Inventory Management

Adelia Setiadi, CSCM

 Why Inventory?

● Transport interruption
● Unexpected customers demand
Demand Supply ● Suppliers constraint
 Day-to-day Inventory Decisions

Order Management Inventory Control Space Optimization Distribution

● How much to order?
● When to order?
● What’s the demand
forecast?
● Any planned sales activity?
● What’s causing the
stockout / overstock?
● Can we expedite the
delivery?
● Any alternative products
with similar function?
● Do we have an optimum
inventory level?
● Routine to ensure inventory
accuracy
● Do we have enough ● Can we have direct delivery
capacity? to store?
● How do we maximize ● Which ID port should we
capacity? utilize?
● Preparing for future ● Can we maximize the
capacity freight filling rate?
Goal
To secure the
highest availability
for customers’
satisfaction at the
lowest cost
Replenishment Size
● Sales history and sales forecast (including planned sales

01 Demand
●
activities)
Market trend

02 Safety Stock
●
●
The higher the uncertainty, the higher the SS
Lead time precision will affect how much SS we have

03 Lead Time
● Long lead time will affect how much inventory we need to
order

● The area / space given for a particular product in the sales

04 Owned Capacity ●
floor to enable commerciality
Short term, mid term, and long term planning of capacity -
including capacity planning during peak period

05 Inventory Accuracy ● This will affect order quantity, hence availability

● Do we have efficient SKU?

06 Product Range ●
●
The higher the SKU the higher the storage cost
Slow moving SKU creates low turn over for working capital
Calculating Safety Stock
What kind of information do we need?
Demand Forecast Error / SD

Lead time Service Level

1. Find demand and SD during lead time

DL = D x L σL = √L x σD
2. Calculate Safety Stock
SS = Fs-1 (CSL) x σL

Excel formula using NORMSINV

Reorder Point
What kind of information do we need?
Demand Lead Time Safety Stock

1. Find demand during lead time

DL = D x L
2. Calculate ROP
ROP = DL + SS
 When to Place an Order

EOQ = Economic Order Quantity

D = Annual demand (units)
S = Cost per order ($)
H = Holding cost ($)

Slack N., A. Brandon-Jones and R. Johnston (2013) Operations Management (7th edition), Harlow (Essex, UK): Pearson Education Ltd
Cost Associated with Inventory
01 Cost of placing the order ● Hours spent to calculate, place, monitor the orders

● Customers’ satisfaction

02 Shortage cost ●
●
Opportunity cost
Cost to sales steer

03 Working capital cost

●
●
Interest paid for funding the inventory
Unhealthy financial position

● Manpower and equipment used to handle the

04 Handling & storage cost

●
inventory
Space usage

05 Obsolete cost
● Cost of unsellable items - e.g. seasonal items that
often requires a write-off or discount to clear out

06 Transport and import cost ● Freight, custom clearance and tax

Inventory Aggregation
Purpose:
- Reduce inventory holding (less safety
stock) which will lead to lower costs

Store B Store C

Store A Store D

Central Warehouse
 Understand The Products

180 x 40 x 38 cm
140 x 74 x 32 cm

What’s the packaging look like?

How many pcs per pallet? Can it be ordered in multipack quantity?
What’s the size / weight?
Securing the Right Capacity
Space Capacity / m2

Enables commerciality to present full

product range

Volume Capacity / m3

Ensure sufficient storage space to

make products available for
customers
Inputs to Capacity Calculation

KNOW YOUR PRODUCTS

Knowing what product to offer to customers. Will the products be available for immediate takeaways?

KNOW YOUR SALES GOAL

Understand the strategy to achieve sales goal

KNOW YOUR FORECAST

Translate the sales goal into volume

Requires continuous assessment to ensure

capacity is sufficient to support business growth.
Replenishment Flow simplified

External WH is used if there’s not enough capacity in

Stores
the store.
Factors to consider for receiving:
- Capability in the store to receive goods
- Available capacity in the store
- Product size

Suppliers
External
Or
Warehouse
Distribution Centre

Fulfillment
Unit Customers’
home
Study Case 1
Sales team is planning to push the sales of a shelf by doing a 10% With the available information, please
discount for the period of 2 weeks in week 15. The shelf is sold in
calculate:
flat pack packaging hence it’s available for immediate takeaway by
customers, thus stocks need to be available in the sales floor.
1. Safety inventory
In this case, we have: 2. Reorder Point
3. EOQ
Average weekly demand = 1000 pcs
Forecast error = 65 pcs
Please elaborate your answer.
Expected weekly sales during promotion period = 1200 pcs
Lead time = 7 weeks
Service Level = 96% 4. Do you think implementing EOQ
Quantity / pallet = 600 would be suitable for furniture
Holding cost = $15 (retail) industry?
Cost per order = $200
Study Case 2
Company XYZ currently has 5 stores in JABODETABEK and planning to open another 2 stores next year. Total
product range (SKU) is 3000 articles. The current setup is that all stores are ordering on their own according to
their forecast to DC with direct delivery to store. Ordering per store is done minimum in pallet quantity to
prevent piece picking at DC. As the total volume per order is high, delivery is always done in TL and milk run
delivery to stores is allowed.

Based on information from service department, customers usually use home deliveries service and installation
for kitchen items. And it’s known that at least 10% of SKU only contribute to 20% of total sales.

As the number of stores increase, so does the cost associated with inventory. The management is requesting
the logistic manager to review and make recommendation to reduce cost.

What would be your recommendation? What are the steps needed?