1. real-time management of inventory for items Inventory Concept LOGISTIC & WAREHOUSING

2. Inventory Concepts Part 1: Introduction Inventory Inventory is a list/record for goods and materials, held available in stock by a business Is a large and costly investment. Better management of corporate inventories can improve cash flow and return on investment

3. Inventory serves 5 purposes 1.It enables the firm to achieve economies of scale 2.It balances supply and demand 3.It enables specialization in manufacturing 4.It provides protection from uncertainties in demand and order cycle 5.It acts as a buffer between critical interfaces within the channel of distribution Part 2: Basic Inventory Concept

4. Inventory is required to realized the economies of scale in purchasing, transportation or manufacturing Example: ordering large quantities of raw materials/ finished goods inventory allows the manufacturer to take advantage of the per unit price reductions associated with the volume purchases. Purchased materials have a lower transportation cost per unit if ordered in large volumes  because less handling is required. 1. Economies of scale

5. Finished goods inventory makes it possible to realize manufacturing economies.  Long production Runs Lower costs for per unit manufacturing Prevent from responding to stock-outs since items are produced less frequency  Short production Runs Requires high changeover costs Reduce the quantity of inventory that must be carried and shorten the lead time, they require time that could be used for manufacturing a product At the beginning of a production run, the line often operates less efficiently due to fine tuning the process and equipment setting 1. Economies of scale

6. Seasonal supply or demand may make it necessary for a firm to hold inventory Example: Boxed Chocolate sales  increase during Mother’s Day Demand for a product may be relatively stable throughout the year, but raw materials may be available only at certain times during the year (e.g. producer of canned fruits and vegetables)  this makes necessary to manufacture finished products in excess of current demand and hold in inventory 2. Balancing Supply and Demand for Seasonal Inventories

7. Inventory makes it possible for each of a firm’s plants to specialize in the products that it manufactures The finished product can be shipped to field warehouses where they are mixed to fill customer order The specialization by facility is known as Focused Factories 3. Specialization

8. Inventory is held to prevent a stock-out in the case of variability in demand or variability in the replenishment cycle example: price increase, supply shortage and to maintain a source of supply 4. Protection from Uncertainties and Order Cycle

9. Often maintained between manufacturing operations within a plant to avoid a shutdown if a critical piece of equipment were to break down Inventory planning is critical to successful manufacturing operations because a shortage of raw materials can shut down the production line or lead to a modification of the production schedule While shortages of raw materials can disrupt normal manufacturing operations, excessive inventories can increase inventory carrying cost and reduce profitability Finished good inventory can be used as a means of improving customer service levels by reducing the stock- out due to unanticipated demand or variability in lead time Work-in-process Inventory

10. Inventory is held throughout the supply chain to act as a buffer for the following critical interfaces: 1.Supplier – procurement (purchasing) 2.Procurement – production 3.Production – marketing 4.Marketing – distribution 5.Distribution – intermediary 6.Intermediary – consumer/user 5. Inventory as a Buffer

11. Raw materials inventory Supplier inventory Work-in- process inventory Finished goods inventory at plant location Retail inventory Reworking or repackaging of product Waste and by product Waste disposal KEY: Forward logistics flow Reverse logistics plow The Logistics Flow Reverse logistic  move product backward through the channel for a number of reason Example: a customer may return a product because it is damaged/ manufacturer may need to recall a product because of defects Finished goods inventory at field location Consumer inventory

12. 1.Cycle stock That results from replenishment of inventory sold or used It is required in order to meet demand under conditions of certainty; when the firm can predict demand and replenishment times (lead times) Example: if the rate of sales for a product is a constant 20 units per day and the lead time is always 10 days  no inventory beyond the cycle stock would be required Types of Inventory

13. Basic inventory Principles – cycle stock 0 10 20 30 40 50 60 300 600 100 200 400 InventoryOrder place Order arrival Order place Order arrival Average Cycle inventory Days B Order quantity of 200 units Inventory Order place Order arrival: Average Cycle inventory Days C Order quantity of 600 units Inventory Order place Order arrival: Next order placed Average Cycle inventory Days A Order quantity of 400 units Order place

14. 2.In-transit Inventories Items that are en route from one location to another Considered part of cycle stock even though they are not available for sale or shipment until after they arrive at the destination In-transit inventory should be considered as inventory at the place of shipment origin since the items are not available for use, sale or subsequent reshipment 3.Safety or Buffer Stock Is held in excess of cycle stock because of uncertainty in demand or lead time Average inventory at a stock-keeping location is equal to half the order quantity plus the safety stock

15. Average inventory investment under conditions of uncertainly Inventory 200 100 Safety Stock (50) 10 8 20 Days 30 40 Average Cycle inventory Inventory 200 100 Safety Stock (40) 12 10 20 Days 30 40 Average Cycle inventory B With variable lead time Inventory 200 100 Safety Stock (100) 12 10 20 Days 30 40 Average Cycle inventory C With variable demand and lead time 8 a With variable demand 10

16. 4.Speculative Stock Is inventory held for reason other than satisfying current demand. Example: materials may be purchased in volumes larger than necessary in order to receive quantity discount, because of a forecasted price increase or materials shortage or to protect against the possibility of a strike. 5. Seasonal Stock Is a form of speculative stock that involves the accumulation of inventory before a seasonal periods begins Example: agricultural product, fashion industry and seasonal items

17. 6.Dead Stock Refers to items for which no demand has been registered for some specified period of time Might be obsolete throughout a company or only at one stock-keeping location

18. Measures of Inventory Management Effectiveness The key measure of effective inventory management is the impact that inventory has on corporate profitability Effective inventory management can improve profitability by lowering costs or supporting increased sale Better inventory management can increase the ability to control and predict how inventory investment will change in response to management policy Part 3: Basic Inventory Management

19. Measured as: Annual dollar sales volume Average dollar inventory investment A higher number is preferred, indicating that inventory moves through the firm’s operation quickly, rather than being held for an extensive period Example: annual sales = RM500,000 valued at cost and an average inventory investment of RM100,000 would have a turnover of five times. Inventory Turnover

20. A logistics measure of inventory effectiveness at meeting demands Is a common measure of the customer service performance of inventory Low inventory level can reduce fill rates, hurting customer service and creating loss sales Increased sales are often possible if high levels of inventory lead to better-in-stock availability and more and more consistent service level Example: Fill rate = 96%  4% of requested unit were unavailable when ordered by the customer Fill Rate

21. Pull versus Push Systems Pull System  If a company waits to produce until customer demand it (customer demand ‘pull’ the inventory) Push System  if a firm produces to forecast or anticipated sales to customers (the firm is pushing its inventory into the market in anticipation of sales) Impact of Demand Patterns on Inventory Management

22. Independent versus Dependent Demand inventory focuses on whether the demand for an item depends on demand An independent demand item  is a finished good A dependent demand item  are a raw materials and components that go into the production of that finished good The demand for raw materials or components is derived based on the demand for the finished product The need for dependent demand items can be calculated based on the production schedule of the finished product The need for production of the finished good may be forecasted or based on customer demand/order Independent versus Dependent Demand

23. The components of ordering costs Replenishment policy under condition of certainty requires the balancing of ordering costs against inventory carrying costs Example: a policy of ordering large quantities infrequently may result in inventory carrying costs in excess of the savings in ordering costs Inventory Management Under Conditions of Certainty

24. Ordering costs for products purchased from an outside supplier include; 1.The cost of transmitting the order 2.The cost of receiving the product 3.The cost of placing it in storage 4.The cost of processing the invoice for payment In restocking its own field warehouses, ordering costs include; 1.The cost of transmitting and processing the inventory transfer 2.The cost of handling cost 3.The cost of receiving the product 4.The cost of documentation

25. The best policy by minimizing the total of inventory carrying costs and ordering costs The EOQ is a concept which determines the optimal order quantity on the basis of ordering and carrying costs When incremental ordering costs equal incremental carrying costs, the most economic order quantity exists Economic Order Quantity

26. Two questions seem appropriate in reference to the example of the previous diagram 1.Should we place order for 200, 400, or 600 units, or some other quality? 2.What is the impact on inventory if orders are place at 10, 20, or 30-day intervals, or some other time period? Assuming constant demand and lead time, sale of 20 units per day, and 240 working days per year, annual sales will be 4,800 units. If orders are place every 10 days, 24 orders off 200 units will be placed. With a 20-day order interval, 12 orders of 400 units are required. If the average inventory is 100, 200, and 300 units, respectively. Which of these policies would be best?

27. The EOQ in unit can be calculated using the following formula; EOQ = 2PD CV P= The ordering cost (RM per order) D= Annual demand or usage of product (number of unit) C= Annual inventory carrying cost (as a percentage of product cost or value) V= Average cost or value of one unit of inventory Example; P= RM40 D= 4800 units C= 25% V= RM100 per unit EOQ = 2 (40)(4800) (25%)(100) =124 units (rounded to 120) Economic Order Quantity √√ √

28. Order Quantity (EOQ) Number of Order (D/EOQ) Ordering Cost P x (D/EOQ) Inventory Carrying Cost ½ EOQ x C X V Total Cost 4012048005005300 608032007503950 8060240010003400 10048192012503170 12040160015003100 14035140017503150 16030120020003200 2002496025003460 3001664037504390 4001248050005480 Cost Trade-Offs Required to Determine the Most Economical Order Qty

29. Size of order Inventory carrying cost Total cost Annual Cost (dollars) Lowest total cost (EOQ) Ordering cost Cost trade-offs required to determine the most economical order quantity

30. Fixed Order Point An order is placed when inventory on hand reaches a predetermined minimum level necessary to satisfy demand during the order cycle The automated inventory control system normally generates an order or at least a management report when the reorder point is reached Fixed Order Point versus Fixed Order Interval Policy

31. Fixed Order Interval Inventory level are reviewed at a certain, set time interval, perhaps every week An order is placed for a variable amount of inventory, whatever is required to get the company back to its desired inventory level A weekly order may be placed to reduce ordering costs and take advantage of purchase volume discounts and freight consolidation

32. Management should consider factors such as customer relations, customer wants and needs, competitive service levels and the ability of the firm to support continuous production processes Management improves customer service levels by adding safety stock because the cost of carrying inventory has often not been calculated for the firm Inventory and Customer Service