Planning & Managing Inventory

in Supply Chain:
Cycle Inventory, Safety
Inventory, ABC Inventory &
Product Availability

1
 Role of Inventory in the Supply Chain

2
 Role of Inventory in the Supply Chain
Improve
ImproveMatching of Supply
Matching of Supply
and
and Demand

Improved Forecasting

Cost Reduce Material Flow Time Availability

Efficiency Responsiveness
Reduce Waiting Time

Reduce Buffer Inventory

Supply / Demand
Economies of Scale Variability Seasonal Variability

Cycle Inventory Safety Inventory Seasonal Inventory

3
 Cycle Inventory
Cycle inventory
Improve is the average
Matching inventory that built up in the supply
of Supply
chain because anda stage of the supply chain either produces or
Demand
purchases in lots that are larger than those demanded by the customer.
Improved Forecasting
Inventory
Cost Reduce Material Flow Time Availability
Efficiency Responsiveness
QReduce Waiting Time

Reduce Buffer Inventory

Time t
Supply
Cycle / Demand= lot size/2 = Q/2
inventory
Economies of Scale Variability Seasonal Variability

Cycle Inventory Safety Inventory Seasonal Inventory

4
 SC Costs That Are Influenced
By Lot Size

Average Flow Time

Average Price Paid Per Unit Purchased

Fixed Ordering Cost

Holding Cost
 Total Costs Based On Lot Sizes

Annual Material Cost

Annual Order Cost

Annual Holding Cost

 Multiple Products In Single
Order

Common components across multiple products.

Reduced Fixed Costs at Distribution Centers.

Advance Shipping Notices (ASN)

 Aggregating Multiple Products in a Single
Order
One of major fixed costs is transportation
Ways to lower the fixed ordering and transportation costs:
Ways to lower receiving
Aggregating across theorproducts
loadingfrom
costs:
the same supplier
Single delivery from multiple suppliers
ASN (Advanced Shipping Notice) with EDI
Single delivery to multiple retailers

9
 Quantity Discounts by
Economies of Scale

Lot Size Based Quantity Ordered in Single Lot.

Volume Based Total Quantity in a Given Period

Regardless of Number of Lots Purchased
 Why Quantity Discounts?

Improved coordination to increase total supply

chain profits.

Extraction of surplus through price discrimination.

 Strategies

Two-Part Tariff

Volume-Based Quantity Discount

Price Discrimination to Maximize Supplier Profits

 Inventory Holding Cost

Cost of Capital

Obsolescence (Spoilage) Cost

Handling Cost

Occupancy Cost

Miscellaneous Cost
 Order cost

Buyer Time

Transportation Cost

Receiving Cost

Other Costs
 Impact of Desired Product
Availability & Uncertainty on
Safety Inventory
The required safety inventory grows rapidly with an
increase in the desired product availability.

Reduce the supplier lead time.

Reduce the underlying uncertainty of demand.
Information Centralization.
Specialization.


Safety Inventory
Measuring Product Availability

Product Fill Rate

Order Fill Rate

Cycle Service Level (CSL) (Replenishment

Cycles)
Continuous Review through ROP (Re-Ordering Point)
Periodic Review
 Product Substitution

Manufacturer Driven Substitution

(One-Way Substitution).

Customer Driven Substitution

(Two-Way Substitution).
Role of IT in Inventory Management
Two Bin System
 ABC Principle or Paretos Law
(Vilfredo Pareto Italian
Economist)
Relationship between % of item and the % of annual $
usage:
- A About 20% of the items account for about 80% of the
$ usage.

- B About 30% of the items account for about 15% of the

$ usage.

- C About 50% of the items account for about 05% of the

$ usage.
 ABC Inventory

4 questions for all SKUs:

1. What is the importance of the inventory item?

2. How are they to be controlled?
3. How much should be ordered at one time?
4. When should an order be placed?
 Steps in Making ABC Analysis

1. Establish item characteristics - $ usage, Scarcity.

2. Classify items into groups.

3. Apply degree of control

 A Items High Priority tight control, accurate records, regular &
frequent review, expedite lead time.

B Items Medium Priority normal control with good records,

regular attention, & normal processing.

C Items Lowest Priority simplest control & records, periodic

review, carry safety stock.