Supply Chain Inventory Management PDF

UNIT VI: SUPPLY CHAIN INVENTORY MANAGEMENT Overview The unit covers key concepts, techniques, and strategies that contribute to optimizing inventory levels, improving operational efficiency, and meeting customer demands. Learning Objectives At the end of the unit, I am able to: 1....

UNIT VI: SUPPLY CHAIN INVENTORY MANAGEMENT Overview The unit covers key concepts, techniques, and strategies that contribute to optimizing inventory levels, improving operational efficiency, and meeting customer demands. Learning Objectives At the end of the unit, I am able to: 1. understand the role of inventory in the supply chain; 2. know the inventory management process; 3. identify and apply the inventory management techniques; and 4. understand the inventory management strategies. Setting Up Name: _____________________________________________ Date: __________________ Course/Year/Section: ___________________________ Direction: In layman’s terms, answer the question below: How does effective inventory management contribute to the strategic decision- making process within a supply chain? _________________________________________________________________________________________________________ _________________________________________________________________________________________________________ _________________________________________________________________________________________________________ _________________________________________________________________________________________________________ _________________________________________________________________________________________________________ _________________________________________________________________________________________________________ _________________________________________________________________________________________________________ _________________________________________________________________________________________________________ _________________________________________________________________________________________________________ _________________________________________________________________________________________________________ _________________________________________________________________________________________________________ ________________________________________________________________________________________________. 32 Lesson Proper The Role of Inventory in the Supply Chain Inventory plays a fundamental role in supply chains by facilitating the balance between demand and supply. Managing both forward and reverse flows in the supply chain involves handling upstream supplier exchanges and downstream customer demands. Striking a balance between fulfilling unpredictable customer demands and maintaining an adequate supply of materials and goods is challenging but is often achieved through inventory. Positioned strategically at different points in the supply chain, inventory acts as a crucial component, serving a multifaceted role in ensuring smooth operations and customer satisfaction. Acting as a buffer against uncertainties in demand and supply, inventory enables organizations to promptly meet customer needs and mitigate the impact of fluctuations, lead times, and unexpected disruptions. Effective inventory management has a direct impact on the overall performance of the supply chain. Optimization of inventory levels is crucial for minimizing holding costs, reducing stockouts, and enhancing order fulfillment efficiency. Conversely, poor inventory management can lead to overstocking, tying up capital unnecessarily, or stockouts, resulting in dissatisfied customers and potential revenue loss. Therefore, a well-managed inventory system contributes significantly to increased operational efficiency, cost-effectiveness, and improved customer satisfaction. In summary, inventory's role in balancing demand and supply is pivotal, and its effective management is essential for a resilient and high-performing supply chain. Inventory Management Process The inventory management process can be divided into five stages: 1. Purchasing. It is the process of sourcing and buying the goods, materials, equipment, and services required to produce and sell products. Inventory management informs how much inventory should be ordered, when to order it, and where costs can be saved. 2. Production. It is the process in which your finished product is created from its constituent parts. Not every business will engage in manufacturing; for example, wholesalers might entirely omit this stage. 3. Stock control. It is the step in inventory management that deals with goods and raw materials once they’ve been purchased or made by a business before they are sold. It involves organizing where and how inventory is stored and keeping each product line within its minimum and maximum levels. 4. Order management. It refers to the processing and fulfilment of customer orders. There are several steps in the order management process, including order picking, packing, shipping, returns management, customer service, warehouse management and reporting. 5. Inventory reporting. It is the recording and analysis of key sales and inventory data to make the best decisions at any given time. It involves tracking multiple inventory metrics to accurately understand the costs that go in and out of a business. 33 Inventory Management Techniques The following are the practical and often tactical method employed in the execution of tasks or activities involved in managing inventory: 1. Just-in-time inventory. It involves holding as little stock as possible, negating the costs and risks involved with keeping a large amount of stock on hand. The premise is that goods and materials are ordered and used only when they are needed. While this technique works well in minimizing waste and reducing inventory carrying costs, it can lead to painful understocking problems if not managed carefully. 2. Just-in-case stock control. It is an inventory management technique deployed to protect against unexpected demand surges and supply chain disruptions. It enables businesses to reduce the risk of stockouts – and the lost sales that come with them – as well as negotiate fairer prices with suppliers. The major downside of the inventory technique is that it can result in serious cash flow issues as a business’s capital becomes tied up in unsold inventory. 3. ABC inventory management. This technique splits goods into three categories to identify items that have a heavy impact on overall inventory cost. Category A is your most valuable products that contribute the most to overall profit. Category B is the products that fall in between the most and least valuable. Category C is for small transactions that are vital for overall profit but don’t matter much individually. 4. First in, First, out (FIFO). FIFO is an inventory costing technique used to measure the value of inventory stock. In FIFO, the items purchased or produced first in a specific product line are the first to be sold to customers. 5. Last in, First out (LIFO). LIFO is an inventory costing technique that, unlike FIFO, involves selling the most recently purchased or produced items first and retaining older items until newer ones have been sold. 6. Drop shipping. Businesses that use drop shipping essentially outsource all aspects of managing stock. Products are stored and managed by your supplier until they are sold: when a customer places an order with you, you pass that order on to your supplier and they ship the goods directly to your customer. 7. Cross-docking. It is an inventory management technique that virtually eliminates the need to hold inventory. Products are delivered to a warehouse where they are sorted and prepared for shipment immediately. They are usually then reloaded into other trucks at the same warehouse and sent out for delivery immediately. 8. Cycle counting. The inventory cycle count technique involves counting a small amount of inventory on a specific day without doing an entire stocktake. This method helps your business regularly validate accurate inventory levels in your inventory management software. 9. Economic order quantity (EOQ). It is the optimal order quantity at any given point in time. An optimal EOQ minimizes total holding and ordering costs. As an inventory management technique, EOQ involves using a specific formula to calculate ideal reorder quantities for each Stock Keeping Unit. In doing so, you can ensure the efficiency of your replenishment process. 34 Inventory Management Strategies The following are the broader and more comprehensive plan or course of action designed to achieve the objectives of inventory management: 1. Demand planning. It is when a business attempts to predict what future customer demand will be for each product they sell. This strategy enables businesses to better allocate their spending and resources and understand upcoming storage requirements. Planning begins with data analysis, which feeds into forecasting – predicting demand based on historical data and market trends – and extends to procuring the right suppliers and organizing the warehouse (or investing in a new one). 2. Inventory optimization. It is applying a calculated approach to inventory management to keep costs and excess inventory low while improving customer satisfaction and fulfilment times. It also focuses on ensuring there is enough capital available in a business to facilitate healthy growth. If inventory management is the tracking and organization of inventory within a business, inventory optimization is the strategy used to audit how efficiently those processes are being carried out. 3. Warehouse optimization. Warehouse management plays a critical role in managing inventory effectively. By optimizing the warehouse layout, processes, and staff training, the time and cost of labor efforts required to manage inventory can be minimized. Useful Inventory Management Formulas The following inventory metrics are essential for keeping stock levels optimized: 1. Economic Order Quantity (EOQ) To calculate the optimal order quantity EOQ = √ [2DS/H] where: D = Demand in units (annual) S = Order cost H = Holding costs (per unit, per year) To determine how many times the company would need to place orders per year: No. of orders per year = D / EOQ 35 Illustration 1: Demand from last year was 10,000 units. The average order cost was ₱5,000. The holding cost is ₱3 per unit, per year. EOQ = √ [2 x D x S / H] = √ [ (2 x 10,000 x ₱5,000) / ₱3] = √ [33,333,333.33] = 5,774 units No. of orders per year = D / EOQ = 10,000 / 5,774 = 1.73 or 2 orders Based on this results, the economic order quantity is 5,774 units per order, roughly twice per year. Illustration 2: ABC Electronics, sells a popular electronic gadget. The demand for this gadget is relatively stable, with an annual demand of 2,000 units. The cost to place an order (ordering cost) is ₱50 per order, and the holding cost per unit per year is ₱4. EOQ = √ [2 x D x S / H] = √ [ (2 x 2,000 x ₱50) / ₱4] = √ [50,000] = 223.61 No. of orders per year = D / EOQ = 2,000 / 223.61 = 8.95 or 9 orders The economic order quantity is approximately 223.61 units per order, translating to an estimated nine (9) orders per year. 2. Safety Stock 2.1 Average – Max Method Safety Stock = (Max Lead Time X Max Sale) – (Average Lead Time X Average Daily Sale) Max Sales = month with the highest number of sales / 30 Ave Sales = total sales / 365 Ave Lead Time = total lead time / 12 Max Lead Time = highest number of lead time from the table 36  Once you have the value of the buffer stock, you can use it to calculate the exact time at which you will need to place an order to restock your supplies. So, you reorder when the stock gets reduced to the reorder point. It is referred to as the reorder point. Reorder Point = Safety Stock + Average Daily Sale X Average Lead Time Illustration 1: Lead Time Month Sales Delivery (Day) January 1,200 1 15 February 1,100 2 14 March 900 3 9 April 1,000 4 8 May 800 5 10 June 1,200 6 13 July 900 7 15 August 800 8 9 September 1,300 9 8 October 900 10 9 November 800 11 10 December 1,400 12 12 Total 12,300 To compute the Max Sales: Max Sales = month with the highest number of sales / 30 Max Sales = 1,400 / 30 = 46.67 To compute the Average Sales: Ave Sales = total sales / 365 Ave Sales = 12,300 / 365 = 33.70 To compute the Average Lead Time: Ave Lead Time = total lead time / 12 Ave Lead Time = 132 / 12 = 11 To determine the Max Lead Time: 15 37 To compute the safety stock: Safety Stock = (Max Lead Time X Max Sale) – (Average Lead Time X Average Daily Sale) Safety Stock = (15 X 46.67) – (11 X 33.70) = 700.05 – 370.70 = 329.35 To compute the reorder point: Reorder Point = Safety Stock + Average Daily Sale X Average Lead Time Reorder Point = 329.35 + (33.70 X 11) = 700 38 Assessing Learning Activity 5-1 Name: _____________________________________________ Date: __________________ Course/Year/Section: ___________________________ Score: _________________ Direction: Do this to evaluate your understanding of the lessons. 1. ABC Co. sells chairs with an annual demand of 10,000 units. The ordering cost per order is ₱100, and the holding cost per unit per year is ₱2. Compute the Economic Order Quantity (EOQ). 2. Compute the Safety Stock and Reorder Point for the following case: Lead Time Month Sales Delivery (Day) January 700 1 12 February 300 2 10 March 450 3 11 April 600 4 8 May 500 5 11 June 1,200 6 13 July 450 7 9 August 300 8 12 September 500 9 8 October 900 10 8 November 700 11 12 December 1,000 12 10 Total 7,600 39