Tools and Techniques of Inventory Management and it's Importance

Inventory management

1. Inventory Management
(Blood)

2. INVENTORY MANAGEMENT
•Companies used to measure their muscle by the size of their
inventory
•Bigger was better. Vast warehouses filled to capacity ensured
efficient assembly lines and guaranteed that, production would
never stop.
•Who cared about carrying costs? They would be erased by
increased sales.
But now that equation has changed
•Lowering inventories is one of the quickest ways to decrease
working capital needs. Performance measurements, such as the
old standby ROA (return on assets) and the newer EVA (economic
value added), as well as other measures that gauge how efficiently
capital is used, have become more common organizational
drivers.
•How efficiently capital is used. combine the drive for efficient
capital use with the need.

4. Inventory
•Basically a stock or store of goods which can be
physical or information based.
•Items that can be worked on to add value
•Supplies typically consumed during operations
•Raw materials and purchased parts
•Partially completed goods, called work-in-process
(WIP)
•Finished goods inventories (manufacturing firms) or
merchandise (retail stores)
•Replacement parts and tools

5. Functions of Inventory
•Meet anticipated demand
•Smooth seasonal production requirements
•Protect against stock outs
•Take advantage of economic lot size
•Hedge against price increases

6. Concerns of Inventory Control
•Level of customer service
•Costs of ordering and carrying inventories

7. Overall Objective of Inventory Management
To achieve satisfactory levels of customer
service while keeping inventory costs within
reasonable bounds.

8. Inventory Counting Systems
•Two-Bin System - Two containers of inventory;
reorder when the first is empty, use the
contents of the second until order received
•Universal Bar Code - Bar code
printed on a label that has
information about the item
to which it is attached 0
214800 232087768

9. •Lead time: time interval between ordering and
receiving the order
•Holding (carrying) costs: cost to carry an item
in inventory for a length of time, usually a year
•Ordering costs: costs of ordering and
receiving inventory
•Shortage costs: costs when demand exceeds
supply
Key Inventory Terms

10. There are three categories of inventory; too much in either
may be a bad thing unless you have reasons for it such as
seasonality, production runs, and prevention of stockouts
or improvement of customer satisfaction levels.
 
TYPES OF INVENTORY/STOCK
–Cycle stock
–In-transit stock
–Safety or buffer stock
–Speculative stock
–Seasonal stock
–Dead stock

11. •If demand and lead time is constant, only cycle stock is
necessary.
•In transit inventory is usually accounted for on the place of
shipment as it is not available at the destination.
•In-transit stock can be reduced through faster modes of
transportation.
•Safety or buffer stock is a result of uncertainty of demand
and lead time.
•Speculative stock is inventory held for reasons other than
satisfying current demand, often acquired to reach
economies of scale or to generate seasonal stock.
•Dead stock includes items for which no demand has been
registered and may become obsolete.
 

12. •Most of us don’t work in a place called
perfect, and are facing uncertainties.
 
SYMPTOMS OF POOR INVENTORY
MANAGEMENT
•Increasing number of backorders
•Increasing cancelled orders
•Increasing numbers of returns
•High customer turnover rate
•Large number of obsolete items
•Periodic lack of storage space

13. WAYS TO REDUCE INVENTORY LEVELS
•Lead-time analysis
•Delivery-time analysis
•Eliminate low turnover items
•Eliminate obsolete items
•Analysis of package size
•Analysis of discount structure
•Examine returned goods procedures
•Measurement of fill rate by stock-keeping unit (SKU)
•Analysis of customer demand
•Improve forecasting
•Improve Electronic data interchange with vendors/suppliers

14. INVENTORY MANAGEMENT SYSTEMS/ANALYSIS
ABC Analysis
Forecasting
Advanced Order Processing Systems
Enterprise Resource Planning (ERP
Electronic Data Interchange (EDI)
Vendor-Managed inventory (VMI)
•ABC Analysis is a tool to classify items according
to their relative importance/profitability (Category
A items are more important than category B items,
and so on)

15. ABC Classification System
Classifying inventory according to some
measure of importance and allocating
control efforts accordingly.
A - very important
B - mod. Important
C - least important
Annual
$ volume
of items
AA
BB
CC
High
Low
Few Many
Number of Items

16. A distribution by value report usually forms the basis of an ABC
analysis.
Better sales forecasting and advanced order processing systems
as part of a larger marketing plan will reduce inventory.
And Enterprise Resource Planning (ERP) system such as SAP will
eliminate stove pipes and information silos and contribute to
information sharing along with a company knowledge
management (KM) system.
Top management may see Vendor-Managed Inventory (VMI) as a
way to out-source the inventory problem.
But one has to be careful as it requires a high degree of
transparency and integration between the partners. Such a
marriage may bring a lot of benefits during the honeymoon period
but also may have a costly divorce lurking in the background.

17. •Order quantity decisions: Managements face a
daunting task in striking the right balance
between the size of the order placed and costs
associated with cycle stock inventory and costs
linked with carrying inventory. Economic order
quantity best serves its purpose by determining
least cost order quantity.
•Economic order quantity model (EOQ): This
model puts forward a simple relationship
between costs of placing orders, inventory
carrying costs and order quantity. The
assumptions made are constant demand rate,
non variable costs and unlimited production and
inventory capacity.

18. Basic Inventory Trade Off
Logistics and Finance
Inventory increases
costs and decreases
ROA (return on
assets)
Marketing and
Manufacturing
Inventory increases
responsiveness to
demand and ability to
achieve economies
of scale
VS.

19. Inventory Carrying Cost
Inventory investment
Insurance
Taxes
Inventory
carrying
costs Storage
space costs
Capital
costs
Inventory
service
costs
Inventory
risk costs
Plant warehouses
Public warehouses
Rented warehouses
Company-owned warehouses
Relocation Costs
Obsolescence
Pilferage
Damage

20. Incremental
Carrying Cost
Savings
The Impact of Inventory Turns on Inventory
Carrying Costs
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
$750,000
375,000
250,000
187,500
150,000
125,000
107,143
93,750
83,333
75,000
68,182
62,500
57,692
53,571
50,000
$300,000
150,000
100,000
75,000
60,000
50,000
42,857
37,500
33,333
30,000
27,273
25,000
23,077
21,428
20,000
$150,000
50,000
25,000
15,000
10,000
7,143
5,357
4,167
3,333
2,727
2,273
1,923
1,649
1,428
Inventory
Turns
Average
Inventory
Carrying Cost
at 40 Percent

21. Measures of Inventory
Investment

dollarsin inventory Average
dollarsin sales Annual
turnoverInventory 
dollarsin sales (daily) weekly average
dollarsin inventory Average
supply of (days) Weeks 

22. Inventory Investment Measures Example: The Coach Motor
Home Company has annual cost of goods sold of $10,000,000.
The average inventory value at any point in time is $384,615.
Calculate inventory turnover and weeks/days of supply.
•Inventory Turnover:
•Weeks/Days of Supply:
turns inventory 26
$384,615
0$10,000,00
value inventory average
sold goods ofcost annual
Turnover 
2weeks
0/52$10,000,00
$384,615
COGS weekly average
value inventory average
Supply of Weeks 

23. ABC Inventory Classification
•ABC classification is a method for determining level
of control and frequency of review of inventory items
•A Pareto analysis can be done to segment items into
value categories depending on annual dollar volume
•A Items – typically 20% of the items accounting for
80% of the inventory value-use Q system
•B Items – typically an additional 30% of the items
accounting for 15% of the inventory value-use Q or P
•C Items – Typically the remaining 50% of the items
accounting for only 5% of the inventory value-use P

24. ABC Example: the table below shows a solution to an ABC analysis. The
information that is required to do the analysis is: Item #, Unit $ Value, and
Annual Unit Usage. The analysis requires a calculation of Annual Usage $ and
sorting that column from highest to lowest $ value, calculating the cumulative
annual $ volume, and grouping into typical ABC classifications.
ItemAnnual Usage ($)Percentage of Total $Cumulative Percentage of Total $Item Classification
106 16,500 34.4 34.4A
110 12,500 26.1 60.5A
115 4500 9.4 69.9B
105 3200 6.7 76.6B
111 2250 4.7 81.3B
104 2000 4.2 85.5B
114 1200 2.5 88C
107 1000 2.1 90.1C
101 960 2 92.1C
113 875 1.8 93.9C
103 750 1.6 95.5C
108 600 1.3 96.8C
112 600 1.3 98.1C
102 500 1 99.1C
109 500 1 100.1C

25. Calculating EOQ
EOQ
C
QP2

Q=The market demand in units for the period
P=The overhead cost of placing one order
C=The total carrying cost for one unit for the period
How much inventory should we order?
What is the formula for EOQ?
What do the terms mean?

26. Reorder Point
When do we place the inventory order?
What is the formula?
Reorder point =Average lead time in days
x Average daily sales
Define Lead Time:
time lag between initiating a
purchase order and when
inventory is delivered and
ready for sale.

27. Safety Stock
Because a rush in customer demand or
problems in order processing or
shipping may cause fulfillment
problems, a manager may see the need
for a little cushion in reorder point.
Safety stock — calculation has two parts:
1.To handle possible problems in the reorder process.
2.To handle an unexpected spike in sales demand.
Why does a business want to hold safety
stock?

28. Thank You