Inventory Management Logistics Workshop Asia 2004 Phnom Penh, Cambodia 10 – 14 May 2004

2 Inventory Management Why do we keep inventory?

3 Inventory management in general (incl. Supply chain) Functions of inventory Relevant inventory costs and factors A simple inventory policy Economic order quantity/ batch size Safety stock Re-order point systems Inventory analyses JIT & TOC Agenda Inventory Management

4 Key Factors (un)reliable deliveries (un)reliable lead times

5 Inventory Management Spare parts Raw mat. Pack. mat Fin. Prod.Bottling Brewing Lagering Distrib. SuppliersWarehouses (stocks)brewery (Stocks)

6 Inventory Management Inventory management in general I Includes all goods in the production and distribution channel Riskiest area in logistical management Understocks / overstocks Trade off (inventory is a cost factor) Support the organisation objectives and profit

7 The consequences on profit of better inventory management (1) Decomposition sales price

8 Profit 4% Physical Distribution 21% Inventory44% of the PD-costs Inventory costs : 0,44 x 21 = 9,2% If inventory costs decrease with 10%, then: 0,9 x 0,44 x 21 = 8,3% Profit will be 4+ (9,2-8,3) = 4,9% Which is an increase of over 22% The consequences on profit of better inventory management (2)

9 Inventory Management Importance of balanced inventory shortening product life cycle growing assortment decrease in margins optimal utility of capacity change of power in the distribution channels (decrease stock levels) increasing customer service less working capital

10 Inventory management in general (incl. Supply chain) Functions of inventory Relevant inventory costs and factors A simple inventory policy Economic order quantity/ batch size Safety stock Re-order point systems Inventory analyses JIT & TOC Agenda Inventory Management

11 Inventory Management Functions and types of inventory Geographic specialisation stocks Speculating stocks Strategic stocks Technical and economical stocks De-coupling stocks batch/cycle buffer seasonal pipeline safety

12 Inventory Management mat. product. S.F.P.F.P.R. product. F.P.R. D.C. customers DP 1 DP 2 DP 3 DP 4 DP 5 Purchasing and production on order Production on order stock prod. DC level stock prod. plant warehouse production semi fin.prod. De-coupling point (5 possibilities)

13 Inventory management in general (incl. Supply chain) Functions of inventory Relevant inventory costs and factors A simple inventory policy Economic order quantity/ batch size Safety stock Re-order point systems Inventory analyses JIT & TOC Agenda Inventory Management

14 Inventory Management Relevant inventory costs and factors  Procurement costs Carrying costs (storage) Space costs Capital costs Inventory service costs Inventory risk costs Out of stock costs

15 Inventory management in general (incl. Supply chain) Functions of inventory Relevant inventory costs and factors A simple inventory policy Economic order quantity/ batch size Safety stock Re-order point systems Inventory analyses JIT & TOC Agenda Inventory Management

16 Inventory Management A simple inventory policy (I) In general The inventory problem is one of balancing conflicting costs procurement and out-of-stock costs against inventory carrying costs Inventory policy A to order in large quantities but infrequently result: high average inventory level Inventory policy B to order in small quantities but more often result: low average inventory level and an increase of out of stock costs

17 Inventory Management

18 Inventory Management Total costs Inventory carrying costs Procurement and out-of stock costs Q* Quantity ordered, Q 0 Total relevant costs, in dollars

19 Inventory Management A simple inventory policy (II) Logistic desire Establish the order quantity level and The timing of the placement order That will minimise total inventory costs This is an extremely simple statement of the practical inventory decision-making problem without thinking of the environment in which the decision must be made

20 Inventory Management