Introduction to Global Supply Chain Management Module Six: Global Inventory Management

Presentation Agenda Inventory management defined Strategic considerations for I.M. Operational activities Economic Order Quantity & Period Order Quantity Order Point Systems Safety Stock Cycle Counting

and at a price that they’re willing to pay. Inventory Management “Inventory Management transcends the Buy-Side and Sell-Side of a company’s supply chain to cover all facets of the acquisition, valuation, location, storage, usage, sale, distribution, recovery and disposal of merchandise related to the operation of a business. At a strategic level, inventory management must be aligned with a firm’s organizational, marketing and financial objectives. From a tactical perspective, inventory management is all about making goods available to customers when they want them, in the quantities they’d like to buy, via the means they’d like to make a purchase and at a price that they’re willing to pay. In a global environment, inventory management must be enabled by technology that maximizes visibility across the supply chain, thus allowing management to make dynamic inventory management decisions. Ideally, inventory management software is linked to a company’s ERP system, as well as other “Best-In-Breed” software like Warehouse Management Systems and Transportation Management Systems.” -Dan Gardner, April 2015

Different Industries & Business Models Determine How Supply Chains Are Designed Retailer (brick & mortar) E-Commerce Wholesaler/Distributor Manufacturer (OEM) Tier I, II or III supplier Agricultural importer/exporter Marketer/Merchandiser

Different Types of Inventory & Operating Models Also Influence How Inventory Management is Executed Raw materials Components/sub-assemblies Work In Process Finished goods Distribution inventory Accessories Spare parts MRO Build to stock Build to order Assemble to Order Engineer to Order Just In Time Vendor Managed Inventories

Global Inventory Management: Integrating & Synchronizing the Supply Chain Raw materials, components, sub-assemblies, work-in-process, finished goods, accessories, service parts, MRO S U P L I E R MANUFACTURER DISTRIBUTION SYSTEM C T O M MATERIALS MANAGEMENT Buy Side Sell Side

Inventory Management: Guiding Principles & Objectives Maximize customer service (availability of product) Contribute to the maximization of sales Minimize inventory investment Continuously reduce costs Constantly increasing inventory accuracy

Inventory Management: Guiding Principles & Objectives Increase productivity Integrate & synchronized Buy-Side, Sell-Side and inventory management activities Enhance overall supply chain performance Increase overall company profitability

Global Inventory Management: Strategic & Tactical Considerations Total dollar investment in global inventories Number and type of Stock Keeping Units (SKU’s) or Part Numbers to carry Locations of distribution centers, warehouses and/or satellite operations By region and/or country Risk Management policies & procedures

Global Inventory Management: Strategic & Tactical Considerations In-house inventory management or with a Third Party Logistics (3PL) company Systems integration Inventory management system Warehouse management system Transportation management system

Regardless of the Model or Type of Inventory: I. M Regardless of the Model or Type of Inventory: I.M.-Related Costs to Consider Ordering costs Clerical & Admin support Carrying costs Cost of capital Opportunity cost Lease Payroll Systems Materials handling equipment Maintenance Supplies

Regardless of the Model or Type of Inventory: I. M Regardless of the Model or Type of Inventory: I.M.-Related Costs to Consider Transportation costs Ocean, air, surface Returns & reverse logistics Risk management Theft, pilferage & damage Insurance Security Stock-out costs Expedited transport Back-order processing Lost sales Depletion of customer goodwill

Linking Inventory Management With Demand Management Activities

Linking Inventory Management With Demand Management Activities Forecasting Delivery Promising (Available To Promise, ATP) Order Processing Inventory Management Order quantities Order points Safety Stock ABC Analysis Cycle Counting

Methods for Determining Order Quantities Simultaneous to forecasting for demand, decisions must be made on: In what quantities goods should be ordered When orders should be placed Those decisions must be made at an SKU or Part Number level

Integrating DRP with Inventory Management: Order Quantities & Order Points In addition to gross-to-net exploding and lead time off-setting, distribution professionals must also determine order quantities and order points for replenishing finished goods in the distribution network These activities help to integrate and synchronize DRP with Inventory Management Economic Order Quantity (EOQ) calculates the optimum replenishment amount by balancing the total cost of an order with that product’s carrying cost

Integrating DRP with Inventory Management: Order Quantities & Order Points An integrating activity between DRP and inventory management, an “Order Point” is reached when a product’s on-hand quantity reaches a pre-determined level When inventory is depleted down to that pre-determined level, a replenishment order is generated by the system (based on EOQ in the form of a Planned Order Release) Remember, order points are a function of demand during lead time and safety stock requirements

Economic Order Quantity EOQ is a formula that is used to determine a replenishment order quantity for a product that balances the total cost of an order with that product’s carrying cost Variables in the formula are: Annual usage in units Unit cost Annual carrying cost Ordering cost per order

Economic Order Quantity Demand is relatively constant Product is produced or purchased in lots and not continuously Order costs and carrying costs are constant Replacement occurs all at once Lead time is stable No volume discounts used Best used for finished goods with independent (and predictable) demand

Periodic Order Quantity (POQ) EOQ intends to balance the total cost of an order with its carrying cost Periodic Order Quantity (POQ) calculates the period of time between orders Instead of ordering the quantity, orders are placed to satisfy time intervals (quantities will differ based on actual demand) Assumes that demand is uniform

The Order Point System When the quantity of an item falls to a pre-determined level (order point), a replenishment order must be placed The quantity to be ordered is often based on EOQ concepts The key factor about the O.P. methodology is that it considers product demand during lead time (DDLT) O.P. also considers Safety Stock (SS) in its calculation

The Order Point System Order Point = DDLT + SS DDLT = Demand During Lead Time SS = Safety Stock (Safety Stock is carried to safeguard against supply chain variance(s)… Forecast, demand, lead time, etc.)

Inventory Management: The Use of Min/Max Levels A type of order point replenishment system where the “min” is the order point and the “max” is the order up to level Order quantity is variable and depends on item usage during prior periods ERP systems automatically notify the user to place an order Lead time accuracy is integral to min/max success High mins and maxes offer potential to bloat inventories Used often for dependent demand items

Safety Stock & Inventory Management Safety stock is additional inventory that is intended to safeguard against supply chain variation Variation in quantity Variation in timing Factors that influence SS Demand variability during lead time Frequency of reorder Service level desired Length of lead time Variability of lead time

Inventory Management: Cycle Counting There is a big difference between periodic (yearly) physical inventories and cycle counting Physical inventories are for financial purposes (Balance Sheet) Cycle Counting assures inventory accuracy and is a building block for inventory reductions The first in reducing inventories is knowing how much you really have Especially effective for “A” items in an ABC System

Inventory Management: Cycle Counting C.C. is an inventory accuracy auditing practice driven by a perpetual schedule of item-specific counts Depending on the item, cycle counts can be done weekly, monthly, et al (daily for ultra-high value item like prescription narcotics) Require the counting of certain items every day rotating locations in a warehouse Goal is to find errors in physical counts vs. system records and continuously improve accuracy

End of Module Six Congratulations!!!