Inventory Management
❖PLEASE

COLLECT YOUR COURSE
MATERIAL FROM REPROGRAPHY
SECTION.
Reactive Methods
❖

Reactive inventory system responds to channel member’s
inventory needs by the drawing the product thro...
Reactive Methods
I
ROP
OQ
D
I
- 250
ROP - 200
OQ - 400

Distribution
Center

-

45
50
200
5

Wholesaler A
I
ROP
OQ
D

- 80...
Reactive Methods Assumptions
❖

All customers, market areas, products contribute equally to
profits

❖

It assumes infinit...
Planning Methods - Multistage
Inventory

❖

Fair Share Allocation

❖

Distribution Requirements Planning (DRP)
Fair Share Allocation
PLANT WAREHOUSE
Inventory 600 units
Safety Stock 100 units

DISTRIBUTION
CENTER 1

DISTRIBUTION
CENT...
Fair Share Allocation
❖

Common Days’ supply DS = (Aj + ∑Ij) / ∑Dj , Where

❖

DS = Common days’ supply for distribution c...
Inputs to DRP
❖

Sales forecast by SKU at each ISL (Inventory Stocking
Location)

❖

Customer orders for current and futur...
DRP - Marketing Benefits
❖

Improved service levels - On time deliveries and customer
complaints

❖

Improved and effectiv...
DRP - Logistics Benefits
❖

Reduction of DC’s freight costs due to coordinated shipments

❖

Reduced inventory levels as w...
STRATEGY DEVELOPMENT
PROCESS

❖

Product / Market Classification

❖

Segment Strategy Definition

❖

Operationalized Polic...
PRODUCT / MARKET CLASSIFICATION
Product
ID

Annual Sales
(000’s)

1

45000

2

35000

3

25000

4

15000

5

8000

6

5000...
PRODUCT / MARKET CLASSIFICATION
Product
ID

Annual Sales
(000’s)

11
12
13
14
15
16
17

18
19
20
0

% total
sales

Cumulat...
SEGMENT STRATEGY
DEFINITION
Forecastin
First-line
Service
g
classification objective
procedure
Apromotional
A - regular
B
...
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Inventorymgmt

  1. 1. Inventory Management
  2. 2. ❖PLEASE COLLECT YOUR COURSE MATERIAL FROM REPROGRAPHY SECTION.
  3. 3. Reactive Methods ❖ Reactive inventory system responds to channel member’s inventory needs by the drawing the product through the distribution channel. ❖ Reactive system waits for customer demand to pull the product through the system. ❖ Order quantity is a function of safety stock levels and predetermined maximum level
  4. 4. Reactive Methods I ROP OQ D I - 250 ROP - 200 OQ - 400 Distribution Center - 45 50 200 5 Wholesaler A I ROP OQ D - 80 - 75 - 200 - 14 Wholesaler B
  5. 5. Reactive Methods Assumptions ❖ All customers, market areas, products contribute equally to profits ❖ It assumes infinite availability at the source ❖ It assumes infinite inventory availability at the supply location too ❖ Performance-cycle (lead time) is constant ❖ Customer demand patterns are relatively stable and consistent - doesn’t apply for lumpy demands ❖ Each distribution center’s timing and quantity of replenishment orders are determined independently of all other sites, including the supply source
  6. 6. Planning Methods - Multistage Inventory ❖ Fair Share Allocation ❖ Distribution Requirements Planning (DRP)
  7. 7. Fair Share Allocation PLANT WAREHOUSE Inventory 600 units Safety Stock 100 units DISTRIBUTION CENTER 1 DISTRIBUTION CENTER 2 DISTRIBUTION CENTER 3 Inventory 50 units Daily use 10 units Inventory 100 units Daily use 50 units Inventory 75 units Daily use 15 units
  8. 8. Fair Share Allocation ❖ Common Days’ supply DS = (Aj + ∑Ij) / ∑Dj , Where ❖ DS = Common days’ supply for distribution center inventories ❖ Aj = inventory units to be allocated from plant warehouse ❖ Ij = inventory in units for distribution center j ❖ Dj = daily demand for distribution center j ❖ Amount to be allocated to each distribution center is given by, ❖ Aj = (DS - (Ij / Dj)) * Dj
  9. 9. Inputs to DRP ❖ Sales forecast by SKU at each ISL (Inventory Stocking Location) ❖ Customer orders for current and future delivery - Outstanding purchase orders or manufacturing orders ❖ Available inventory for sale by SKU at each ISL ❖ Logistics, manufacturing and purchasing lead times ❖ Modes of transport and deployment frequencies ❖ Safety stock policies by SKU at each ISL ❖ Order quantity by SKU at each ISL
  10. 10. DRP - Marketing Benefits ❖ Improved service levels - On time deliveries and customer complaints ❖ Improved and effective promotional plans ❖ Improved ability to anticipate shortages of right items ❖ Improved inventory coordination with other functions of firm ❖ Customers finally benefit due to all of the above
  11. 11. DRP - Logistics Benefits ❖ Reduction of DC’s freight costs due to coordinated shipments ❖ Reduced inventory levels as what product when it is needed is determined ❖ Decreased warehouse space requirements ❖ Fewer back orders leading to reduction of freight costs ❖ Improved inventory visibility
  12. 12. STRATEGY DEVELOPMENT PROCESS ❖ Product / Market Classification ❖ Segment Strategy Definition ❖ Operationalized Policies and Parameters
  13. 13. PRODUCT / MARKET CLASSIFICATION Product ID Annual Sales (000’s) 1 45000 2 35000 3 25000 4 15000 5 8000 6 5000 7 4000 8 3000 9 2000 10 1000 % total sales Cumulative Sales% Products% Category
  14. 14. PRODUCT / MARKET CLASSIFICATION Product ID Annual Sales (000’s) 11 12 13 14 15 16 17 18 19 20 0 % total sales Cumulative Sales% Products% Category
  15. 15. SEGMENT STRATEGY DEFINITION Forecastin First-line Service g classification objective procedure Apromotional A - regular B C 99% Review period Aggregate Perpetual Schedule Replenish Inventory ment mgmt monitoring DRP Daily 98 Sales history Perpetual DRP Daily 95 Sales history Weekly DRP Weekly 90 Sales history Biweekly ROP Biweekly

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