PLANNING AND

MANAGING
INVENTORIES IN A
SUPPLY CHAIN
LEARNING OUTCOME
● Understand inventory.
● Determine the reason for the inventory.
● Identify the classification of inventory.
● Learned the economics of inventory.
● Determine the scope of inventory.
WHAT IS INVENTORY
MANAGEMENT?
Refers to the purchasing, storage, and use of a product by a
company. It involves the handling of raw materials, parts, and
finished goods, the storage and distribution of such objects.
Inventory management is the products or materials a company sells to
its customers in order to make profit. As part of the supply chain,
inventory management includes several different aspects such as
controlling and overseeing purchases from suppliers and customers,
maintaining the storage of stock, controlling the amount of product for
sale and order fulfillment
Three Core Steps of Inventory
Management:
1. Purchasing inventory - raw materials or components are bought
and delivered to the warehouse.
2. Storing inventory - inventory is stored until needed. Raw materials
are moved to production facilities to be made into finished goods
and returned to stock areas until ready for shipment.
3. Profiting from inventory - the amount of product for sale is
controlled. Finished goods are pulled to fulfill orders. Products are
shipped to customers.
REASONS FOR KEEPING
INVENTORY
●It helps a company to reduce the risk of loss or confusion from
suppliers. Contingency security e.g., hits, flood-related
transportation breakdown, crop failure, and other similar factors, are
needed. Because of this, protection and buffer inventories are held
to take care of certain occurrences.
●It helps a company to meet unforeseen product customization
requirements or demands.
●Ensure that items in constant demand, such as repair supplies and
office stationery, are replenished swiftly.
REASONS FOR KEEPING
INVENTORY
●Hedge against anticipated shortage and price rises more like a
deliberate policy of speculation, particularly in times of high inflation.
●Profit from tons of sales quantity i.e., discounts on price and
quantity.
●It allows a company to defend itself against lead time volatility, e.g.,
when suppliers do not know the replenishment and lead times with
certainty in such situations, the investment in the security service is
to be preserved at appropriate levels.
AIMS OF INVENTORY
MANAGEMENT
● They are providing the necessary service levels to both internal and
external customers in terms of quality and order rate fill.
● Find out current and potential criteria for all inventory forms to
prevent over-storage and prevent output bottlenecks.
● Keep costs to a minimum level by variety reduction, economic lot
sizes, and analysis of expenses incurred in obtaining and carrying
inventories.
● Provide upstream and downstream inventory visibility in the supply
chain.
INVENTORY CLASSIFICATIONS
Classifications will vary according to the particular undertaking
● Manufacturing enterprise:
○ Raw materials
○ Components and sub- assemblies
○ Consumables
○ Finished goods
SCOPE OF INVENTORY MANAGEMENT

● Demand management
● Forecasting future demand requirements
● Managing items with difficult supply and demand patterns
● Reviewing safety stock levels
● Implementing lean inventory policies
● Developing cost effective systems and procedures relating to ordering
procurement and budgeting of supplies
● Ensuring safety and scarcity of supplies
● Appropriate disposal of scrap, surplus, and obsolete items
TOOLS OF INVENTORY
MANAGEMENT
1. ABC Analysis
Classifies inventory into three groups
Class A Items-Items that warrant in simple control due to their budgetary value,
e.g., bread, milk, vegetables, etc.
Class C items – Things which only account for a small portion of the expenditure.
Require a year or more before buying them again, e.g. water taps.
Class B items- set of items intermediate between class A and C. Regularly
reviewed.
TOOLS OF INVENTORY
MANAGEMENT
2. Barcoding
Accelerate the flow of products and information
Benefits :
● Faster data entry
● Greater accuracy
● Reduced labor cost
● Better decision making
● Faster access to information
● More excellent responsiveness to customers and suppliers.
TOOLS OF INVENTORY
MANAGEMENT
3. Radiofrequency identification (RID)
A silicon chip with an identification number and antenna capable of
transmitting the number to a reader
Benefits :
● Sight tagline eliminates manual handling; cost
● Scope tags can be read through a vast spectrum
● Loading bulk tags can be read in a short time
● Durable vs. barcodes
TOOLS OF INVENTORY
MANAGEMENT
3. Radiofrequency identification (RID)
Accommodates updating; read/write tags
Limitations of RFID
● RFID tags cost more than bar-coders
● Electrical interference, correspondence on radio frequencies
● Safety, Rogue people write fake information
● Metal-distorted radio waves
● In the product, radio waves may absorb moisture
TOOLS OF INVENTORY
MANAGEMENT
4. SOFTWARE PROGRAMS
● Maintain Service and Consumer Information
● Build lists and receipts
● Provide instant stock balances and automatic repurchase
● Reading Barcode
● Implement JIT technique etc.
THE ECONOMICS OF INVENTORY
1. Acquisition costs
● Ordering costs –
○ Preliminary costs e.g., vendor selection, negotiation
○ Placement costs e.g., order preparation, stationery
○ Post-placement costs e.g., materials inspection,
○ Payment of invoices
THE ECONOMICS OF INVENTORY
○ The complexity of the order and seniority of the concerned
personnel
○ If order preparation is manual/informatics
○ Repeat Order or First Order
THE ECONOMICS OF INVENTORY
2. Holding costs
● Cost equal to inventory value
○ Financial costs e.g., capital expenditure
○ Insurance Premiums
○ Value loss; deterioration, obsolescence, pilfering
● Cost proportional to the physical characteristics of inventory
○ Storage costs – light, rent
○ Labor costs – handling, inspection
THE ECONOMICS OF INVENTORY
2. Holding costs
● Cost of stock –outs
Loss of production output
● Cost of idle time and fixed overheads
● Cost of actions taken to deal with stock out e.g., switch
production, substitute materials
● Loss of customer goodwill
INVENTORY PERFORMANCE
MEASURES
● Lead times – Time is taken from the time a need is identified to the time the
market is met, to obtain or supply a requirement.
● Service levels
○ The number of times the item is given on request
○ Number of times the item is requested
● Rate of stock turn- Number of times in a given period, a stock item was sold
and replaced.
○ Sales / issues
○ Average Inventory
INVENTORY PERFORMANCE
MEASURES
● Stock-outs- Over a given time, expressed as a percentage of the
total stock population.
● Stock longevity – The number of days the existing stock of a stock
holding unit (SKU) will last if the expected rate of sales or use
continues.
● The present sum on hand
● Future daily consumption or sales volume forecasted