This document discusses various additional inventory management processes and concepts. It covers distribution requirements planning (DRP), aggregate inventory management across multiple locations, estimating inventory needs for new distribution centers or sales increases, comparing inventory performance across locations using inventory throughput functions, storage of inventory within factories and warehouses using fixed location versus random location strategies, challenges with random location storage in retail backrooms, perpetual inventory systems, sources of error in inventory records, and the concepts of risk pooling and the bullwhip effect in supply chains.

1. 1

2. ADDITIONAL INVENT
OR
Y
MANAGEMENTPROCESSES
A
N
D CONCEPTS

3. MRP is often referred to as
a method of time-phased
planning.
Another method of time-
phased planning that uses
a similar logic in a different
situation is distribution
requirements planning
(DRP).
3

4. Inventory must also be
managed in aggregate, as
we discussed in the multi-
item inventory management
section earlier in this
chapter.
4
There is also the need to
estimate how much
inventory will be held in a
location if sales increase or
how much inventory will be
required in a new
distribution center.

5.  In the multi-item inventory management discussion we
examined issues associated with inventory investment
constraints and space constraints, but there are also other
issues associated with aggregate inventory management,
such as the need to compare the inventory management
performance of various distribution centers or retail stores or
even items.
5

6. AGGREGATE
INVENTORY
CONTROL:
INVENTORY
THROUGHPUT
FUNCTIONS
 The ITF method also allows
for comparison of different
distribution centers.
 The problem is that if one
distribution center has a
throughput of 1,000,000 units
per year and another has a
throughput of 100,000 units
per year, it is difficult to
compare them because we
would expect them to have
different levels of inventory
and there should not be a
linear relationship.
6

7. The storage of inventory within a facility is often a topic in material
handling and warehousing books, but not typically a focus of
inventory management books.
In a factory, the idea of storing inventory, especially raw material
inventory, components, subassemblies, and assemblies, at point of
use makes sense in terms of production lead time minimization and
also errors in using the wrong parts and damage
7

8. STORAGE O
F
INVENTORY
Sometimes this is necessary when
parts are used in common among
many different workstations within
the factory
If parts inventory is held centrally
within a factory, every time a part is
needed for production the worker or
robot has to leave the workstation to
retrieve it, or there is labor dedicated to
keeping workstations in stock.
8

9. STORAGE O
F
INVENTORY
If inventory comes into a factory and
is stored in a central location and then
retrieved for a workstation when
needed, there is an additional “touch”
in comparison to storing the inventory
at the workstation that will need it for
production.
The number of times inventory is
touched is often correlated with
shrink, damage, and labor.
9

10. Within a warehouse,
keeping inventory in a
fixed location minimizes
errors in terms of put
away and picking.
10
However, it does not
minimize the amount of
space required for
inventory storage.

11. The alternative to fixed location storage is random
location storage. In this approach, when space is
available, it is used for the inventory.
In a retail store, backroom space is expensive and
therefore, most of the storage in retail backrooms is
based on the random location strategy.
11

12.  This makes it difficult to find specific
SKUs in retail backrooms because there
are typically so many different SKUs in a
retail store, and many times these SKUs
are rotating, new products are introduced,
and some SKUs are discontinued.
 Storage of inventory in retail backrooms is
one of the most difficult inventory storage
management problems in the industry.
12

13. Inventory
• Inventory storage decisions and management effectiveness affect inventory holding costs
because a component of the inventory holding cost factor is storage space costs, shrinkage,
and damage, to name a few.
Turn
• In turn, the inventory holding cost factor affects the optimal level of inventory to hold,
which affects the optimal order quantity and/or the optimal order up to level.
Inventory
• Similarly, inventory management process decisions affect inventory storage decisions.
13

14. For example, if safety stock increases in retail stores
without increasing shelf capacity for a given SKU, it is
possible that the additional inventory will need to be
stored in the backroom of the retail store.
Within a retail store, you will not only see inventory stored
in the backroom but sometimes on the top of the
gondolas.
Sometimes you will notice that inventory stored on the
top of the gondolas doesn’t even correspond to the
inventory on the shelf below.
This seems to happen often in retail wholesale clubs.
14

15. Inventory records are a
salient part of any
inventory management
system. For automated
inventory systems, there
exist perpetual inventory
systems.
A perpetual inventory
system keeps track of on-
hand inventory using point
of sale (POS) information
and bar code scans as
inventory is received.
15

16. Every time a case or pallet of product is received, it is
scanned and the perpetual inventory system increases
by the number of units in the case or on the pallet.
Every time a unit is purchased or shipped, the
perpetual inventory system is reduced by that
amount.
16

17.  Error can enter the inventory
record system in many ways,
two of which have already
been mentioned: namely,
theft and returns that are
misreported or not reported.
17

18. Theft Damage
Failure to
record upon
receiving
Misplaced
inventory
Mislabeled
SKUs
And many
others.
18

19. MANAGING SUPPL
Y
CHAIN INVENT
OR
Y
FLO
WS
MAY 13, 2023 | CHAPTER
7
2

20. Risk pooling, the portfolios effect,
and safety stock aggregation all
refer to the same idea, which we
will call risk pooling.
20
Risk pooling is the phenomenon
whereby combining demand streams
reduces the amount of safety stock
because the sum of random
variables has lower levels of relative
uncertainty than the aggregate
amount of uncertainty of the
individual random variables.

21.  This is true as long as the correlation of the random variables is less than one.The
implication is that less safety stock is required.
 For example, if two different demand markets are fulfilled from two different
distribution centers, less safety stock would be required if only one distribution center
served both markets, other things being equal, as long as the correlation of demand is
less than one.
21

22. 22

23. 23

24. 24

25.  Risk pooling can occur by combining distribution
centers, but it can also occur in other ways.
 If two products are exact substitutes, perhaps two
brands of yellow number 2 pencils in a retail store,
elimination of one of the SKUs has the same effect,
assuming the same service level target remains.
 This concept can also be helpful with forecasting.
 You can forecast in aggregate more accurately than
you can at a disaggregate level.
2
8

26. W
H
A
TIS A BULL
WHIP?

27. Bullwhip is the amplification of
uncertainty in demand as it moves up
the supply chain
3
0

28. For example, the uncertainty of point of sale (POS) would be less than
the uncertainty of orders faced by the retail distribution center, which
would be less than the uncertainty of orders faced by the supplier.
This is one of the reasons why it has become popular for retailers to
share POS data with suppliers—it gives the suppliers a better estimate of
demand than orders do since orders have more noise than POS.
3
1

29. REFERENCES
2
9