**Planning and Inventory Management: Optimizing Supply Chain Efficiency**
**Introduction:**
Planning and inventory management are essential components of supply chain management, crucial for ensuring efficient operations, meeting customer demand, and minimizing costs. This detailed description explores the key principles, strategies, and best practices involved in planning and inventory management within a supply chain context.
**Principles of Planning:**
1. **Demand Forecasting:** Accurate demand forecasting is the foundation of effective planning. Utilizing historical data, market trends, and predictive analytics, organizations can anticipate customer demand and adjust production and inventory levels accordingly.
2. **Capacity Planning:** Capacity planning involves aligning production capacity with demand forecasts to optimize resource utilization and avoid bottlenecks or excess inventory.
3. **Lead Time Management:** Managing lead times for procurement, production, and delivery is crucial for synchronizing supply and demand and reducing order cycle times.
4. **Risk Management:** Proactive risk management involves identifying potential disruptions in the supply chain, such as supplier delays or natural disasters, and developing contingency plans to mitigate their impact.
5. **Collaborative Planning:** Collaboration with suppliers, manufacturers, distributors, and other stakeholders enables shared visibility and coordination of activities, leading to more efficient planning and inventory management.
**Strategies for Inventory Management:**
1. **ABC Analysis:** Classifying inventory items based on their value and frequency of demand allows organizations to prioritize resources and focus on managing high-value or critical items more effectively.
2. **Just-in-Time (JIT) Inventory:** JIT inventory systems minimize inventory holding costs by synchronizing production with customer demand, reducing excess inventory levels and improving cash flow.
3. **Safety Stock Management:** Maintaining appropriate safety stock levels mitigates the risk of stockouts and ensures continuity of supply in the face of demand variability or supply chain disruptions.
4. **Inventory Optimization:** Utilizing advanced inventory optimization techniques, such as economic order quantity (EOQ) models and inventory turnover analysis, helps organizations strike the right balance between holding costs and stock availability.
5. **Vendor-Managed Inventory (VMI):** VMI programs delegate inventory management responsibilities to suppliers, allowing them to monitor stock levels and replenish inventory automatically based on predefined agreements and demand signals.
**Best Practices:**
1. **Data-driven Decision Making:** Leveraging real-time data and analytics enables organizations to make informed decisions about inventory levels, production scheduling, and supply chain optimization.
2. **Continuous Improvement:** Implementing a culture of continuous improvement fosters innovation a
2. Inventory
•Inventory is commonly thought of as the finished goods a company accumulates
before selling them to end users
•But inventory can also describe the raw materials used to produce the finished
goods, goods as they go through the production process (referred to as "work-
in-progress" or WIP), or goods that are "in transit"
3. 12-3
Types of demands
•Independent demand – finished goods, items that are ready to be sold
E.g. a computer
•Dependent demand – components of finished products
E.g. parts that make up the computer
4. Costs of Inventory
Physical holding costs:
◦ out of pocket expenses for storing inventory (insurance, security, warehouse
rental, cooling)
◦ All costs that may be entailed before you sell it (obsolescence, spoilage,
rework...)
Operational costs:
◦ Delay in detection of quality problems.
◦ Delay the introduction of new products.
◦ Increase throughput times.
5. ABC Classification
Class A
◦ 5 – 15 % of units
◦ 70 – 80 % of value
Class B
◦ 30 % of units
◦ 15 % of value
Class C
◦ 50 – 60 % of units
◦ 5 – 10 % of value
7. ABC Classification
9 $30,600 35.9 6.0 6.0
8 16,000 18.7 5.0 11.0
2 14,000 16.4 4.0 15.0
1 5,400 6.3 9.0 24.0
4 4,800 5.6 6.0 30.0
3 3,900 4.6 10.0 40.0
6 3,600 4.2 18.0 58.0
5 3,000 3.5 13.0 71.0
10 2,400 2.8 12.0 83.0
7 1,700 2.0 17.0 100.0
TOTAL % OF TOTAL % OF TOTAL
PART VALUE VALUE QUANTITY % CUMMULATIVE
A
B
C
$85,400
8. ABC Classification
Example 10.1
% OF TOTAL % OF TOTAL
CLASS ITEMS VALUE QUANTITY
A 9, 8, 2 71.0 15.0
B 1, 4, 3 16.5 25.0
C 6, 5, 10, 7 12.5 60.0
9.
10. Direct Inventories
These includes such items which are directly used for production or manufacture
and are a part of the goods/services produced or provided. Direct Inventories can
be further classified into following types:
i. Production Inventory
Items such as raw materials, components and subassemblies used to produce the
final product.
ii. Work-in- progress Inventory
The components which are in the process, neither raw material nor finished good
but semi finished goods lying in machines or in factory awaiting completion is
called work in progress.
11. Cont.
iii. Finished goods inventories
This includes the final products ready for dispatch to consumers or distributors. After
production. The finished goods may be stocked to meet varying market demands
iv. MRO Inventory
Maintenance, repair and operating items such as spare parts and consumable stores
v. Miscellaneous Inventory
All other items such as scrap, obsolete and unsaleable products, stationary and other
items
12. Indirect Inventories
i. Transportation Inventory
Under normal conditions, a business transports raw materials, WIP, finished
goods etc from one site to other. Due to long distances, the inventory stays on
the way for days, weeks and even months depending on distances
ii. Buffer inventories
They are required as protection against the uncertainties of supply and demand.
13. Indirect Inventories
iii. Decoupling Inventories
A "decoupled" inventory consists of inventory stock set aside in the event of a
slowdown or stoppage in production. Decoupling inventory cushions the
company's inventory against potential issues in the production line. These issues
can occur when one part of the production line works at a different speed than
another.
iv. Seasonal Inventories
Demands in many cases are seasonal and he inventories have to be maintained
to meet such high seasonal demands economically. Like demand for cooler or
ACs before summer season
14. Cont.
v. Lot-size Inventories
These are held to take advantages of discounts which are usually available for
purchase of large quantities. Lot sizes or cycle inventories are held by making
purchases in lots rather than for numbers which are exactly required.
vi. Anticipation Inventories
These inventories are stocked in anticipation of an event like major promotion
programme being launched for display at exhibition or for meeting the customer
demand for the plant shut down period for maintenance.
