Module 2: Supply Chain & Logistics Management Chapter 6: Inventory Management-1

Learning Objectives By the end of this session you will be able to: Understand the importance of Inventory Identify the components of Inventory Classify items for inventory management Set up inventory norms using basic models Apply inventory review policies to various categories of items Trainer’s Talk: Trainer Instructions: Additional details: 2

Inventory is the stock of items held. What is Inventory? Inventory is the stock of items held.

Why is inventory required? To meet anticipated demand To make the product available when the customer wants and not when we can deliver.

Why is Inventory Required? To take advantage of order cycles (economy of scale) A retailer who stores 1000 SKUs, what will happen if he orders every SKU everyday from the distributor? Order

Why is inventory required? To cater to the Variability in Supply Chain: Demand Variability Supply Variability Demand Time

Why is inventory required? To help hedge against price increases or to take advantage of quantity discounts

Types of Inventories – Based on the Value Chain Finished Semi Finished 2000 Pcs Raw Material Work in Process 8 T Garment manufacturer 5 T 1000 Pcs Distribution Centre Yarn Warehouse Cloth manufacturing Work in Process 15000 Pcs Finished 100T 8 T 50 T Semi Finished Finished

Components of Inventory Transit / Pipeline Transit / Pipeline 2000 Pcs Seasonal Stock Speculation Stock Cycle Stock Safety Stock 8 T Garment Manufacturer 5 T 1000 Pcs Distribution Centre 15000 Pcs Yarn Warehouse Cloth Manufacturing 100T 8 T 50 T Cycle Stock Cycle Stock Seasonal Stock Cycle Stock Safety Stock Cycle Stock Cycle Stock Safety Stock

Rate of supply from the input process Cycle Stock Inventory is created to compensate for the differences in timing & quantum between supply and demand. Rate of supply from the input process Inventory Rate of demand from the output process The message is simple to reduce inventory we need to try to ensure the rates for all the processes in the supply network are the same. Output process Input process Inventory

Cycle Stock Cycle Stocks are created due to difference in LOT SIZES of Goods Arrival and Depletion

Cycle Stock Quantity Period Max Level Order Lot Size Quantity Min Level Period Cycle Inventory = (Max Level - Min Level)/2 = Order Lot Size /2

Cycle Stock Representation Max Level Cycle Inventory Quantity Order Lot Size (Q) Min Level Period Cycle Inventory = (Max Level - Max Level)/2 = Q/2

Exercise 1: Stock Movement Refer to the handout for the exercise. Write the answers in the space provided in the handout. Objective of the exercise: To find minimum stock level, maximum stock level, order quantity and cycle stock

Exercise 1: Stock Movement (Solution) Minimum Stock Level : 20 Maximum Stock Level : 100 Order Quantity : 80 Cycle Stock : 40

Safety Stock Stock maintained as safety against uncertainty of : Demand Production / Supply Lead Times Forecast Period Quantity Actual Demand

Safety Stock Stock maintained as safety against uncertainty of : Demand Production / Supply Lead Times Forecast Period Quantity Safety Stock

Transit / Pipeline Inventory Transit Time = 7 Days Average Pipeline Inventory = Average Demand per day x Transit Time

Seasonal / Anticipatory Inventory Seasonal Inventory Seasonal Demand Capacity Demand Quantity Production Inventory Period Positioning Inventory upfront of Seasonal / Peak Demand to avoid Fluctuations in Capacity Requirement.

Speculation Inventory Price Hedged Stock Max Level Quantity Min Level Period

Inventory Decisions Stock Out Unhappy Customers Lost Revenue Low Stock

Blocked Working Capital Inventory Decisions Blocked Working Capital High Stock

Inventory Decision : Right Balance Cost Working Capital COST OF CAPITAL SERVICE Order Size Discounts Availability Creating the right balance between the Availability and various Costs is the foremost challenge in Inventory Management.

Inventory Drivers Type Function Trade-offs Pipeline Movement of Materials Consolidation Lead time vs. Transportation Cost Cycle Economy of Scale Gap between Demand and Supply Rate Inventory Carrying Cost vs. Fixed Costs Safety Buffer against demand and supply uncertainty Service vs. Inventory Carrying Cost

Inventory Drivers Type Function Trade-offs Seasonal Servicing anticipated peak demand Incremental Production Cost vs. Inventory Carrying Cost Hiring and lay-offs vs. smooth resource occupation Loss of profit vs. Salvage cost Price Hedging Quantity based discount or prices Speculating price changes Cost of Material vs. Inventory Carrying Cost

Key Inventory Decisions When to Order? How much to Order?

Effective Inventory Management Classification system Knowledge of lead times Reasonable estimates of: Holding or carrying costs Ordering or setup costs Shortage or stock-out costs Inventory tracking system

Product Classification for Inventory Management 10 20 30 40 50 60 70 80 90 100 Percentage of items Percentage of dollar value 100 — 90 — 80 — 70 — 60 — 50 — 40 — 30 — 20 — 10 — 0 — Class C Class B Class A ABC Classification or Pareto Analysis

Exercise 2: ABC Classification Refer to the handout for the exercise. Write the answers in the space provided in the handout. Objective of the exercise: To perform an ABC Classification

Exercise 2: ABC Classification (Solution) Item Unit Cost/ Unit Quantity Usage x 1000 Value Cumulative Value % of total Value % of total Items Palm Oil Kg 50 100 5000 50% 10% Soap Powder 25 120 3000 8000 80% 20% Outer Wrapper Nos. 4 200 800 8800 88% 30% Carton 16 400 9200 92% 40% Inner Wrapper 1.5 300 9500 95% Glycerin Ltr 2 9700 97% 60% TiO2 175 1 9875 99% 70% Color 85 9960 100% Fragrance 0.1 30 9990 90% Sod. Chloride 5 10 10000

Exercise 2: ABC Classification (Solution) Item Unit Cost/ Unit Quantity Usage x 1000 Value Cumulative Value % of total Value % of total Items Palm Oil Kg 50 100 5000 50% 10% Soap Powder 25 120 3000 8000 80% 20% Outer Wrapper Nos. 4 200 800 8800 88% 30% Carton 16 400 9200 92% 40% Inner Wrapper 1.5 300 9500 95% Glycerin Ltr 2 9700 97% 60% TiO2 175 1 9875 99% 70% Color 85 9960 100% Fragrance 0.1 30 9990 90% Sod. Chloride 5 10 10000 A B C

Other Product Classifications VED (Vital, Essential, Desirable) FSN (Fast Moving, Slow Moving, Non Moving) Can you think of cases for which these classifications can be used?

Independent vs. Dependent Demand 2000 Pcs 8 T Garment Manufacturer 5 T 1000 Pcs 15000 Pcs Distribution Centre Yarn Warehouse Cloth Manufacturing 100T 8 T 50 T Independent Demand (Demand not related to other items or the final end-product) Dependent Demand (Derived demand items for component parts, subassemblies, raw materials, etc.)

Various Costs in Inventory Decision Carrying Cost Opportunity Cost Cost of Capital Storage Cost Storage Space Cost Handling Cost Admin. Cost Inventory Service Cost Insurance Cost Safety Cost Inventory Risk Cost Obsolescence Cost Discounting / Mark Down Cost Fixed Costs Ordering Transaction Cost Logistics Cost Receiving Cost

Measuring Inventory Inventory Number of Days : Inventory Value at the end of Month x 30 Average Sale per Month Inventory Turns : 365 Inventory in Number of Days

Inventory Savings and Inventory Turns 6,000,000 5,000,000 4,000,000 Inventory Carrying Cost 3,000,000 2,000,000 1,000,000 1 2 3 4 5 6 7 8 9 10 Inventory Turns

Exercise 3: Inventory Measures Refer to the handout for the exercise. Write the answers in the space provided in the handout. Objective of the exercise: To calculate the Inventory Holding Cost

Exercise 4: Inventory Turns Refer to the handout for the exercise. Write the answers in the space provided in the handout. Objective of the exercise: To calculate the Inventory Turns To calculate the No. of Days of Inventory

Exercise 4: Inventory Turns (Solution) Item Average Stock Average Annual Consumption Inventory Turn No. of Days of Inventory A90901 120 540 4.5 81 A89231 600 300 0.5 730 T09898 750 9000 12 30 X11098 420 840 2 183 P09124 275 1375 5 73

Session Summary There are five basic types of inventory: raw material, work-in-process, finished goods, distribution inventory and maintenance, repair, and operating (MRO) supplies Inventory includes the cycle stock, safety stock, transit or pipeline inventory, anticipation inventory and speculation inventory ABC Classification is the most used classification method for the products in inventory Inventory is measured in terms of inventory number of days and inventory turns Trainer’s Talk: Trainer Instructions: Additional details: Divide the class into teams of 5 to 6 students. Each team will be asked to select any known company each. The teams will need to discuss and present the following: 40

Discussion and Query 41

42