Managing-Inventories-in-Supply-Chain.pdf

Engr. Ian Chris L. Tumulak
Managing Inventories
in Supply Chain

Discussion Outline
• Introduction: Basic Terminologies in Inventory Management
• Focus Area of Inventory Management and Supply Chain Management
• Four Types of Inventory
• Supply Chain and Inventory Model
• Inventory Model Considerations
• Inventory Management Techniques
• Inventory Management Challenges
• Steps to Mitigate Inventory Challenges

Basic Terminologies in Inventory Management
Inventory
- is the raw materials, work-in-process products and finished goods that are considered to be
the portion of a business's assets that are ready or will be ready for sale (D. Singh).
Inventory Management
- “the continuing process of planning, organizing and controlling inventory that aims at
minimizing the investment in inventory while balancing supply and demand” (D. Singh).
- It is a train fundamentally about indicating the arrangement of supplied merchandise
(Mwangi, 2013)

Basic Terminologies in Inventory Management
Supply Chain
- “a network of connected and interdependent organizations mutually and cooperatively
working together to control, manage and improve the flow of materials and information from
suppliers to end users.”(L.Holden)
Supply Chain Management
- Defined as overseeing the sequence of processes involved in the production and distribution
of a commodity; from the external supplier to internal functions then to external distribution of
the finished goods. (Heizer and Render,2014)

Focus Area of Inventory Management
• Flows and storage of goods and services
• Supervision supply, and storage accessibility
of items
• Ensure adequate supply without excessive
oversupply
• Planning, implementing and controlling the
efficient, effective, forward, and reverse
flow and storage of goods, services, and
related information.

Focus Area of Supply Chain Management
• Movement of product or service from
suppliers to customers
• Transformation of natural resources, raw
materials, and components into a finished
product
• Network of organizations that are involved,
through upstream and downstream linkages
• Alignment of firms that brings products or
services to market including the final
customer
• Management of inventory from the supplier
to customer and vice versa

Four Types of Inventory
Source: Supply Chain Management: Inventory Management by Donglei Du
Raw
Materials
Work In
Progress
(WIP)
Finished
Good
Inventories
Goods-in-
Transit
(GIT)

Why is Inventory Management Important?
Inventory
Management
Satisfactory
Customer Service
Sufficient Supply
Reasonable
Inventory Costs

Basic Supply Chain Model
Supplier Manufacturer Retailer

Supply Chain Model

Complex Supply Chain Model

Inventory Model
Inventory
Model
Cost
System
Demand

Inventory Model
Demand
• Deterministic
• Known exactly and in advance
• Random
• Use forecasting techniques when historical data are available
• Estimate the average and standard deviation of the demand

Inventory Model
Cost
• Order Cost
• Product and transportation costs
• Inventory Holding Cost
• Taxes and insurance, maintenance, etc.

Inventory Model
Physical Aspect of the System
• The physical structure of the inventory system
➢ Single or multiple-warehouse

Inventory Model Considerations

Inventory Model: Considerations
❑ How much to order?
❑ When to order?

Inventory Management Techniques
➢ Just in Time (JIT)
➢ Re-order point (ROP)
➢ Economic Order Quantity (EOQ)
➢ Vendor Managed Inventory (VMI)
JIT ROP EOQ VMI

Just in Time (JIT)
• The exact amount of inventory goods arriving at the exact time when it is needed, Hazier
and Render (2014).
• Minimum inventory necessary to keep the system running.
• Increases efficiency and decreases waste
• Reduction in inventory costs
• Goods will only arrive when needed in the production process

Just in Time (JIT)
Pros
•Avoid excess amount
of inventory
•Reduce waste
•Save rental costs
Cons
•Can cause issue if not
thoroughly planned
•Puts business at risk of
having stockouts

“The implementation of the JIT inventory system requires a long-
term and good relationship with suppliers, as they play a crucial
role in supplying inventory as they reach a minimum level. This
system is viewed as the most critical component in reducing
costs within an organization, as it has benefits such as lower
inventory levels, which decreases the inventory holding cost
(Phung 2011).”

• Re-order Point (ROP)
• When to order and when to not order
• Can be accomplished utilizing quantitative techniques which require appropriate stock
administration (Apte, 2010).
• The organization will just request when the stock achieves a specific level and that the
request will be gotten instantly (Hazier and Render, 2014).
• Suitable for generally varying kinds of stock inside a similar firm
• Automatic age of a recharging request at the proper time.

Re-order Point (ROP)
Pros
•Lower stocks on
average
•Responsive to
fluctuations in demand
•Timely replenishment of
supply
•Applicable for varying
inventory
Cons
•Complicated when
many items reached
ROP level at the same
time.
•Variable Demand

The re-order level is basic for associations to accomplish ideal
productivity and be viable prompting high store network execution and
consumer loyalty, at that point they need two reorder levels one that is
ordinary while the other is a crisis one in the event of catastrophe
(Beamon and Kotleba, 2006).
ROP = Demand per day x lead time for a new order

• Economic Order Quantity (EOQ)
• Ability to know when to ask for and the sum to orchestrate
• Stock is coming in and going out immediately
• It is the requested amount that limits add up to holding expenses and requesting costs for
the year.
• Ensure that the supply chain of these organizations is replenished on a timely basis and
delivered to the final consumer.

Economic Order Quantity (EOQ)
Pros
•Reduces logistical costs
including ordering and
handling
•Can be tailored fit to
all type of businesses
Cons
•Complicated
mathematical
computations
•Fails to consider
economic fluctuations
•It assumes the demand
is stable

EOQ Computations
• Annual Holding Costs
𝑨𝒏𝒏𝒖𝒂𝒍 𝒉𝒐𝒍𝒅𝒊𝒏𝒈 𝒄𝒐𝒔𝒕𝒔 = 𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝒊𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚 𝒙 𝑨𝒏𝒏𝒖𝒂𝒍 𝒉𝒐𝒍𝒅𝒊𝒏𝒈 𝒄𝒐𝒔𝒕
=
𝑸
𝟐
𝑪𝒉
𝑨𝒏𝒏𝒖𝒂𝒍 𝒐𝒓𝒅𝒆𝒓𝒊𝒏𝒈 𝒄𝒐𝒔𝒕𝒔 = 𝑵𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝒐𝒓𝒅𝒆𝒓𝒔 𝒑𝒆𝒓 𝒚𝒆𝒂𝒓 𝒙 𝒄𝒐𝒔𝒕 𝒑𝒆𝒓 𝒐𝒓𝒅𝒆𝒓
=
𝑫
𝑸
𝑪𝒐
𝑻𝒐𝒕𝒂𝒍 𝒂𝒏𝒏𝒖𝒂𝒍 𝒄𝒐𝒔𝒕 = 𝒂𝒏𝒏𝒖𝒂𝒍 𝒉𝒐𝒍𝒅𝒊𝒏𝒈 𝒄𝒐𝒔𝒕 + 𝒂𝒏𝒏𝒖𝒂𝒍 𝒐𝒓𝒅𝒆𝒓𝒊𝒏𝒈 𝒄𝒐𝒔𝒕
=
𝑸
𝟐
𝑪𝒉 +
𝑫
𝑸
𝑪𝒐
Note:
Inventory level (IL) is the quantity on hand, which is different from Inventory Position (IP), which
is equal to inventory on-hand plus quantity on order minus backorder (if any).
The maximum IL is Q, the minimum is 0, therefore the average IL is
𝑸
𝟐
.

EOQ Computations
• Trade-off of holding and ordering costs Economic order quantity
𝑄 =
2𝐷𝐶𝑜
𝐶ℎ
Cycle Time
𝑇 =
𝑄
𝐷
Annual Orders
𝑁 =
1
𝑇
=
𝐷
𝑄

“EOQ and ROP are basic instruments that organizations can use to ensure
that stock supply does not hit a stock out as cleared up by.” (Gonzalez and
Gonzalez, 2010)

EOQ ROP

• Vendor Managed Inventory
• It assists the provider with screening the client’s stock
• Clients will stay away from stock-outs in light of the way that the providers will have as of late
reestablished their stock
• Requires a good business relationship between the provider and the client
• Supplier will have the ability to screen its customer's stock levels
• Keep away from cases of stockouts

Vendor Managed Inventory (VMI)
Pros
•Improved Efficiency
•Cost Reduction
•Reduced Complexity
•Improved Data Insights
Cons
•Loss of Control
•Limited Options
•Less Agile Market
Responsiveness

Inventory Management Challenges
• Integrating demand planning and inventory planning has been listed as
one of the inventory management challenges.
• Enterprise Resource Planning (ERP) or Material Resource Planning is
recommended to keep the inventory management system up to date.
• Inventory management can bring outlandish misfortunes the business
dependably has stockouts, absence of legitimate warehousing designs,
conveying the wrong merchandise to the clients and in addition absence of
appropriate documentation for products obtained (Sandeep K, 2007).

Five Main Challenges in Inventory Management System:
1. Not knowing specific statuses is costly
2. Depending on manual procedures
3. Guaranteeing everybody approaches the stock data they require
4. Manual stock control isn’t versatile
5. Software is to complex
Source: “Overcome the 5 Key Challenges of Inventory Management( n.d.)” there are five main challenges faced within the inventory
management system (QBES Inventory, n.d)

Not knowing specific statuses is costly
• Can build stock expenses
• Increased lead times and stock-outs
• Delayed sending and conveyance
• Lack of bits of knowledge and data
• No consistent change

Depending on Manual Procedures
• Unable to track long-haul patterns.
• Causes store network bottlenecks or wasteful aspects.
• Hampers coordinated effort and data sharing.

Guaranteeing everybody approaches the stock data they require
• Data Security Concerns
• Complicated when different customers uses different platforms

Manual Stock Control is not Versatile
• Difficult to handle a large amount of data
• Requires a lot of paper works

Software is too Complex
• Complicated product networks
• Tedious preparation requirements
• May result to additional costs

Steps to Mitigate Inventory Challenges
Performance
Improvement
System
Structure
Improvement
Technology
Integration

Managing-Inventories-in-Supply-Chain.pdf

Recommended

Recommended

More Related Content

Similar to Managing-Inventories-in-Supply-Chain.pdf

Similar to Managing-Inventories-in-Supply-Chain.pdf (20)

Recently uploaded

Recently uploaded (20)

Managing-Inventories-in-Supply-Chain.pdf