InventoryManagement

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 INVENTORYBroadly 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 METHODSContinuous or Perpetual Review Fixed Qty

Periodic Review Fixed time period

INVENTORY PLANNING METHODS Fair ShareallocationDistribution RequirementPlanning

FAIR SHARE ALLOCATION Plant WarehouseInventory- 600 unitsDistributionCentre-1DistributionCentre-2Distribution Centre-3Inventory= 50 unitsDaily use= 10 unitsInventory= 100 unitsDaily use= 50 unitsInventory= 75 unitsDaily 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 , whereDS= no. of days supply for distribution centre inventories.A= inventory units to be allocated from the warehouseIj= 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,

whereAj = amount allocated to distribution centre jDS= number of days supply that each distribution centre is brought upto.Ij = inventory in units for distribution centre jDj= 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 384.00A3= (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 PLANNINGOperates 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.

Plant WarehouseRegional warehouseRegional warehouseDistribution centreDistributioncentreDistributioncentreDistributioncentreDistributioncentreDistribution centreC U S T O M E R S

BENEFITS OF DRPImproved 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 APPROACHESA. Top-Down Approach Plant Distribution CentreField DistributionCentre# 1Forecast4000 units

FieldDistributionCentre#2Forecast3000 unitsFieldDistributionCentre#3Forecast2000 unitsFieldDistributionCentre#4Forecast1000 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 Control

Inventory Performance Cycle

HCEOQ Model