Inventory

Management
Chapter V
Inventory management is an important function in controlling assets in the supply chain

Course Agenda
1. Introduction to Inventory
Management
2. Monitoring and Analyzing Inventory
3. Inventory Control
4. Inventory Management and
Forecasting
5. Managing Inventory in the Supply
Chain
6. Inventory Performance
Measurement and Financial
Implications

2
Learning Block
Agenda
• Understand the role and importance of
inventory
• Discuss the main reasons for carrying
inventory
• Describe the main approaches to
managing inventory
• Outline how inventory items can be
classified
• Explain the key roles and
responsibilities for managing inventory
at distribution centers (DCs)
 Key Elements
Techniques for
The importance and Exposure to the
effectively managing
use of inventory in different types of
and controlling
the supply chain. inventory.
inventory levels.

The relationship
Financial impacts of
between forecasting
inventory
and inventory
assessment.
management.
Unit 1: Inventory Basics
Inventories may be
Inventory Includes:
found in:
• Raw Materials • Factories
• Work in Progress (WIP) • Warehouses
• Finished goods • Retail Stores
• Merchandise • Other type of storage
• Spare parts facilities
• Other operating
supplies
Unit 1: Inventory Basics
• Ideally, an organization
would have sufficient
Greatest Challenges for
inventory to satisfy
customer demands for managing inventories
products without losing
any revenue due to
insufficient stock.
• An organization does not
want to have too much Balancing Supply and
inventory on hand, Demand
because it costs too much
money to both acquire
and hold inventory.
Introductory Management

Loss of Sales
Equipment
downtime due to
the lack of spare
parts

A complete lack
or limited amount
of components
and raw materials
to assemble
products

Insufficient Inventory
Inventory Basics
• Carrying Costs
• Purchasing large quantities of product may require a form to utilize funds
from loans or the issuance of stock.
• The cost of using borrowed funds

• Acquisition Costs
• Include the purchase price paid and associated administrative costs.
• The labor costs to receive and pay for ordered items.
Inventory Basics
• Stockout Costs

Backorder Costs Lost Costumers

• These are incurred when a firm must • if costumers are not willing to
place an order with its suppliers for a wait for a backorder, they may
rush shipment to meet customers or decide to take their business
internal manufacturing needs; rush elsewhere, leading to reduce
shipments typically incur higher revenue for the firm.
handling and transportation costs
The Necessity of
Inventory
• Firms hold inventories as means of
dealing with uncertainty in the
supply chain.
• This uncertainty comes from chronic
• supplier manufacturing delays
• late deliveries
• poor quality
• damaged and incorrect deliveries
• other issues that arise in the
supply chain
Problematic Reasons for Carrying Inventory

• Ordering inventory is
often used to compensate
for supply chain
problems, which leads to
excess inventory.
• Instead of addressing the
root causes of problems,
companies mask them
with high inventories
Problematic Reasons for
Carrying Inventory
• Examples of supply chain problems include
 Poor demand planning, poor forecasting, and high
forecasting error
 Product theft
 Poor supplier performance (inaccurate lead time, late
delivery, poor quality, etc.)
 Poor production yields that require greater inputs for the
desired output
 Poor or non-existent inventory planning and tracking
systems
 Poor inventory counting systems that reduce stock accuracy
 Large-quantity purchases to obtain lower unit prices that
are outweighed by higher carrying costs
 Inattention to obsolete inventory disposition; obsolete stock
no longer has value
Inventory • Inventories of raw
materials, components,
• Inventories of finished
or intermediate (semi-
Carrying semi-finished products,
maintenance items, and
finished or processed)
goods may be found at
Locations repair items are often
held at supplier facilities
locations such as
manufacturing
or at the buying facilities, warehouses,
company’s warehouse DC’s (distribution
and other facilities. centers), retail
locations or point-of-
sale (POS) locations.
Functional Types of Inventory

• Different types of inventory have unique functions or purposes

and may be managed differently depending on where the
inventory is held and its role in the supply chain.

• Cycle Stock
• Seasonal stock
• In-process stock
• Promotional stock
• Safety tock
• Speculative stock (hedge
• Maintenance, Repair, and stock)
Operations (MRO) Inventory
Functional Types of Inventory
• Cycle stock: inventory that is depleted through normal use or sale; firms
hold cycle stock in DC’s and retail stores in anticipation of customer
orders or to respond to normal consumption demands.

• In-process stock: good being manufactured or in between manufacturing

processes (also known as WIP or semi-finished goods)

• Safety stock (buffer stock): Held to protect against uncertainties in the

supply chain. These uncertainties include chronic supplier manufacturing
delays, changes in demand rate (the rate of demand for stock that can vary
over time), and variances in lead-time length.
 Functional Types of Inventory
• Seasonal stock: Stock held in advance of the season when the firm expects to sell
it. Industries that typically require significant seasonal stock include apparel,
sporting goods, and specialty holiday.

• Promotional stock: Stock held to respond quickly to marketing promotions or

price incentives a firm plans to offer its customers, including holiday promotions.

• Speculative stock (hedge stock): most commonly associated with companies

involved in manufacturing or assembly. This type of inventory is held to protect
against expected and possible price increases or constrained availability.
Functional Types of
Inventory

Maintenance, Repair, and

Operations (MRO) Inventory:
• Service parts help ensure that
key pieces of equipment
continue to function effectively.
 Managing Inventory
• Demand Planning: A key element of inventory planning is
to estimate the amount of inventory required over a set time
period to meet customer needs.

• Counting Inventory: For inventory control purposes, it is

necessary to compare the on-hand levels with inventory
records by performing a physical count of all items.

• Deciding How Much Inventory to Hold: Rightsizing the

inventory is dependent on the specific industry.

• Tracking and Controlling Inventory: Once a company has

acquired inventory, suitable tracking and control methods
must be implemented.
 Types od Jobs in
Inventory Management

• Jobs and Key Duties in inventory management include:

• Inventory Control Analyst: Includes cycle counting and keeping

records

• Inventory Data Analyst: Analyzes data and scenarios, evaluates

options, and makes recommendations to management

• Inventory Operations Specialist: Includes product tracking and

placement

• Quality assurance: Includes acceptance and inspection of incoming

and outbound product

• Inventory Supervisor: Includes direct supervision of inventory

control personnel
Inventory Management/Control
Employee Tasks
• Depending on the size of the operation, Inventory control workers typically report to
a supervisor.

• The supervisor typically reports to a warehouse manager or inventory manager,

depending on the size of the organization and its structure. Warehouse managers
may in turn report to a distribution director, while inventory managers may report to
an inventory director.

Inventory
Supervisor

Inventory Quality
Inventory Inventory Data
Operations Assurance
Control Analyst Analyst
Specialist Specialist
 Inventory Management Jobs
• There are four aspects of inventory management and these are;
a. Stock turnovers
b. When to order(Re-order point)
c. How much to order (Economic order Quantity)
d. Warehousing

Stock Turn overs

-This is the balance between sales and inventory on hand, expressed by stock turnover, the number of
times during specified period that average inventory on hand is sold.

The advantage of high inventory turnover are:

1. Inventory investments are productive;

2. Merchandise are fresh;
3. Losses from changes in styles and packaging are reduced; and
When to re order inventory
The reorder point depends on: order lead time, usage rate, and safety sock.

Order lead time is the period form date a sales order is placed until the date goods are
ready for sale or use (received, checked, and altered if necessary)
Usage rate means the average sales in units per day or the rate at which a product is
used in production process.
Safety stock is the extra merchandise kept on hand to protect against out-of-stock
conditions resulting from unexpectedly high demand, grater-than anticipated
production volume and delivery delays.
Transportation
There are four common modes of transportation used by companies in shipment of goods.
1. Waterways
2. Railroads
3. Truck/motor carriers
4. Airways

Various supply chain optimization models are as follows:

5. Mixed integer linear programming
6. Stochastic modelling
7. Uncertainty modelling
8. Be level Optimization
 Revenue Management
1. Revenue Management- is a strategic approach used by businesses
to optimize their pricing and availability of products or services in
order to maximize revenue
2. Importance of Revenue Management-a crucial aspect of business
strategy that involves the optimization of pricing and inventory to
maximize revenue and profitability.
3. Revenue Management Strategies-he primary goal of revenue
management is to sell the right product to the right customer at the right
time for the right price. This involves analyzing consumer behavior,
market demand, and competitive dynamics to optimize pricing and
distribution strategies.
*Understand Your Market- opportunities for growth, and develop
effective marketing strategies to reach their target audience.
*Segmentation and Price Optimization- two important concepts in
marketing and business strategy. Segmentation refers to the
process of dividing a market into distinct groups of consumers
who have similar needs, wants, using data analysis and
mathematical models to determine the most effective pricing
strategies for products or services, with the goal of
maximizing revenue and profit.
*Work closely with Other Departments- essential for the success
of any organization. Collaboration between different
departments within a company can lead to improved
communication, increased efficiency, and better decision-
making.
*Forecasting Strategies-methods and techniques used to predict future
events or trends based on historical data and other relevant
information.
*Embrace Search Engine Optimization- the process of improving the
visibility of a website or a web page in search engine results.
*Choose the Right Pricing Strategy-This approach requires businesses to
understand their target market and the benefits that customers derive
from their offerings.
*Incentives for Direct Bookings-various strategies and benefits offered by
businesses, particularly in the hospitality industry, to encourage
customers to book directly with them
*Focus on Mobile Optimization- process of ensuring that a website or
application is designed and developed to provide an optimal user
experience on mobile devices, such as smartphones and tablets.
*Work with freelance Revenue Management- practice of managing and
optimizing a company’s revenue streams on a temporary or project