Module 3: Tactical & Operational - Inventory PDF

MODULE 3: Tactical & Operational Inventory Role of Inventory Inventory Management Inventory Optimization ©...

MODULE 3: Tactical & Operational Inventory Role of Inventory Inventory Management Inventory Optimization ©2023 B2G Copyright MODULE 3 : TACTICAL & OPERATIONAL - INVENTORY Role of Inventory ©2023 B2G Copyright MODULE 3: TACTICAL & OPERATIONAL > INVENTORY > ROLE OF INVENTORY Inventory ensure smooth run of supply chain processes and prevent disruption What is inventory? Inventory meaning that Material or Items which are owned by the business for further production of goods and for sale Supplier Manufacturer Distributor Retailer Inventories Raw Materials Goods in Transit Finished Goods Work in Progress Customer Finished Goods ©2023 B2G Copyright MODULE 3: TACTICAL & OPERATIONAL > INVENTORY > ROLE OF INVENTORY Inventory held a Safety Stock in case forecasted demand exceeds expectations, or supply shortfalls occur Understocking Demand exceeds amount available which leads to a loose margin and future sales Overstocking Amount available exceeds demand which leads to liquidation, obsolescence and holding The role of inventory is to match Supply and Demand ©2023 B2G Copyright MODULE 3: TACTICAL & OPERATIONAL > INVENTORY > ROLE OF INVENTORY Service level is the expected probability of being able to satisfy all possible inventory requirements within a particular period of time Service level is the percent of demand a company want to cover. It have different metrics (Item Fill Rate IFR, Cycle Inventory Service Level CSL are most common). It depend on the the availability amount of inventory kept by the firm. stockout The service level will tend to be high if the amount of inventory on hand is sufficient to cover a significant the need/demand The service level will tend to be low if the inventory on hand is not enough to cover the need/demand Bad Service Good Service Level level Service level is strongly correlated with the safety stock, the service level will get better as the safety stock get higher. ©2023 B2G Copyright MODULE 3: TACTICAL & OPERATIONAL > INVENTORY > ROLE OF INVENTORY Sustainable inventory management focus on reduction of the environmental impacts of an industry without affecting its profitability Sustainable inventory management reduce carbon emission Using green energy in warehouses; Inventory contribute to carbon emission Warehouse emission depends on the total inventory and the warehouse energy consumption per unit item. Using transportation mode with less carbon emission; Transportation emission depends on the vehicle's fuel consumption, the fuel emission, and the distance traveled. Reducing the amount of inventory; Disposing some items may produce a produced a lot of carbon Designing product to be reusable reducing the need for item disposal. ©2023 B2G Copyright MODULE 3: TACTICAL & OPERATIONAL > INVENTORY > ROLE OF INVENTORY It is important to store the right amount of the right type inventory, for the right amount of time, in the right environment… Warehouse is very important for any business Warehousing produce a significant amount of waste and carbon emission It constitute a safe have for inventory The amount of emission depend on the type and amount of It server for order preparation inventory and the amount of energy needed per item. The warehouse building per se, the type and amount of product stored, and the warehouse handling procedures used are topics for sustainable supply chain management ©2023 B2G Copyright MODULE 3: TACTICAL & OPERATIONAL > INVENTORY > ROLE OF INVENTORY …and get it to end customer in the right condition Transportation is a major part of the Inventory operation and Type of the transportation used is a topic for sustainable consumes resources and time supply chain management Raw material should be moved to plant and even within the Companies must use environmentally friendly modes of plant transport such as electric vehicles. Items should be moved to warehouses, customer warehouse, Keep only the amount of inventory needed and make at the distribution center, retail store, customers right place and the right time. ©2023 B2G Copyright MODULE 3: TACTICAL & OPERATIONAL > INVENTORY > ROLE OF INVENTORY Inventory disposal is needed for different reasons, however it is very difficult to dispose some items, the carbon emission related to this disposal can be very huge Inventory disposal need should be reduced Make Inventory items need to be disposed for many reason such as over production, defective product, obsolescence, newer version…etc. Production technique, raw material selection, vendor selection, vendor Recycle product return policy, product design, etc. impact the amount of need for disposal Use Going green implies that the products are designed to be reuse Companies must do everything to reduce the need for item disposal; Repair Type of, and need for, the disposal methods used is a topic for sustainable supply chain management. Disposal ©2023 B2G Copyright MODULE 3: TACTICAL & OPERATIONAL > INVENTORY > ROLE OF INVENTORY There is a lot of material recovery opportunities Material recycling state Recycling industries state in US Of the 367 material recovery facilities; 66% Papers and 14% 11% cardboard Process plastic Process plastic cups clamshells 22% Glass 4% 1% 8% Process plastic bags Process plastic plate, cutlery, Straws, stirrers Plastics ©2023 B2G Copyright MODULE 3 : TACTICAL & OPERATIONAL - INVENTORY Inventory Management ©2023 B2G Copyright MODULE 3: TACTICAL & OPERATIONAL > INVENTORY > INVENTORY MANAGEMENT Sustainable inventory management allows companies to make more profit while increasing positive social and environmental impacts Manage inventory cost to generate profit Preventing Dead Profit = Revenue - Costs Stock or Perishability Total inventory cost = cost of material + holding costs + ordering and/or set-up costs + Taxes/Insurance/shrinkage If revenue remains the same and costs are reduced, profit will Optimizing be increased Reducing Storage Cost Purchase Cost of Reduce the total inventory will reduce significantly the Goods Inventory associated cost as well as waste and carbon emission Management Objectives High Profit & Low cost & Enhancing Cash positive Flow Maintaining carbon Sufficient Stock social emission impact ©2023 B2G Copyright MODULE 3: TACTICAL & OPERATIONAL > INVENTORY > INVENTORY MANAGEMENT ABC analysis is an inventory management technique that helps to focus on the few critical and not the trivial many Profit/Usage ABC analysis is a categorization technique used in inventory management. Knowing which SKUs make up most of the business allows to set priorities for A the items before negotiating prices with suppliers, determining service levels and safety stocks, or assigning workers to tasks like inventory review. Focus Products are the most important stock items having the highest A value. It is also the smallest category with minimal products. B A mid-level category in which the products of slightly higher value B and less tightly controlled goods are recorded. Items are bigger in terms of volume but of less utility as compared to category A. General category that contains the largest volume of inventory C C goods having the least value in terms of generating business revenue. These products need the simplest controls and minimum Volume records. ©2023 B2G Copyright MODULE 3: TACTICAL & OPERATIONAL > INVENTORY > INVENTORY MANAGEMENT Planning out inventory schedule to avoid stockouts between supplier shipment arrivals is the ideal setup for inventory, four types of inventory exist Cycle Average amount of inventory used to satisfy demand between shipments Inventory Anticipation Inventory Built up to counter predictable variability in demand Inventory Inventory held in case actual demand exceeds forecasts , or in case supply shortfalls occur Safety Inventory Costs of carrying too much inventory versus cost of losing sales In transit En-route goods or materials which are in the ownership of the company but in the possession of the carrier Inventory ©2023 B2G Copyright MODULE 3: TACTICAL & OPERATIONAL > INVENTORY > INVENTORY MANAGEMENT The inventory is the essential capital and what runs a business, it is important to be aware of its expenses and operations at all times Inventory Costs Purchasing Costs Ordering Costs Carrying Costs Shortage Costs Nominal cost. Occurs whenever the Holding cost. Cost incurred when stock replenishes. customers are not being Cost incurred in buying Cost associated with served. from outside sources. Procurement cost. storing an item in the inventory Stockout Cost may vary according Independent to the order to the quantity size. Expressed in terms of purchased. rate per unit. ©2023 B2G Copyright MODULE 3: TACTICAL & OPERATIONAL > INVENTORY > INVENTORY MANAGEMENT Inventory performance metrics should take into account sustainable inventory metrics Inventory turnover Fill rate measure the number of times inventory turns over in a year. the fraction of order/demand that were met on It is the ratio of either the cost of goods sold or time from inventory. Fill rate should not be sales(at cost), to the average aggregate inventory averaged over time but over a specified number value. of units of demand Cash-to-cash cycle Obsolete inventory measure is a high level metric that includes inventories, the fraction of inventory older than a specified accounts payable, and receivables. obsolescence date Average inventory Seasonal inventory measures measures the average amount of inventory the amount of both cycle and safety inventory carried. It should be measured in units, days of that is purchased solely due to seasonal changes demand, and financial value. in demand ©2023 B2G Copyright MODULE 3: TACTICAL & OPERATIONAL > INVENTORY > INVENTORY MANAGEMENT Cycle counting early identify source of error and make correction and eliminate shutdowns and interruption Cycle counting is a method of checks and balances by which companies confirm physical inventory counts match their inventory records. This method involves performing a regular count and recording the adjustment of specific products. Over time, they have counted all their goods. Cycle counting allows to update records based on periodic count. It has several advantages Allows causes of errors to be identified and corrected Eliminates shutdowns and interruptions Eliminates annual inventory adjustment Trained personnel audit inventory accuracy Maintains accurate inventory records ©2023 B2G Copyright MODULE 3: TACTICAL & OPERATIONAL > INVENTORY > INVENTORY MANAGEMENT The accuracy of inventory items in the warehouse is obtained through counting Inventory accuracy refers to any inconsistencies between the actual quantity or type of physical inventory and what is recorded or is supposed to be. In most cases, it is the difference between what’s recorded in an inventory management system and what is available for sale in a store, warehouse, or storage location. Accurate records are a critical ingredient in production and inventory systems Necessary to make precise decisions about ordering, scheduling, and shipping Incoming and outgoing record keeping must be accurate and timely Stockrooms should be secure ©2023 B2G Copyright MODULE 3 : TACTICAL & OPERATIONAL - INVENTORY Inventory Optimization ©2023 B2G Copyright MODULE 3: TACTICAL & OPERATIONAL > INVENTORY > INVENTORY OPTIMIZATION Optimizing inventory requires to know precisely when and how much product to order to fulfill customer requests without increasing stock carrying costs A forecasting solution monitors when each item is purchased, order Demand quantities, and peak seasons to determine how a business can optimize Forecasting Inventory optimization is the practice of having inventory the right inventory to meet the target service levels while tying up a minimum amount of capital in inventory. Inventory optimization is the next level of Inventory Set inventory policy to determine each product line's optimal stock inventory management for warehouse and policy level. Many companies use the ABC analysis method supply chain managers and buyers. Key elements of optimizing inventory: Stock The minimum amount of stock a business can hold before placing Replenishment another order. ©2023 B2G Copyright MODULE 3: TACTICAL & OPERATIONAL > INVENTORY > INVENTORY OPTIMIZATION There are numerous source of pressure for the amount of inventory to keep Pressure for high inventory Pressure for low inventory Customer service: reduce the potential for Inventory holding cost is the sum of: stockouts and backorders ○ Cost of capital: cost of investing in Ordering cost/setup cost: The cost of preparing an asset order ○ Storage and handling:arise from Labor and equipment utilization: creating more moving in and out of a storage inventory can increase workforce productivity facility Transportation cost: Costs can be reduced ○ Insurance, shrinkage, taxes Quantity discount: drop in the price when an order is large ©2023 B2G Copyright MODULE 3: TACTICAL & OPERATIONAL > INVENTORY > INVENTORY OPTIMIZATION Balancing demand and supply is a challenging task in practice. Customer Supply Chain Customer Supply Chain Requirements Capability Requirements Capability Market Suppliers, Increased Demand: Increased: Demand, New Manufactures, Products, Distributors, Marketing programs, Costs, Overtime, Promotions Carriers Promotions Expediting, ©2023 B2G Copyright MODULE 3: TACTICAL & OPERATIONAL > INVENTORY > INVENTORY OPTIMIZATION Capacity and inventory management are fundamental for operations management, as they concern the planning and control of the processing side of matching supply and demand Production capacity Inventory Seasonal workforce Common components across multiple products Workforce time flexibility Build inventory for high or Subcontracting predictable demand items Flexible production equipment ©2023 B2G Copyright MODULE 3: TACTICAL & OPERATIONAL > INVENTORY > INVENTORY OPTIMIZATION Inventory is categorized into two types based on the demand pattern, which creates the need for inventory Demand categories Independent Dependent Demand for any finished product Demand for the raw materials, parts, and components Used tools: used to manufacture a product. Independent Dependent Master Production Schedule (MPS) Used tools: Economic Order Quantity (EOQ) Economic Order Quantity (EOQ) Safety Stock Calculations Safety stock Material Requirements Planning(MRP) ©2023 B2G Copyright MODULE 3: TACTICAL & OPERATIONAL > INVENTORY > INVENTORY OPTIMIZATION Managers should consider different option regarding the inventory management Decision regarding the manufacture or purchase of item or Make-or-Buy service. Outsourcing is a powerful supply chain strategy. It allows the firm to focus on it’s main activities. Both services and items can be Outsource outsource but it also has cons such as less control on the outsourced side Here, supplier is responsible for all decisions regarding inventories of supplier product at their customer’s location. Very Vendor Managed Inventory (VMI) powerful to counteract the bullwhip effect but requiert huge investment on software and systems. Continuous Replenishment The wholesaler or manufacturer replenishes a retailer, based on Program (CRP) POS data at the retailer, or warehouse withdrawals Bullwhip effect Fluctuations in order increase as they move up the supply chain ©2023 B2G Copyright MODULE 3: TACTICAL & OPERATIONAL > INVENTORY > INVENTORY OPTIMIZATION The bullwhip effect occurs when retailers become highly reactive to demand, and in turn, amplify expectations around it, which causes a domino effect A few of the most common dependencies that can cause a bullwhip effect are: Lead-time issues such as manufacturing delays Less-than-optimal decisions made by supply chain stakeholders at any point along the chain, for example, customer service or shipping A lack of communication and alignment between each link or stakeholder organization in the supply chain Over- or under-reacting to demand expectations, such as ordering too many units or not enough Customer companies, often retailers, waiting until orders build up before placing orders with their suppliers, a practice called order batching Discounts, cost changes and other price variations that disrupt regular buying patterns Inaccurate forecasts from over-reliance on historical demand to predict future demand ©2023 B2G Copyright