How to control held inventory

Introduction
Inventory control is a foundational pillar of supply chain management that entails more than
simply counting items on shelves. It is a strategic initiative that has an impact on a company's
financial health, customer satisfaction, and overall operational efficiency. In this reading, we
will go over the key inventory control principles that enable supply chain analysts to
accurately assess, plan, and manage inventory.

Implementing effective inventory control practices can help companies:

 Minimize stockouts
 Reduce carrying costs
 Optimize production and distribution processes
These principles include accurately forecasting demand, setting appropriate reorder points
and order quantities, implementing efficient inventory storage and tracking systems, and
regularly reviewing and updating inventory levels. Through a mastery of these principles,
supply chain analysts can ensure that the right products are available at the right time and in
the right quantities, improving overall supply chain performance and customer satisfaction.

By the end of this reading, you will have a thorough grasp of the fundamental principles that
underpin effective inventory control, and you will be prepared to apply these principles to
real-world scenarios, making informed decisions that improve supply chain performance and
contribute to your organization's success. Keep in mind, it isn’t necessary for you to
memorize or execute any of the formulas presented here, but as a supply chain analyst,
you should recognize them. You may want to keep this as reference for future work.

Inventory Management and Control

Inventory represents all of your business's physical assets, from raw materials that need to be
processed to finished products that are ready to sell. At its core, inventory management and
control is the art of finding the best balance between supply and demand to improve
operational efficiency and financial performance. By effectively managing and controlling
inventory, businesses can avoid stockouts and overstock situations, ensuring that they have
enough products to meet customer demand while minimizing the costs associated with
carrying excess inventory.

Inventory management and control are more than just logistical exercises. Effective inventory
management involves:

 Accurately forecasting demand

 Implementing efficient ordering and replenishment processes
 Regularly monitoring inventory levels to identify any potential issues or opportunities
Ultimately, effective inventory management and control enable businesses to optimize their
resources and enhance their overall competitiveness in the market. Regular monitoring of
inventory levels allows businesses to identify any potential issues, such as slow-moving or
obsolete items, and take proactive measures to address them. With effective inventory
management and control, businesses can make informed decisions and stay ahead of their
competitors in today's dynamic market by improving:
  Financial Optimization: Effective inventory control minimizes holding costs and
maximizes capital utilization by maintaining a careful balance between overstocking
and stockouts.
 Customer Satisfaction: A well-managed inventory ensures that customers find the
products they desire, fostering loyalty and positive brand experiences.
 Operational Efficiency: Seamless inventory control streamlines processes, reduces
wastage, and enables better resource allocation.

Inventory Quantity
Deciding the optimal inventory quantity involves a blend of quantitative analysis and
strategic judgment. Quantitative analysis involves using mathematical models and algorithms
to determine the ideal inventory quantity based on factors such as demand patterns, lead
times, and holding costs. Strategic judgment, on the other hand, requires considering broader
business objectives, market trends, and potential risks. By combining these approaches,
businesses can make informed decisions about inventory levels that strike a balance between
meeting customer demand and minimizing costs. Let's see how Economic Order Quantity and
Material Requirements Planning relate to determining inventory quantity.

1. Economic Order Quantity (EOQ): EOQ is a formula-based approach that considers the
cost of placing orders against the cost of holding inventory. It helps you determine the ideal
quantity to order, striking a balance between procurement costs and storage expenses. To
calculate the EOQ, you need to balance ordering costs and carrying costs. EOQ is the order
quantity that minimizes the total cost of inventory, striking the right balance between the cost
of placing orders and the cost of holding inventory.

EOQ formula

𝐸𝑂𝑄=2𝑥𝐷𝑆𝐻EOQ=H2xDS
Where:

EOQ = Economic order quantity

D = Annual demand (typically based on the units required per year)

S = Order cost per order

H = Holding costs per unit, per year

The following scenario demonstrates how the EOQ formula is applied in a real business
context to help the boutique owner, Nina, make informed decisions about the quantity of
materials to order, balancing the costs associated with ordering and holding inventory.

Imagine a small boutique that specializes in handmade jewelry. The boutique owner, Nina,
wants to optimize her inventory management for beads and clasps, which are essential
materials for crafting jewelry. Nina knows that maintaining the right balance between
ordering costs and holding costs is crucial for her business's success. Here's how she applies
the EOQ formula:
Step 1: Data Collection. Nina starts by gathering the necessary data. She determines that her
boutique typically sells 5,000 pieces of jewelry each year. She also knows that the ordering
cost for each purchase order (which includes shipping and handling) is $100. Additionally,
she calculates that the holding cost per unit of jewelry materials per year is $2.

Step 2: Nina calculates the EOQ:

𝐸𝑂𝑄=2𝑥𝐷𝑆𝐻EOQ=H2xDS
Plugging in the values:

𝐸𝑂𝑄=2𝑥5,000𝑥1002EOQ=22x5,000x100

𝐸𝑂𝑄=500,000EOQ=500,000

𝐸𝑂𝑄=707.11EOQ=707.11
The calculated EOQ is approximately 707 units.

Step 3: Decision-Making. Nina decides that it's cost-effective to order beads and clasps in
batches of approximately 707 units. By doing so, she minimizes her ordering costs and
reduces the need for frequent orders, saving both time and money.

Step 4: Inventory Management. With her new EOQ-based ordering strategy, Nina can now
place orders for 707 units of beads and clasps at a time. This means she needs to store fewer
materials at any given moment, freeing up storage space in her small boutique.

Step 5: Impact on Business. As a result of optimizing her inventory management with the
EOQ formula, Nina experiences several benefits. She reduces unnecessary holding costs,
avoids stockouts, and ensures that she has enough materials to meet customer demand for her
handmade jewelry. This efficient inventory management ultimately improves her boutique's
profitability and customer satisfaction.

2. Material Requirements Planning (MRP): Material Requirements Planning (MRP) is a

systematic approach to ensure the right materials are available at the right time, in the right
quantities, to support production while minimizing excess inventory. It involves forecasting
demand, scheduling production, and managing inventory levels efficiently.

MRP is about keeping the right balance between supply and demand. To better visualize the
application of the MRP process, imagine a car manufacturing company called AutoTech that
produces a range of car models to meet customer demands. AutoTech understands the
importance of efficient inventory management and production planning, so it implements the
MRP process to optimize its operations. Here's how it might apply MRP:

Process Step Description

AutoTech starts by analyzing historical data, market trends, and customer orders to forecas
Forecasting
demand for each car model. It considers factors like seasonal variations, market preference
Demand
economic conditions to make accurate predictions.
Scheduling Based on the demand forecasts and considering lead times for manufacturing components,
 schedules the production of different car models. It determines when and how much of eac
Production
produce to align with customer orders and market demand.
AutoTech closely monitors inventory levels of essential components, such as engines, tran
Managing and body panels, required for car assembly. They use the MRP system to automate the pro
Inventory ordering materials from suppliers when inventory levels reach reorder points. This ensures
the right materials available at the right time without overstocking or running out of crucia
AutoTech collaborates closely with its suppliers to ensure a seamless flow of materials. It s
Supplier production schedules and demand forecasts with suppliers, allowing them to plan their own
Coordination production and delivery schedules accordingly. This coordination helps prevent delays and
in the manufacturing process.
As a result of implementing MRP, AutoTech experiences significant efficiency gains. It m
the risk of production delays caused by material shortages, reduces excess inventory holdin
Efficiency Gains
and optimizes its manufacturing process. This efficiency allows it to meet customer expect
delivering cars on time and in the right quantities.
AutoTech uses specialized MRP software integrated into its Enterprise Resource Planning
Software system. This software automates calculations, generates production schedules, and provide
Facilitation visibility into inventory levels and supplier interactions. It simplifies the complex process o
managing materials and production planning.
By applying the MRP process and utilizing software systems, such as ERP systems, AutoTech
successfully balances supply and demand, optimizes