increasing number oI orders cancelled5. Periodic lack oI suIIicient storage space6. Wide variance in turnover oI maior inventory items in distribution centers7. Deteriorating relationship with intermediaries, as typiIied by dealer cancellations and declining orders.8. Large quantities oI obsolete items.Methods/Techniques of Inventory Reduction1. Multiechelon inventory planning, ABC analysis2. Lead time analysis3. Elimination oI low turnover & or obsolete item4. Analysis oI pack sizes and discount structure5. Examination oI procedures Ior returned goods6. Encouragement/Automation oI product substitute7. Installation oI Iormal reorder review systems8. Measurement oI Iill rates by skus9. Analysis oI Customer demand characteristics10. Development oI Iormal sales plan and demand Iorecast by predetermined logic11. Reengineering inventory management.$ttStock out Costs.$tock out costs occur when seller is unable to satisIydemand with available inventory. One oI possibleevents occur1.Customer waits until the product is available2.The customer back orders the product3.The $eller looses a sale4.The seller losses a customerDetermining stock out cost1.IdentiIy a stock out's potential consequences I.e. back order, lost sale, Lost customer2.Calculate each result`sexpense or loss oI proIit and then to estimate the cost oI single stock out.3.Assume that 70 oI stock out results in back order and a back order results in extra handling cost. $ay 20 result in lost sales Ior itemand this loss equals to $20 in lost proIit margin; and 10 result in lost customer, or a loss oI say $200.Calculate the overall impact,70 oI $6.00 $4.2020 oI $20.00$4.0010 oI $200.00 $20.00Total .Estimated cost per stock out.$ince $ 28.20 is the average dollar amount the Iirm can save by averting a stock out, the Iirm should carry additional inventory to protect against stock outs only as long as carrying additional inventory costs less than $ 28.20.ssumptionsW Inventory transIers between stocking locations at the same level are not common practice W Lead times do not vary, and thus inventory concentration is not aIIected by inbound supply uncertaintyW .W Customer service level, as measured by inventory availability, is constant regardless oI the number oI stocking locations.W Demand at each location is normally distributed..ements of Inventory Carrying CostCapital CostsInventoryCarryingCostsInventory$ervice Costs$toragespace CostsInventoryrisk costsPlant WarehousesTaxesPublic WarehousesInsuranceRented WarehousesInventory InvestmentObsolescenceCompany Owned WHDamage$hrinkageRelocation Costs B C naysistemCodeAnnual Sales$% of Annual Sales Cumulative Sales % of tems Classificationcategory64R 6800 68% 68% 10.0% A89Q 1200 12 80 20 A68j 500 5 85 30 B37S 400 4 89 40 B12G 200 2 91 50 B35B 200 2 93 60 B61P 200 2 95 70 B94L 200 2 97 80 C11T 150 1.5 98.5 90 C20G 150 1.5 100 100 C$10,000 100% 100%"R1. QR is eIIective Ior synchronizing product Ilow with inIormation Ilow.2. Vendor commits to meet criteria as lead time, service levels & Iill rates, EDI communication & possibly vendor managed inventory.3. Retailer commits to provide accurate timely demand inIormation4. PerIormance criteria applied is precise.ements of ".R.W $horter, compressed time horizonW Real time inIormation available by $.K.U.W $eamless, integrated logistic network that depend on rapid incoming transporting, strategic cross docking, and eIIective store receipt and distribution systemW Partnership relationship between manuIacturers and retailers, including sharing oI processes and inIormation.W Redesign oI manuIacturing operations and processes to reduce lot sizes and changeover times, enhance Ilexibility and responsiveness and coordinate MP$ with Iorecasts and actual customer orders.W Commitment to TQM, process improvement and $ervice response logistics`.EIements ofQUICK RESPONSEnformationTime HorizonLogisticsManufacturingOperationsPhilosophical/Cultural ChangeSupplierManufacturerRelationship$tructure oI U.$. Textile / Apparel IndustryFibreFabricApparelRetailConsumer$ynthetics (75 highly concentrated10 Iirms contribute 90 marketMore IragmentedW 6000 IirmsW 12 Iirms provide 25 marketExtremely IragmentedW 15,000 IirmsIncreasing concentrationMaior categoriesW Department storesW Mass merchandisersW Mail orderW ChainsW$pecialty storesIncreasing sophisticationVariety expectedWide choiceREVENUE LOSSES IN THE APPAREL PIPELINE (% RETAIL SALES)ibre&textileApparel Retail Totalorced markedown0.6% 4% 10% 14.6%stockouts 0.1% .4% 3.5% 4%nventory@15%c1.0% 2.5% 2.9% 6.4%total 1.7% 6.9% 16.4% 25%" R SystemPresentRetaippareTextieFibre "uick Very quick W46 W66 WWeeks inventory Inventories RWL/LV/PT-17Efficient Consumer ResponseW Report for the US ood Marketing nstitute States:Today's supply chain consists of a series of individual components, each pushing product to the next player in the supply chain.Each transaction adds substantial costs: selling expense, buying expense, purchasing ordering, order processing, order assembly, shipping, receiving, checking, put away, invoicing, paying,deducting, reconciling and more. urther, receivables average several weeks for each transaction. Very little, if any of these costs add value to the ultimate product or service the consumer receives.Efficient Consumer ResponseW The spirit of ECR has been captured by Birds Eye Wall's,a Unilever frozen food company in the United Kingdom. t defines ECR as 'the process which facilitates the true working together to achieve ultimate consumer satisfaction, maximizing business efficiency for mutual benefit'. W The objective of ECR as defined by ECR Europe Conference in 1996, is " to fulfill consumer wishes better, faster and at least cost.Means Reduce nventory thereby permitting price reductions or higher margins and secondly strengthen brand propositions that are compatible between manufacturer and retailer in order to meet consumer needs, thereby stimulating category growth and increasing revenue.W The power of ECR lies in cooperation and the sharing of information and expertise between trading partners towards a common goal of increased consumer satisfaction. W ECR is a tool for integrating separate aspects of supply chain to deliver increased value to the consumerW ECR takes a process view, defining four core processes that span all supply chain playersW Research conducted by Anderson Consulting for ECR in 1997 found that most ECR related initiatives had centered around working together to reduce costsRetailerWholesalerManuIacturer$upplierIntroduceProductPromoteProductMerchandiseProductsReplenishProductsDemand management$upply managementIntegrated$uppliers$ynchronizedProductionContinuousReplenishmentAutomated$tore orderingReliable operations CrossdockingElectronicDataInterchangeElectronic FundsTransIerItem codingAnd databasemaintenanceECR Improvement conceptsImprovement ConceptsW emand Management: which covers those activities focused on improving the product offering to consumersW Supply management: which covers several initiatives designed to improve the flow of product through the supply chainWW Enabling Technologies: which are activities that act as enablers for the other ECR improvement concepts, many of which are related to electronic commerce For CR to be successfu. Seven basic capabiities are required from manufacturing and retai firms.W Integrated EDIW Continuous ReplacementW Computer assisted orderingW Flow through distributionW Activity based costingW Category Managementto optimize design, promotion, stocking etc.W Flexible manuIacturingto match production with actual demand.Vision of the CR SystemTimely, accurate, paperless inIormation IlowAnatomy oI ECRConsumer purchasesProduct A` Irom a $upermarket.The transaction is recordedby the stores scanner.The scanner Iorwards the Transaction record to an Instore computer.The productA` manuIacturer whose computersInterIace with the retailer`s, notes The transaction & automaticallyReorders a replacement unit oI JIT basis.$mooth, continuous product Ilow matched to consumption An automatic orderingsystem allows the Product A` supplierto match production withdemand using productmovement inIormation& IorecastingBecause production is tied directly into demand,retailers become increasingly Ireed Irom the needIor excess inventory, thus opening the door Ior increased cross docking & direct store delivery.The retailer`s in store computer acknowledgesreceipt oI the shipment and automatically issues a computer generated payment or electronic Iund transIer payment, eliminatingthe need Ior paper invoices & streamlining the accounting process.$upplier DistributorRetailer$toreConsumerhouseholdCR - Broad OperationsIntegrated EDIContinuous ReplenishmentComputer OrderingABCFlexible MIg.ManuIacturingBusiness$trategyRetail Business$trategyReplenishmentPromotion$tore AssortmentProduct IntroductionReplenishmentPromotion$tore AssortmentProduct IntroductionChange ManagementOpen CommunicationBefore CR$upplier Warehouse 38 days Distributor Warehouse(Forward buy 9 days)turn inventory 31 days40 days Retail store 26 daysConsumerpurchasePacking Line104 days fter CR$upplier Warehouse 27 days Distributor Warehouse12 daysRetail store 26 daysConsumerpurchasePacking Line61 days RWL/LV/PT-17Cost Structure of Dry Grocery Suppy ChainReducing prices by .100 Average consumer price in present dry grocery system42. ProIit$tore operationsAdministrativeLogistics$elling buyingMarketingCost oI GoodsPresentECRBull Whip EIIectThe $upply ChainExternal DemandRetailerWholesalerDistributorFactoryOrder LTOrder LTOrder LTDeliveryLTDeliveryLTDeliveryLTProductionLTBULLWHIP FFCT1. InIormation reduces inventory in supply chain 2. InIormation enables make better Iorecasts, accou