1. BEST PRACTICES IN
INVENTORY
MANAGEMENT
INTM – Supply
Chain Management
By Rafel Mayol

2. Introduction
 Definition:
 Activitythat organizes the availability of goods to
the customers, from sales items to consumables
and spare parts.
 A balancing act :
 Operations: long runs for better efficiency.
 Sales: high inventory ready to sell.
 Purchasing: large orders for better prices.
 Finance: working capital and cash flow concerns.

3. Objectives
 To optimize:
 Customer service (availability, delivery, etc.)
 Inventory costs (tied cash, space, etc.)
 Operating costs (linked to logistics)
“Improve three objectives simultaneously, not one at a time.”
“High stock levels are the result of poor control and
low availability”

4. Customer Service
 Availability polices:
 Separate products by
 Core1:increase portfolio of these products.
 Non-core (and seasonal): lower its inventory levels
and establish product life cycle management2.
 Estimating delivery times accurately: high
impact on customer satisfaction.
1Core:things you don’t want to run out.
2Product life cycle management: inventory levels function of actual cycle
time.

5. Manage Inventory
 Use ABC Analysis:
Policy Method Stock
Target
Class A Tight control Frequent monitoring 1 to 4 weeks
10% of JIT Advanced forecasting
inventory approach Service-level policy
65% of turnover
Class B Lean stock Sophisticated method 2 to 8 weeks
20% of policy Computerized
inventory management
25% of turnover Exception reporting
Class C Minimum Infrequent ordering 3 to 20
70% of supervision Automatic system weeks
inventory Large
Class O or Xof turnover orders
10% for non-movers.
Include Class Z for non-stock items considered in ABC Analysis

6. Manage Inventory
 Supplier delivery quantities are very
important.
 Little and often for A class.
 Apply just in time in A class items.
 FIFO1 approach in warehouse movements.
 Periodically identify and remove obsolete
items.
 Manage excess items (O class).
1First In, First Out

7. Just In Time management
 JIT is the aim of best practice inventory
control.
 JIT is the result of successful management of:
 High-qualitysupply
 Inventory control
 Process planning & plant design
 Workforce motivation
 Logistics
 MRP
 Continuous improvement

8. Just In Time management
 JIT ideal environment:
 Narrow product portfolio with stable demand.
 High volume manufacturer in stable market.
 Local, reliable and dependent suppliers.
 Fast-cycle processes.
 Key concepts:
 Only buy when needed.
 Make and buy small quantities.
 Balance flow throughout supply chain.
 High reliability for supply, products and
processes.

9. Organization
 Inventory management as a senior management
activity
 Set objectives
 Customer service
 Stock availability and delivery on time
 Satisfaction surveys
 Inventory
 Value
 Stock cover ratio
 Operating costs
 Warehousing and inventory operations
 Cost per transaction, movement and purchase.
 Work closely with less suppliers

10. Safety stock
 Collect data
 Analyze demand in variability.
 Demand for slow movers is a Poisson
distribution.
 Safety stock depends on
 Company policy
 Variability of demand
 Reliability of supply
 Dependability of transport

11. Ordering size
 EOD1 doesn’t work in reality; too high stock
level.
 Order size considerations
 Min order value: place order for phased delivery.
Negotiate on annual volume.
 Min shipment size: coordinate orders mix.
Change shipping method.
 Min order quantity per line: order for phased
delivery. Schedule payment once stock is used.
 Min delivery quantity per line: share items with
others. Renegotiate or look for alternative supply.
1Economic Order Quantity

12. Reduce cumulative lead times
 Benefits of reducing lead times:
 Shorter lead times with smaller lot sizes.
 Demand forecast becomes less important.
 Customer service levels improve.
 Safety stocks reduced.

13. Reduce cumulative lead times
 Make to order business:
 Purchase raw materials before finalization of
engineering process.
 Publish and measure lead time for every
business unit activity.
 Use a Project Manager for big proposals.
 Consider outsourcing on bottleneck activities.
 Use real time procedures.

14. Reduce cumulative lead times
 Make to stock business:
 Smaller lot sizes reduce lead time.
 Analyze material planning MRP system and its
lead times in the procurement process.
 Reduce purchasing cycle lead time with
suppliers. Vendor managed inventory.
 Improve forecast accuracy.
 Analyze inbound and outbound warehousing and
distribution lead times. Consider outsourcing.
 Use real time procedures.

15. Forecasting
 Good forecasting results in low costs
 Predicting for a group is more accurate than for
each item.
 Use right forecasting technique for each product
 Market research
 Market demand models
 Historical techniques
 Minimum stock levels
 Demand patterns
 Consider product life cycle: introductory, supply and
obsolescence.
 Sales and demand are different things
 Inclusion of offers & campaigns after forecasts are
made.

16. Key Point Indicators for
Inventory
 At least
 Accuracy +95% (both deviation and frequency). Inventory
and Bill Of Materials accuracy.
 Inventory turnover.
 Additionally
 Perfect order rate.
 top-line and bottom-line growth.
 maintained gross margin.
 initial customer order fill rate.
 final fill rate/returns/cancellations.
 gross margin return on investment (GMROI).
 cost of backorders.
 age of inventory.
 measures of overstock.
 write-downs as a percentage of costs.

17. Finally
 Improve whole supply chain rather than one
step (see the big picture).
 Minimize logistic costs while exceeding
customer expectations.
 Decide best locations and quantities to hold
stock. Use inventory pooling if possible.
 Use of automated systems to allow managers
to focus on value added activities.
 Involve in vendor-managed inventory
programs.

18. Finally
 Sales, Inventory and Operations Planning.
Develop processes to address their particular own
interests.
 Supply chain oriented product development to
take advantage of its capabilities.
 Identify deteriorated stock early in the chain and
take action
 Make purchasing and inventory people work
together
 Use lean principles
 Move from ABC to multi-echelon optimization

19. QUESTIONS?
Rafel Mayol