Inventory and warehousing

“Minimize costs while maintaining production output, quality and

customer service”
 Inventory hides underlying problems

inventory
Restricte Quality
d problems Inadequate
informati processing
on flow
 Customer Demand: Few More Concepts

Make-to- Make-to stock would largely based on independent

Stock demand where goods or services are available ex-
stock or off-the-self. Examples are fast moving
consumer goods e.g. groceries, cosmetics etc.
This concepts are mostly applied in retail store

Make-to-Order Make-to order goods and services are produced

according to customer requirements only after
order has been received. Examples are original
equipment (OEM) components for the motor vehicle
industry, flexible packaging, sheet metal etc

Assemble Assemble-to order goods and services allow

customization of standard item. It is a combination
-to-Order
of make-to-stock and make- to-order. Examples are
furniture manufacturers producing lounge chair and
sofas where they are partially completed awaiting
the customer’s choice of upholstery fabric.

All pictures: internet

 Inventory- Definition
Inventory is a list of goods and materials , or those goods and
materials themselves, held available in stock by a business

In other word, inventory is stored accumulation of material

resources and physically located that are used in a
transformation process and/or activated as asset.

In Accounting: An Asset comprised of all materials, supplies,

finished goods or goods in some stage of processing that are
owned by a company, whether located physically on the
premises of that company, in transit, or in the hands of a
distributor who has them on consignment

Inventory is a very expensive asset that can be replaced with a less

expensive asset called “information”. In order to do this, the information
must be timely, accurate, reliable, and consistent. When this happens, you
carry less inventory, reduce cost and get products to customers faster.

“It’s easy to turn cash into inventory, but the

challenge is to turn inventory into cash”.
All pictures: internet
 “Bullwhip effect” in Supply Chain Management

The final customer places an order (whip) and order fluctuations build up upstream the supply chain.
Distorted information, or the lack of information, is the main cause of the “bullwhip effect”
,named after the way the amplitude of a whip increases

As expected, babies use diapers at a fairly steady and predictable rate, and retail sales are quite
uniform. But, P&G found that each retailer bases his own orders on his own slightly exaggerated
forecast, thereby distorting the information about real demand. Wholesalers' orders to the P&G
diaper factory fluctuated even more. And P&G’s orders to 3M and other materials suppliers
fluctuated even more.

One of the most important methods of lessening the bullwhip effect is to reduce uncertainty along
the supply chain. This can be achieved by sharing information about customer demand and by
using the same forecasting method e.g. by supplying EPOS data to supplier.
All pictures: internet
 Reasons behind Inventory

 Error in demand forecast

 Late delivery or unpredictable from suppliers
 Minimum supply order quantity
 Supplier delivery interval
 Stocking methodology
 Reorder interval
 Strategic stocking
 Possibility to increase of purchase price
 Lead-time variations
 Consignment stocking
 Minimization of delivery costs
 Pipeline inventory
 Precautionary stock

All pictures: internet

 Why inventory management is important
• Working capital cycle/ order to cash received cycle.

Dead money
How much inventory to keep
 Cost of holding inventory and cost of not holding inventory

Cost of holding inventory Cost of not holding inventory

1. The cost of money tied up in stock 1. Loss of sales from delay in supply.
2. Fixed storage cost. 2. Loss of goodwill and delayed payment
3. Variable storage cost. from supplier.
4. Inventory management cost. 3. Higher transportation cost.
5. Stock deterioration, loss and 4. Disruption of the production process
obsolescence. leading to higher unit resources cost.
5. Inefficient production scheduling due
to shortage.
6. Quality or specification differences
 Role of Inventory Manager

• Integration
• Technology
• Objectives & functions
• Building a inventory management plan
 Types of Inventory
 Normal Inventory:This is inventory required to support the normal replenishment process under
conditions of certainty. If demand and lead times are consistent, normal inventory is what the
organization needs to meet customers demand at a given point in time. This type of inventory should
generally be as close to zero as possible. However, this may not happen due to transportation,
production or distribution economics of scale.

 Safety Inventory: Surplus inventory that a company hold to protect against the uncertainty in demand,
in lead-times and in quality of supply.

 Pipeline inventory: Inventory moving from point to point in the material flow is called pipeline inventory.
This type of inventory will either belong to the shipper or to the customer depending on the terms of sale.

 Speculative Inventory: This type of inventory is held other than meeting current demand. For example,
the company may decide to buy and stock more than it needs in the event that it forecasts that prices of
material will rise or supplier offers lower price if a large quantity is purchased at one time.

 Seasonal Inventory: This type of inventory is accumulated in advance of significant selling session. If the
majority of sales occur in relatively short projects of time, companies may stock seasonal inventory to
stabilize production over a more extended period of time and maintain labor force capacities.

 Dead Inventory: Dead or excess inventory is normally considered that exist for more than 12 months.
No one wants this type of inventory, but it is held for a variety of reasons. Sometimes to meet occasional
need of customers, it is kept as a gesture of goodwill.
 Stages of Inventory
• Three common stages:
– Raw-material inventory:
inventory that is stored before it
is used in the production process

– Work-in-process inventory:
partially finished inventory that
is within the production process

– Finished product inventory:

inventory of product ready to be
sold

There is one more common store item

i.e. consumables - for example, fuel
and stationery

All pictures: internet

 Inventory Categorization

ABC analysis

Class of Item % of Items % of Value

Class A 15-20% 70-80%

Class B 25-30% 15-20%
Class C 50-60% 5-10%
• ABC and inventory control efforts:
– A-items
• very careful management
• careful estimates of future usage.
– B-items
• routine management
• routine effort in forecasting demand.
– C-items
• little effort in forecasting demand
• however be careful for strategic items (safety stock).
 ABC analysis-Cont’d

Items Listed in Descending Order of Dollar Volume

Monthly Percent of
Unit cost Sales Dollar Dollar Percent of
Inventory Item ($) (units) Volume ($) Volume SKUs Class

Computers 3000 50 150,000 74 20 A

Entertainment center 2500 30 75,000

Television sets 400 60 24,000

Refrigerators 1000 15 15,000 16 30 B
Monitors 200 50 10,000

Stereos 150 60 9,000

Cameras 200 40 8,000
Software 50 100 5,000 10 50 C
Computer disks 5 1000 5,000
CDs 20 200 4,000

Totals 305,000 100 100

 Item Categorized:SKU- Stock Keeping Unit

 An individual color, flavor, size, or pack

of a product that requires a separate
identification number to distinguish it
from other items (a measure of an item
of merchandise for inventory
management).
 In inventory control and identification
systems, it represents the smallest unit
for which sales and stock records are
maintained.

Successful inventory management

systems assign a unique SKU for each
product and also for its variants, such
as different versions or models of
product or different bundled packages
including a number of related products.

This allows merchants to track, for

instance, whether blue shirts are
selling better than green shirts.

All pictures: internet

 Item Categorized Based on Supply Positioning model

H Bottleneck Critical
Impact/Supply Risk Rating

Routine Leverage
L

80% of items = 20% of value Expenditures 20% of items = 80% of value

 Routine items= Low expenditure and low impact/supply risk

 Leverage items= High expenditure and low impact/supply risk
 Bottleneck items= Low expenditure and high impact/supply risk
All pictures: internet
 Critical items= High expenditure and high impact/supply risk
 Supply Positioning Model: Stock for different categories

H Bottleneck Critical

• Highest level of safety stock • Relatively low safety stock

Impact/Supply Risk Rating

• Short review interval • Shortest review interval

• High degree of monitoring • Highest degree of monitoring
M & control & control

Routine Leverage
L
• High level of safety stock • Lowest safety stock
• Longest review interval • Short review interval
• Lowest degree of monitoring • High degree of monitoring
& control & control

N
80% of items = 20% of value 20% of items = 80% of value

Expenditures
 Inventory management & SCM
• Lean production & JIT
• Agile supply chains- efficient & responsive supply chain
• demand forecasting
7 types of waste in lean –
1. overproduction
2. waiting
3. transporting
4. inappropriate processing
5. unnecessary inventory
6. unnecessary motions.
7. Defects.
 Inventory management & SCM-cont’d
• Agile supply chain
a. integration
b. Flexibility.
• Push VS Pull and postponement strategies.
• The importance of reducing variety.
• Inventory in the supply chain
• Holding Inventory “ off site”
a. CMI
b. VMI
c. cross docking operations
• composite lead time and demand estimations
 Techniques used to improve certainty of
delivery and lead time estimation

• Line of balance(LOB) supplier monitoring.

• Vendor managed Inventory(VMI)
• Electronic data interchange(EDI).
• Business process re-engineering(BPR).
• Industry and government initiatives.
 Inventory coding system

• Simple sequential system.

• Structured coding systems.

Structured coding systems

A.Product code
A.01 product sub group
A.01.01 individual product
A.01.01.01 1st variant of individual product
A.01.01.02 2st variant of individual product
 Demand forecasting

• Forecasting demand
• Demand forecasting helps predict the amount of inventory a should keep.
Incorrect forecasting can lead to stock-outs, lost orders or cash flow
shortage from excess stock holdings. Demand can flow different patterns.
The key four types of demand patterns are shown below:
– Trend: constant, increasing or reducing. The trend, however, may
change over the long-term.
– Cyclical fluctuations: Demand tends to increase or decrease over
extended periods of time due to business cycles, product life-cycles,
etc.
– Seasonality: influenced by weather, regular events such as holidays,
festivals, or the end or beginning of financial years, etc.
– Random variations: when demand varies from the underlying pattern
due to unforeseen reasons.

ITC
 Quantity: Demand characteristics

1. Trend
A) B) C)

PAST FUTURE PAST FUTURE PAST FUTURE

2. Cyclical 3. Seasonality 4. Random variations

fluctuations

PAST FUTURE PAST FUTURE PAST FUTURE

 PP-1:Quantity: Types and Forecasting demand

• Types of Demand:
– Independent demand
– Dependent demand
• Ways of forecasting demand
– Expert opinion
• Scenario analysis
• Delphi technique
– Market testing
– Quantitative analysis
• Time series analysis (about 5
types)
• Casual methods
– Using computer-based
material planning system
• MRP & MRP 1
• DRP
• ERP

Picture: internet
 Quantity: Independent Demand vs. Dependent Demand

• Independent demand is the demand • Dependent demand is the demand for

for finished goods and other items and raw materials, components and sub-
often beyond the control of an assemblies that are converted into
organization finished goods and which can be
controlled by the organization.
• Inventory system based on
independent demand: • Inventory system based on dependent
demand:
– Re-order level systems
– Material Requirement Planning
– Periodic review systems
(MRP)
– JIT
– ERP

All pictures: internet

 Methods of Demand Forecasting
Judgment Methods
Market Research Analysis

Panels of Experts

• Internal experts
• External experts
• Domain experts • Market testing
• Delphi technique • Market surveys
• Focus groups
Accurate
Time-Series Methods Forecasts
Causal Analysis

• Moving average • Relies on data other than

• Exponential smoothing that being predicted
• Trend analysis • Economic data, commodity
• Seasonality analysis data, etc.
 Ways of forecasting demand

1) Expert Opinion

1.1) Scenario It is made by the group of experts. The

analysis results express identifying the best
and worst case scenarios, together
with what is believed to the most
likely case scenario(s). i.e. somewhat
in between two extremes.

1.2) Delphi This method of forecasting means a

technique group of experts making predictions
anonymously and independently of
each other. Each prediction is
compared to the others and any
differences are debated. A consensus
usually emerges.

Picture: internet
 Ways of forecasting demand
2) Market Testing

– Market Testing:
– This needs identifying a sample
of population that a company’s
product or services is aimed
at, and conducting trial sales
for a limited a period of time to
ascertain likely demand.

– This approach might be applied

where there is significant
uncertainty about likely future
demand.

Picture: internet
 Ways of forecasting demand

3) Quantitative Analysis
– Quantitative analysis:
This indicates a series of
techniques that use past data (i.e.
quantities purchased over a
period of time) to generate a
forecast.
– This method assumes that the
past patterns of demand will
continue in the future. They are
appropriate where conditions are
relatively stable.
– They may work well for short-
term forecasts, but tend not to
work so well for making long-
term forecasts.

Picture: internet
 Ways of forecasting demand
3.1) Quantitative analysis: Moving straight averages
Quantitative analysis: Moving Moving straight averages:
straight averages:
• This is the most fundamental Period (Year) Demand
mathematical projection quantities
technique.
2007 10
• The average is based on a
specified number of data points, 2008 25
for example, demand over each 2009 30
of the last twelve months or the
last six months. 2010 35
• As each new period goes by, the 2011 50
new data is added to the series
and the oldest is dropped, to Average 30
calculated the new average. This
is why it is called “moving”.

Picture: internet
 Ways of forecasting demand
3.2) Quantitative analysis: Moving weighted averages

Quantitative analysis: Moving weighted averages:

• This is the same as the moving straight average, except that each demand figure is multiplied
by a growing factor. As shown in the table below, the greatest weight has been applied to the
most recent data, and the weighting factors have been progressively reduced as the data gets
older. In this way, more notice is taken of recent demand, which will improve the projection if
there is an increasing or reducing trend

Moving weighted averages:

Period (Year) Demand quantities Quantities X Weighted quantities

weighting factor
2007 10 10 x 0.050 = 00.500

2008 25 25 x 0.100 = 02.500

2009 30 30 x 0.175 = 05.250

2010 35 35 x 0.275 = 09.625

2011 50 50 x 0.400 = 20.000

Average 30 (Total weight= 1.0) = 37.875

Picture: internet
 Ways of forecasting demand

3.3) Quantitative analysis: Moving exponential weighted averages

Quantitative analysis: Moving Exponentially weighted averages:

• This is the same as the moving weighted average average, except that weights are taken from exponential
series. The main benefit of this approach is the ease of recalculating projections for each period.

The Formula:
New forecast = Past forecast + a ( Past forecast error)
Or
New forecast = Past Forecast + a (Actual demand- Past Forecast)
Or
Ft +1 = ft +a (d1-f1)

This formula means is that experiences (as reflected in the past forecast error) is used to
determine the next projection), tempered by the value given to a
The value of a
The value selected for a will normally be between 0.1 and 0.4. The higher the value, the more
notice is taken of recent demand. However, high values will also be more likely to produce
unstable projection, which incorrectly respond to random noise in the data.

“Ft” means past forecast and “Ft+1” means new forecast

Picture: internet
 Ways of forecasting demand
3.3) Quantitative analysis: Moving exponential weighted averages- Cont’d

Let us look at the example of how to apply the method of exponentially weighted forecasts. In the case
illustrated below, the value given to a = 0.2. Period 1 (where the earlier demand forecast was 50) has
just been completed. Using the recently obtained data on actual demand for the period (60), a past
forecast error of + 10 has been established.
Period (t) 1
Past forecast f1 50
Actual demand d1 60
Forecast error (d1-f1) +10
New forecast 52

Period 1: Ft +1 = ft +a (d1-f1) = 50+0.2(10)= 50+2 = 52

In period 2, the previous forecast, thus, repeating the cycle. During this period, let us
assume that actual demand turns out to be 72, resulting in a forecasting error of+20
Period (t) 1 2
Past forecast f1 50 52
Actual demand d1 60 72
Forecast error (d1-f1) +10 +20
New forecast 52 56

Period 2: Ft +1 = ft +a (d1-f1) = 52+0.2(20)= 52+4 = 56 **** (to be corrected)

 Ways of forecasting demand
4) Demand Forecasting- Simple Linear Regression
Simple linear regression is the most straightforward case of *causal method analysis. It
can be applied when only one independent variable influences the demand for product
and when the relationship is linear.
For instance, the level of demand for a soft drink bottle will be effected by its price only. In
this case formula will be:

D= a- {bxp}
D= the forecasted demand (i.e. dependent variable)
a= a constant (also called intercept) which expresses the value that the dependent variable
will have if the independent variable – in this case price- is equal to zero. We can assume
that, as per past experience, if the bottles are given free, this would be equal to the
maximum production capacity of the company. Suppose in this case it is 2 million per month.

B= the slope (or regression coefficient) which expresses the nature of the causal relationship
between the independent variable. Suppose demand drops by 40000 bottles per month for
every increase of $0.10 in the price of bottle i.e. a drop of 400,000 bottles for every
increase of $ 1.
P= the price of soft drink (i.e. independent variable)
Determine what will be level of demand, if price is $1.25:
D= 2,000,000- {400,000 x 1.25} = 1,500,000
*Causal means relating to cause and effect
 Ways of forecasting demand
5)Demand Forecasting: Multiple Linear Regression

It can be applied when two or more independent variable influences dependent

variable, in a linear (i.e. straight line”) relationship.

For instance, the bottling company may know from past experience that every
decrease of 1 degree C in average monthly temperature (t) from a maximum
temperature of 35 degree C causes demand of its soft drink to decrease by 30,000
bottles per month. It can then use the following formula to forecast demand if its
price will be $1 per bottle and the average temperature is exceeded to be 29
degree C (i.e 6 degree below the maximum)

D= a- {b1xp} – {(b2Xt)

D= 2,000,000- {400,000 x 1}- {30,000X6}

D= 1420,000 bottles
Where in the supply chain and how much inventory to keep?

Raw cotton Yarn Grey fabric Finished Shirt

grower manufacturer manufacturer fabric manufacturer
manufacturer

 Cost

 Flexibility

 Service level

 Response time

All pictures: internet

 Bill of Materials (BOM)

• A bill of materials (BOM) is a list of the raw

materials, sub-assemblies, intermediate
assemblies, sub-components, components,
parts and the quantities of each needed to
manufacture an end product.
• The different types of BOMs depend on the
business need and use for which they are
intended. In process industries, the BOM is
also known as the formula, recipe, or
ingredients list. In electronics, the BOM
represents the list of components used on
the printed wiring board or printed circuit
board.
• BOMs are hierarchical in nature with the
top level representing the finished product
which may be a sub-assembly or a
completed item.
• The first hierarchical databases were
developed for automating bills of materials
for manufacturing organizations in the early
1960s.[4]
 Bill of Materials (BOM): Example 1

In order to show the make-up (in

terms of the parts needed for
production) we have a Bill of
Materials (BOM) for the end-
product (namely the chair). Below
we show the BOM for the chair.

This BOM means that to produce one

chair we need:
one seat
one back
four legs .

Extensions
To extend our example suppose that
each leg is made up from two
components (X and Y). Two units
of X and 3 units of Y are needed
for one leg and the lead time is 1
week. Then our BOM is
 BOM: Spare parts of two products: Example 2

Cooking pot for open fire Cooking pot for open fire with space bar

Product 04.0000 BOM Product 05.0000 BOM

Part Description Size Qty BOM Part Description Size Qty BOM
Code Code
No No

21 Spun, 25 gauge 30 cms 1 4.0021 21 Spun, 25 gauge 30 cms 2 4.002

silver color bowl diamete silver color bowl diameter 1
r 22 Pressed steel 74 cms 1 4.002
13 Bowl interior 1 4.1300 yoke bar overall 2
sub assembly 14 Bowl interior 2 4.140
23 Iron eye hooks 3 cms 3 4.1323 sub assembly 0
23 Iron eye 3 cms 3 4.142
welded hooks 3

29 Pressed 120 3 4.1329 welded

degree 28 Pressed 180 2 4.142
aluminum
degree 8
compartment aluminum
compartment
30 3 mm thick 30 100 4 4.1330
cms 30 3 mm thick 30 100 cms 2 4.143
mm wide steel
0
strip mm wide steel
strip
 Bill of Materials: Example2

Product 04
Product 05

1 Off 1 Off 2 Off 1 Off 2 Off

Sub- Assembly 13
Sub- Assembly 14

3 Off 3 Off 4 Off 3 Off 2 Off 2 Off

Part 21 Part 23 Part 29 Part 30 Part 21 Part 22 Part 23 Part 28 Part 30

Calculating Dependent Demand for Part 23

 Material Requirement Planning

Material requirements planning, referred to by the initials “MRP” is a technique

which assists a company especially a industry concern in the detail planning
of its production

MRP is a system for planning that determines when materials should be

purchased and when works orders should be scheduled to manufacture
goods

MRP implies three questions:

What material is required?
When is the material required?
How much of the material is required
Inputs and Outputs of MRP:

Inputs Outputs

Master Production Schedule (MPS) Purchase Orders

Bill of Materials (BOM) Work Orders
Inventory Records Rescheduling/ Action Notices
 Material Requirement Planning: Flow Chart 1

MRP. Supply Chain Management

CUSTOMER

Sales Order F.G. stock

or Schedule in hand
Projection

No
R. M. Store B.O.M
Yes
Raw

Materi
al in
stock F.G.
No Warehouse

Yes
Sales
Purchase Invoice
Vendor
Order

Production
 Material Requirement Planning: Flow Chart 2

MPS is a
Aggregate Plan manufacturing plan
which specifies how

Ac
many completed units

tu
of the end item are to

al
Master Production Schedule
t
as

O
(MPS) made and when they

rd
ec are to be produced

er
r “Drives” the mrp & the operation
Fo

s
s by indicating the timing and
a le quantity of the end item to
S be made

Material Requirements Inventory Record Status (Stock

Bill of Materials (BOM) Planning (MRP) Status)
A listing of all the sub- Take MPS requirements for Accurate records of the status of
assemblies, components end item and using all dependent demand
& raw materials required BOM, “explodes” them items; on hand, scheduled
to make a single unit of into time-phased receipts, lead-times,
the end item requirements suppliers etc.

Purchase Orders (PO) Rescheduling/ Action

Work Order (WO) notices
An order placed with
A listing of all the sub- Rescheduling of time-
suppliers/s showing
assemblies, components phased
timing & quantity for
& raw materials required manufacturing to
the required materials
to make a single unit of accommodate
etc. i.e. time- phased
the end item program change
supply ,
etc.
 Material Requirement Planning (MRP)

Suppose ABC Company receives order for 100 Uni Doll (Toy) which to be
delivered in 9th week, the MRP would be as follows:

Item/Part Code Description Gross Requirements Lead Time to Assemble

MRP is aimed
No. Level/Code or purchase
at managing
purchased raw Finished Goods Quantity Week/s
material and
component 0-001 Uni Doll Order size = 100 1 (assemble)
inventories for Sub-
manufacturing Assemblies
according to
the 1-1100 Body Shell 1 X 100 = 100 4 (purchase)
predetermined 1-1200 Wheel sub-assembly 2 X 100 = 200 1 (assemble)
production plan
or Master 1-1300 Handle sub-assembly 1 X 100 = 100 1 (assemble)
Planning Components
Schedule of
finished 2-1200-01 Wheel Holder 1 X 200 = 200 1 (purchase)
products 2-1200-02 Push-on-axle 1 X 200 = 200 1 (purchase)
2-1200-03 Push –fit wheels 2 X 200 = 400 2 (purchase)
2-1300-01 Handle holder 1 X 100 = 100 1 (purchase)
2-1300-02 Rivet 1 X 100 = 100 1 (purchase)
2-1300-03 Handle 1 X 100 = 100 1 (purchase)
2-4447-18 Blind pop-rivet 6 X 100 = 600 6 (purchase)
 MRP Calculation
Parts and Required date and Week No Lead-time
component order release date
1 2 3 4 5 6 7 8 9

Uni Doll 0-001 Required date 100 WO 1 week

eks
Order Release Date
4we 100

Body Shell Required date 100 PO 4 weeks

1-1100 Order Release Date 100

Wheel sub- Required date 200 WO 1 week

assembly 1-1200
Order Release Date 200

Wheel -Holder Required date 200 PO 1 week

2-1200-01 Order Release Date 200

Push-on-Axle Required date 200 PO 1 week

2-1200-02 Order Release Date 200

eks
Push-fit-wheels Required date 2we 400 PO 2 weeks
2-1200-03 Order Release Date 400

Handle sub- Required date 100 WO 1 week

assembly 1-1300
Order Release Date 100

Handle Holder Required date 100 PO 1 week

2-1300-01 Order Release Date 100

Rivet Required date 100 PO 1 week

2-1300-02 Order Release Date 100

Handle Required date 100 PO 1 week

2-1300-03 Order Release Date 100

Blind pop-rivets Required date

eks 600 PO 6 weeks
6we
2-4477-88 Order Release Date 600
 DRP: Time-bucket matrix display
Distribution resource
Lead Time: 1 week
Planning (DRP) is
Order Quantity: 500 pieces
essentially a simulation
Time Horizon: 8 weeks
system that models all
Min. Safety Stock 250 pieces
expected activities
Max. Stock limit 600 pieces Delivery cancelled
involved in shipping
goods through networks
over a defined planning
time horizon

Details Past Week

Due
1 2 3 4 5 6 7 8

Forecast Demand 200 210 220 200 180 200 210 160
Shipment on Order (in 500 500 500 500 500
transit)

Planned Shipment 500 500 500 500

Quantity
ALERT
Received Shipment 500 500 500 500
Quantity

Projected Stock on Hand 195 495 285 565 365 185 485 775 615

Delayed receipt Over limit

 Measuring inventory and warehouse performance

• Six steps are to evaluate –

1. verify the quality of record
2. determine inventory ratio,
3. Analyze the composition of inventory
4. space utilization
5. performance of warehouse processes, equipment and
employees
6. examine the components of the cost per unit stored.
7. consider the scope for reducing the variety of items
purchased and stored.
 Valuation of Inventory

• Methods are-
• First in first out(FIFO)
• Last in first out(LIFO)
• Weighted average costing.
• Standard costing
• Replacement costing.
 Inventory Replenishing System

The aim of an effective inventory replenishment system is to maintain a

suitable balance between the costs of holding stock and the particular
service requirement for customers.
The need for this balance can be illustrated by considering the
disadvantages of low stock levels (which should provide very low costs)
and high stock levels (which should provide a very high service).
There are mainly three types of inventory replenishment system:

Re-order level system (fixed order quantity, variable order interval)

Periodic review system (fixed order interval, variable order quantity
Demand driven lean supply system (orders placed in the precise
quantity and time required for production)
 Fixed
quantity,
variable Re-order level systems - formula:
interval
Where...

ROL = (Rd i.e Rate of demand X L) + S

Demand in the lead-time + Safety stock (S)

Demand in the lead-time =

Rate of demand/usage (Rd) (e.g., per week or per day)
x Lead-time (L) (e.g., in weeks)

 Example: If rate of demand per day is 200 tons and average lead-time is
10 days and company decides to keep 3 days usages as safety stock;
what will be the Re-order level quantity?
 Therefore, Re-order level would be = (200 tons X 10 days) + (200 tons X
3 days) = 2,600 tons
ITC M11:U4:4.5-2
 Fixed
interval, Periodic review systems - formula to calculate the order size:
variable
quantity
Order size =
(Demand over the review interval + demand to cover lead-time) –
(Actual stock) – (Pipeline stock) + (Safety stock)

 Example: If rate of demand per day is 200 tons and average lead-
time is 10 days, and company decides to keep 3 days usages as
safety stock, review interval becomes 15 days, and currently actual
stocks are 900 tons and 800 tons are in pipeline; what will be the Re-
order quantity?
 Therefore, Re-order level would be = (200 tons X 15 days) + (200
tons X10 days) – (900 tons) – (800 tons) + (200 tons X 3 days) =
3,900 tons

In a periodic review system, the basis for determining the order

size (which varies each time) is therefore the (fixed) review
interval.

ITC M11:U4:4.5-6
 Inventory: Demand-driven lean supply systems

Both the frequency of ordering & the quantity of

items ordered are driven by data on demand from
the production line that is passed directly to
suppliers

Requirements for an effective JIT functioning:

 The company’s production process runs very smoothly
 Supply lead-times are short & respond rapidly to changes in
production requirements
 Suppliers are fully responsible for the quality and quantity
control of the products

M11:U4:4.5-8
 Inventory: Economic Order Quantity (EOQ)

 The model was originally developed by F.W. Haris in 1913, though R.H. Wilson is
credited for his in-depth analysis of the method
 EOQ is a model that defines the optimal quantity to order that minimizes total
variable cost required to order and hold inventory
 By following EOQ, we would be able to minimize the sum of ordering costs and
the inventory carrying costs to cover the demand for a particular period.
 Too many orders will incur excessive ordering costs, while too few orders will
cause high inventory holding costs
 In order to make EOQ, we need to make balances of two sets of costs:
 Inventory holding costs
 Ordering costs
 Cost associated with inventory
• Ordering costs
• Price discount costs
• Storage and handling costs
• Stock out costs
• Interest or opportunity cost
• Working capital costs of inventory
• Obsolescence costs
• Production inefficiency costs
• However, in most cases, while we calculate, we consider following three types of
expenditures as inventory holding costs:
– Working capital cost
– Storage cost
– Obsolescence risk costs
• We also consider following two types of expenditures as ordering costs:
– Administrative costs of placing the order
– Communication costs (with suppliers, trans. and other related parties)
 Inventory: Holding cost calculation

Holding cost (H)= (P) x (I) x (Q/2)

In which:
P = Unit purchase costs (i.e. price plus transport and other delivery cost
I = Inventory carrying cost (expressed as a percentage of P)
Q/2 = Average inventory (the order quantity divided by 2)

Ordering costs (O) = (Co) x (D/Q)

In which:
Co = Cost per order
D/Q = The number of orders in the period (I.e. the demand over the period divided
by the order quantity)
Total cost = PiQ + CoD
2 Q
 EOQ Calculation

Cost of adopting plans with different quantities

Order Qty Holding cost Ordering cost
EOQ (Q) (Pi Q/2) `+ Co D/Q) `= Total cost
method
50 25 400 425
balances
inventory 100 50 200 250
holding 150 75 133 208
costs and
ordering 200 100 100 200
cost 250 125 80 205
300 150 67 217
350 175 57 232
400 200 50 250

Total cost = PiQ CoD  Demand (D) = 1000 units per  Minimum
+ year
total cost
2 Q  Unit purchase cost (P) = $5
 Inventory carrying cost (i) = 20%
 Cost per order © = $20
ITC M11:U4:4.6-7
 Deriving the EOQ formula
As Q is the quantity per order and D is the demand over the period,
the average inventory = Q and the number of orders D
2 Q
The inventory holding cost (H) = (purchase cost) x (% carrying cost) x (average inventory)
Therefore,
PiQ
H=
2

The ordering cost (O) = (the cost per order) x (the number of orders)

Therefore, Co x D
O=
Q
Since EOQ will be found where the inventory holding costs are equal to the ordering cost, i.e

PiQ = Co x D or = 2C o D and therefore Q =

2 Q Pi 2CoD
Q 2
=
= Pi
 Safety stock calculation

 Safety stock due to uncertainty in lead time:

 Safety stock= (Maximum lead time-Normal lead
time) x Consumption rate
 For example, the daily usage rate 400 units, which
requires average lead time 20 days. Sometimes,
due to transport or other difficulties, it takes 23
days to reach.
 So safety stock = (23 days - 20 days) x 400 units =
1200 units

 Safety stock due to uncertainty in demand:
 Safety stock= (Maximum rate of consumption-
Average rate of consumption) x Lead time
 For example, the demand varies from 375 units to
425 units, we can determine the safety stock
 So safety stock = (425 units- 400 units) x 20 days
=500 units

All pictures: internet

 Re order point(ROP)

• The reorder level and re order point depend on the order lead
time and rate of demand.
400
Re-order
level
Inventory level

200 Re-
order
point

2 3 4 time
 Conclusion

Thank you for your attention…

… and Good Luck in implementing

effective Supply Chain Management in
your organization!

All pictures: internet