Amazon Inventory Management

Inventory Management at Amazon.com

• Amazon.com began as a virtual retailer with no physical inventory, warehouses, or overhead
• Initially, the company used computers to take orders, which were then fulfilled by others
• Amazon's growth led it to become a global leader in warehousing and inventory management
• Computer systems assign each order to one of the distribution centers
• Robots and technology help employees move goods and select items, increasing productivity from 100 to 300-400 items per hour
• Items are put into crates on a conveyor belt, and barcode scanners scan each item 15 times for accuracy
• Crates are transported to a central location, where items get packed and labeled with a barcode after which orders arrive within 1-2 days
• The goal is to provide customers with the lowest prices, quickest delivery and error-free fulfillment

Key Objectives of Inventory Management

• Finding the balance between inventory investment and quality of customer support

Importance of Inventory

• Inventory balances supply and demand, streamlines operations, and maintains financial stability
• It often represents up to 50% of a company's total invested capital
• Proper inventory management increases ROI by decreasing holding costs

Balancing Cost and Availability

• Lower inventory reduces expenses for storage, insurance, and maintenance
• Lower inventory increases the risk of stockouts, disrupting supply chains
• Higher inventory ensures consistent production and meets customer demand
• Higher inventory increases carrying costs and could lead to waste from damage or obsolescence

Inventory and Competitive Strategy

• Aligning inventory levels with strategic goals is important
• Employing Just-in-Time (JIT) minimizes inventory, cutting costs and waste
• Safety Stock Strategy creates a buffer, preventing shortages
• Economic Order Quantity (EOQ) determines the ideal order size, balancing ordering and holding costs

Customer Satisfaction and Operational Efficiency

• Keeping the right inventory levels avoids product delivery delays
• Operational continuity is ensured by preventing production stoppages
• Supply and demand forecasting optimizes inventory, balancing affordability and availability

Functions of Inventory

• Inventory supports supply chain operations
• Inventory ensures a variety of goods are available when expected, meeting anticipated demand
• Responsiveness to changing customer demand enables the minimization of lost sales
• It buffers against seasonal changes and unpredictable market shifts
• It separates production stages, allowing independent operation
• Inventory Prevents system-wide disruptions from delays in one production area
• Batch production scheduling becomes more efficient, reducing downtime as a result
• Buying in bulk allows them to leverage discounts, which lowers per-unit costs
• Bulk purchasing reduces the expense of procurement and transportation
• Balances cost savings with storage limitations

Protection Against Market Changes

• Holding inventory protects against inflation, preventing future price increases from impacting finances
• Locking in lower costs is achieved by buying materials before prices increase
• Helpful for long-term budgeting and keeping operational expenses consistent

Types of Inventory

• Raw materials are bought but not yet processed and are basic inputs ready for processing
• Work-in-process (WIP) inventory has undergone some change but is not completed determined as a function of flow time and is currently undergoing production
• Maintenance/repair/operating (MRO) inventory includes supplies to keep machinery and processes running
• Finished goods are completed products awaiting shipment, that are ready for sale

Material Flow Cycle

• The material Flow Cycle moves resources between sections of supply chain, and is critical to operational success

Managing Inventory

• Inventory items can be classified using ABC analysis
• Accurate inventory records can be maintained

ABC Analysis

• ABC analysis categorizes inventory based on value and frequency of use
• Category A is high-value, low-quantity and requires tight control
• Category B is moderately valuable with moderate demand
• Category C is low-value, high-quantity and requires minimal monitoring
• Establishes policies that focus on critical parts and avoid trivial ones by prioritizing various inventory management efforts accordingly
• Category A items get strict monitoring
• Category B items get moderate oversight
• Category C items are managed with a simple replenishment strategy

Record Accuracy

• Accurate inventory records are essential for production planning, order fulfillment, and cost control
• Without accurate records, a company may face stockouts, excess inventory, and inefficiencies
• Record accuracy ensures correct stock availability, reduces errors, and supports decision-making for purchasing, production, and sales
• Periodic inventory systems use physical checks to verify inventory levels, often done through cycle counting and audits
• Periodic inventory systems help identify discrepancies between recorded and actual stock
• Two-bin systems use separate bins for current supply and as a backup which is effective for small, frequently used items
• Perpetual inventory systems automatically track receipts and subtractions
• Perpetual inventory systems barcode scanning, RFID, and ERP systems to maintain and provide real-time data
• Semi-automated systems combine manual checks with automated tracking
• Scanners, software, and reordering systems are examples of semi-automated systems
• These reduce manual entry, decreasing errors and inefficiencies
• Accurate records prevent costly mistakes and improve efficiency
• Periodic systems require scheduled counts, while Perpetual systems update continuously
• Technology automates record accuracy and reduces human error
• Incoming and outgoing record keeping must be accurate
• Stockrooms should be secure and necessary to make precise decisions about ordering, scheduling, and shipping

Cycle Counting

• Cycle counting updates items on a regular basis
• Often used with ABC analysis
• Cycle counting eliminates shutdowns and interruptions, eliminates annual inventory adjustments, trains personnel to audit inventory accuracy, identifies and corrects error causes, and maintains accurate records

Cycle Counting Example

• For 5,000 inventory items, with 500 A, 1,750 B, and 2,750 C items, cycle counting takes place
• A items are counted every month, B items every quarter, and C items every six months
• A items are counted at a rate of 25 per day, B items at 29 per day, and C items at 23 per day

Control of Service Inventories

• A critical element of profitability
• Losses may come from shrinkage or pilferage which means small quantities of theft from employees, contractors or suppliers
• Pilferage can cause discrepancies, financial losses, and inefficiencies
• Pilferage occurs in warehouses, production facilities, or retail settings.
• Pilferage Commonly affects small, high-value, or easily concealed items.
• Pilferage may go unnoticed if inventory records are not regularly monitored.
• Pilferage can be reduced through security measures like surveillance, restricted access, and inventory tracking systems.
• Good personnel selection, training, and discipline
• Tight control of incoming shipments
• Effective control of all goods leaving facility

Inventory Models

• Inventory models help organizations decide how much to stock, and when to restock
• Inventory can be either dependent demand or independent demand items
• Independent demand means that one item's demand is not related to any other item
• Dependent demand means the demand for an item depends on the demand for another item

Independent Demand Inventory

• Demand for an item is not influenced by the demand for any other product
• Applies to finished goods or replacement parts sold directly to customers
• Forecasting methods are required to estimate demand
• Examples include retail products like laptops, manufacturing spare parts, and bottled beverages

Dependent Demand Inventory

• Demand for an item depends on the demand for another item, often a finished product
• Common in assembly operations, were parts are needed in fixed quantities
• Managed using Material Requirements Planning (MRP) to create precise schedules
• Examples include automotive parts, electronics for smartphones, and furniture components

Costs in Inventory Models

• Inventory management balances holding costs, ordering costs, and setup costs

Holding Costs

• Holding costs are the total expenses of storing and maintaining inventory
• Includes warehousing, insurance, depreciation, spoilage, and capital
• Higher inventory levels increase holding costs, making inventory control crucial

Ordering Costs

• Includes placing and receiving orders for raw materials or finished goods
• Includes administrative expenses, procurement processing, supplier coordination, and transportation.
• More frequent orders increase total ordering costs but reduce inventory holding costs.

Setup Costs

• These are the costs to prepare a machine or process for production run
• Includes labor, downtime, equipment calibration, and material changes
• Long setup times mean higher costs
• Reducing setup times can minimize costs
• Examples are downtime and labor costs for retooling machinery

Key Takeaways

• Holding costs increase with excess inventory, requiring efficient stock management
• Ordering Costs rise with frequent small orders but prevent excessive storage expenses
• Setup costs impact manufacturing efficiency and are linked to production downtime
• Companies must balance all costs using systems like Economic Order Quantity (EOQ) and Just-in-Time (JIT)

Holding Costs

• Holding costs expressed as a percentage of inventory value using Annual Holding Cost = H × Q/2
• H = Holding cost per unit per year
• Q = Order quantity
• Q/2 = Average inventory level
• Holding costs are 15%-30% of total inventory costs

Inventory Holding Costs

• Housing costs are 6% of inventory value
• Costs include rent or depreciation, operating costs, taxes, and insurance
• Material handling costs are 3% of inventory value
• Costs include equipment lease or depreciation, power, and operating costs
• Labor costs are 3% of inventory value for receiving, warehousing, and security
• Investment costs are 11% of inventory value
• Costs include borrowing costs, taxes, and insurance
• Pilferage, space, and obsolescence are 3% of inventory value
• Higher in industries undergoing rapid change
• Overall carrying cost is 26%
• Holding costs depend on business, location, and interest rates
• Can be greater than 15% and some high tech and fashion items have holding costs greater than 40%.