INVENTORY MANAGEMENT INCLUDING INVENTORY

DECISIONS, INVENTORY CLASSIFICATION, INVENTORY

MODELS, VMI AND INVENTORY ON WHEELS.

Arjun K R

School of Management Studies

CUSAT, Kochi -22
E-mail: [email protected]

Abstract: Inventory management is a challenging problem area in supply

chain management. Companies need to have inventories in warehouses in
order to fulfil customer demand, meanwhile these inventories have holding
costs, and this is frozen fund that can be lost. Therefore, the task of inventory
management is to find the quantity of inventories that will fulfil the demand,
avoiding overstocks.

Keywords: Inventory management, Classifications, Models, VMI

1. INTRODUCTION

Inventory is the supply of raw materials, partially finished goods called work-in-progress and
finished goods, an organization maintains to meet its operational needs. It represents a sizeable
investment and a potential source of waste that needs to be carefully controlled. Inventory is
defined as a stock of goods that is maintained by a business in anticipation of some future
demand. The quantity to which inventory must fall in order to signal that an order must be placed
to replenish an item. Using an extension of a standard inventory-dependent demand model
provide a convenient characterization of products that require early replenishment. The optimal
cycle time is largely governed by the conventional trade-off between ordering and holding costs,
whereas the reorder point relates to a promotions-oriented cost-benefit perspective. The optimal
policy yields significantly higher profits than cost-based inventory policies, underscoring the
importance of profit-driven inventory management. To work towards perfect order metrics, there
has to be aggressive inventory management, restructuring supply chain operations, and
updating standards to the perfect standard. When updating the metrics, this would include the
cases shipped vs. the orders on-time delivery, data synchronization, damages and unusable
products, days in supply, the ordering time cycle, and shelf level of service. Inventory problems
of too great or too small quantities on hand can cause business failures. If an organization
experiences stock-out of a critical inventory item, production halts could result. Inventory
management indicates the broad frame work of managing inventory. The inventory management
technique is more useful in determine the optimum level of inventory and finding answers to
problem of safety stock and lead time. Inventory management has become highly developed to
meet the rising challenges in most Corporate entities and this is in response to the fact that
inventory is an asset of distinct feature.
2. INVENTORY MANAGEMENT

A. What Is Inventory?

Inventory is a stock or store of goods or services, kept for use or sale in the future. There are
four types of inventory:
i. Raw materials & purchased parts
ii. Partially completed goods called work in progress (WIP)
iii. Finished-goods inventories
iv. Goods-in-transit to warehouses or customers (GIT)

There are three motives for holding inventory, similar to cash. They are:
i. Transaction motive: Economies of scale is achieved when the number of set-ups is
reduced, or the number of transactions is minimized.
ii. Precautionary motive: hedge against uncertainty, including demand uncertainty, supply
uncertainty
iii. Speculative motive: hedge against price increases in materials or labour.

Inventory management refers to the process of ordering, storing, and using a company's
inventory. These include the management of raw materials, components, and finished products,
as well as warehousing and processing such items.

Inventory management is the supervision of non-capitalized assets (inventory) and stock items.
A component of supply chain management, inventory management supervises the flow of goods
from manufacturers to warehouses and from these facilities to point of sale. A key function of
inventory management is to keep a detailed record of each new or returned product as it enters
or leaves a warehouse or point of sale.

The inventory management process:

Inventory management is a complex process, particularly for larger organizations, but the basics
are essentially the same regardless of the organization's size or type. In inventory management,
goods are delivered into the receiving area of a warehouse in the form of raw materials or
components and are put into stock areas or shelves.

Compared to larger organizations with more physical space, in smaller companies, the goods
may go directly to the stock area instead of a receiving location, and if the business is a wholesale
distributor, the goods may be finished products rather than raw materials or components. The
goods are then pulled from the stock areas and moved to production facilities where they are
made into finished goods. The finished goods may be returned to stock areas where they are
held prior to shipment, or they may be shipped directly to customers.

Inventory management uses a variety of data to keep track of the goods as they move through
the process, including lot numbers, serial numbers, cost of goods, quantity of goods and the
dates when they move through the process.
B. Inventory Management Decisions

To be successful, most businesses other than service businesses are required to carry inventory.
In these businesses, good management of inventory is essential. The management of inventory
requires a number of decisions.

Poor decision-making regarding inventory can cause:

i. Loss of sales because of stock outs.
ii. Depending on circumstances, inadequate production for a period of time.
iii. Increases in operating expenses due to unnecessary carrying costs or loss from
discarding obsolete inventory.
iv. An increase in the per unit cost of finished goods.

C. Factors Involved in Decision Making of Inventory

Management involves keeping in focus a number of elements when in the process of decision
making. It is a difficult task to decide the best quantity for inventory which does not adversely
affect the cash flow or show larger amount of total assets and keeps the liquid assets low. The
quantity should perfectly be in line with the demand of the product and the supply’s capability of
the company to make the best use of its capacity. Inventory management looks at a certain factor
when considering the quantity. These factors include; order size, number of orders, safety stock,
lead time, and planned production, suppliers of raw material, freight, production budget,
purchasing cost and carrying cost. These are briefly discussed as follows:

i. Order Size

This defines the units of products per order (Caro & Gallien, 2010, pp. 260-263). Whether
one order itself means a large quantity or whether only receiving a lot of orders means a
large quantity is required to be produced. Another thing to be considered is that how
frequently these orders come in.

ii. Number of Orders

This tells about how many orders have been received at a given point in time.

iii. Safety Stock

This is backup stock which ensures that the company would never run out of stock and will
always have some reserve in times of need.

iv. Lead Time

This is the margin between initiation of the order that placing the order and the arrival of the
stock at the company i.e. receiving it. This has to be considered to keep enough stock for
the lapse during the order processing.

v. Planned Production

Efficient planning and execution of production plans for the benefit of the company.

vi. Suppliers of Raw Material

 A company relies heavily on the suppliers of its raw materials. If they make the delivery late,
the entire company can be affected, and the estimated sales can fall drastically because of
late delivery of inventory or failure. It is utmost important for a company to have some very
reliable suppliers and well-planned system to avoid any lapses during the order processing
period.

vii. Freight

The cost of inventory per unit might not be too high but its freight charges can make the
overall package a little too pricey. The inventory management shouldn’t just focus on the
price of the inventory, but also its transportation as that can also cause for a large portion of
the inventory expense. This is one of the reasons why companies usually set up their
production units near the raw material productions and suppliers to cut down the overall cost
of inventory and hence the total cost.

viii. Production Budget

Good production budget can be made when the sales forecast is spot on. If the sales
forecast isn’t too dependable or valid, it won’t be possible for the management to decide on
the production process and hence the decision of production budget would also not be very
accurate and might have a lot of loopholes (Caro & Gallien, 2010, pp. 260-263). One has to
know the demand to forecast the sales and then decide upon the stock levels, safety stock
requirements, and most importantly the overall production budget. This element also plays
a vital role as it determines what plant capacity is needed. The production budget at a certain
point in time if exceeds the plant capacity during that time, then the capacity of the plant has
to be increased.

Fig. 1 Sample Production Budget

ix. Purchasing Cost

This aspect is somewhat covered in the production budget. The inventory management must
try their best to get inventory at the best rates possible to keep the cost as low as possible.
This in turn would make the profit margin bigger (Zhou & Yu, 2011, pp. 515-517). The
company can also lower down the prices of their products because of their low costs which
in turn will attract more customers. Purchasing cost is basically the cost of placing order
which consists of; purchase requisition preparing cost, purchase order preparing cost, cost
 of order delivery which includes postage, telephone calls, filing, etc., cost of inspection,
receiving and storing i.e. cost of receiving purchased materials and voucher costs and
accounting costs.

Fig. 2 Sample Total Purchasing Cost

x. Carrying Cost

When a company purchases raw materials or manufactures goods, it needs to store these
goods for the time till they are used or sold i.e. storage space is required. When the lot of
the goods is big, there is a need for a bigger storage space as well. Another point to be
considered is how long a particular batch of goods stay in the storage spaces (Zhou & Yu,
2011, pp. 515-517). If the pace of production is faster than that of sales, the storage required
has to be quite big to accommodate the incoming products. If inventory purchased isn’t too
big at a time, the space required should be reasonable.

Carrying costs that can be incurred either are; interest, where the bigger the size of the
order, more the money will be needed for investment, storage costs, where manufactured
goods and raw material both require some storage space which can be in the form of a
building; a big warehouse etc. and have depreciation costs, taxes, where property tax is
applied on the inventory, insurance, where in case of any unforeseen incident like fire etc.
insurance covers up for losses. But these things don’t always take place and hence mostly
these add to the costs of the company, spoilage and salary of the warehouse/storekeeper
and of the help if any.
 Fig. 3 Sample Total Carrying Cost

D. Inventory Management Techniques

i. Economic order quantity:

Economic order quantity, or EOQ, is a formula for the ideal order quantity a company needs
to purchase for its inventory with a set of variables like total costs of production, demand
rate, and other factors.

The overall goal of EOQ is to minimize related costs. The formula is used to identify the
greatest number of product units to order to minimize buying. The formula also takes the
number of units in the delivery of and storing of inventory unit costs. This helps free up tied
cash in inventory for most companies.

ii. Minimum order quantity:

On the supplier side, minimum order quantity (MOQ) is the smallest amount of set stock a
supplier is willing to sell. If retailers are unable to purchase the MOQ of a product, the
supplier won’t sell it to you.

For example, inventory items that cost more to produce typically have a smaller MOQ as
opposed to cheaper items that are easier and more cost effective to make.

iii. ABC analysis:

This inventory categorization technique splits subjects into three categories to identify items
that have a heavy impact on overall inventory cost.

Category A serves as your most valuable products that contribute the most to overall profit.
Category B is the products that fall somewhere in between the most and least valuable.
Category C is for the small transactions that are vital for overall profit but don’t matter much
individually to the company altogether.

iv. Just-in-time inventory management:

Just-in-time (JIT) inventory management is a technique that arranges raw material orders
from suppliers in direct connection with production schedules.
 JIT is a great way to reduce inventory costs. Companies receive inventory on an as-needed
basis instead of ordering too much and risking dead stock. Dead stock is inventory that was
never sold or used by customers before being removed from sale status.

v. Safety stock inventory:

Safety stock inventory management is extra inventory being ordered beyond expected
demand. This technique is used to prevent stockouts typically caused by incorrect
forecasting or unforeseen changes in customer demand.

vi. FIFO and LIFO.

LIFO and FIFO are methods to determine the cost of inventory. FIFO, or First in, First out,
assumes the older inventory is sold first. FIFO is a great way to keep inventory fresh.

LIFO, or Last-in, First-out, assumes the newer inventory is typically sold first. LIFO helps
prevent inventory from going bad.

vii. Reorder point formula.

The reorder point formula is an inventory management technique that’s based on a
business’s own purchase and sales cycles that varies on a per-product basis. A reorder
point is usually higher than a safety stock number to factor in lead time.

viii. Batch tracking.

Batch tracking is a quality control inventory management technique wherein users can group
and monitor a set of stock with similar traits. This method helps to track the expiration of
inventory or trace defective items back to their original batch.

ix. Consignment inventory.

If you’re thinking about your local consignment store here, you’re exactly right. Consignment
inventory is a business deal when a consigner (vendor or wholesaler) agrees to give a
consignee (retailer like your favourite consignment store) their goods without the consignee
paying for the inventory upfront. The consigner offering the inventory still owns the goods
and the consignee pays for them only when they sell.

x. Perpetual inventory management.

Perpetual inventory management is simply counting inventory as soon as it arrives. It’s the
most basic inventory management technique and can be recorded manually on pen and
paper or a spreadsheet.

xi. Drop shipping.

Drop shipping is an inventory management fulfilment method in which a store doesn’t
actually keep the products it sells in stock. When a store makes a sale, instead of picking it
from their own inventory, they purchase the item from a third party, and have it shipped to
the consumer. The seller never sees our touches the product itself.

xii. Lean Manufacturing.

Lean is a broad set of management practices that can be applied to any business practice.
Its goal is to improve efficiency by eliminating waste and any non-value-adding activities
from daily business.
 xiii. Six Sigma.
Six Sigma is a brand of teaching that gives companies tools to improve the performance of
their business (increase profits) and decrease the growth of excess inventory.

xiv. Lean Six Sigma.

Lean Six Sigma enhances the tools of Six Sigma, but instead focuses more on increasing
word standardization and the flow of business.

xv. Demand forecasting.

Demand forecasting should become a familiar inventory management technique to retailers.
Demand forecasting is based on historical sales data to formulate an estimate of the
expected forecast of customer demand. Essentially, it’s an estimate of the goods and
services a company expects customers to purchase in the future.

xvi. Cross-docking.
Cross-docking is an inventory management technique whereby an incoming truck unloads
material directly into outbound trucks to create a JIT shipping process. There is little or no
storage in between deliveries.

xvii. Bulk shipments.

Bulk shipments are a cost-efficient method of shipping when you palletize inventory to ship
more at once.

E. Inventory Classification

In 1951, General Electric was the first company to classify its warehouse inventory with a process
known as the ABC methodology, after an employee named H. Ford Dickey suggested sorting
items based on sales volume, lead-time, cash flow or stockout costs. In this system, Group A
contained items that had the highest impact on the company's bottom line, while the Group C
group contained items with the lowest impact.

This system heavily relied on The Pareto Principal--also known as the 80/20 rule, which states
that for many events, roughly 80% of the effects come from 20% of the cause. In other words, a
few chief products drove the majority of profits. This means that most warehouse items have far
less impact. Supply chain or logistics departments accordingly make decisions, based on this
data. Some large companies use more than three groups to silo their warehouse inventory--
particularly if they have complex cycle counting requirements.

The ABC approach provides a way of categorizing items that will have a big impact on overall
inventory cost. It also provides a way for Supply Managers for identifying items that require
different controls and oversight. These categories are:

 Class A: These are high revenue products that account for 80% of annual sales and
20% of inventory
 Class B: These are products account for 15% of annual sales
 Class C: These are products account for 5% of annual sales. These are low volume
sales items
Another recommended breakdown of ABC classes:

 Class A: approximately 10% of items or 66.6% of value

 Class B: approximately 20% of items or 23.3% of value
 Class C: approximately 70% of items or 10.1% of value

Classifying inventory will allow the Supply Manager to set up a review schedule to check
inventory levels to establish inventory control. With Class A items they should have a high-
frequency review schedule and strict controls. With Class B items they should have a periodic
review schedule to establish moderate control utilizing EOQ and Reorder Point Analysis. Class
C items should have moderate controls too because keeping high stock levels of these products
is costly, takes up space and reduces the turnover ratio.

F. Inventory Models

The major Inventory models are the fixed-order quantity, fixed-order-interval model, the single-
period model, and part-period balancing.

 FIXED-ORDER-QUANTITY MODEL.
EOQ is an example of the fixed-order-quantity model since the same quantity is ordered every
time an order is placed. A firm might also use a fixed-order quantity when it is captive to
packaging situations. If you were to walk into an office supply store and ask to buy 22 paper
clips, chances are you would walk out with 100 paper clips. You were captive to the packaging
requirements of paper clips, i.e., they come 100 to a box and you cannot purchase a partial box.
It works the same way for other purchasing situations. A supplier may package their goods in
certain quantities so that their customers must buy that quantity or a multiple of that quantity.

 FIXED-ORDER-INTERVAL MODEL.
The fixed-order-interval model is used when orders have to be placed at fixed time intervals such
as weekly, biweekly, or monthly. The lot size is dependent upon how much inventory is needed
from the time of order until the next order must be placed (order cycle). This system requires
periodic checks of inventory levels and is used by many retail firms such as drug stores and
small grocery stores.

 SINGLE-PERIOD MODEL.
The single-period model is used in ordering perishables, such as food and flowers, and items
with a limited life, such as newspapers. Unsold or unused goods are not typically carried over
from one period to another and there may even be some disposal costs involved. This model
tries to balance the cost of lost customer goodwill and opportunity cost that is incurred from not
having enough inventory, with the cost of having excess inventory left at the end of a period.

 PART-PERIOD BALANCING.
Part-period balancing attempts to select the number of periods covered by the inventory order
that will make total carrying costs as close as possible to the set-up/order cost.

When a proper lot size has been determined, utilizing one of the above techniques, the reorder
point, or point at which an order should be placed, can be determined by the rate of demand and
the lead time. If safety stock is necessary, it would be added to the reorder point quantity.

Reorder point = Expected demand during lead time + Safety stock

Thus, an inventory item with a demand of 100 per month, a two-month lead time and a desired
safety stock of two weeks would have reorder point of 250. In other words, an order would be
placed whenever the inventory level for that good reached 250 units.

Reorder point = 100/month × 2 months + 2 weeks' safety stock = 250.

G. Vendor Managed Inventory (VMI)

The goal of Vendor Managed Inventory is to provide a mutually beneficial relationship where
both sides will be able to more smoothly and accurately control the availability and flow of goods.

In VMI a manufacturer or distributor assumes the role of inventory planning for the customer.
Extensive information sharing is required so that the manufacturer/distributor can maintain a high
degree of visibility of its goods at the customer’s location. Instead of the customer reordering
when its supply has been exhausted, the supplier is responsible for replenishing and stocking
the customer at appropriate levels. Wal-Mart has mastered VMI and is the company against
which many other organizations benchmark themselves.

Customer Benefits
When the supplier can see that its customer is about to exhaust its inventory, the supplier can
better prepare to replenish the customer because the supplier can then better schedule its own
production/distribution. Customers will reduce/eliminate stockouts because they will not have to
reorder goods at the last minute without knowing whether the supplier has the ability to restock
without interrupting the customer’s operations. Therefore, part of VMI’s goal is to reduce
uncertainty that arises when the supplier is blind to the customer’s inventory status.

Supplier Benefits
As long as the supplier carries out its task of maintaining predetermined inventory and avoiding
stockouts, it will be able to lock in a VMI-supported customer for the long term with or without a
contract. This will produce a steady and predictable flow of income for the supplier and reduce
the risk that the customer will switch suppliers (Switching would be too costly for the customer).
A VMI arrangement will allow the supplier to schedule its operations more productively because
it is now monitoring its customer’s inventory on a regular basis. Furthermore, reductions in
inventory will be achieved once the supplier develops a better understanding of how the
customer uses its goods over the course of a year.

How to make VMI work

 Clarify expectations.
There needs to be thorough discussion about how the system will benefit both organizations in
the long term or one of the parties, particularly the supplier, is prone to disappointment with some
of the short-term results. If these items are not addressed the program will likely be terminated
quickly with neither side gaining any of the benefits expected from the program. The objective is
clear and constant communication between the supplier and customer. When the two parties
work in conjunction, they can be assured that the planning function, for both sides, will begin to
smooth over time.

 Agree on how to share information.

If the supplier and customer can agree to share information vital to restocking in a timely manner,
then the odds of a synchronized system will dramatically improve. Proprietary information would
not have to be shared between the supplier and customer, but enough information to maintain a
steady flow of goods is necessary. The customer should be willing to share production schedules
and/or forecasts to provide some visibility for the supplier.

 Keep communication channels open.

When the two parties set out to implement a VMI program, they need to meet and discuss their
goals and how they need to proceed in order to realize those goals. Once a VMI program has
been activated, each side needs to understand that there are going to be some miscues. These
miscues need to be studied as opportunities for learning and then used to avoid repetitive
problems in the future.

Common Mistakes
Unexpected demand changes by the customer need to be shared with the supplier. Changes in
demand could result from the customer acquiring a new, large customer opening of a great deal
of stores in a short period; or offering special promotions that create spikes in demand. The
supplier may be unable to schedule production or shipment in a timely manner, causing a drop-
in inventory available for the customer to sell in the event of a foreseen increase in demand. A
spike in demand could also create a burden on the supplier, who will have to reprioritize its
production plan or inventory from one customer to another. Likewise, if the supplier is
experiencing a significant spike in demand from a major customer, it may be wise to let the VMI
customer, and other customers as well, know that the supplier will have very little flexibility over
a certain period of time, so that everyone can adjust accordingly.

The most common cause of VMI failure revolves around communication breakdowns. All of these
problems in implementing a VMI program can be significantly diminished if they are adequately
addressed at the beginning of discussions. Hence, there should be several in-depth meetings
upfront to avoid problems down the road.

H. Inventory On Wheels

Goods in transit refers to merchandise and other types of inventory that have left the shipping
dock of the seller, but not yet reached the receiving dock of the buyer. The concept is used to
indicate whether the buyer or seller of goods has taken possession, and who is paying for
transport. Ideally, either the seller or the buyer should record goods in transit in its accounting
records. The rule for doing so is based on the shipping terms associated with the goods, which
are:

 FOB shipping point. If the shipment is designated as freight on board (FOB) shipping
point, ownership transfers to the buyer as soon as the shipment departs the seller.

 FOB destination. If the shipment is designated as freight on board (FOB) destination,

ownership transfers to the buyer as soon as the shipment arrives at the buyer.

3. WRITE UP ON SCM
The concept of Supply Chain refers to a complex environment that extends beyond the walls of
the factory. While it guarantees the production efficiency and quality, its actors are responsible
for coordinating the three types of flows that make up the production chain.
Physical flows

Physical flows, commonly known as logistics, correspond to the movement of raw materials,
goods and finished products, as well as their storage. If the traditional supply chain model was
based on the management of these flows, it is because they represent one of the main items of
expenditure.

It’s a well-oiled machine. In order to ensure business continuity, operators must meet the
fluctuating needs of the production chain and ensure the supply of consumables, while avoiding
excess stocks.

Information flows

In an increasingly digitized environment, information management is becoming one of the most

critical parts of the supply chain. Faced with the multiplicity of available data, today’s real
challenge for companies is to analyse them in order to anticipate the organization's needs.

While the information collected is mainly related to logistics activities (inventory levels, equipment
condition, etc.), they are generated throughout the entire product life cycle:

Supplier relationships - Before entering into a partnership with new suppliers, it is essential to
conduct an audit of their performance, but also that of their suppliers. Prices, delivery terms and
conditions, quality and customer satisfaction are all factors that will influence the efficiency of
your supply chain.

Customer support - Delivery (whether internalized or not) and customer care have a significant
influence on the continuous improvement of the supply chain. As customer satisfaction is at the
heart of the supply chain, a growing number of its players consider the analysis of feedback as
a competitive advantage. From this perspective, customer reviews are a fundamental flow of
information in the company's overall performance. Customer support is therefore the voice of
customers within an organization in terms of delivery, packaging, return or refund conditions,
price.

It is therefore up to each function to accurately collect and analyse this information in order to
improve supplier performance, production quality, performance and, ultimately, the customer
experience. In this respect, precision is the cornerstone of the supply chain.

Why should you invest in supply chain management?

From Procurement to R&D to industrial maintenance, all links of the supply chain are connected
to each other and play a defined role within the value chain. At the same time, each of these
functions is facing an increasing number of obstacles: demand volatility, inventory management,
CSR issues, etc. SCM offers business leaders the means to protect their organizations against
the specific hazards of their environment.

The importance of Supply Chain Management

SCM (Supply Chain Management) is about defining a set of best practices that enable
organizations to identify the actors in their supply chain, improve their relationships and better
manage flows. At the company level, this reduces costs, potential losses and production times.
Ultimately, SCM's objective is to offer the end customer the best possible experience.
To this end, SCM is based on four fundamental principles.

The pillars of SCM are:

i. Organizing: The development of an SCM strategy requires a thorough knowledge of

the organization's structure and activities. It is therefore essential to define a common
reference framework in which operators can find their place.
ii. Sourcing: In an increasingly competitive environment, industrial suppliers are becoming
real partners. By streamlining the management of supplier relationships, contracts,
deliveries and payments, companies show greater reactivity and reliability.
iii. Making: To ensure the proper conduct of operations and company performance, supply
chain managers measure and analyse in real time the quantity and quality of production,
in order to ensure that it meets market expectations.

iv. Delivering: Coordinate customer orders, organize deliveries, manage vehicle fleets,
manage customer invoices and receive payments: logistics teams act as a gateway
between the factory and the end consumer.

4. APPLICATION OF INVENTORY MANAGEMENT IN SCM

We’re living in a globalized world. So, it makes sense that more and more businesses are
developing an international supply chain and taking advantage of its many benefits. If you’re
already international, or are thinking of heading in that direction, make sure you keep doing
inventory management right.

Inventory management, or the management of your most important assets, is an essential part
of business operations. At the best of times, it can be a complicated feat. Add in multiple
locations, different countries, even different continents, and things can get even trickier. Small
mistakes can cost big money, or on the flip side, there are small changes that could save you a
lot of money. Keep these seven things in mind when going international with inventory
management.

Global supply chain

1. Fine tune your inventory forecasting methods

Inventory forecasting is all about predicting how much inventory you’re going to need to keep
fulfilling orders on time. Depending on which inventory management technique you use, you may
have to make some international adjustments. While some aspects such as trends and base
demand stay the same, your overall re-order points and EOQ (economic order quantity) may
need to change to adjust for shipping times, customs clearances and extra landed costs.

2. Keep the holidays in mind...all the holidays.

Seasonality is a major factor when you have international suppliers. If your business is based in
Australia, but you have a supplier from Indonesia, Christmas may be your busiest time of year,
but Idul Fitri will be the biggest time for the supplier. Make sure to sync up your holiday schedule
to include when you’ll need to order more inventory than usual, and when your inventory lead
time may be affected. But hey, this international aspect means you get to celebrate holidays from
both countries, which, in the end boils down to one thing: more cake! right? Speaking of lead
times.

3. Re-evaluate lead times

Lead time is the amount of time you need to take into account, from the point that you order your
inventory until you actually receive it. It should include supply delay (as in, the time it takes for
the supplier to send it to you), and reorder delay (or the extra days until you actually create
another order for that inventory). As expected, if you change your supplier from local or regional
to international, your lead time will increase. This change in lead time is an essential part of your
inventory control and overall supply chain management - make sure to readjust.

4. Choose your supply chain partners carefully

Not just for the product, but for the relationship you have with the suppliers, manufacturers or
wholesalers. Especially when they’re intercontinental, relationships with suppliers can be
essential to getting the goods on time and in the condition, you need them. Choose a supplier
that you truly feel comfortable with to get a good response. Also, make sure you trust them.
Trust, an essential part of any long-distance relationship, can save you a lot of time traveling
back and forth between suppliers, manufacturers, and warehouses.

5. Find a local consultant

It’s always good to have feet on the ground wherever you’re warehousing or producing. If not a
fulltime local contact, it should at least be someone who knows a lot about the laws, taxes and
customs of the country. For example, knowing the inventory holding costs in one country can
save big bucks, and can help you decide how to adjust your inventory management techniques
to best take advantage of the costs of holding in each country.

5. CONCLUSION
Every business needs an Inventory Control System to function, to keep track of inventory from a
physical and an accounting perspective. Such a system is historical, with transactions captured
to document something that has already happened.

An Inventory Management System recommends replenishment based on dynamic optimal

levels, ensuring that the next order you place is the right quantity for both your customers and
your business.
In addition, exception lists highlight both current issues and potential future issues and rank them
based on the impact on your business. This enables to proactively manage inventory, reducing
the costs associated with inventory, the cost of inventory, and increasing service level to
customers.

An Inventory Control System is needed to run your business, but an Inventory Management
System is a strategic system that can change your business.

6. REFERENCES

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