Inventory Management

Logistics Workshop Asia 2004

Phnom Penh, Cambodia10 – 14 May 2004

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Inventory Management

Why do we keep inventory?

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• 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

AgendaInventory Management

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Inventory Management

Key Factors

• (un)reliable deliveries

• (un)reliable lead times

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Inventory Management

1

2

3

Spare

parts

Raw mat.

Pack.

mat

Fin. Prod.BottlingBrewing

Lagering Distrib.

Suppliers Warehouses

(stocks) brewery (Stocks)

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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

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Marketing costs27,0%

Manufacturing costs48,0%

Profit4,0%

Administration / overhead1,7%

Internal transport1,9%

Warehouse / materials handling

3,4%

Transport4,8%

Inventory9,2%

Physical Distr.21%

The consequences on profit of better inventory management (1)

Decomposition sales price

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Profit 4%Physical Distribution 21%Inventory 44% 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)

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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

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• 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

AgendaInventory Management

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Inventory ManagementFunctions and types of inventory

• Geographic specialisation stocks

• Speculating stocks

• Strategic stocks

• Technical and economical stocks

• De-coupling stocks

• batch/cycle

• buffer

• seasonal

• pipeline

• safety

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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)

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• 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

AgendaInventory Management

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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

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• 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

AgendaInventory Management

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Inventory Management

A simple inventory policy (I)

In generalThe 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

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Inventory Management

AIL1

AIL2

Time

Large order quantity - low order frequency

Small order quantity - high order frequency

Average inventory level (AIL)

Effect of extreme inventory policies on inventory level under constantdemand and constant lead-time conditions

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Inventory Management

Total costs

Inventory carrying costs

Procurement and out-of stock costs

Q*

Quantity ordered, Q 0

Tot

al r

ele

vant

cos

ts,

in d

olla

rs

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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

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Inventory Management

L

Time

Inventory (units)

Re-order point

Minimum level