⛓️Supply Chain Management Unit 4 – Inventory Management

What's Inventory Management?

• Involves overseeing and controlling a company's inventory levels to ensure optimal stock levels are maintained
• Aims to minimize inventory costs while ensuring sufficient stock is available to meet customer demand and avoid stockouts
• Includes activities such as inventory planning, purchasing, receiving, storing, and tracking inventory levels
• Requires balancing the costs of holding inventory with the benefits of having stock readily available
• Utilizes various inventory control systems and metrics to monitor and manage inventory effectively
  • Perpetual inventory system continuously updates inventory records in real-time as transactions occur
  • Periodic inventory system updates inventory records at regular intervals, typically through physical counts
• Plays a critical role in supply chain management by optimizing inventory levels across the entire supply chain
• Helps improve cash flow by reducing the amount of capital tied up in excess inventory

Types of Inventory

• Raw materials inventory includes the basic materials and components used in the production process (steel, wood, plastic)
• Work-in-progress (WIP) inventory consists of partially completed products that are still undergoing manufacturing or assembly
• Finished goods inventory refers to completed products ready for sale to customers
• Maintenance, repair, and operating (MRO) inventory includes supplies and spare parts used to maintain and repair equipment
• Safety stock inventory is extra inventory held to protect against uncertainties in demand or supply
  • Helps prevent stockouts and ensures customer orders can be fulfilled even if demand spikes or supply is disrupted
• Cycle stock inventory is the regular inventory held to meet normal demand between replenishment cycles
• Anticipation inventory is built up in advance of expected demand spikes (seasonal products, promotional items)

Key Inventory Metrics

• Inventory turnover ratio measures how quickly a company sells and replaces its inventory, calculated as: $\text{Inventory Turnover Ratio} = \frac{\text{Cost of Goods Sold}}{\text{Average Inventory}}$
• Days of inventory on hand (DOH) indicates the average number of days it takes to sell the current inventory, calculated as: $\text{Days of Inventory on Hand} = \frac{365}{\text{Inventory Turnover Ratio}}$
• Inventory accuracy measures the difference between recorded inventory levels and actual physical inventory, expressed as a percentage
• Stock-out rate represents the percentage of customer orders that cannot be fulfilled due to insufficient inventory
• Fill rate measures the percentage of customer orders that are fulfilled from available inventory
  • A high fill rate indicates that the company can meet customer demand effectively
• Inventory carrying cost represents the total cost of holding inventory, including storage, insurance, obsolescence, and opportunity costs
• Inventory shrinkage refers to the loss of inventory due to theft, damage, or administrative errors

Inventory Control Systems

• Perpetual inventory system continuously updates inventory records in real-time as transactions occur
  • Utilizes technology such as barcode scanners and RFID tags to track inventory movements
  • Provides up-to-date information on inventory levels, enabling better decision-making and inventory management
• Periodic inventory system updates inventory records at regular intervals, typically through physical counts
  • Suitable for businesses with low inventory turnover or less critical inventory management needs
• Two-bin system involves using two separate storage bins for each inventory item
  • When the first bin is emptied, a replenishment order is triggered while the second bin is used
• ABC analysis categorizes inventory items based on their value and importance
  • "A" items are high-value, critical items that require close monitoring and control
  • "B" items are moderately important and require less stringent control
  • "C" items are low-value, less critical items that can be managed with simpler control methods
• Just-in-time (JIT) inventory system aims to minimize inventory by receiving goods just as they are needed in the production process
  • Requires close coordination with suppliers and reliable delivery to avoid production disruptions

Inventory Costs and Trade-offs

• Holding costs include the costs associated with storing and maintaining inventory (storage space, insurance, obsolescence)
  • Higher inventory levels lead to increased holding costs
• Ordering costs are the costs incurred when placing an order for inventory replenishment (administrative costs, transportation, inspection)
  • More frequent ordering results in higher total ordering costs
• Stockout costs represent the losses incurred when a company is unable to fulfill customer orders due to insufficient inventory
  • Includes lost sales, customer dissatisfaction, and potential damage to brand reputation
• Trade-off between holding costs and ordering costs
  • Larger order quantities reduce ordering frequency and costs but increase holding costs
  • Smaller, more frequent orders reduce holding costs but increase total ordering costs
• Economic order quantity (EOQ) model determines the optimal order quantity that minimizes total inventory costs
  • Balances the trade-off between holding costs and ordering costs
• Safety stock levels impact the trade-off between inventory costs and service levels
  • Higher safety stock reduces the risk of stockouts but increases holding costs

Demand Forecasting Techniques

• Qualitative forecasting methods rely on expert judgment, market research, and customer surveys to predict future demand
  • Suitable for new products or markets where historical data is limited
• Time-series forecasting analyzes historical demand patterns to predict future demand
  • Moving average method calculates the average demand over a specified number of past periods
  • Exponential smoothing assigns greater weight to recent demand data, allowing the forecast to adapt to changes more quickly
• Causal forecasting explores the relationship between demand and external factors (economic indicators, promotions, weather)
  • Regression analysis is used to develop a mathematical model that relates demand to the identified causal factors
• Collaborative forecasting involves sharing information and coordinating forecasts with supply chain partners
  • Helps align production, inventory, and distribution plans across the supply chain
• Forecast accuracy should be regularly monitored and measured using metrics such as mean absolute deviation (MAD) or mean absolute percentage error (MAPE)
  • Forecasting models should be adjusted and refined based on actual demand data to improve accuracy over time

Inventory Optimization Strategies

• Economic order quantity (EOQ) model determines the optimal order quantity that minimizes total inventory costs
  • Assumes constant demand, lead time, and costs
• Reorder point (ROP) system triggers a replenishment order when inventory levels reach a predetermined threshold
  • Considers lead time and safety stock to ensure stock availability
• Vendor-managed inventory (VMI) involves the supplier taking responsibility for managing the inventory levels at the customer's location
  • Enhances collaboration, reduces stockouts, and improves inventory efficiency
• Cross-docking is a logistics strategy where incoming goods are directly transferred to outgoing vehicles without long-term storage
  • Reduces inventory holding costs and improves supply chain efficiency
• Consignment inventory is owned by the supplier but held at the customer's location until it is sold or used
  • Reduces the customer's inventory carrying costs and improves cash flow
• Postponement strategy delays the final customization or assembly of products until customer orders are received
  • Allows for greater flexibility and responsiveness to changing customer demands
• Regular review of slow-moving and obsolete inventory to identify items for clearance or disposal
  • Helps optimize inventory mix and reduces holding costs associated with outdated or unsaleable items

Technology in Inventory Management

• Barcode scanning automates data entry and improves inventory tracking accuracy
  • Enables real-time updates of inventory records and reduces manual errors
• Radio-frequency identification (RFID) uses radio waves to track and identify inventory items
  • Provides real-time visibility, enhances inventory accuracy, and enables automated data capture
• Warehouse management systems (WMS) are software applications that optimize warehouse operations and inventory management
  • Includes features such as inventory tracking, order processing, and pick/pack/ship functionality
• Enterprise resource planning (ERP) systems integrate inventory management with other business functions (finance, procurement, production)
  • Provides a holistic view of inventory across the organization and enables better decision-making
• Inventory optimization software uses advanced algorithms and simulation to determine optimal inventory levels and policies
  • Considers factors such as demand variability, lead times, and service level targets
• Cloud-based inventory management solutions offer scalability, accessibility, and real-time collaboration
  • Enables remote inventory monitoring and management across multiple locations
• Internet of Things (IoT) devices, such as smart shelves and connected sensors, provide real-time inventory data and alerts
  • Helps prevent stockouts, optimize replenishment, and improve inventory visibility