The document discusses inventory management and outlines several key points. It describes the need for inventory to address supply chain uncertainties and ensure customer demand is met. It also discusses underlying principles of inventory management, current philosophies like multi-echelon systems, and pros and cons of different approaches. The document then covers theories like Theory of Constraints and metrics like inventory turnover. It emphasizes the need for effective inventory management systems to integrate planning factors and provide real-time visibility.

1. 18th May 2011

2. Table of Contents
Need for Inventory
Underlying Principles
Current Philosophies of Inventory Mgmt
Pros and Cons of IM Principles
TOC and MEIO
Primary Needs of an Effective IM System
MapMySupplyChain
5/27/2011 Strictly Private & Confidential 2

3. Need for Inventory
Inventory Effective IM MapMySupply
Principles Philosophies Pros and Cons TOC and MEIO
Need System Chsin
 To tide against Supply Chain Uncertainities – Transporter uncertainity, Supplier Lead
Time, etc.
 Ensure all Customers, at every location are served at the right time, with the right
quantity
 Normally, Sales People would like to Stock up, as much Inventory as possible, so that
Stock Out scenarios are ruled out
 On the other hand, the CFO would like to cut inventories, so that the capital costs are
kept in check
 If Planned properly, Inventory will have a positive impact on Customer Satisfaction
 If Planning of Inventory is inaccurate, then it leads to either:
 Stock outs, Customer Dissatisfaction, lost sales and indirect cost increase or
 Increase in Capital Costs, Obsolescence and raises Operational challenges
5/27/2011 Strictly Private & Confidential 3

4. Underlying Principles
Effective IM MapMySupply
Inventory Need Principles Philosophies Pros and Cons TOC and MEIO
System Chsin
 Underlying assumptions that define a Supply Chain Inventory model is often
conflicting. This is depicted in the figure.
Underlying principle
conflict
5/27/2011 Strictly Private & Confidential 4

5. Current Philosophies of Inventory Management
Effective IM MapMySupply
Inventory Need Principles Philosophies Pros and Cons TOC and MEIO
System Chsin
 Inventory Management in the current context, is designed to be held closer to the
customers
 But not all products/SKUs can be held close to the Customers, at all times. This means
there would be further classification of SKUs as fast moving, slow moving, etc. and then
the fast moving SKUs will be stocked closer to the Customer. At the same time, the slow
moving will be held closer to the place of manufacture
 This leads to formation of echelons. The fresh order receipts, are at the Regional
Warehouse or Motherhouse and the SKUs are then moved to a local Distribution for
further storage, before dispatch
 The issues with Multi - echelon formation, is that Inventory Planning, at times are
carried out for One – echelon, without taking into consideration its effect on other
echelons
 This may either lead to excess Inventory stocking in one or more of the echelons OR
stock out situation in any one of the echelons
Plant Regional Warehouse Local Warehouse Customer
5/27/2011 Strictly Private & Confidential 5

6. Current Philosophies of Inventory Management
Effective IM MapMySupply
Inventory Need Principles Philosophies Pros and Cons TOC and MEIO
System Chsin
 Further, the quanity that needs to be held at each level is a question mark
 A company may have around 1000 SKUs, out of which 10 may be fast moving, in one
market and slow moving in 4 other markets.Similarly few other SKUs may be fast
moving in a totally different market. So how much Inventory should we hold?
 To be safe few companies, may not only stock excess inventory in the local
warehouses but also in the regional warehouses
 At one end the supply chain the question is how much to produce? And at the other
end the question is how much will be consumed?
Plant Regional Warehouse Local Warehouse Customer
Quantity Quantity
SKU SKU
5/27/2011 Strictly Private & Confidential 6

7. Pros and Cons of IM Philosophies
Effective IM MapMySupply
Inventory Need Principles Philosophies Pros and Cons TOC and MEIO
System Chsin
Sr. No. Pros Cons
1. Customer Demands may The Inventory Carrying Cost to meet Customer
be met Demand is too high
2. The Regional Warehouse The indirect cost of movement of inventory between
can act as an extended Regional and Local warehouse may be high, in
Buffer Stock for Local addition to the Inventory Carrying Cost, at both
Warehouses places
Excess Inventory may become Obsolete, if Market
dynamics change
Production of Products, with added buffers, may lead
to shortfalls in production of other Products
Sudden spike in demand for a particular product, may
become difficult to meet
Agility of the Supply Chain takes a hit
Excess Inventory may have adverse effect on the
Financials
5/27/2011 Strictly Private & Confidential 7

8. Theory of Constraints and MEIO
TOC and Effective IM MapMySupply
Inventory Need Principles Philosophies Pros and Cons
MEIO System Chsin
 Theory of Constraints (TOC) has a different view to Multi – Echelon Inventory
Optimization (MEIO) from the one we have already discussed
 The Concept so used is called, Demand Pull and Buffer Management (DPBM)
Demand Pull
 The concept says, that instead of Placing the Inventory closer to the Customer, it
subscribes to the principle of holding the Inventory closer to the source (Factory, in
this case)
 The Regional warehouse only maintains stock needed for replenish lead time
 Once the customer places an order for a particular product with the Regional
Warehouse, the ordered quantity will be simultaneously reported to the Regional
Warehouse
 The factory will deliver the products promptly, once they are produced
5/27/2011 Strictly Private & Confidential 8

9. Theory of Constraints and MEIO
TOC and Effective IM MapMySupply
Inventory Need Principles Philosophies Pros and Cons
MEIO System Chsin
Buffer Management
 Buffer Management is a method used to monitor the inventory in Factory or Regional
Warehouse
 In TOC, the biggest quantity required in replenish lead time is regarded as the target buffer
stock
 Once the target buffer stock has been determined, it is divided into 3 parts
 Neglected Zone (Green Zone)
 Warning Zone (Yellow Zone)
 Rush Zone (Red Zone)
 If Inventory is in the Neglected Zone, it is required to reduce the Inventory
 If Inventory is in the Rush Zone, it is required to increase Inventory
 By using Buffer Management, the Inventory can be maintained at an appropriate level,
without running out of stock
5/27/2011 Strictly Private & Confidential 9

10. Theory of Constraints and MEIO
TOC and Effective IM MapMySupply
Inventory Need Principles Philosophies Pros and Cons
MEIO System Chsin
Performance Evaluation
 Further, in the aspect of Performance Evaluation – the commonly used terms like Inventory
Turn – Over Rate and Stock – Out Rate are modified to TDD and IDD
 TDD index measure reliability. That is it measures “How much work is uncompleted”
 IDD index measures effeciency. That is “How much work is overdone”
TDD
 When the company or department is unable to meet the deadline for delivery, TDD is index
will be computed to show the level of incompletion.
 The computation is to multiply the effective production value by the number of days delayed
 The bigger the TDD value, the longer is the order delayed, which means more damages to
the company
 An Organization or department should follow the principle of zero TDD
5/27/2011 Strictly Private & Confidential 10

11. Theory of Constraints and MEIO
TOC and Effective IM MapMySupply
Inventory Need Principles Philosophies Pros and Cons
MEIO System Chsin
IDD
 When a company produces more than enough products, it is considered ineffecient
 This not only raises the cost of Inventory but also wastes raw materials
 The computation is to multiply the Inventory Value by the Total Time Spent in the
warehouse
 Bigger the IDD value means, higher overstock which leads to higher Inventory Costs
and delivery delays due to insufficient raw materials, resources for manufacturing
other products
 Therefore, company or department should strive to lower the IDD
5/27/2011 Strictly Private & Confidential 11

12. Primary Needs of an Effective IM System
Effective IM MapMySupply
Inventory Need Principles Philosophies Pros and Cons TOC and MEIO
System Chsin
A System which makes an Inventory Management System effective should factor in:
 Demand Forecasts
 Manufacturing Capcities
 Supplier Capabilities
 Integrated Planning Environment
 Linking Planned parameters (TDD, IDD, etc.) with key Financial Measures
That would basically mean, an Organization can review supply chain planning decisions
based on their financial impact, especially when it comes to revenue, profitability, and
return-on-assets.
If in addition to these parameters, an actual real-time end to end visibility is brought in,
then the decision making and planning, can have an actual view of the impact of thier
decisions
5/27/2011 Strictly Private & Confidential 12

13. MapMySupplyChain
Effective IM MapMySupply
Inventory Need Principles Philosophies Pros and Cons TOC and MEIO
System Chsin
1. All of the essential parameters that we discussed are covered in the product –
MapMySupplyChain
2. The product uses Google Map to provide location of Factories, Warehouses, Markets
and Inventory availability SKU wise
3. This allows the Management and Operations Team likewise to see their Market in
front of them
4. It further alllows the simulation of decisions, even before the decision is actually
implemented. Which means, the plan to produce extra quantity of a partcular product,
can be traced right up to the forecasted consumption, in a particular market. So, if a
particular warehouse runs out of stock, then an immediate corrective action, can be
taken, at the simulation stage itself
5. The product can be further used to Optimize Inventory, Resource, Location, Network,
etc.
5/27/2011 Strictly Private & Confidential 13

14. MapMySupplyChain – MEIO Solution
Effective IM MapMySupply
Inventory Need Principles Philosophies Pros and Cons TOC and MEIO
System Chsin
1.Each echelon and its entities
Warehouses are depicted on Google Map
Plant
as per its location
2.Location based
replenishment policy like
safety stock, cyclic stock,
replenish lead time, replenish
quantity and replenish
triggering point, can be
configured
3.Simulate complete end to
end supply chain with each
echelon’s entities
4.Heuristic based optimization
approach and encapsulates
TOC fundamentals
5.Intimate business users as
replenish trigger point comes
5/27/2011 Strictly Private & Confidential 14

15. MapMySupplyChain – MEIO Solution
Effective IM MapMySupply
Inventory Need Principles Philosophies Pros and Cons TOC and MEIO
System Chsin
6. Optimize ordering policy like
Plant
Warehouses replenish quantity, lead time
& triggering point
7. Adaptive enough to
incorporate change in
supply & demand
fluctuations
8. Makes system immune to
supply & demand variations
9. Easy to use and implement,
same experience as with
excel - spreadsheet solution
5/27/2011 Strictly Private & Confidential 15

16. MapMySupplyChain – TOC Approach
Effective IM MapMySupply
Inventory Need Principles Philosophies Pros and Cons TOC and MEIO
System Chsin
1.All Supply Chain entities are
Warehouses mapped on the interactive Map
Plant
2.Lead time drives ordering policy
at each location
3.IDD & TDD are computed and
optimized
4.At every echelon Buffer
Inventory, with largest replenish
lead time becomes critical and
hence requires zone computation
for replenishments
5.The production run is in batches,
as per need and maximum
Inventory is held closer to the
Manufacturing Plant
6.The complete supply chain is
based on the Demand Pull and
Buffer Management Principle
5/27/2011 Strictly Private & Confidential 16