Slide 1

Welcome to Module 3 which is all about Inventory and management. Before we begin, this
is just a brief overview of the areas that we will be discussing and covering in more detail.

The first area is really about thinking about the requirements of the business, the internal
customer, the internal client, and what they need. It also talks about the challenges of
demand and then scheduling the customer’s needs along with the logistics of how we are
going to do that. We will be thinking about the first point, other than the budgeting process
that sits behind that. But really thinking about requirements that the client has. Next, we
will be covering the purpose of inventory management, what the point of it is, and how it
can impact a supply chain. We will move on to discuss what the difference is between
management and control. A lot of people have been asking about forecasting, how we can
predict demand, how can we get it right with our forecasting and scheduling, so we will be
talking about that. Then we will be thinking about the different stages of the life cycle within
inventory and some systems for replacing and replenishing your inventory and goods. With
that, comes stock valuation and how we value both stock and inventory, and the kinds of
methods that are used. Some points will be made and covered around inventory
positioning and logistics coordination, and lastly, the sales and operation process that really
brings together the demand, the anticipation of sales for the future, and how we will link
that into how we are going to build, what we need to build, assembling goods, and
determining goods for future demand in order to meet the sales and sales forecasting

Slide 2

In the procurement module, we discussed the difference between supplier relationship

Here we have got the differences between inventory control and inventory management.
Control is very much based on the housekeeping and making sure that everything is efficient
and well organised.

On point number two, you can see that the inventory in the warehouse says that it is in
good condition. This means there is good housekeeping involved, good organisation, and an
efficient way of working with the inventory and stock that we hold.
Here we can compare the control with the inventory management. Inventory management
is all about the activity revolved around reordering stock and what we do with our stock in
an active way and proactive way. We also have to make sure that we are acknowledging
demand as the demand may be fluctuating, so realistically speaking, we need to ensure that
the reordering of goods is in line with that. So it is not too difficult to establish the difference
between the two, as I said, a proactive piece is the inventory management, whereas the
inventory control is a day-to-day housekeeping event. Systems are often used and put in
place to assist us. They will also highlight things and alert us when stock is running out so
that we have time to replenish the stock levels before we completely have a stock-out
situation.

Slide 3 – This can be split into 3 parts instead of 4. You can add a button that the users have
to click on to get more information. Maybe some slight animation once they have clicked i.e.
a short clip of raw materials being picked or harvested etc?

We can think about inventory in four different stages, and these are raw materials, work-in-
process, finished goods, and the cost of goods sold. Let’s go down the list in order and start
with raw materials.

Raw materials

In some cases the raw materials could be something that is still in the ground, it could be
something that we need to take, process, and modify before it starts its life as a component
and as a piece part. This is very much the raw ingredient. You can imagine copper, iron, and
many more raw materials, especially in food manufacturing where you are thinking about
the plant.

The second part is that you are going to make it into something and bring it together to
develop that raw material into something that Is more fitting and fit for purpose with your
assembly and with your end product. You will also have a store where you keep your raw
materials.

Work in process and finished goods

Work in progress is usually referred to as ‘on the shop floor’. You will also think about a
finished goods store where the items are placed after they have been built on the shop
floor.

The cost of goods sold

The last area is about once they have been delivered and what has been delivered as far as
inventory is concerned through the delivery and packaging process to the client. This is the
actual goods that you have sold.

The first 3 points are listed on the balance sheet as a cost and working capital, and then you
have got the income stream which is on your statement and will be reflected on the goods
that you have sold. So really, the first 3 are the cost to the business, and the last one is the
income to the business.

Slide 4 – Maybe put this to the user first. Maybe a question that says, “What is inventory
management to you?” There can be an answer box at the bottom and then afterwards
they can click on an arrow, where each bullet point is then brought up along with the
narration of that part

Let’s just dwell for a moment on what is inventory management. As we have said previously,
we have started to segment inventory around 4 key areas. Inventory management simply
means the methods that we are using to separate, segment, organise, store, replenish
inventory and keep an adequate supply of goods in line for what we are scheduling. Whilst
at the same time, trying to minimise the cost by using a just-in-time technique which will
also ensure that we are not overstocking and that we don’t carry over excessive amounts of
inventory that we don’t need to put into the production process, which we cannot then sell
on to the customer. The whole point of the process of having goods in inventory quickly
through the shop floor and sold quickly is to get this quick turnaround so we can turn the
things that we are buying, into sales as quickly as possible.

Each location area that we choose, for example, the factory floor, the production process,
the incoming goods inward store, and the finished goods store all require different
paperwork documentation and different control mechanisms and methods for the
respective inventory. This is because they are always increasing in cost, as they go through
our company.

We need to keep a very detailed record and inventory stock of goods and make sure that we
have got, and are keeping these records of everything that we have got during the process
which is owned by us, because it is a cost of goods.

Customers prefer to physically know what they are buying. This is where we have seen a rise
of purchases that can be made online, however, in business, part of the due diligence
process is that you would want to go and visit the company that you are working with. You
would want to see this inventory system and touch and feel the quality of goods that are
being used, such as the raw materials, to make sure that you are comfortable with the level
of standards that you have specified.

We want to make sure that we get it right the first time, and that we have set up a process
that follows the specification that we are going to give to a supplier and we can actually see
that the items in the inventory process are up to the standards that we have given them.
We don’t want failure, mistakes, or ‘so called’ downtime because the materials don’t have
the specific quality which in turn will ultimately cause disruption in the process and the
supply chain.

Slide 5 – Could this slide be made into a bit of a game? Like a slide and sort? Maybe before
the narration begins, all of these 11 ovals are on screen but are sporadically spread out
and not yet joined up to the ‘INVENTORY MANAGEMENT’ part yet. There will then be 4
more ovals (totalling at 15) which have nothing to do with inventory management. The
aim of the game is to click and drag the correct 11 items to the ‘INVENTORY
MANAGEMENT’ item, which will then link it up, just like the slide. If they choose a wrong
one, they have to start all again.

This slide is giving you an indication of all of the adjoining and related roles that exist around
inventory management. So it's not a one-dimensional process that goes on, we have got
many people who are interested in the inventory management piece. For example, our
customers are wanting to be certain that we have the goods available to meet their sales
forecast. We have got suppliers that want to make sure that they are meeting our
requirements. We have got the product team that wants to make sure that any changes
have been made to the product for future sales and new releases, which again, has all been
communicated into and through the inventory management process. That is linked together
with product sales and product inventory.

Reporting is a big part of this as we need to make sure that we have goods and clear
reporting on what they sometimes call the ABC reporting, meaning the key inventory and
the ‘a class’ items. We want to make sure that the finance team are informed through
reports and with the correct management information of what the cost of inventory is, so
that the balance sheets are accurate and that we have a profit at the end of the day. This
will confirm and check that the inventory is not sapping and absorbing all of the money in
the business and that we are actually a profitable business at the end of the year.

So we have got a lot of people who are interested and who are actively wanting to know
from a sales point of view, from a customer point of view, from a sales manager point of
view, an accountants point of view, a suppliers point of view, the finance point of view, as
well as our supply chain point of view, all about inventory management.

Slide 6

Here we are developing this notion of inventory control and inventory management. As we
have mentioned before, control is all about the piece around being very much organised,
efficient, and good planning involved to make sure that our warehouse is in good order. The
management part is more around the proactive forecasting replenishment matching
demand and making sure that both our inventory and replenishment levels are in order and
whether it is going up or down, with demand. We don’t want lots of inventory if we are not
selling, and vice versa, we don’t want to be running out of parts where demands are high.
Some of that will be seasonal variation, and some of it will be marketing and sales
campaigns.

The scope of inventory control is there for following a process and you could say it has a
defined end to it. Whereas, with inventory management, there is more of an ongoing
proactive piece with can move into effective supplier management relationships and
develop much more of looking at the total cost of ownership and making sure that it is
measured and baselined at the beginning, but also that the total cost of ownership, meaning
the effectiveness, the cost of deliveries and the packaging. We want to make sure that
again, we don’t have too much or too little and making sure that it is optimum for the needs
of our business.

The main purpose of inventory and inventory control is to acknowledge what and how
goods are being stocked and to ensure that they are in good condition. We don’t want
damp, we don’t want them to be too hot or too cold that could cause damage, particularly
in perishable inventory items. The main purpose of inventory management is this
responsiveness towards demand and management to then go and develop the supplier
relationship management piece.

Slide 7 – Maybe worth splitting this into 2 parts. Inventory management and inventory
control. I’m quite stuck on ideas for this slide. Any ideas, Demetrius?

This slide will give us some more information on inventory control and inventory
management. We will start off with Inventory control. Inventory control is making sure that
the goods are in a usable condition, are ready to be used, and are in good order.
Maintaining this can have some effect on the cost side of things, for example, it may be that
the warehouse needs to be kept heated, clean, and an insurance is taken out for the goods
when they are in our charge. Obviously, there is a cost to holding stock such as the raw
materials, the work in progress, and the finished good stock, but there is also the add-on
cost still to come which is the total cost of ownership.

Moving onto budgeting. This is about the pieces that we buy in and when we add labour,
the apportionment of the warehouse and the shop floor, and the capital equipment. All of
this makes up the budgeting process where we are calculating the cost of acquiring the
goods and the working capital. So holding inventory and how much it costs and how much
we have, is a big part of our budgeting process and our accounting practices. We need to
make sure that we are clear and have an efficient flow through the supply chain, from the
supplier through our company in order to get the goods sold onto the end-user, and getting
paid for that is a huge part of how we do business and how we make our money. So supply
chain management and inventory effectiveness are big drivers for a profitable company.

Inventory control is all about having an annual stock policy and forecasts from the business
within these three areas of raw materials, work in progress, and finished goods. We need to
make sure that we have inventory levels and forecasts that are predicted which we can then
use as key performance indicators to see how we are doing a month on month against the
annual stocking forecast and policy. We can then see how good we are at matching or
forecast with demand.

If you want to set up a perpetual inventory system, it is really about an automatic process
and an automatic system. If you are confident that you are going to be replenishing stock
and you have everything organised and set up in the inventory control, you can set up the
perpetual inventory system where it is reordering goods at a certain point in time and that
they are a set quantity. You must keep on top of that to make sure that you don’t have any
significant variances that you need to go back and make adjustments to.
Let’s now turn our attention to the multi-dimensional and the proactive area of inventory
management. We are really taking this last point on perpetual inventory systems where we
are constantly looking at regular reorders and that we are running almost a weekly or daily
stock intake of those. Now we are looking at a much more proactive and strategic area of
inventory management, where we will be making a judgement here on what we order, the
average use, and the intelligence that we put into inventory control, how much are we going
to order, and who are we going to be working with or ordering from.

We can think about an economic order quantity, for example what the right amount to be
ordering is and we can think about drawing down against this contract with the supplier. All
of these can certainly bring down the inventory costs when we look at the economic order
quantity where we will only order the optimum number of units to order to satisfy us. But
do remember, especially in a just in time environment, you are going to have bottlenecks,
you will have to think about using your pest or pestle analysis and think about what
potential risks, delays, and issues that are in the supply chain. You will need to factor these
into the economic order quantity when you are bringing your goods in. You don’t want to
have a stock out situation that holds up the efficient production process. Relying on
suppliers is a key part of this, particularly if you have outsourced your make or buy and you
have outsourced to key suppliers, you are going to be thinking about whether they are able
to respond to any changes that you make, the volatility that exists, and they will need to
meet you and work with you in a collaborative way so that they can meet your demands and
respond to any changes that are required.

You want to make sure that everything is clear in your own business and with the supply
chain and your policies in order to obtain the most suitable suppliers. You might have a
procurement manual that delivers quality goods on time. We need to have suppliers that
are adding value and service to us to meet our particular specialist needs in the business.
The name of the game is to make sure that we have the correct and optimum amount of
inventory at the correct time. We don’t want too much and we don’t want too little, too
much is going to cost us money and too little is going to give us stockouts.

We will be looking at our inventory turnover ratios and stock turn ratios in terms of our
ongoing reporting and our inventory systems, looking at the information that we gather
such as which stock is moving and which stock is not going anywhere. We might have to
make hard decisions such as writing stock off if things have changed, if we are not using it, if
it is old stock and going anywhere, we might need to be looking to shift that and get it out of
our accounts. Ratio analysis when it comes to inventory is something that is necessary for
the overall management of inventory.

Slide 8

Sometimes within inventory, you will have something called materials management and you
will have a materials manager whose job it is to make sure that they are balancing demand
from the business, from the customer, and then supplying that demand through suppliers
with those materials. So the name of the game is efficiency and optimisation, being optimal
and making sure that we don’t have too much stock, which will cost us money, and not have
stock so low where we run out of things, stop the production facility and don’t make our
sales targets and monthly targets.

Slide 9 – Can we have this a competition and emphasise the push vs pull approaches. For
example, the bullet points are randomised and pop up in the middle of the screen and
there is ‘PULL’ on one side of the screen and ‘PUSH’ on the other side. They then have to
click on either ‘PULL’ or ‘PUSH’ depending on which category it falls into?

Pull

We are now going to cover the push vs. pull. Let’s start with the optimal pull approach
which is on the right-hand side. This is around making things that are needed when we need
them and to do that, we need to have an accurate forecast of demand and we need to have
numbers that we can rely on. If you have followed a pest approach, you should be aware of
the political, economic, and social implications around us in a macro environment and a
macro economy that can change our perspective on certain things.

From a pest point of view, having all of these things factored in and given due consideration
to the factors that can change, the variations that exist, seasonal variations, and the impact
of weather changes. There are so many things that could have an impact on demand for
your goods and services, in fact, the budgeting cycle as companies come to the end of the
year, you could say that they spend more when they realise that they have some money
left. Understanding how the forecasting process works will give you this optimal positioning
and forecasting to make what is needed when needed.

Once you have your precision around your production process sorted and you know what is
going to be consumed month by month and throughout the year, then you can bring in a
Kanban process and the optimal number of key parts and the assemblies to assemble the
item together. You can still keep the inventory reasonably low, except for possibly worrying
about your low value highly complex pieces that are in the bottleneck area where you might
want to have more inventory for a contingency. You are minimising the number of write-
offs, rejections, and poor quality that goes towards waste. You are making sure that you can
see that it is not taking up as much room, money, and costs throughout the process and that
the communication lines are kept open and clear in terms of managing the end to end
supply chain in line with the demands of the business and customers.

Push

The reverse of that on the left-hand side here is the push approach. One terminology for
this approach is pile them up, stock them high and sell them cheap. Here we will make as
much as we can to sell it but we don’t know when we are going to sell it, but we build and
buy in bulk to get the lowest price and we might be in a leverage position to open books and
get cost down. It feels as though we have a long-term plan, we are pulling together big
numbers, loading up the front-end suppliers, getting the price down by aggregating our
needs and volumes. The downside of this is that if the sales don’t come, we have high
inventories and high storage costs because we have anticipated an upcoming need whether
it be seasonal or a high event need. For example, the boxes here could be bottles of alcohol
for a huge sporting event that is taking place. When the event is over, if we are left with a
high inventory of this and probably a sell-by date on the item, it does have a shelf life,
although it is not perishable compared to dairy products. We want to make sure that we
don’t write off a lot of these goods that we have made in anticipation of this big event and
the big payday that we are going to have by taking this risk. This is a risk because if we are
not having the same communication along the way on forecasting, then after the event, we
will be left with a lot of stock, bottles, labels, and packaging that we have ordered and paid
for because of the breakdown in communication was wrong, and therefore the anticipated
forecast would also be wrong. The point about pull is that it is not risk-free but it relies a lot
on meticulous planning, precision, and communication to deal with the peaks and troughs
that exist with the volatility of sales and demand.

Slide 10 – Maybe the arrows and pictures are already there, but they have to link it up
themselves? When this is done, that is when the narration will begin with the
information.

This here is showing us a pictorial illustration of what we have just covered regarding the
push and pull part of the process, and really the way in which the connection that it makes
between the end-user, the consumer, and the suppliers bringing the raw materials and
incoming goods. We then bring that into the assembly process and then sell that through
the distribution and wholesale network, in this case, into retailers before consumers can buy
that on an individual basis. Here you have wholesale distributors buying by the caseload and
by volume and then that volume will be reduced to units as the consumers will individually
buy lower volumes from the retailers. Consumer pull can happen, we may not be in a push
environment, for example, if we get consumers pulling that, we might not be ready for it as
we might not have enough inventory, and we haven’t forecasted demand effectively. The
position that we want to be in is a harmonious one with distributors and the distribution
network to make sure that the inventory and raw materials that we are buying from the
suppliers and making in the assembly process is the right optimum number for the
consumer, regardless of peaks and troughs in the sales process.