Inventory Management
Logistics Workshop Asia 2004
Phnom Penh, Cambodia10 – 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
AgendaInventory Management
4
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)
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
AgendaInventory 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
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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
16
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
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