Chapter 8 Inventory

1. Inventory
Management
Fundamentals
Chapter 8

2. THE DEFINITIVE GUIDE TO INVENTORY
MANAGEMENT
PRINCIPLES AND STRATEGIES FOR THE EFFICIENT
FLOW OF INVENTORY ACROSS THE SUPPLY CHAIN

3. PRINCIPLES AND
STRATEGIES FOR THE
EFFICIENT FLOW OF
INVENTORY ACROSS
THE SUPPLY CHAIN
Trade-Off Analysis

4. Terminal Learning Objective
(TLO):
▶ Upon completion of this lecture on inventory
measurement and trade-offs, participants will be able to
understand the interconnected nature of inventory
management within the broader supply chain context,
recognize the importance of trade-offs in inventory
performance measurement, and apply trade-off analysis
to evaluate and improve inventory management
decisions.

5. Enabling Learning Objectives
(ELOs):
▶ Explain the relationship between inventory management and supply chain management,
emphasizing the interconnectedness of inventory with other supply chain functions, such as
transportation.
▶ Understand the concept of trade-offs in inventory management and how they impact overall
supply chain performance.
▶ Identify the key cost drivers and factors affected by inventory management decisions, including
inventory costs, carrying costs, and transportation costs.
▶ Evaluate the concept of "true" cost reductions in inventory management decisions, considering
the trade-off between inventory-related cost reductions and potential increases in transportation
costs.
▶ Analyze the net effect of inventory performance improvements by considering the trade-offs
between different cost components and performance metrics.
▶ Apply trade-off analysis techniques to assess the impact of inventory decisions on overall supply
chain costs, customer service levels, and performance indicators.
▶ Explore methods and tools for measuring inventory performance, such as inventory turnover,
carrying cost ratios, and customer service level metrics.
▶ Understand the importance of aligning inventory performance measurement with broader supply
chain objectives and key performance indicators (KPIs).
▶ Develop strategies for optimizing inventory performance by balancing trade-offs, such as reducing
inventory costs while maintaining satisfactory customer service levels and controlling
transportation expenses.
▶ Create recommendations for improving inventory management practices based on trade-off
analysis, considering the specific characteristics and objectives of the organization's supply chain.

6. The Interconnectedness of
Inventory Management and
Supply Chain Management
Introduction
• Definition of Inventory Management
• Definition of Supply Chain
Management
• The Relationship Between Inventory
Management and Supply Chain
Management
• Interconnectedness with
Transportation

7. Inventory
Management
Definition of Inventory Management
The objectives of inventory
management include:
▶ Ensuring adequate stock levels to
meet customer demands.
▶ Minimizing holding costs, such as
storage and carrying costs.
▶ Balancing inventory investment
with service levels and customer
satisfaction.
Key Components of Inventory
Management

8. Supply Chain Management
Definition of Supply Chain Management
Key functions of supply chain management include:
▶ Supplier relationship management.
▶ Demand planning and forecasting.
▶ Procurement and sourcing.
▶ Production and operations management.
▶ Logistics and transportation management.
▶ Customer relationship management.
Importance of Integration and Collaboration

9. The Relationship Between Inventory
Management and Supply Chain
Management
Inventory as a Key Component of Supply Chain Management
Impact of Inventory Management on Supply Chain
Performance. Effective inventory management has a direct
impact on supply chain performance, including factors such
as:
▶ Customer service levels and order fulfillment.
▶ Supply chain costs and working capital.
▶ Supply chain resilience and responsiveness.
Influence of Supply Chain Management on Inventory
Decisions

10. Interconnectedness with Transportation
Transportation's Role in Supply Chain Management
Impact of Transportation on Inventory Management,
Transportation directly affects inventory management in
several ways, including:
▶ Lead time and order cycle times, which influence inventory
levels.
▶ Transportation costs and their impact on overall supply
chain costs.
▶ Transport mode selection and its impact on product
availability and responsiveness.
Key Considerations for Transportation-Inventory Integration

11. Trade-Offs in Inventory Management and
their Impact on Supply Chain Performance
INTRODUCTION TO TRADE-
OFFS IN INVENTORY
MANAGEMENT
KEY TRADE-OFFS IN
INVENTORY MANAGEMENT
IMPACT OF TRADE-OFFS ON
SUPPLY CHAIN
PERFORMANCE

12. Key Trade-Offs in
Inventory Management
▶ Cost vs. Service Level
▶ Holding Costs vs.
Stockout Costs
▶ Inventory Levels vs.
Order Cycle Time

13. Impact of Trade-Offs
on Supply Chain
Performance
▶ Cost-Service Trade-Off: Cost
optimization can lead to lower
inventory carrying costs, but it may
impact customer satisfaction and
service levels.
▶ Holding Costs vs. Stockout Costs:
Balancing these costs is essential to
avoid excessive inventory costs or
customer dissatisfaction due to
stockouts.
▶ Inventory Levels vs. Order Cycle Time:
Balancing inventory levels and order
cycle time ensures a balance between
stock availability and supply chain
responsiveness.

14. Analyzing the Net Effect of
Inventory Performance
Improvements
▶ Introduction to Analyzing
Inventory Performance
Improvements
▶ Trade-Offs Between Cost
Components and Performance
Metrics
▶ Factors to Consider in Evaluating
Net Effect

15. Trade-Offs Between
Cost Components and
Performance Metrics
▶ Holding Costs vs. Stockout Costs
▶ Ordering Costs vs. Carrying
Costs
▶ Lead Time vs. Service Level

16. Factors to Consider in
Evaluating Net Effect
▶ Cost Reduction Opportunities
▶ Performance Metric Improvements
▶ Customer Satisfaction and Service Level
▶ Supply Chain Responsiveness

17. Inventory-Transportation
Trade-Off
▶ Concept of Transportation Cost and Volume
▶ Trade-Off Between Full-Load Shipments and Inventory
Costs
▶ Impact of Shipment Consolidation and Inventory Carrying
Costs
▶ Reverse Trade-Off: Lean Operations and Reduced
Inventory Costs
▶ Balancing Inventory Performance and Transportation Cost
Efficiencies

18. Key Points
▶ Transportation costs decrease as
transportation volumes increase
▶ Full truckload (TL) and full container
load (FCL) quantities are cheaper
▶ Shipping in full-load quantities may
result in higher inventory costs
▶ Shipment consolidation can increase
inventory carrying costs
▶ Lean operations reduce inventory costs
but may increase transportation costs
▶ Balancing inventory performance and
transportation cost efficiencies is crucial

19. Product Variety-
Inventory Trade-Off
▶ Importance of Product Variety
▶ Revenue Generation and
Customer Segments
▶ Manufacturing Considerations: Lot
Sizes and Inventory Cost Benefits
▶ Inventory Requirements for
Product Variety
▶ Balancing Inventory Cost Benefits
and Revenue Opportunities

20. Key Points
▶ Product variety caters to
customer preferences and
different market segments
▶ Manufacturing in larger lot sizes
offers inventory cost benefits
▶ Simplified and standardized
products reduce complexity and
increase efficiency
▶ Product variety requires more
inventory due to multiple stock
keeping units (SKUs)
▶ Trade-off: Balancing inventory
cost benefits and revenue
opportunities

21. Lot Size-Inventory
Trade-Off
▶ Manufacturing Preference: Large
Lot Size Quantities
▶ Benefits: Process Control,
Decreased Unit Costs, Efficiency
Gains
▶ Issue: Demand in Smaller Lot Size
Quantities
▶ Inventory Requirement for Large
Production Runs
▶ Trade-Off Considerations:
Inventory Performance vs.
Manufacturing Cost Reductions

22. Key Points
▶ Manufacturing preference:
Large lot size quantities
▶ Benefits: Process control,
decreased unit costs, efficiency
gains
▶ Issue: Demand in smaller lot
size quantities
▶ Inventory requirement for large
production runs
▶ Trade-off: Inventory
performance vs. manufacturing
cost reductions

23. PRINCIPLES AND
STRATEGIES FOR THE
EFFICIENT FLOW OF
INVENTORY ACROSS
THE SUPPLY CHAIN
Trade-Off Analysis

24. Terminal Learning Objective
(TLO):
▶ By the end of the training session, you will learn about
types of measures and the 4-V model for inventory flow
in the supply chain, participants will be able to
understand the concepts of volume measures, value
measures, and velocity measures, and apply them
strategically to ensure efficient inventory flow across
the supply chain.

25. Enabling Learning Objectives
(ELOs):
▶ Define volume measures and their significance in inventory management,including metrics such as
stock-keeping units (SKUs), units sold, units produced, and units held in inventory.
▶ Explain the importance of value measures in inventory management, including metrics such as total
inventory value, cost of goods sold (COGS), and value-added metrics that capture the financial impact of
inventory flow.
▶ Understand the concept of velocity measures and their role in assessing the speed of inventory flow,
including metrics such as inventory turnover, lead time, order cycle time, and cash-to-cash cycle time.
▶ Analyze the relationship between volume measures, value measures, and velocity measures in
evaluating inventory flow efficiency and identifying areas for improvement in the supply chain.
▶ Apply volume measures to assess inventory demand patterns, SKU performance, and inventory
turnover ratios to optimize stock levels and minimize excess or obsolete inventory.
▶ Utilize value measures to evaluate the financial impact of inventory management decisions, such as
COGS as a percentage of sales or inventory carrying costs as a percentage of total inventory value.
▶ Evaluate velocity measures to identify bottlenecks, delays, or inefficiencies in the inventory flow process
and develop strategies to improve lead times, order cycle times, and cash flow.
▶ Understand the 4-V model (Volume, Variety, Velocity, and Visibility) and its application in managing
inventory flow across the supply chain.
▶ Analyze the impact of variety on inventory management and its relationship with volume, value, and
velocity measures, considering factors such as SKU proliferation, product assortment, and
customization.
▶ Develop strategies and principles for optimizing inventory flow across the supply chain, considering the
interplay of volume, value, and velocity measures, and leveraging visibility and data analytics to drive
continuous improvement

26. The 4-V Model in Inventory
Management
Introduction to the 4-V Model
▶ Categorization of Inventory Measures
▶ Purpose: Assessing Volume, Value, Velocity, and Variance
▶ Importance of Understanding the Intent of Inventory
Measures

27. The 4-V Model
▶ Volume: Measures focusing on the
physical quantity of inventory
▶ Value: Measures assessing the
financial worth of inventory
▶ Velocity: Measures evaluating the
speed at which inventory moves
through the supply chain
▶ Variance: Measures examining the
variability or deviation in
inventory levels

28. Understanding the Intent of Inventory
Measures
▶ Importance of understanding the purpose of inventory measures
▶ Alignment of measures with organizational objectives
▶ Selection of appropriate measures based on business needs

29. Definition of Volume Inventory
Measures Units as the Key Metric
Importance of Physical Inventory
Assessment Out-of-Stock Percentage
(OOS%)
• Definition of Volume Inventory
Measures
• Units as the Key Metric
• Importance of Physical Inventory
Assessment
• Out-of-Stock Percentage
(OOS%)

30. Out-of-Stock
Percentage (OOS%)
▶ Definition of Out-of-Stock
Percentage (OOS%)
▶ Calculation Formula
▶ Focus on SKUs rather than
Individual Pieces
▶ Assessing the Volume of
Inventory Availability

31. Key Takeaways
• Volume inventory measures focus on
capturing the quantity of inventory a
firm has.
• These measures are typically stated in
units and assess the physical
inventory available.
• Units and total weight denominations
are used to evaluate inventory for
transportation considerations.
• Out-of-Stock Percentage (OOS%)
helps measure the volume of
inventory availability relative to what
should be available.

32. Management by
Exception in Inventory
Management
Definition of Management by
Exception (MBE)
▶ Focus on Significant Differences
▶ Examples of Exception
Thresholds
▶ Benefits and Drawbacks of MBE

33. Examples of
Exception Thresholds
▶ Out-of-Stock Percentage below
95%
▶ Inventory Variance exceeding a
$1,000 threshold

34. Benefits of MBE
▶ Focuses Management
Attention on
Significantly Deviating
Results
▶ Increases Efficiency in
Inventory Measurement
Process

35. Drawbacks of MBE
▶ Relevance of Variances to Expectations and Budgets
▶ Potential Distraction from Important Management Areas
▶ Additional Oversight Requirement

36. Management by
Exception in Inventory
Management
▶ Definition of Management by
Exception (MBE)
▶ Measurement Dashboards
▶ Balanced Scorecard (BSC)
Framework

37. Measurement
Dashboards for MBE
▶ Definition of Measurement
Dashboards
▶ Visualization of Key Performance
Indicators (KPIs)
▶ Color-Coding for Problem Areas or
Exceptions
▶ Engaging in Management by
Exceptions

38. Balanced Scorecard
(BSC) Framework
▶ Definition of Balanced Scorecard
(BSC)
▶ Purpose: Aligning Processes with
Vision and Strategy
▶ Nonfinancial and Financial
Performance Measures
▶ Categories: Financial, Customer
Service, Internal Business
Processes, Learning/Growth

39. BSC Components in
Inventory
Management
▶ Financial Component: Financial
Performance Measures
▶ Customer Service Component:
Measures for Positive Customer
Perception
▶ Internal Business Processes
Component: Inventory Accuracy
and Velocity Measures
▶ Supply Chain BSC: Capturing
Inventory Performance