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

2. 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

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

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

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

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

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

8. 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

9. 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

10. 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

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

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

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

14. 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

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

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

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

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

19. 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.

20. Speculation Inventory
Price Hedged Stock
Max Level
Quantity
Min Level
Period

21. Inventory Decisions
Stock Out
Unhappy Customers
Lost Revenue
Low Stock

22. Blocked Working Capital
Inventory Decisions
Blocked Working Capital
High Stock

23. 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.

24. 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

25. 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

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

27. 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

28. Product Classification for Inventory Management10 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

29. 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

30. 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

31. 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

32. 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?

33. 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.)

34. 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

35. 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

36. 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

37. 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

38. 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

39. 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

40. 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

41. Discussion and Query 41

42. 42