Session 5

Inventory Management - I
Nature of Inventory (RM, MRO, WIP, FG, GIT),
Types & Function of Inventory - Seasonal, Decoupling, Cyclic, Pipeline, Safety Stock
Inventory Cos - Inventory Carrying, Cost of Ordering, Cost of Shortages
Inventory Management a critical element of supply chain, tracking of inventory from
manufacturers to warehouses and from these facilities to a point of sale. The goal of
inventory management is to have the right products in the right place at the right time

5 step Inventory Management Process

• The first step in the inventory management process includes receiving your
order from the supplier, Receive and inspect products
• Sort and stock products
• Accept customer order
• Fulfil package and ship order
• Reorder new stock
Primary purpose of Inventory Management is to ensure there is enough goods or
materials to meet demand without creating overstock, or excess inventory

The three most popular Inventory Management Techniques -

• Push technique
• Pull technique
• Just-in-time technique
Five Types of Inventory -
• Raw materials inventory
• Work-in-Progress (WIP) Inventory / GIT - Goods In transit
• Maintenance, Repair, and Operating (MRO) Inventory
• Finished Goods Inventory
• Packing Materials Inventory

MRO inventory refers to supplies, spare parts other materials needed for
Maintenance, Repair and Operations
Examples of Raw Materials Steel, Oil, Corn, Grain, Gasoline, Forest resources,
Plastic, Natural gas, Coal, Minerals
Inventory Risk
Inventory risk is the probability that a business will be unable to sell its products or
that its inventory will lose value
Inventory is Valuable Asset of a company In industries like Retail, Food services,
Manufacturing, a lack of inventory can have detrimental effects. Aside from being a
liability, It is prone to theft, damage, spoilage

Objectives of Inventory Control

• Minimize Inactive, Waste, Surplus, Scrap, Obsolete items
• Minimize Holding, Replacement & Shortage costs
• Maximize the efficiency in production & distribution
• Treat inventory as investment which is risky
Solutions - Inventory Management issues
• Centralized Tracking: Upgrade to tracking software provides automated re-
ordering and procurement
• Transparent Performance
• Stock Auditing
• Demand Forecasting
• Go Paperless
• Preventive Control
• Measure Service Levels
Stock is supply of finished goods available to sell to end customer.
Inventory can refer to finished goods, as well as components used to create a
finished product
Inventory Accounting Methods:
First-in-first-out (FIFO) costing
Last-in-first-out (LIFO) costing
Weighted-average costing

Benefits - Efficient Inventory Management

• Improved Accuracy of Inventory Orders
• Accuracy of Product orders
• Status & Tracking are critical to good inventory management
• Improved Warehouse Organization
• Improved Warehouse Productivity
• Save Time and Money
• Improved Customer Retention and Engagement
Inventory Costs involve expenses associated with purchasing, storing, and
managing inventory throughout Supply Chain. Cost of inventory goes beyond initial
purchase, including storage costs, as well as costs of holding unsold finished goods
Two main Inventory Control Systems - Periodic and perpetual systems. Choosing
the right inventory control system for your business will depend on various factors
such as the type of business, the inventory size, and the inventory turnover
frequency
Five R’s of Reverse Logistics -Returns, Reselling, Repairs, Repacking, Recycling
The average time taken by the supplier to deliver the order to the factory's stores is
the average reorder period

Lead time of Inventory management is amount of time between when a Purchase

Order is placed to replenish products and when the order is received in the
Warehouse
Minimum Stock Level is lowest quantity of a product that a company wants to have
on hand at any given time to avoid stockouts or backorders
Maximum stock level is largest number of goods a company can store to provide its
customers with service at lowest possible cost
Formula for Calculating Final Inventory -
Opening inventory + Net purchases – COGS = Final Inventory

Seasonal inventory is stock that sells more quickly during specific times of the
year. Seasonal inventory management involves analyzing the seasonality of product
demand and the SKUs stored
Seasonal inventory is the stock that businesses acquire to meet increased demand
during specific times of the year, such as holidays or seasonal events. This type of
inventory helps companies manage fluctuations in sales and ensure product
availability during peak seasons

Here are some tips for managing seasonal inventory

Safety stock
Helps avoid stockouts and lost sales, as well as excess inventory and carrying
costs.
ABC analysis
Determines the value of inventory items based on their importance to the business. It
ranks them based on demand, inventory costs, and risk data

Decoupling inventory is the process of setting aside extra parts or raw materials to
ensure there aren't any delays or disruption in the production of finished goods in the
event of a supply shortage or machinery breakdown
Decoupling inventory is a safety stock of raw materials or work-in-progress items
that manufacturers set aside at different stages of production to prevent delays or
stoppages
Protects against supply chain issues
Decoupling inventory helps ensure that production doesn't stop if there's a supply
shortage, machine breakdown, or other unexpected issue.
Maintains consistent production
Decoupling inventory helps manufacturers maintain consistent production levels, can
lead to improved customer satisfaction & higher retention rates.
Fulfills orders on time
Decoupling inventory helps manufacturers fulfill customer orders on time, even if
there are disruptions in the production process.
Creates a resilient supply chain
Decoupling inventory helps create a resilient supply chain that can withstand
uncertainties and failures
Here are some examples of how decoupling inventory can be used
Computer manufacturer
A computer manufacturer might hold extra display screens if there are periodic
disruptions in touchscreens, while running a second shift for subassemblies that are
moving more slowly.
Notebook manufacturer
Notebook manufacturer might hold a buffer of cut, printed, bound sheets at each
machine or station to ensure that production doesn't stop when any of these
machines need repairs. To properly decouple inventory, you can:
• Check your current stock levels
• Analyze past sales data to predict future stock needs
• Set safety nets for critical points in your production line
• Put your plan into action
• Keep an eye out and adjust as needed
• Consider investing in smart inventory management technology
Classifying Inventory allows business owners to focus on items that make most
impact on their business goals while identifying items that aren't contributing to the
bottom line, are selling, are obsolete. Classifying items provides a better way to
assign service levels to meet target fulfillment rates
Cycle Inventory is the Products, Materials or Raw ingredients that company keeps
to fulfill its minimum Production quotas

Cycle inventory also known as cycle stock or working inventory, is the part of total
inventory that is available to meet the usual demand. It is comprised of the products
that will be used first to fulfill customer orders in the standard business cycle of a
company

Purpose - Cycle inventory helps companies balance production costs, meet

customer demand, avoid stockouts and maintain customer satisfaction.
Calculation - To calculate cycle inventory, companies consider manufacturing lead
time demand and production quantity.
Management - Cycle inventory requires careful supply chain management to avoid
tying up capital and increasing storage costs.
Benefits - When managed effectively, cycle inventory can help companies reduce
set-up costs and take advantage of economies of scale.
Formula - The formula to calculate the number of units to order at once is:
Cycle inventory = √[(2 x D x S) / (C x I)]. In this formula, D = annual demand, S =
fixed cost per unit, C = unit cost, and I = storage cost per unit
Pipeline inventory is the value of products that a business has ordered but are still
in transit, and have not yet reached their final destination. It's important for
businesses with long supply chains, like retail, manufacturing, and e-commerce, to
carefully track pipeline inventory to keep production and sales plans on track

Pipeline inventory can be broken down into three categories:

In-transit inventory - Inventory that has been shipped from the supplier but has not
yet been received by the customer
Backlogged inventory - Inventory that has been ordered by the customer but not
yet shipped by the supplier
Stock-in-trade inventory - Inventory that has been received from a supplier, sold to
a customer, but has not yet been shipped
Effective pipeline inventory management can help businesses:
• Schedule production or shipments in advance
• Reduce standing inventory levels
• Avoid stock-outs
• Plan for delays in the supply chain
• Keep operations going when there are production challenges or backlogs
• Ensure in-stock, on-time delivery on a consistent basis

Safety stock is a term used by logisticians to describe a level of extra stock that is
maintained to mitigate risk of stockouts (shortfall in raw material/packaging) caused
by uncertainties in supply and demand. Adequate safety stock levels permit business
operations to proceed according to their plans

Why it's important - Safety stock helps businesses avoid the hassle of running out
of stock and losing customers. It also helps businesses maintain high customer
service levels and avoid potential losses.
How to calculate it - Safety stock is calculated by looking at historical sales data or
using statistical forecasting methods.
How much to keep - The optimal amount of safety stock to keep is a balancing
act. Too much safety stock can lead to increased holding costs and potential
obsolescence, while too little increases the risk of stockouts.
Benefits - Maintaining safety stock can help businesses plan and forecast more
effectively. It can also help businesses make more informed decisions about
inventory management, production planning, and overall business strategy
Safety Stock is a term used by logisticians to describe a level of extra stock that is
maintained to mitigate risk of stockouts (shortfall in raw material or packaging)
caused by uncertainties in supply and demand. Adequate safety stock levels permit
business operations to proceed according to their plans
Inventory/ Stock control, is the process of ensuring the right amount of supply is
available in an organization
Stock handling - Process of buying and storing materials and products while
controlling costs for ordering, shipping, handling, and storage

Safety Stock Calculator - The simplest method for manually calculating safety
stock levels is with this formula:
(Maximum Daily Usage x Maximum Lead Time) - (Average Daily Usage x
Average Lead Time)
Company sells an average of 10 products per day, your lead time is about 14 days.
Peak periods, you sell up to 15 products per day, delays in inventory shipment mean
it takes up to 18 days for products to arrive at your warehouse, Here's the formula in
action: (15 × 18) - (10 × 14)
This makes your safety stock level 130 units. You’ll need to keep 130 extra products
on hand to compensate for delays in shipping or periods of high demand. That
formula is pretty straightforward, which makes it great for small businesses. The
downside is, average lead time can be hard to figure because it's so variable — and
outliers can seriously skew your calculations. Large companies may need a better
formula to compensate for a greater product volume and a wider variety of supply
and demand
What are inventory costs?
Inventory costs encompass the overall cost of goods and all expenses associated
with ordering, holding, and managing a product-based business's inventory or stock
levels. Total inventory costs are frequently broken down into three distinct
categories:
ordering costs, carrying costs, and stockout costs. Business owners and/or
management often assess or examine these amounts to determine how much
inventory to keep on hand at any given time

Ordering Costs - Every time your company purchases from a supplier, you’ll have to
consider relevant ordering costs; even if order in question is fairly small, ordering
costs will always be involved. To estimate how much an order is going to cost, you’ll
need to track purchase requisition, purchase orders and invoicing, labor costs, and
fees for transportation and processing. Some of these costs will be relatively
insignificant like preparing invoices, others, like purchase orders and transportation,
will run much higher
Carrying Costs -Inventory carrying costs (also referred to as inventory holding
costs) are the fees a business pays for keeping its inventory items in stock. Carrying
costs can vary and include anything from taxes and insurance to inventory bin
occupancy fees to employee costs and the price for replacing perishable goods. An
accurate view of your carrying costs is critical to knowing how much profit your
current inventory can make. Fortunately, businesses can reduce these costs by
utilizing an efficient warehousing layout and leveraging innovative inventory
management software (IMS)

Stockout Costs
Stockout costs represent any lost (potential) sales from insufficient product—the lost
income and expense due to an inventory shortage. For instance, this can happen if a
customer orders the last of a stock keeping unit (SKU) you have in stock, but that
item turns out to be defective. It will be a loss since you can’t ship a defective
product, and you don’t have available inventory to fulfill the order. Alternatively,
stockout costs can occur if customers see the product they want is out of stock on
your website, so they purchase it elsewhere.
Ecommerce retailers who also operate brick-and-mortar storefronts face additional
other risks for stockouts. When your website ships inventory located at a store for
online orders, additional uncontrollable variables might cause an item to be
unavailable for an omnichannel order. For example, a customer might have the last
unit in hand waiting to purchase in a store while another places an online order for
that same item
Inventory types
https://www.youtube.com/watch?v=TU2OniIvVmw
https://www.youtube.com/watch?v=qk15U_GSCDI Inventory cost

Summary
Inventory Management System can simplify the process of ordering, storing and
using inventory by automating end-to-end production, business management,
demand forecasting and accounting