Inventory Planning & Mgt for inventory management

the presentation discusses about how inventory is planned and management in an organization

1. Inventory Planning & Management 1

2. Definitions: 2  Inventory- A physical resource that a firm holds in stock with the intent of selling it or transforming it into a more valuable state.  Inventory System- A set of policies and controls that monitors levels of inventory and determines what levels should be maintained, when stock should be replenished, and how large orders should be

3. Importance of Inventory 3 Management of inventory is a powerful driver of financial performance. Improper management of inventory leads to slow growth and pressure on profitability. Companies aim at improving the efficiency of inventory cycle. This helps the firm from locking up of capital, which can be invested elsewhere, and improve financial performance and create competitive advantage in delivering goods at lower prices.  

4. Functions of Inventory 4 To separate various parts of the production process To d isassociate the firm from fluctuations in demand and provide a stock of goods that will provide a selection for customers To take advantage of quantity discounts To make barrier against inflation

5. Functions of Inventory 5 Striking a balance between supply and demand : It is very difficult to achieve a match between the production and consumption cycle. Whenever there is a sudden requirement of product in large quantities, it is not possible to produce such quantities immediately. Thus, products are manufactured in advance, and kept in stock during the peak period to avoid any shortage . 2. Minimize costs at acceptable inventory levels :   When inventories are replaced in extremely small quantities, they result in low investments but high ordering costs. There has to be a point where, the total carrying cost of inventory is minimum but the level of inventory is such that it doesn’t affect production . 3. Provide the desired customer service levels : Customer demands are satisfied through inventory. The location of inventory determines time in which customer will be served, the company’s policies concerning the economic order quantity, safety stocks, etc will determine the cost at which customer is getting served.  

6. Functions of Inventory 6 4 . Protecting the operating system:   Inventory ensures that the operating system does not have any disruption. For example, if a worker in one work center falls sick or if there is a machine breakdown, the work need not be affected if the inventory is available and others can continue the work.   5. Advantage of quantity discounts from suppliers : Inventory helps the firms in getting the advantage of quantity discounts from suppliers.  

7. 7 Raw material Purchased but not processed Work-in-process Undergone some change but not completed A function of cycle time for a product the inventory waiting in the process for being assembled into final products. Maintenance/repair/operating (MRO) Necessary to keep machinery and processes productive Finished goods Completed product awaiting shipment ready for delivery to the distribution centers, retailers, and wholesalers or to the customers directly. Types of Inventory

8. The Material Flow Cycle 8 Input Wait for Wait to Move Wait in queue Setup Run Output inspection be moved time for operator time time Cycle time 95% 5%

9. Inventory Management 9 Inventory Management is an integrated process, which aims to operationalize a firm’s as well as the value chain’s inventory policy. It is a strategic area in logistics and has an overall impact on the efficiency and effectiveness of the entire supply chain. It is basically a practice of planning, directing and controlling inventory so that it contributes to the profitability of business . AIM is… How inventory items can be classified? How accurate inventory records can be maintained?

10. Importance of Inventory Management in the Supply Chain 10 Availability of resource (such as finance and space) has made the management to consider lowering the levels of inventory within the supply chain management systems to maintain margins. Latest concepts like Just in Time (JIT) applications and lean manufacturing have reduced the need for inventory as an insurance buffer within the overall logistics activity. Many companies have realized that a greater return on investment (ROI) can be obtained by developing the core business, and investment in working capital items, like inventory and debtors give lesser returns. With the advent of Information technology (IT), inventory management has become essential which can be used to reduce inventory. Better the information, lower is the inventory.

11. Improve customer service Transportation savings Hedge against future Unplanned shocks (labor strikes, natural disasters, surges in demand, etc.) To maintain independence of supply chain W h y h o l d I n v e n t o r y ? 11

12. A nt i cipation inventory Cycle stock Safety stock P ipeline stock Dead stock Decoupling stock Categories of Inventory 12

13. 1 . Cycle Stock : 13 Because of the economies of scale involved in production and transportation it makes sense to produce and transport goods in batches. The is called as cycle stock. 2 . Safety stock : It is a safeguard against the uncertainties of demand and supply. 3.Pipe line stock: Since production and transportation activities take certain finite time, firms need to carry pipeline or in transit stock. Pipeline stock consist of good usually being worked upon (WIP) or being moved from one location to another in the chain ( In transit Inventory).

14. Decoupling Stock: Since it is not possible to carry out supply chain operation with just one decision maker, the entire supply chain is usually divided into various decision making unit, the demarcation of decision making unit take place at both organizational and departmental boundaries, so it is not uncommon for organizational to hold large inventories at organizational as well as departmental level. This becomes decoupling inventories. So that flexibility at each level can be made Dead Stock: It refers to that part of the stock , that remain dormant or non moved over a long period of time . 14

15. 6. Anticipation Stock : It consist of stock accumulated in advance of expected peak in sales or to take care of some special event that does not occur on regular basis. 15 It is of two types Seasonal Stock Speculation Stock

16. Inventory Planning Models 16 Economic Order Quantity (EOQ) : This is the replenishment order quantity, which minimizes the combined cost of inventory maintenance and ordering . In this model, the inventory holding / carrying cost is taken to be proportional to the average inventory held during a period. Thus, by reducing the inventory, its carrying cost can be reduced. 2. Material Requirement Planning (MRP)   Materials Requirement Planning (MRP) is a scheduling procedure for production processes. It determines a schedule for the operations and raw material purchases, given information describing the production requirements of the several finished goods of the system, the structure of the production system, the current inventories for each operation and the lot sizing procedure for each operation . 3. Vendor Management Inventory (VMI)   In VMI, the supplier takes charge of the inventory management of the product and also manages the replenishment process based on the customer’s consumption pattern.

17. Inventory Planning Models 17 4. Distribution Requirement Planning (DRP)   A DRP allocates inventory from the mother warehouse to the various distribution centers based on the following : Pattern of demand Provision of safety stock Quantity ordered Average performance cycle length DRP also coordinates the finished goods requirement across the distribution network . 5. Just – in – Time System (JIT ) Just In Time (JIT) is a manufacturing philosophy, which leads to Production of necessary units, in the necessary quantities at the necessary time with the required quality. The JIT-technique is a "Pull System", based on not producing units until they are needed.

18. Inventory Management Strategy Development Process 18 Three Steps 1. Market / Product Classification : Also known as ABC classification, this groups all products and markets with similar characteristics to ease inventory management. The objective of this classification is to focus and to refine the inventory management efforts. Classification can be based on a variety of measures like sales, contribution of profit, inventory value, nature of the item etc.   2. Segment Strategy : In the second step, the integrated inventory strategy for each product or market group or segment is defined. Various aspects of the inventory management process like service objectives, forecasting methodology, management technique and the review cycle are included in this strategy . 3. Operationalized policies and parameters : Finally, all procedures and parameters are defined for implementation. The procedures have to define the data requirements, software applications, performance objectives, etc.  

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