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07/06/10 1
By :
Prof. Amit Kumar
07/06/10 2
“Logistics has advanced from warehousing and
transportation to boardrooms of the successful leading
companies across the world. Due to increasing
importance of business logistics, it becomes necessary
for the student pursuing management education from
IILM- Graduate School of Management, to understand
logistics, its basic framework and practical utility.”
IILM-GSM
Importance of this course
International Trade Logistics
07/06/10 3
Course: International Trade Logistics
1. Logistics - At the Centre of World Trade
2. Supply Chain Management
3. Warehousing: A Role Beyond Storage
4. Material Handling & Storage System
5. Inventory Management
6. Transportation: Backbone of Logistics
7. Logistics Packaging
8. Logistics Information System
9. Global Logistics & Outsourcing
IILM-GSM
International Trade Logistics
07/06/10 4
IILM-GSM
International Trade Logistics Inventory Management
07/05/10f4t 5
Contents
• Inventory Flow-Bullwhip Effect
• Inventory- Assets or Liability?
• Inventory Decisions & Costs
• Inventory Expectations
• Inventory Functionality
• Inventory Controls
 ABC Analysis, VED Analysis
 SAP Analysis, FSN Analysis
 Inventory Decision Matrix
 Case: Inventory Reduction by Supply Chain
Reengineering at Asian Paint
• Inventory Management System
IILM-GSM
International Trade Logistics Inventory Management
07/05/10 6
• Inventory is technically an asset, but it is indirectly taxing
on the profitability of the firm.
• Corporations across the world always finding different
methods ad techniques to reduce the investments in
inventory.
• It is probably common sense that inventory should be
hold only when the benefits of holding inventory exceed
the cost of holding it.
Introduction: Inventory Management
IILM-GSM
International Trade Logistics Inventory Management
Bullwhip Effect
• While customer demand for specific products does not vary much
• Inventory and back-order levels fluctuate considerably across
their supply chain
• P&G’s disposable diapers case
 Sales quite flat
 Distributor orders fluctuate more than retail sales
 Supplier orders fluctuate even more
IILM-GSM
International Trade Logistics Inventory Management
07/05/10 8
• Inventory constitutes the second largest item after fixed
asset in the financial balance sheet of a company.
• From a financial perspective, inventory is one of the
major current assets that can contribute to maximizing
the value of the firm and no significant disadvantages are
seen in carrying more inventory.
• But investments in inventory carry cost.
Today, inventory management is viewed as a supply chain
cost driver rather than as a material asset. Hence, the
lean supply chain operating on material requirement
planning (MRP) or JIT system is preferred.
Inventory- Assets or Liability?
IILM-GSM
International Trade Logistics Inventory Management
07/05/10 9
Inventories may be held for a variety of purposes, but in
general, there are five types of inventories that an
organization can use for serving these purposes. These
are:
1. Movement Inventories
2. Buffer Inventories
3. Anticipation Inventories
4. Decoupling Inventories
5. Cycle Inventories
Types of Inventory
IILM-GSM
International Trade Logistics Inventory Management
07/05/10 10
Movement inventories are also called transit or pipeline
inventories. Their existence owes to fact that transportation
time is involved in transferring substantial amounts of
resources.
For example, when coal is transported from the coalfields
to an industrial town by trains, then the coal, while in
transit, cannot provide any service to the customers for
power generation or for burning in furnaces.
Types of Inventory: Movement
IILM-GSM
International Trade Logistics Inventory Management
07/05/10 11
Buffer inventories are held to protect against the
uncertainties of demand and supply. An organization
generally knows the average demand for various items it
needs. However, the actual demand may not exactly match
the average and could well exceed it.
To meet this kind of situation, inventories may be held in
excess of the average or expected demand.
Types of Inventory: Buffer
IILM-GSM
International Trade Logistics Inventory Management
07/05/10 12
Similarly, the average delivery time( that is, the time
elapsing between placing an order and having the goods in
stock ready to use, and technically called as the lead time)
may be known. But unpredictability events could cause the
actual delivery time to be more than the average.
Thus, excess stocks might be kept in order to meet the
demand during the time for which the delivery is delayed.
This stock is also known as safety stocks.
Types of Inventory: Buffer
IILM-GSM
International Trade Logistics Inventory Management
07/05/10 13
The idea of keeping buffer stocks is to render a higher level
of customer service and consequently reduce the number
of stock outs and back-orders. A stock out occurs when a
customer is denied fulfillment of an order because the
inventory of the item(s) has run out. In some situations
back-ordering is possible(i.e. the order for goods
demanded may be fulfilled as soon as the next shipment of
the item(s) is received while in others it is not and the
demand might be lost forever leading to
temporary/permanent loss of the customer goodwill.
The optimum level of the buffer stocks to be held can be
determined.
Types of Inventory: Buffer
IILM-GSM
International Trade Logistics Inventory Management
07/05/10 14
Anticipation inventories are held for the reason that a future
demand for the product is anticipated. Production of
specialized items like crackers well before Diwali, umbrellas
and raincoats before rains set in, fans while summers are
approaching, are all examples.
The idea is to smoothen the production process producing
for a longer duration on a continuous scale rather than
operating with excessive overtime in one period and then
let the system to be idle or close down for the reason of
inadequate/ no demand for another period.
Types of Inventory: Anticipation
IILM-GSM
International Trade Logistics Inventory Management
07/05/10 15
The idea of the decoupling inventories is to dis-couple or
disengage, different parts of the production system. As we
can observe easily, different machines/equipment and
people normally work at different rates: some slower and
some faster. A machine, for example, might be producing
half of the output of the machine on which the item being
handled to be processed the next. Inventories in between
the various machines are held in order to disengage the
processing on those machines. In the absence of such
inventory, different machines and people cannot work
simultaneously on a continuous basis. When such
inventories are held, then, even if a machine breaks down,
the work on others would not stop.
Types of Inventory: Decoupling
IILM-GSM
International Trade Logistics Inventory Management
07/05/10 16
Cycle inventories are held for the reason that purchases
are usually made in lots rather than for the exact amounts
which may be needed at a point of time. If purchases are
made frequently and in small numbers, then the cost
involved in obtaining the items would be very large.
As the cycle inventories are related to the purchases in lots,
they are also called lot-size inventories.
Types of Inventory: Cycle
IILM-GSM
International Trade Logistics Inventory Management
07/05/10 17
In an inventory control situation, there are three basic
questions to be answered. They are:
1.How much to order? That is to say, what is the optimal
quantity of an item that should be ordered whenever an
order is placed?
2.When should the order to be placed?
3.How much safety stock should be kept? (buffer stock)
Inventory Decisions
IILM-GSM
International Trade Logistics Inventory Management
07/05/10 18
Inventory as Percentage of Sales
IILM-GSM
International Trade Logistics Inventory Management
Company
Sales
turnover
(Rs
millions)
Raw
material &
components
(% of
sales)
Work in
progress
(% of
sales)
Finished
goods (%
of sales)
Total
inventories
(% of
sales)
L & T 179006 2.24 13.14 1.37 16.75
M & M 102450 6.81 0.37 4.37 11.55
Raymond 13749 4.36 6.30 9.86 20.52
Godrej 7581 5.02 2.82 7.62 15.46
Ranbaxy 40713 10.17 5.38 8.42 23.97
Sterlite Ltd 124576 7.84 6.60 0.40 14.84
07/05/10 19
Inventory Expectations
IILM-GSM
International Trade Logistics Inventory Management
Inventory
Expectations
Finance Department
• Lower inventory levels
• Low cost of operations
• Higher inventory turnover
• Lower cost of delivery
Sales & Marketing
• Quick Delivery
• No stocks outs
• Varieties and volumes
• Frequent & small deliveries
Manufacturing
Department
• Less varieties
• Economic batch quantity
• Quick off takes
• No rejection and cancellations
Top Management
• Higher inventory turnover
• Lower operating cost
• Excellent customer service
Not only external customers make demands on the
inventories but internal customers such as top management,
finance, manufacturing also have different expectation.
07/05/10 20
Irrespective of its location in the supply chain, product
inventory essentially serves the following functions:
• Balancing Supply and Demand
• Periodic variation
• Scale Economics
Inventory Functionality
IILM-GSM
International Trade Logistics Inventory Management
07/05/10 21
Reasons for Carrying Inventories
IILM-GSM
International Trade Logistics Inventory Management
• Meeting Production Requirements
• Supporting Operational Requirements
• Customer Service Considerations
• Hedge Against Future Expectation
07/05/10 22
Inventory-Related Costs
IILM-GSM
International Trade Logistics Inventory Management
Inventory
Related Costs
Inventory Costs
Exchange Rate
Costs
Ordering Costs
Warehousing
Costs
Carrying Costs
Damages, Loss,
Pilferage Cost
07/05/10 23
The classical inventory analysis identifies four major cost
components:
1.Purchase Cost
2.Ordering Cost / Set-up Cost
• Ordering cost is incurred whenever the inventory is replenished.
It includes cost associated with the processing and chasing of
the purchase order, transportation, inspection for quality,
expediting overdue orders and so on.
• It is also known as procurement cost.
• Parallel to the ordering cost when units are produced within the
organization is the set-up cost. It refers to the cost incurred in
relation to developing the production schedules, the resource
employed in making the production system ready and so on.
Inventory Costs
IILM-GSM
International Trade Logistics Inventory Management
07/05/10 24
3. Carrying Cost / Holding Cost
• Also known as holding cost or storage cost. Carrying cost
represents the cost that is associated with storing an item in
inventory. It is proportional to the amount of inventory and
the time over which it is held.
• The element of carrying cost include the opportunity cost of
capital invested in the stock, the cost directly associated with
storing goods (like, store men's salary, rates, heating and
lighting, racking and pelletisation, protective clothing, store’s
transport etc), the obsolescence cost (including scrapping
and possible rework), deterioration costs and costs incurred
in preventing deteriorations; and fire and general insurance.
• The carrying cost is usually expressed as a rate per unit or
as a percentage of inventory value.
4. Stock-out Cost
Inventory Costs
IILM-GSM
International Trade Logistics Inventory Management
07/05/10 25
Inventory Controls
IILM-GSM
International Trade Logistics Inventory Management
• The variability in customer demand if not conveyed
properly with distortion as it travels upstream in supply
chain- the phenomenon called bullwhip effect- cause
either stock-outs or inventory pile-ups.
• Bullwhip effect is a deformation in information when it
goes upstream in the supply chain. The ripple effect of
demand volatility results in inventory problems impacting
on profitability and customer service of the firm.
07/05/10 26
Inventory Controls
IILM-GSM
International Trade Logistics Inventory Management
The after-effects of bullwhip phenomenon can be
minimized by using the latest inventory control
techniques supported by an efficient and effective
information flow for the supply chain.
The ultimate objective of the inventory control
program is to provide maximum customer service
at minimum cost.
07/05/10 27
Inventory Controls
Inventory Reduction by Supply Chain
Reengineering at Asian Paints
IILM-GSM
International Trade Logistics Inventory Management
With the industry business becoming complex, most
companies have restructured. At Asian Paints this
was essential in order to tighten inventory controls
and simultaneously achieve customer satisfaction.
07/05/10 28
Inventory Controls
Inventory Reduction by Supply Chain
Reengineering at Asian Paints
IILM-GSM
International Trade Logistics Inventory Management
Color dispensing machines, both computerized and
manual, have transformed the business, particularly
on the manufacturing and distribution sides.
Earlier, paint companies were required to
manufacture all the shades (30-50 depending on
the product line) in all the packs (5-8 packs). The
result was a drastic reduction in plant-level
finished goods inventory.
07/05/10 29
Inventory Controls
Inventory Reduction by Supply Chain
Reengineering at Asian Paints
IILM-GSM
International Trade Logistics Inventory Management
The demand pattern was difficult to predict even with the
support of historical data/trends, as consumer
preferences were changing fast.
Machines altered the production pattern from shades
to producing bases thus providing economies of
scale, reduced inventory level and eliminate
redundancy of stocks.
This has helped expand the range of shades for each
product category, offering a choice of shades to
consumers in the hundreds
07/05/10 30
Inventory Controls
Inventory Reduction by Supply Chain
Reengineering at Asian Paints
IILM-GSM
International Trade Logistics Inventory Management
There are approximately 11,000 color- tinting machines
installed at the dealers’ end, including multiple
machines at some counter.
With the strategy of ‘postponement’ of finished goods
making at the demand point rather than at the
manufacturing plant, Asian Paints reduced its finished
goods variety and volumes at plant level.
07/05/10 31
Inventory Controls
Selective Control Techniques
IILM-GSM
International Trade Logistics Inventory Management
In these methods the degree of control varies with the
importance of the item in the supply chain.
Following are the methods in practice:
1. ABC Analysis
2. VED Analysis
3. SAP Analysis
4. FSN Analysis
07/05/10 32
Inventory Controls
Selective Control Techniques: ABC Analysis
IILM-GSM
International Trade Logistics Inventory Management
• ABC inventory classification method is used to recognize
inventory into groups based upon certain activity
characteristics.
• It is a process of classification of products per the level of
importance in terms of their relative criteria such as
purchase or sales volume.
• Examples of ABC classification include:
 ABC by velocity (times sold)
 ABC by sales in rupees
 ABC by quantity sold or consumed
 ABC by average inventory investment
 ABC by margin
07/05/10 33
Inventory Controls
Selective Control Techniques: VED Analysis
IILM-GSM
International Trade Logistics Inventory Management
• These relates to Vital, Essential and Desirable status of
inventory items.
• As the term implies, certain parts and items are
considered to be vital for meeting operational
requirements and this aspect is taken into consideration
while making the forecast.
07/05/10 34
Inventory Controls
Selective Control Techniques: SAP Analysis
IILM-GSM
International Trade Logistics Inventory Management
• Scarce, Availability and Plenty status of inventory item is
used for planning and forecasting of inventory
requirement.
• The ordered quantity is governed by the scarcity factor.
07/05/10 35
Inventory Controls
Selective Control Techniques: FSN Analysis
IILM-GSM
International Trade Logistics Inventory Management
• Fast, Slow or Normal determines the consumption
pattern of an item.
• However, a consumption pattern where the production
run is slowed down for various reasons may not give a
realistic picture for procurement action. these
07/05/10 36
Inventory Controls
Inventory Decision Matrix
IILM-GSM
International Trade Logistics Inventory Management
Continuous review
Procure as needed
High safety stock
Low order quantity
Continuous review
Procure as needed
Low safety stock
Low order quantity
Periodic review
High safety stock
High order quantity
Periodic review
Low safety stock
High order quantity
High
V E D
A
C
B
High Low
Low
Critically of Item
Consumption
Value
07/05/10 37
Inventory Controls
Inventory Decision Matrix
IILM-GSM
International Trade Logistics Inventory Management
• For all these control techniques, the degree of control
varies with the importance of the items.
• For the A class vital, scarce and fast moving items
perpetual reviews are recommended.
• While for B class essential, medium moving items,
periodic review will be OK.
• In the case of Class C desirable, slow moving items, the
periodicity of review will be longer.
07/05/10 38
Basically, there are two inventory management systems.
They are:
1.Fixed order quantity system, in which a level called the re-
order level is determined. As soon as the stock level reaches this
point, an order for a predetermined number of units is placed.
2.Periodic review system, where inventories are replenished at
fixed intervals of time. Whereas the size of the order is fixed in
the previous system and the time is not, in this system the time
after which the supplies are ordered is fixed but not the quantity
to be ordered.
3.There is another system, called Ss system, which combines
the features of both of these.
Inventory Management System
IILM-GSM
International Trade Logistics Inventory Management
07/05/10 39
The fixed-order quantity system of inventory management
is also called the Q-system.
Under this system a re-order point is established and as
soon as the stock level reaches this point, a fresh order for
supplies is triggered. We shall consider this system under
conditions of certainty (i.e. when the demand and the lead
time are known with certainty) and then extend it to
probabilistic conditions when demand and lead time are
uncertain.
Fixed Order Quantity System
IILM-GSM
International Trade Logistics Inventory Management
07/05/10 40
According to this, our cost model would, assuming a period
of one year, be
T(Q) = O(Q) + H(Q)
Where, Q = the ordering quantity
T(Q) = total(variable ) annual inventory cost
O(Q) = total annual ordering cost
H(Q) = total annual holding cost
Fixed Order Quantity System
IILM-GSM
International Trade Logistics Inventory Management
07/05/10 41
Let us develop this model with the following examples,
LG Electronics Ltd produces 2000 TV sets in a year for
which it needs an equal number of tubes of certain type.
Each tube costs Rs 10 and the cost to hold a tube in stock
for a year is Rs 2.40. besides, the cost of placing an order
is Rs. 150, which is not related to its size.
Now, if an order for 2000 tubes is placed, only one order per
annum is required. When 1000 units are ordered for, 2 orders
in a year are required, while if 500 units are ordered to be
supplied, then total of 4 orders per annum are required.
Fixed Order Quantity System
IILM-GSM
International Trade Logistics Inventory Management
07/05/10 42
Naturally, as the numbers of orders places increases the
ordering cost goes up.
More order, however, would also imply smaller order
quantity and, therefore decreasing holding costs. Thus we
have a trade-off between the ordering and the holding cost.
What we attempt in our EOQ model is, the, to find the order
size that minimizes that cost function T(Q).
TOTAL ANNUAL ORDERING COST
O(Q) = N * A
The value
Fixed Order Quantity System
IILM-GSM
International Trade Logistics Inventory Management

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IILM-GSM International Trade Logistics Course Covers Key Inventory Management Concepts

  • 2. 07/06/10 2 “Logistics has advanced from warehousing and transportation to boardrooms of the successful leading companies across the world. Due to increasing importance of business logistics, it becomes necessary for the student pursuing management education from IILM- Graduate School of Management, to understand logistics, its basic framework and practical utility.” IILM-GSM Importance of this course International Trade Logistics
  • 3. 07/06/10 3 Course: International Trade Logistics 1. Logistics - At the Centre of World Trade 2. Supply Chain Management 3. Warehousing: A Role Beyond Storage 4. Material Handling & Storage System 5. Inventory Management 6. Transportation: Backbone of Logistics 7. Logistics Packaging 8. Logistics Information System 9. Global Logistics & Outsourcing IILM-GSM International Trade Logistics
  • 4. 07/06/10 4 IILM-GSM International Trade Logistics Inventory Management
  • 5. 07/05/10f4t 5 Contents • Inventory Flow-Bullwhip Effect • Inventory- Assets or Liability? • Inventory Decisions & Costs • Inventory Expectations • Inventory Functionality • Inventory Controls  ABC Analysis, VED Analysis  SAP Analysis, FSN Analysis  Inventory Decision Matrix  Case: Inventory Reduction by Supply Chain Reengineering at Asian Paint • Inventory Management System IILM-GSM International Trade Logistics Inventory Management
  • 6. 07/05/10 6 • Inventory is technically an asset, but it is indirectly taxing on the profitability of the firm. • Corporations across the world always finding different methods ad techniques to reduce the investments in inventory. • It is probably common sense that inventory should be hold only when the benefits of holding inventory exceed the cost of holding it. Introduction: Inventory Management IILM-GSM International Trade Logistics Inventory Management
  • 7. Bullwhip Effect • While customer demand for specific products does not vary much • Inventory and back-order levels fluctuate considerably across their supply chain • P&G’s disposable diapers case  Sales quite flat  Distributor orders fluctuate more than retail sales  Supplier orders fluctuate even more IILM-GSM International Trade Logistics Inventory Management
  • 8. 07/05/10 8 • Inventory constitutes the second largest item after fixed asset in the financial balance sheet of a company. • From a financial perspective, inventory is one of the major current assets that can contribute to maximizing the value of the firm and no significant disadvantages are seen in carrying more inventory. • But investments in inventory carry cost. Today, inventory management is viewed as a supply chain cost driver rather than as a material asset. Hence, the lean supply chain operating on material requirement planning (MRP) or JIT system is preferred. Inventory- Assets or Liability? IILM-GSM International Trade Logistics Inventory Management
  • 9. 07/05/10 9 Inventories may be held for a variety of purposes, but in general, there are five types of inventories that an organization can use for serving these purposes. These are: 1. Movement Inventories 2. Buffer Inventories 3. Anticipation Inventories 4. Decoupling Inventories 5. Cycle Inventories Types of Inventory IILM-GSM International Trade Logistics Inventory Management
  • 10. 07/05/10 10 Movement inventories are also called transit or pipeline inventories. Their existence owes to fact that transportation time is involved in transferring substantial amounts of resources. For example, when coal is transported from the coalfields to an industrial town by trains, then the coal, while in transit, cannot provide any service to the customers for power generation or for burning in furnaces. Types of Inventory: Movement IILM-GSM International Trade Logistics Inventory Management
  • 11. 07/05/10 11 Buffer inventories are held to protect against the uncertainties of demand and supply. An organization generally knows the average demand for various items it needs. However, the actual demand may not exactly match the average and could well exceed it. To meet this kind of situation, inventories may be held in excess of the average or expected demand. Types of Inventory: Buffer IILM-GSM International Trade Logistics Inventory Management
  • 12. 07/05/10 12 Similarly, the average delivery time( that is, the time elapsing between placing an order and having the goods in stock ready to use, and technically called as the lead time) may be known. But unpredictability events could cause the actual delivery time to be more than the average. Thus, excess stocks might be kept in order to meet the demand during the time for which the delivery is delayed. This stock is also known as safety stocks. Types of Inventory: Buffer IILM-GSM International Trade Logistics Inventory Management
  • 13. 07/05/10 13 The idea of keeping buffer stocks is to render a higher level of customer service and consequently reduce the number of stock outs and back-orders. A stock out occurs when a customer is denied fulfillment of an order because the inventory of the item(s) has run out. In some situations back-ordering is possible(i.e. the order for goods demanded may be fulfilled as soon as the next shipment of the item(s) is received while in others it is not and the demand might be lost forever leading to temporary/permanent loss of the customer goodwill. The optimum level of the buffer stocks to be held can be determined. Types of Inventory: Buffer IILM-GSM International Trade Logistics Inventory Management
  • 14. 07/05/10 14 Anticipation inventories are held for the reason that a future demand for the product is anticipated. Production of specialized items like crackers well before Diwali, umbrellas and raincoats before rains set in, fans while summers are approaching, are all examples. The idea is to smoothen the production process producing for a longer duration on a continuous scale rather than operating with excessive overtime in one period and then let the system to be idle or close down for the reason of inadequate/ no demand for another period. Types of Inventory: Anticipation IILM-GSM International Trade Logistics Inventory Management
  • 15. 07/05/10 15 The idea of the decoupling inventories is to dis-couple or disengage, different parts of the production system. As we can observe easily, different machines/equipment and people normally work at different rates: some slower and some faster. A machine, for example, might be producing half of the output of the machine on which the item being handled to be processed the next. Inventories in between the various machines are held in order to disengage the processing on those machines. In the absence of such inventory, different machines and people cannot work simultaneously on a continuous basis. When such inventories are held, then, even if a machine breaks down, the work on others would not stop. Types of Inventory: Decoupling IILM-GSM International Trade Logistics Inventory Management
  • 16. 07/05/10 16 Cycle inventories are held for the reason that purchases are usually made in lots rather than for the exact amounts which may be needed at a point of time. If purchases are made frequently and in small numbers, then the cost involved in obtaining the items would be very large. As the cycle inventories are related to the purchases in lots, they are also called lot-size inventories. Types of Inventory: Cycle IILM-GSM International Trade Logistics Inventory Management
  • 17. 07/05/10 17 In an inventory control situation, there are three basic questions to be answered. They are: 1.How much to order? That is to say, what is the optimal quantity of an item that should be ordered whenever an order is placed? 2.When should the order to be placed? 3.How much safety stock should be kept? (buffer stock) Inventory Decisions IILM-GSM International Trade Logistics Inventory Management
  • 18. 07/05/10 18 Inventory as Percentage of Sales IILM-GSM International Trade Logistics Inventory Management Company Sales turnover (Rs millions) Raw material & components (% of sales) Work in progress (% of sales) Finished goods (% of sales) Total inventories (% of sales) L & T 179006 2.24 13.14 1.37 16.75 M & M 102450 6.81 0.37 4.37 11.55 Raymond 13749 4.36 6.30 9.86 20.52 Godrej 7581 5.02 2.82 7.62 15.46 Ranbaxy 40713 10.17 5.38 8.42 23.97 Sterlite Ltd 124576 7.84 6.60 0.40 14.84
  • 19. 07/05/10 19 Inventory Expectations IILM-GSM International Trade Logistics Inventory Management Inventory Expectations Finance Department • Lower inventory levels • Low cost of operations • Higher inventory turnover • Lower cost of delivery Sales & Marketing • Quick Delivery • No stocks outs • Varieties and volumes • Frequent & small deliveries Manufacturing Department • Less varieties • Economic batch quantity • Quick off takes • No rejection and cancellations Top Management • Higher inventory turnover • Lower operating cost • Excellent customer service Not only external customers make demands on the inventories but internal customers such as top management, finance, manufacturing also have different expectation.
  • 20. 07/05/10 20 Irrespective of its location in the supply chain, product inventory essentially serves the following functions: • Balancing Supply and Demand • Periodic variation • Scale Economics Inventory Functionality IILM-GSM International Trade Logistics Inventory Management
  • 21. 07/05/10 21 Reasons for Carrying Inventories IILM-GSM International Trade Logistics Inventory Management • Meeting Production Requirements • Supporting Operational Requirements • Customer Service Considerations • Hedge Against Future Expectation
  • 22. 07/05/10 22 Inventory-Related Costs IILM-GSM International Trade Logistics Inventory Management Inventory Related Costs Inventory Costs Exchange Rate Costs Ordering Costs Warehousing Costs Carrying Costs Damages, Loss, Pilferage Cost
  • 23. 07/05/10 23 The classical inventory analysis identifies four major cost components: 1.Purchase Cost 2.Ordering Cost / Set-up Cost • Ordering cost is incurred whenever the inventory is replenished. It includes cost associated with the processing and chasing of the purchase order, transportation, inspection for quality, expediting overdue orders and so on. • It is also known as procurement cost. • Parallel to the ordering cost when units are produced within the organization is the set-up cost. It refers to the cost incurred in relation to developing the production schedules, the resource employed in making the production system ready and so on. Inventory Costs IILM-GSM International Trade Logistics Inventory Management
  • 24. 07/05/10 24 3. Carrying Cost / Holding Cost • Also known as holding cost or storage cost. Carrying cost represents the cost that is associated with storing an item in inventory. It is proportional to the amount of inventory and the time over which it is held. • The element of carrying cost include the opportunity cost of capital invested in the stock, the cost directly associated with storing goods (like, store men's salary, rates, heating and lighting, racking and pelletisation, protective clothing, store’s transport etc), the obsolescence cost (including scrapping and possible rework), deterioration costs and costs incurred in preventing deteriorations; and fire and general insurance. • The carrying cost is usually expressed as a rate per unit or as a percentage of inventory value. 4. Stock-out Cost Inventory Costs IILM-GSM International Trade Logistics Inventory Management
  • 25. 07/05/10 25 Inventory Controls IILM-GSM International Trade Logistics Inventory Management • The variability in customer demand if not conveyed properly with distortion as it travels upstream in supply chain- the phenomenon called bullwhip effect- cause either stock-outs or inventory pile-ups. • Bullwhip effect is a deformation in information when it goes upstream in the supply chain. The ripple effect of demand volatility results in inventory problems impacting on profitability and customer service of the firm.
  • 26. 07/05/10 26 Inventory Controls IILM-GSM International Trade Logistics Inventory Management The after-effects of bullwhip phenomenon can be minimized by using the latest inventory control techniques supported by an efficient and effective information flow for the supply chain. The ultimate objective of the inventory control program is to provide maximum customer service at minimum cost.
  • 27. 07/05/10 27 Inventory Controls Inventory Reduction by Supply Chain Reengineering at Asian Paints IILM-GSM International Trade Logistics Inventory Management With the industry business becoming complex, most companies have restructured. At Asian Paints this was essential in order to tighten inventory controls and simultaneously achieve customer satisfaction.
  • 28. 07/05/10 28 Inventory Controls Inventory Reduction by Supply Chain Reengineering at Asian Paints IILM-GSM International Trade Logistics Inventory Management Color dispensing machines, both computerized and manual, have transformed the business, particularly on the manufacturing and distribution sides. Earlier, paint companies were required to manufacture all the shades (30-50 depending on the product line) in all the packs (5-8 packs). The result was a drastic reduction in plant-level finished goods inventory.
  • 29. 07/05/10 29 Inventory Controls Inventory Reduction by Supply Chain Reengineering at Asian Paints IILM-GSM International Trade Logistics Inventory Management The demand pattern was difficult to predict even with the support of historical data/trends, as consumer preferences were changing fast. Machines altered the production pattern from shades to producing bases thus providing economies of scale, reduced inventory level and eliminate redundancy of stocks. This has helped expand the range of shades for each product category, offering a choice of shades to consumers in the hundreds
  • 30. 07/05/10 30 Inventory Controls Inventory Reduction by Supply Chain Reengineering at Asian Paints IILM-GSM International Trade Logistics Inventory Management There are approximately 11,000 color- tinting machines installed at the dealers’ end, including multiple machines at some counter. With the strategy of ‘postponement’ of finished goods making at the demand point rather than at the manufacturing plant, Asian Paints reduced its finished goods variety and volumes at plant level.
  • 31. 07/05/10 31 Inventory Controls Selective Control Techniques IILM-GSM International Trade Logistics Inventory Management In these methods the degree of control varies with the importance of the item in the supply chain. Following are the methods in practice: 1. ABC Analysis 2. VED Analysis 3. SAP Analysis 4. FSN Analysis
  • 32. 07/05/10 32 Inventory Controls Selective Control Techniques: ABC Analysis IILM-GSM International Trade Logistics Inventory Management • ABC inventory classification method is used to recognize inventory into groups based upon certain activity characteristics. • It is a process of classification of products per the level of importance in terms of their relative criteria such as purchase or sales volume. • Examples of ABC classification include:  ABC by velocity (times sold)  ABC by sales in rupees  ABC by quantity sold or consumed  ABC by average inventory investment  ABC by margin
  • 33. 07/05/10 33 Inventory Controls Selective Control Techniques: VED Analysis IILM-GSM International Trade Logistics Inventory Management • These relates to Vital, Essential and Desirable status of inventory items. • As the term implies, certain parts and items are considered to be vital for meeting operational requirements and this aspect is taken into consideration while making the forecast.
  • 34. 07/05/10 34 Inventory Controls Selective Control Techniques: SAP Analysis IILM-GSM International Trade Logistics Inventory Management • Scarce, Availability and Plenty status of inventory item is used for planning and forecasting of inventory requirement. • The ordered quantity is governed by the scarcity factor.
  • 35. 07/05/10 35 Inventory Controls Selective Control Techniques: FSN Analysis IILM-GSM International Trade Logistics Inventory Management • Fast, Slow or Normal determines the consumption pattern of an item. • However, a consumption pattern where the production run is slowed down for various reasons may not give a realistic picture for procurement action. these
  • 36. 07/05/10 36 Inventory Controls Inventory Decision Matrix IILM-GSM International Trade Logistics Inventory Management Continuous review Procure as needed High safety stock Low order quantity Continuous review Procure as needed Low safety stock Low order quantity Periodic review High safety stock High order quantity Periodic review Low safety stock High order quantity High V E D A C B High Low Low Critically of Item Consumption Value
  • 37. 07/05/10 37 Inventory Controls Inventory Decision Matrix IILM-GSM International Trade Logistics Inventory Management • For all these control techniques, the degree of control varies with the importance of the items. • For the A class vital, scarce and fast moving items perpetual reviews are recommended. • While for B class essential, medium moving items, periodic review will be OK. • In the case of Class C desirable, slow moving items, the periodicity of review will be longer.
  • 38. 07/05/10 38 Basically, there are two inventory management systems. They are: 1.Fixed order quantity system, in which a level called the re- order level is determined. As soon as the stock level reaches this point, an order for a predetermined number of units is placed. 2.Periodic review system, where inventories are replenished at fixed intervals of time. Whereas the size of the order is fixed in the previous system and the time is not, in this system the time after which the supplies are ordered is fixed but not the quantity to be ordered. 3.There is another system, called Ss system, which combines the features of both of these. Inventory Management System IILM-GSM International Trade Logistics Inventory Management
  • 39. 07/05/10 39 The fixed-order quantity system of inventory management is also called the Q-system. Under this system a re-order point is established and as soon as the stock level reaches this point, a fresh order for supplies is triggered. We shall consider this system under conditions of certainty (i.e. when the demand and the lead time are known with certainty) and then extend it to probabilistic conditions when demand and lead time are uncertain. Fixed Order Quantity System IILM-GSM International Trade Logistics Inventory Management
  • 40. 07/05/10 40 According to this, our cost model would, assuming a period of one year, be T(Q) = O(Q) + H(Q) Where, Q = the ordering quantity T(Q) = total(variable ) annual inventory cost O(Q) = total annual ordering cost H(Q) = total annual holding cost Fixed Order Quantity System IILM-GSM International Trade Logistics Inventory Management
  • 41. 07/05/10 41 Let us develop this model with the following examples, LG Electronics Ltd produces 2000 TV sets in a year for which it needs an equal number of tubes of certain type. Each tube costs Rs 10 and the cost to hold a tube in stock for a year is Rs 2.40. besides, the cost of placing an order is Rs. 150, which is not related to its size. Now, if an order for 2000 tubes is placed, only one order per annum is required. When 1000 units are ordered for, 2 orders in a year are required, while if 500 units are ordered to be supplied, then total of 4 orders per annum are required. Fixed Order Quantity System IILM-GSM International Trade Logistics Inventory Management
  • 42. 07/05/10 42 Naturally, as the numbers of orders places increases the ordering cost goes up. More order, however, would also imply smaller order quantity and, therefore decreasing holding costs. Thus we have a trade-off between the ordering and the holding cost. What we attempt in our EOQ model is, the, to find the order size that minimizes that cost function T(Q). TOTAL ANNUAL ORDERING COST O(Q) = N * A The value Fixed Order Quantity System IILM-GSM International Trade Logistics Inventory Management

Editor's Notes

  1. VED Vital, Essential and Desirable SAP Scarce, Available and Plenty FSN Fast, Slow and Normal ABC..in diffecnt class..class A are less in numbers, they cost approximately 60-70% of total cost
  2. But all the time..company faces problem in inventory management…or there are some causes which rewsults in inventory problem…i.e bullwhip effect in supply chain…
  3. How to minimize the effect of bullwhip..we will see in inventory controls in next… The variability in customer demand if not conveyed properly with distortion as it travels upstream in supply chain- the phenomenon called bullwhip effect- cause either stock-outs or inventory pile-ups. Bullwhip effect is a deformation in information when it goes upstream in the supply chain. The ripple effect of demand volatility results in inventory problems impacting on profitability and customer service of the firm. The after-effects of bullwhip phenomenon can be minimized by using the latest inventory control techniques supported by an efficient and effective information flow for the supply chain. A bullwhip is a single-tailed whip, usually made of braided leather, which was originally used as a tool for working with livestock. Bullwhips are agricultural tools, traditionally used to control livestock in open country. A bullwhip's length, flexibility, and tapered design allows it to be thrown in such a way that, toward the end of the throw, part of the whip exceeds the speed of sound—thereby creating a small sonic boom.[1] Many modern "sport" whip crackers claim that the bullwhip was rarely, if ever, used to strike cattle, but this is a matter for debate. Livestock (also cattle) refers to one or more domesticated animals raised in an agricultural setting to produce commodities such as food, fiber and labor. The term "livestock" as used in this article does not include poultry or farmed fish; however the inclusion of these, especially poultry, within the meaning of "livestock" is common. Livestock generally are raised for subsistence or for profit. Raising animals (animal husbandry) is an important component of modern agriculture. It has been practised in many cultures since the transition to farming from hunter-gather lifestyles. More than likely, you will find opportunities for improvement by adopting some or all of the following actions, among others, to minimize the “Bullwhip Effect” and increase business performance. • Minimize the cycle time in receiving projected and actual demand information. • Establish the monitoring of actual demand for product to as near a real time basis as possible. • Understand product demand patterns at each stage of the supply chain. • Increase the frequency and quality of collaboration through shared demand information. • Minimize or eliminate information queues that create information flow delays. • Eliminate inventory replenishment methods that launch demand lumps into the supply chain. • Eliminate incentives for customers that directly cause demand accumulation and order staging prior to a replenishment request, such as volume transportation discounts. • Minimize incentivized promotions that will cause customers to delay orders and thereby interrupt smoother ordering patterns. • Offer your products at consistently good prices to minimize buying surges brought on by temporary promotional discounts. • Identify, and preferably, eliminate the cause of customer order reductions or cancellations. • Provide vendor-managed inventory (VMI) services by collaboratively planning inventory needs with the customer to projected end-user demand then, monitor actual demand to fine tune the actual VMI levels. (Note: VMI can increase sales and profits especially in industries where buyers can go to alternative sources if you or your distributor stock-out.)
  4. …talking about manufacturing company. Cost in a sences…handling and carrying cost….interset by the bank…for the fund invested in inventory Lean supply chain management should be considered by businesses who want to streamline their processes by eliminating waste and non-value added activities Lean manufacturing is all about eliminating wastes form the system. A system contains many components in it. Any components when taken isolated from other components, has wastes which are born within those components. But there are many other wastes generated in the interaction points of these components. For an example in the manufacturing context, manufacturers themselves generate wastes. Over manufacturing, waiting for bulk manufacturing are some of them. On the other hand wastes are generated in the supply chain itself. For an example if the suppliers of the manufacturer is supplying only in bulks and if the lead times are longer, then the time of the manufacturer is wasted. The end result would be lengthening the lead time of the customer who sits in the other end of the supply chain and may be the cost of the products. Even the customers can contribute to the wastes in supply chain. For an example if the necessary information to the manufacturers is not passed on time, manufacturers and the suppliers to them will have to suffer consequences of to and ultimately will affect the customer himself apart from the other members in the chain. You can refer to my previous articles on lean manufacturing customers and suppliers for more
  5. Next slide gives adea abiout inventory related investments…
  6. Sterlite…We are India's largest non-ferrous metals and mining company and are one of the fastest growing private sector companies Here godrej consumer products..
  7. Pilferage…a crime of theft of little things, usually from shipments Due to exchange rate risk..(if the inventory is imported)….there is a risk of selling the material at prices lower than the landed costs.
  8. Four manufacturing plant acroos india…kasna..in gujrat..AP and …check it
  9. Tinting.. A shade of a color, especially a pale or delicate variation. 2. A gradation of a color made by adding white to it to lessen its saturation,…or …color considered with reference to other very similar colors; Postponement…as we discuseed in warehouseing finctions and benefits… Postponesment….It provides two economic benefits. First, the risk is minimized because final packaging is not completed until an order for a specific label and package has been received. The required level of total inventory can be reduced by using the basic product (Brights) for a variety of labeling and packaging configurations. The combination of lower risk and inventory level often reduces total system cost even if the cost of packaging at the warehouse is more expensive than it would be at the manufacturer’s facility.
  10. For all thsee control techniques, the degree of control varies with the importance of the items as in the next slide.
  11. Check…channel mgt book…while preparing for PDCM….check and complete the above model