INVENTORY MANAGEMENT

 Inventory decisions are high-risk and high impact in nature from the logistics perspective. Inventory Management is an integrated process, which aims to operationalize a firm's as well as the value chain's inventory policy, it is a strategic area in logistics and has an overall impact on the etticiency and effectiveness of the entire supply chain. It is basically a practice of planning, directing and controlling inventory so that it contributes to the profitability of business.

 

Since it is necessary to have an optimum minimum of multiple types of inventory, inventory management is essential.

 

There are three methods for inventory management The first one being a reactive or pull approach, which uses the customer demand to pull the product through the distribution channel. Another philosophy is the planning approach, which proactively schedules the product movement and also its allocation through the channel according to the demand forecast. The final approach, hybrid logic combines the former versions and results in an inventory management philosophy, which responds to product as well as market environments.

 

Characteristics of Inventory:

 

Once an investment has been made in inventory, it cannot be reversed and that fund cannot be utilized to obtain other assets to improve corporate performance. Thus investments in inventory are risky.

 

There are a lot of chances for the inventory to be pilfered or to become obsolete. The magnitude of risk varies according to the position of the enterprise in the distribution channel:

 

a) Manufacturer: For the manufacturer, there is a longer dimension of risky. Starting with the raw material, and component parts, the risk includes work-in-progress, and

 

finally the finished goods. It doesn't end here, as the inventory needs to be transferred to warehouses in close proximity to the wholesalers and retailers. Though the product line may be narrower, the risk element is deeper and of longer duration.

b) Wholesaler: The wholesaler handles more product lines than the manufacturer. He purchases in bulk and distributes in smaller lots to the retailers. Also these small lots are in assortment. I specially when the product lines are more in number, there is a grave problem, The problem escalates for a seasonal product where the wholesaler has to stock much in advance of the sale.

c) Retailer: The risk for a retailer is wider and not deeper in the sense he stocks a wide variety of products. The number of Stock Keeping Units within a Supermarket is enormous. The risk is primarily of marketing in nature. The enormity of risk faced by the retailers makes them push the risk towards manufacturers and wholesalers bypressing them to assume greater inventory responsibility

The need for inventory and its control

Inventories of materials are necessary by all manufacturing organizations. Materials and inventories serve some social purpose in industries, which stems from some economic motives.

The motive behind inventory is the following:

Meeting the production requirements: A manufacturing organization needs to keep stock of raw materials, components and parts required for producing finished goods to meet the continuous production requirements.

Support in operational requirements: Inventories are required for repairs,maintenance as well as operational support. Inventory for this purpose include production machinery spare parts, chemicals, lubricating oils, welding rods etc.

Customer Service: Customer satisfaction is used as a tool for competitive advantage. To ensure customer satisfaction, it is necessary for suppliers to maintain parts in order to extend after sales service to their clients.

Speculation: Provides ample scope for holding large amount of inventories, but this inventory is not important for industrial purpose.

Precaution: Arises out of the inability to predict future demands precisely and getting the materials in time, without incurring extra costs.

Importance of Inventory Management in the Supply Chain

Managing inventory has become important due to the following factors:

 Availability of resource (such as finance and space) has made the management to consider lowering the levels of inventory within the supply chain management systems to maintain margins

Latest concepts like Just in Time (JIT) applications and lean manufacturing have reduced the need for inventory as an insurance buffer within the overall logistics activity

Many companies have realized that a greater return on investment (ROI) can be obtained by developing the core business, and investment in working capital items. like inventory and debtors give lesser returns.

With the advent of Information technology (IT). inventory management has become essential which can be used to reduce inventory. Better the information. lower is the inventory.

Types of Inventory

a) Raw materials and production inventories: Raw materials and other supplies, parts and components, which enter into the product during the production process and usually form part of the product.

b) In-process inventories: Semi-finished, work – in - progress and partly finished products formed at various stages of production

c) MRO Inventories: Maintenance, repairs, and operating supplies consumed during production process and usually not a part of the product itself (eg: oils and lubricants, machinery and plant spares, tools and fixtures, etc.)

d) Finished goods inventories: Completed products ready for sale.

e) Movement or transit inventories: Arise, as there is time involved while moving stocks from one place to another.

1) Let-size inventories: Large quantities than necessary are stocked to keep costs of buying. receiving, inspection and handling low.

g) Fluctuation inventories: Maintained as a cushion against unpredictable fluctuations in demand.

h) Anticipation inventories: Inventories carried to meet predictable changes in demand.

Inventory Control

This is a mechanical procedure, which helps in implementing an inventory policy. Control procedures are devised to implement the desired inventory management policies. Procedures for inventory control can either be perpetual or periodic. In a perpetual control process, inventory status is reviewed daily in order to determine the needs of replenishment. To ensure proper implementation of this system, there is need to have accurate accountability of all stock keeping units, apart from proper computer assistance. In a periodic review, the inventory status of an item is reviewed at regular time intervals, maybe weekly or monthly.

Types of Selective Inventory Control Techniques

ABC Analysis

Relates to the annual usage cost of a particular item. Generally 10 per cent of items account for nearly 70 per cent of usage value. Another 20-30 percent may account for 20 per cent of usage value and the balance 60 – 70 per cent accounts for 10 per cent of the usage value. Items are classified as per their usage value.

‘A’ items costs approximately 60 – 70 per cent of the total inventory cost while they are less in number. 'B' items cost 20-30 per cent of the total inventory cost while 'C' class items are greater in number and carry less than 10 per cent of the cost of the entire inventory.

VED Analysis

Related to the Vital, Essential, and Desirable status of inventory items. As the term implies. certain parts and items are considered to be vital for meeting operational requirements and this aspect is taken into consideration while making a forecast. While making a forecast. certain items and parts, which are considered as vital for meeting operational requirements. are considered. The modified version of this is the ABC analysis. VED analysis, takes into consideration both the value and criticality of each item. Continuous review is necessary for high value and critical items and thus is ordered in low quantities. Low value. least critical items are reviewed periodically and ordered in large quantities and have lower safety stock requirements.

SAP analysis

Refers to Scarce, Available, and Plenty analysis which allows building into provision forecasts. The ordered quantity is governed by the scarcity factor. The guideline for procurement policy decisions would be the limitations in supply or the obsolescence of the firm in the near future.

FSN analysis

The Fast, Slow or Normal analysis determines the consumption pattern of each item. However, a realistic picture for procurement action will not be available from a consumption pattern where the production run is slowed down due to various other reasons.

SDE Classification

Classification based on the availability of an item. S items are scarce items, which need to be imported and thus take a long time to obtain. D items are difficult to obtain, and E items are easily obtainable.

 Inventory Planning Models:

1. Economic Order Quantity (EOQ): This is the replenishment order quantity, which minimizes the combined cost of inventory maintenance and ordering,

• Assumptions Of Basic EOQ Model
• Demand is known with certainty
• Demand is relatively constant over time
• No shortages are allowed
• Lead time for the receipt of orders is constant
• The order quantity is received all at once

In this model, the inventory holding/carrying cost is taken to be proportional to the average inventory held during a period. Thus, by reducing the inventory, its carrying cost can be reduced. On the other side, smaller lot sizes will increase the number of lot sizes per annum to cover the annual demand and thus the cost of ordering will be more. Thus the economic lot size must balance both these opposing costs.

The mathematical formula for economical lot size is:

2DS HC

Where: Q = Order quantity in units 

S = Cost of placing an order in rupees 

D = Average annual consumption of units 

H = Percentage of inventory cost vis a vis unit cost

C = Cost per unit

2. Material Requirement Planning (MRP)

Materials Requirement Planning (MRP) is a scheduling procedure for production processes that have several levels of production. MRP determines a schedule for the operations and raw material purchases, given information describing the production requirements of the several finished goods of the system, the structure of the production system, the current inventories for each operation and the lot-sizing procedure for each operation.

3. Distribution Requirement Planning (DRP)

This is a sophisticated planning approach, which consider multiple distribution stages and the characteristics in each stage. It is a logical extension of MRP. While MRP is determined by a production schedule, which is defined and controlled by the enterprise, a DRP is guided by customer demands, which cannot be controlled by the enterprise. A DRP allocates inventory from the mother warehouse to the various distribution centers based on the following:

a) Pattern of demand

b) Provision of safety stock c) Quantity ordered d) Re-order point e) Average performance cycle length

DRP also coordinates the finished goods requirement across the distribution network.

Major benefits of using DRP

a) Improved customer service level with increased on-time deliveries.

b) Efficient and effective marketing efforts for high stock items.

c) Reduced inventory levels and thus lower carrying costs.

d) Reduced inventory and thus lesser warehouse space requirements.

e) Reduced customer freight costs due to fewer back-orders.

f) Improved budgeting capability where DRP can simulate inventory and

transportation requirements under multiple planning scenarios.

4. Just-in-Time System (JIT)

ust In Time (JIT) is a manufacturing philosophy. which leads to Production of necessary units in the necessary quantities at the necessary time with the required quality. It is an approach to achieving excellence in the reduction or total climination of waste (Non-Value ided Activities). The IIT-technique is a "Pull System". based on not producing units until they are needed. The Kanban Card is used as a signal to produce. Overproduction. Unnecessary Inventory. Defective Products, Transport and Waiting Time are some examples of waste according to JIT. The benefits of JIT include:

Better quality products, Higher inventory turnover. Higher productivity.

Lower production costs.

4. Vendor Management Inventory (VMI)

In VMI, the supplier takes charge of the inventory management of the product and also manages the replenishment process based on the customer's consumption pattern. EDI or other inter – organizational software packages are used.

Inventory Management Strategy Development Process

This process consist of three steps:

a) Market / Product Classification: Also known as ABC classification, this groups products and markets with similar characteristics to ease inventory management. The objective of this classification is to focus and to refine the inventory management efforts. Classification can be based on a variety of measures like sales, contribution of profit, inventory value, nature of the item etc.

b) Segment Strategy: In the second step, the integrated inventory strategy for each product or market group or segment is defined. Various aspects of the inventory management process like service objectives, forecasting methodology, management technique and the review cycle are included in this strategy.

c) Operationalized policies and parameters: Finally, the focused inventory management strategy has to be implemented which involves clearly defining the detailed procedures and parameters. The procedures have to define the data requirements, software applications, performance objectives, etc. The parameters give the actual numeric values like the length of the review period, service objectives, percentage of inventory carrying cost, order quantities and re-order points.

 Improved Inventory Management

Certain additional initiatives need to be taken to improve the effectiveness of inventory. These are a number of policies and procedures that form guidelines for inventory-related decisions are incorporated in inventory management.

Performance Measures: Clear and consistent measures of performance are necessary for the inventory management process. These measures must bring out the trade-offs between service and inventory level. For example, if the performance measure of the planner focuses only on inventory level, then the planner will have a tendency to minimize the inventory levels, which might have a potential negative impact on the service level. On the contrary, if the planner's single focus is on service, it will lead the planner to disregard the inventory level.

Training: Inventory management is complex owing to the number of factors involved. The interface between the inventory management in the enterprise and also other entities within the value chain needs to be understood. Thus the firms need to increase not only the amount but also the sophistication of training in order to improve inventory management decision-making. Planners must understand how certain inventory parameters like service objectives. review periods. order quantity, safety stock etc, influence inventory operations and performance etc. Also, planners must understand how their inventory management decisions will affect other members in the value chain.

Integration of Information: Effectiveness and performance of inventory can be increased substantially and the uncertainty can be decreased by integrating the information requirement related to forecasts, orders, marketing plans, status of inventory, shipment, etc across the enterprise and also among the channel partners. Exchange of information using global

networks, forecasts and also a reliable measure of inventory reduce the uncertainty between the enterprise systems and thus result in teaser need for buffer inventory

Application of Expert Systems: These expert systems utilize a computerized knowledge base to share inventory management expertise among the enterprise. This expertise can provide a lot of support for the training and awareness and thus lead to substantial improvements in productivity and performance of' inventory,

Conclusion

Supply Chains being complex, inventory plays a key role in managing them. Inventory managers need to provide for stocks, whenever necessary in order to utilize the available storage space efficiencies such that stocks do not exceed the storage space available for them, and at the minimum inventory cost. There is a need for trade-offs to be achieved among st the various costs so that the production and marketing functions of inventory are fulfilled.