NEGOCIOS INTERNACIONALES

INTERNATIONAL LOGISTICS I

Mariela Ortega M.

LOGISTICA INTERNACIONAL 1
INTERNATIONAL LOGISTIC I
SEXTO CICLO
Unit 3:
Sustainable Inventory Management,
Storage, Sourcing and Procurement

CONTENT:

Fourth / Fifth Week: Inventory Management

Sixth Week: Warehouse and Distribution centers

Seventh Week: Operations, Technologies and

sustainability

Eighth Week: Procurement management

Unit 3:
Sustainable Fourth Week: Inventory management
Inventory • Introduction to inventory management.
• Meaning and characteristics of the inventory.
Management,
• Types and classification of inventories.
Storage, • Inventory turnover and coverage.
Sourcing and • Costs associated with the inventory management system. I
Procurement • Inventory replenishment systems: Economic Order Quantity
(EOQ).
TOPICS

• Inventory Definition and

characteristics,
• Inventory functionality,
• Inventory terms, components.
• Valuation of inventory.
 Inventory
Definition and
Characteristics
At present, it is necessary to integrate the management of
purchases and inventories in a global logistic vision that allows
increasing the chances of achieving high levels of efficiency and
profitability in the management of the company.
What Is Inventory
CONCEPT

• It is the set of goods owned by a company that have been

acquired with the intention of selling them again, in the same state
in which they were bought, or to be transformed, into other types of
goods and sold as such.

MAIN TYPES OF INVENTORY:

• Merchandise or Stock for Sale

• Raw material
• Of Products in Process
• Of Finished Products
• Of Materials and Factory Supplies.
 Importance Of Inventory Management

 In most companies, especially industrial and commercial, the management of

purchases and inventories is one of the aspects that, due to the financial
resources involved, requires careful and effective accounting and financial
processes.

 The achievement of sales goals depends largely on purchasing and inventory

management that ensures procurement.

 Compliance with production plans or operations, depends largely on the

management of purchases and inventories.

 An effective management of purchases and inventories allows to increase the

profitability and the levels of competitiveness of the companies.
 Importance Of Inventory Management
THE COMPANY AS AN INPUT-OUTPUT SYSTEM
Set of operations or activities connected to each other that are forming the links of a large operational
chain, whose end is the delivery of products or services to the market.

This process and the set of operations or activities that integrate it, form what is known as input-output
relationship. (inputs-outputs)

INSUMOS OPERATIONS PRODUCTO

(inputs) ACTIVITIES (outputs)
TASKS

• Materias primas – Raw Material • Transformación - Transformation • Productos - Products

• Energía - Energy • Registro - Register • Servicios - Services
• Recursos Humanos – Human • Análisis - Analysis • Registros - Registers
Resources • Gestión - Management • Estrategias - Strategies
• Sistemas - Systems • Administrativas - Administrative • Decisiones - Decisions
• Procedimientos - Procedures • Etc. • Planes - Plans
• Materiales varios - Materials • Programas - Programs
• Consumibles - Consumables • Etc.
• Etc.
The Function Of Purchases And Inventories

1. Ensure the flow of inputs to the areas in which the activities are carried out.

2. Ensure the flow of products to the market.

RAW ACTIVITIES OF
MATERIAL TRANSFORMATION PRODUCTS MARKET
INSUMOS OR OPERATIONS

PURCHASES AND PURCHASES AND

INVENTORIES INVENTORIES INVENTORIES

THE COMPANY AS AN INPUT-PRODUCTS SYSTEM AND THE

FUNCTION OF PURCHASES AND INVENTORIES
INVENTORY Previsión de necesidades – Needs forecast
FORMATION Selección de proveedores – Suppliers/Vendors Selection

Compra - Purchasing

Recepción de Insumos – Input/Raw Material Reception Functions

STORAGE AND
HANDLING
Planificación de materiales – Materials planning
Distribución en los centros de producción- Distribution in production centers
That
Depósitos de materiales, materias primas, productos intermedios – Whs for materials, raw materias, intermediate products
Depósitos de material de empaquetado – Packaging material depots
Depósito de productos terminados – Warehouse of finished products
Integrate
Empaquetados de protección – Protective packaging
Consolidación - Consolidation The
Interno - Internal
TRANSPORTATION
AND PHYSICAL
Externo - External
Programación - Programming
Logistics
DISTRIBUTION Sistemas utilizados – Systems used
Depósitos externos de la empresa – External company deposits System
Depósitos externos ajenos a la empresas – External deposits outside the company
Entrega a los clientes – Delivery to customers

PROCESSING Pedidos - Orders

Ordenes de Compra – Purchase Orders

Previsiones provenientes del mercado – Forecasts from the market

Planificación del sistema – System planning

Productos obsoletos – Obsolete products

RECOLECTION
Productos dañados – Damaged products

Productos caducados – Expired products

Reciclaje y reprocesado – Recycling and reprocessing

Destrucción - Destruction
Objective Of • Respond to the need to maintain, at all stages of the logistics
system, an optimal level of materials and products that can
Inventory maximize the profitability of the financial resources that have
Management been invested in its training.
Types Of Inventory
• Inventories of merchandise in stock: Value of the goods acquired under any
title for sale, and which will not be subject to any transformation process.

• Inventories of raw materials and supplies: They represent the value of the
materials and supplies acquired for their transformation, exploitation, construction,
or production.

• Inventories of products in process: They represent the value of semi-finished

products, which require processes of transformation, exploitation, construction or
addition, so that they become finished goods or merchandise and available for
sale.

• Inventories of merchandise in stock: Value of the goods acquired under any

title for sale, and which will not be subject to any transformation process.
Types Of Inventory
• Obsolete and expired inventories : Account that represents the value of
inventories that due to exploitation of natural and time factors, technological
advances and others have become obsolete and expired.
• For consumption or use because they are in a process of processing, transport,
legalization or delivery by suppliers or responsible persons

• Initial inventory: Are the stocks that a company has at the time of starting its
fiscal year. This is located in the Cost of Sale in the Statement of Profit and Loss.

• Final inventory: It is the physical inventory that is taken at the end of the
Financial Year (at cost), will become part of the Assets in the Balance Sheet and
will also decrease to the Cost of Sale in the Statement of Profit and Loss.
Types Of Inventory
• Semi-finished products: Manufactured articles that are incorporated into a
larger article to constitute the final product; They are also called components.

• Packaging: Items used to package finished products before sale; It also includes
items that are intended for protective packaging, both for sale and to better
preserve the materials during the period in which they remain in inventory.

• Consumables: They are goods that are not incorporated into the finished
product, but which, in one way or another, are necessary for its elaboration.

• Finished products: Complete articles, working and ready for sale.

 • It refers to the products that the company buys and
sells, since for a commercial company this is the
main activity. The control of these is done through
accounts that relate to it, such as:.
• Inventory
• Sales.
• Shopping
Goods • Return in purchases.
• Purchase expenses.
• Goods in transit.
• Goods in consignment.
• Discount for prompt payment in
purchase or sales.
• Selling expenses .
• Return in sales.
 Real cost:
• It is called real cost, the price of the item according
to the invoice, plus all the expenses incurred in it,
until it is available for sale

Valuation Of Replacement Cost:

• The true replacement cost is the current net cost,
The Inventory: according to the invoice of the merchandise, plus the
transport costs, handling costs and all other
expenses that are applicable to the merchandise
based on what these additional elements would
presently consist of.

Cost or Market:
• It is a combination of the cost price and the market
price that is chosen which is the lower of the two and
has the important advantage of being a conservative
base.

Sale price:
• It is the price of the items or merchandise, for
which they are sold.
Methods To Value Or
Value The Inventory

• First In, First out (F.I.F.O.)

• Weighted Average

• Simple or Arithmetic Average

• Moving Average

• Specific Identification
Methods To Value Or Value The Inventory

FIFO (First In First Out)

• The first items to enter the warehouse are the

first to be used.

• The first cost of income is used until it is used

up, it works sequentially with the costs.

Weighted average

• It is calculated after each departure/delivery

• The total cost is divided among the available

units
 Moving Average
• A moving average is a technique often used in
technical analysis that smooths price histories
Methods to by averaging daily prices over some period of time.
Simple moving averages (SMA) takes the arithmetic
mean of a given set of prices over the past number of
Value or Value days, for example over the previous 15, 30, 100, or
200 days

The Inventory Specific Identification

• The specific identification inventory valuation method
keeps individual track of every single item in the
inventory from the time it enters inventory until the time
it leaves. It is tagged for the specific cost associated
with purchasing it and any additional costs incurred
until it is sold.
• is often used for larger items such as furniture or
vehicles. It is used for items that have widely differing
features and costs associated with those features
 Methods To Value Or
Value The Inventory
Quantity Unit Cost Total Value

Weighted Average Initial 10 un. $10 $100

• Average Value per item: Total Value / Total Inventory
Amount = $ 550/40 = $ 13.75
Buys 30 un. $15 $450
• Final inventory value: Final inventory x Total Qty 40 un. $550
Average value = 5 x $ 13.75 = $ 68.75
Sales 35 un.
FIFO (First in First out)
• Final Inventory : 5 units Final 5 un.
Inventory
• Cost of the last 5 units: $ 15
• Final inventory value: Units x Acquisition cost
= 5 x $ 15 = $ 75
 Santiago "El Jevi" specializes in the commercialization of
electric guitars. The following table shows the warehouse
movements regarding the inputs and outputs of this instrument:
Date of transaction
• 06/01 It has 300 guitars in the warehouse valued at S / .500 /
unit
• 04/06 Buy 50 guitars for S / .480 / unit.

Exercise • 06/06 Due to a flood problem, 10 guitars are lost from the
stock.
• 06/08 Sell 100 guitars at S / .600 / unit.
• 06/09 From the sale of the previous day, two guitars are
returned because “with the CCC course they already gave him
the guitar”.
• 06/15 Buy 25 guitars at S / .600.
• 06/21 Sell 150 guitars.
• 06/22 Sell 100 guitars.
• 07/01 Buy 120 guitars for S / .460.
 INVENTORY SYSTEM - BASIC CONDITIONS

PLAZOS DE ENTREGA
The inventory system must meet
-Qué tiempo medio three basic conditions:
transcurre entre el
pedido y la entrega
1. Guarantee customers the
desired service quality

CICLO TEMPORAL NIVEL DE EXISTENCIAS 2. Keep capital immobilized in

DEL PRODUCTO EN INVENTARIO
inventories at the lowest
- Cuánto tardamos en - Materias Primas possible levels
Elaborar los productos - Materiales
- Semielaborados
- Productos Terminados
3. Manage the function with the
lowest possible costs for the
company.
PREVISIÓN DE VENTAS

- Cuánto vamos a
vender cada mes
COSTS RELATED DIRECTLY TO THE INVENTORIES

TOTAL
COSTS

Costes
Financial Conservation
Financieros
Costs Costs

Management Risk
Costs Costs
 INVENTORY MANAGEMENT COSTS

1. Financial costs (possession costs). It is calculated in terms of Cost of money in the market.
A) assuming that the money for the Inventory has been financed.
B) calculating the profitability that could be generating the company if it had been invested in others.

2. Conservation costs. They represent the costs related to the maintenance, physical preservation of
inventories. Staff, rent building amortization, maintenance, repairs, etc.

3. Management costs: composed of the costs related to the personnel of the managerial or supervisory
levels of the area of ​inventories, accounting and computer controls, processing of income and expenses of
materials and products, internal transport, consumables, surveillance, telephone, audit, etc.

4. Risk costs: expenses incurred by the company to avoid or compensate the causes that could diminish, in
one way or another, the value of inventories; for example, insurance, obsolescence, damages, relocation,
etc.
The longer the materials and
products remain in inventory, the
higher their possession and
management costs

The higher the turnover of

existing materials and products
in the inventory, the lower their
possession and management
costs.
Inventory
Functionality
ROLE OF INVENTORIES IN THE
COMPREHENSIVE SCHEMEA
INTEGRAL

The logistics function of the company is

interrelated with at least Three key
areas of the company

• Finance
• Marketing and sales
• Production
THE INVENTORIES AND PHYSICAL FLOWS THAT LINK THEM WITH THE INTERNAL
LOGISTICS SYSTEM

INVENTORIES INVENTORIES INVENTORIES

Cash Materials Orders

Flow Flow Flow
SALES
DISBURSEMENTS PRODUCTOS Ventas
Desembolsos Productos
RAW
COLLECTIONS MATERIALS ORDERS
Cobros Materias Ordenes
Primas
Accounting Production Marketing
and Areas And Sales
Finance System

INTERNAL LOGISTICS SYSTEM

 This flow of different currents: Cash Flow,
Material Flow and Order Flow, allows
inventories to be classified as nerve points of
THE INVENTORIES AND any process.

PHYSICAL FLOWS THAT

LINK THEM WITH THE Its poor management can cause:
INTERNAL LOGISTICS • Inability to sell
• Production interruptions
SYSTEM • Cashflow problems
• "Bottlenecks" in the process
• Unnecessary costs
• Etc.

There must be a constant and fluid information system that allows adequate planning
and control of the entire flow of materials, products, cash and information generated in
the system.
 • Generate economies of
scale

• Balancing supply and

demand

• Protection against
fluctuations in the supply of
raw materials

• Protection against
mismatches between the
areas involved in the
process
STRATEGIC OBJECTIVES OF
INVENTORIES • Improve customer service
 STRATEGIC
OBJECTIVES OF
INVENTORIES

1. Generate economies of scale:

• Purchases in adequate quantities allow the company to generate
significant savings, both in purchase prices, in transportation (through
better use of vehicle capacity), and in production (increased
production capacity and unit cost is reduced when manufacturing
batches of optimal size.

2. Balancing supply and demand:

• Inventories act as a “cushion” between the market and production,
to allow time for the latter stop to adjust to the level of demand.
STRATEGIC OBJECTIVES OF
INVENTORIES
3. Protection against fluctuations in the supply of raw
materials:
Sometimes, the raw materials of some companies are only
obtained in a certain period of the year: in other cases,
companies can carry out significant stocks in the face of an
imminent increase in prices or in anticipation of a future
shortage caused by problems in the production chains prior to
the company.

4. Protection against mismatches between the areas

involved in the process:
Mismatches that may occur due to failure in delivery times of
suppliers, deficiencies of scheduling between
purchases production or between production and distribution,
etc.
STRATEGIC
OBJECTIVES OF
INVENTORIES
5. Improve customer service:
The maintenance of optimal levels
of existence allows, for example, to
quickly meet an unforeseen demand
from a customer, the immediate
replacement of defective products,
etc.
HIDDEN COSTS
GENERATED BY LOW
ROTATION PRODUCTS

• Management time: low turnover products, because

they become "problem products", require, in relation to
the results generated in sales and profitability, a great
deal of time, attention and concern on the part of the
management levels

• Price adjustment: low-turnover products need, too

often, price adjustments, which must be considered, in
reality, as “added costs” of the sales area that directly
affect the profitability of the company

• Small batches: low-rotation products are usually

produced in series or small batches, which means that
the time devoted to the preparation of the machines is
prolonged, with the final result of the decrease in
productivity.
HIDDEN COSTS
GENERATED BY LOW
ROTATION PRODUCTS
4. Marketing efforts: require greater efforts in sales
activities, advertising, promotion, etc. That subtract
resources valuable to the support that could be
given to others Highest rotation products.

5. Distribution: these products must be distributed in

small batches, generating distribution costs high in
unit terms.

6. Image and moral: low levels of acceptance

of low rotation products can reach demoralize
sellers and affect the image of the company.
 THE "ABC" ANALYSIS
• It is one of the most used instruments to
classify products in “high, medium and low”
rotation categories.

• It is known as: "Law 80:20"

• This analysis is performed in order to:

BASIC CONCEPT: • Determine the importance of the different

products based on their contribution to the total
80 percent, in money, of a company's sales of the company and the gross profit margins
sales, is generated by 20 percent of the generated.
existing products in the Briefcase.
 Steps to perform the “ABC”
Analysis
• Order from highest to lowest, according to the percentage they represent
with respect to the total sales of the company.

• Place the percentage that each product represents in relation to the total
gross margin generated by the sale of all the company's products next to
the sales percentage

• Separate into “sections” or categories, in order to classify them into

products of high, medium and low relative importance

• The previous classification is made by calculating, first, what are the

products that, added together, represent u0% of sales and / or margins
(receive the classification of products A)

• Then, those representing 15 percent are separated (classified as products

B)

• Finally, the products that only contribute together the remaining five percent
(products C) are identified
 Steps to perform the
“ABC” Analysis The tendency is for the products of
most companies to be grouped,
naturally and following a “law” that
governs all markets
100
95
• 20% - of the # of items
80 represents 80% of sales

• The next 30% represents 15% of

Tantos porciento sobre el total de las ventas

sales

• The remaining 50%, in number of

items, barely represents 5% of
sales

0
0 20 50 100
Tantos porciento sobre el total de productos
BEFORE TAKING A DECISION…
Consider:

• If it is necessary to maintain a complete line of

products, although some of them sell little
• The growth potential of the market to which the
products are directed
• Possibilities for recovery of the pace of sales through
marketing actions
• Product need in certain markets or segments
important to the company,
• Etc.
BEFORE TAKING A DECISION…
The Inventory Policy must be established in order to
guide its management towards the achievement of two
very clear and specific objectives:

• Maintain sufficient inventory levels to meet

customer needs with quality and competitive prices

• Keep investment in inventories as low as possible

but that is consistent with customer service
requirements.
THE INVENTORY BREAKS EFFECTS
• Products stopped producing due to lack of materials
or Raw Material

• Products stopped selling due to lack of stocks of

finished products

• Negative impact on customer service, company

image and future potential

• Orders do not arrive despite the requirements;

sellers continue to offer them.

• Lost Sale Opportunity

Inventory
Rotation
 Inventory Rotation

• Number of times that, on average, a stored merchandise is replaced during a specific

period.

• It is one of the financial reasons used in the Stock Exchanges to analyze the efficiency
in the management of the warehouse of a certain company.

• It is obtained by dividing the amount of net sales for the period by the average of
inventories of finished items valued at the sale price, or by dividing the amount of the
cost of sales, by the average of the investment in inventories of finished items valued at
price of cost.

INVENTARY ROTATION = SALES COST = “X” TIMES

INVENTORY
 Inventory Rotation

• The result expressed in TIMES, means the number of returns that the inventory gives, how
many times on average, the merchandise entered and left.

• This operation determines the number of times that the investment in inventories has been
converted into cash or accounts receivable during the year or during the period in question.
The inventory turnover can be expressed in days, dividing 360 (or the days included in the
period), by the determined turnover rate.

• It can be calculated monthly, semi-annually or annually.

• If sales vary the inventory must be adjusted in the same proportion.

• The rotation should be almost constant, regardless of the level of sales. Since the expiration
of the products is always the same.
 Inventory replenishment
systems: Economic Order
Quantity (EOQ).

• The Economic Order Quantity model is a commonly used

element of a continuous review inventory system.

• It is based on a formula that calculates the most economical

number of items a business should order to minimize costs and
maximize value when re-stocking inventory.

• The Economic Order Quantity (EOQ) is the number of units that

a company should add to inventory with each order to minimize
the total costs of inventory—such as holding costs, order costs,
and shortage costs.

• Economic Order Quantity (EOQ) determine fixed order

quantities based on minimizing total variable costs (TVC), which
are the sum of carrying costs and ordering costs for each stock
keeping unit.
The EOQ
balance
Inventory replenishment systems: Economic Order
Quantity (EOQ). -
Advantages

Provides specific
Minimizes Storage Specific to the
numbers particular
and Holding Costs Business
to the business

Customized
recommendations provided Regarding how
regarding the most
economical number of units much inventory to
per order.
Maintaining hold, when to re-
The model may suggest sufficient inventory order it and how
buying a larger quantity in
levels to match many items to order.
fewer orders to take This smooths out
advantage of discount bulk customer demand is
buying and minimizing the re-stocking
a balancing act for
order costs.
many small process and results
Alternatively, it may point
businesses in better customer
to more orders of fewer service as inventory
items to minimize holding
costs if they are high and is available when
ordering costs are relatively needed.
low.
Inventory replenishment systems: Economic Order
Quantity (EOQ). -
Disadvantages

Complicated Based on
Math Calculations Assumptions

The EOQ model assumes:

EOQ model requires a good understanding of algebra,
a disadvantage for small business owners lacking math - Steady demand of a business product and
skills. immediate availability of items to be re-stocked. It does
not account for seasonal or economic fluctuations
Effective EOQ models require detailed data to calculate
several figures. - Fixed costs of inventory units, ordering charges and
holding charges. This inventory model requires
EOQ software is one solution that may be worth the continuous monitoring of inventory levels.
investment for small business owners lacking the time
and capital to hire a consultant or employee for regular - One-product business, and the formula does not allow
calculations. for combining several different products in the same
order.
Inventory replenishment systems: Economic
Order Quantity (EOQ).

• The equation recognizes the tug of war between acquisition costs and inventory
carrying costs:

• When you order bigger quantities less frequently, your aggregate acquisition
costs are low, but your inventory costs are high due to higher inventory levels.

• Conversely, when you order smaller quantities more often, your inventory
costs are low, but your acquisition cost are higher because you are expending
more resources on ordering.

• The EOQ is the order quantity that minimizes the sum of these two costs.
Inventory replenishment systems: Economic Order
Quantity (EOQ).

EOQ = Economic Order Quantity

ACPO = Acquisition Cost Per Order
AUU = Annual Usage in Units (Demand)
UC = Unit Cost
CCP = Carrying Cost Percentage

Note: UC x CCP is the maintenance cost, and it can be

given as a fix amount
Economic Order Quantity or
Purchase Lot
• Calculation of the EOQ Case of study

• Requirement: 1,000 units per year.

• Cost of maintaining the piece: $ 2.00 (refrigeration, waste, financial cost,

opportunity cost, space, insurance ...)

• Cost of ordering merchandise: $ 150 (freight, carry, insurance, depreciation of

vehicles ...)

• Three alternatives:

• Buy the 1,000 units at the beginning of the year

• Buy 2 times 500 pieces
• Buy 4 times 250 pieces
Economic Purchase Lot - EPL
Calculation Formulas

 AVERAGE INVENTORY = UNITS PURCHASED / 2

 COST OF KEEPING TOTAL = AVERAGE INVENTORY X COST OF

KEEPING AVERAGE PER PIECE

 NUMBER OF ORDERS = UNITS REQUIRED / UNITS PURCHASED

 TOTAL ORDER COST = NUMBER OF ORDERS X COST OF

ORDER PER EVENT

ALTERNATIVE
PURCHASE
AVERAGE INVENTORY
MAINTENANCE COST
NUMBER OF ORDERS
TOTAL COST OF ORDER
TOTAL COST
Applying the Formula to the case

EPL = Pieces

CONCEPT
PURCHASE
AVERAGE INVENTORY
MANTENANCE COST
NUMBER OF ORDERS
TOTAL, ORDER COST
TOTAL, COST
Example
If you know that it cost you $150 in overhead per order, you use 5,000 widgets
a year, you pay $200 per widget, and your Finance Department tells you that
annual carrying cost are equal to 20% of the value of the goods in stock

How much you should order?

2 x 150 x 5,000
EOQ = = 37500
200 x 20%

Answer: 194 widgets at a time

Maximum Calculation
Maximum Calculation

To calculate the maximum for the management of a

warehouse, the following should be considered:

• Storage capacity
• Discounts on purchase
• Wholesale prices
• Supplier Distribution Capacity
• Product Expiration
• Waste and leakage due to excess
storage
• Financial cost
• Opportunity cost
Minimum Calculation
Calculation of the minimum

 For the calculation of the minimum, the

following should be considered:

 Time it takes for the provider to refill

 Supplier Reliability Level
 Possible fluctuations in demand
 Product Expiration
Inventory turnover
and coverage.

The inventory turnover ratio is an efficiency ratio that

shows how effectively inventory is managed by
comparing cost of goods sold with average
inventory for a period.

This measures how many times average inventory

is “turned” or sold during a period.

In other words, it measures how many times a

company sold its total average inventory dollar
amount during the year.

A company with $1,000 of average inventory and

sales of $10,000 effectively sold its 10 times over.
Inventory turnover and coverage.

This ratio is important because total turnover depends on two main components of
performance:
1. Stock purchasing.
If larger amounts of inventory are purchased during the year, the
company will have to sell greater amounts of inventory to improve its
turnover. If the company can’t sell these greater amounts of inventory, it
will incur storage costs and other holding costs (additional costs involved
in storing and maintaining a piece of inventory over the course of a
year).

2. Sales.
Sales must match inventory purchases otherwise the inventory will not
turn effectively. That’s why the purchasing and sales departments must
be in tune with each other.
Inventory turnover formula
The inventory turnover ratio is calculated by dividing the cost of goods sold for a period by
the average inventory for that period

(COGS)

* COGS is calculated = Beginning Inventory + Purchase – ending inventory

* Average inventory is usually calculated by adding the beginning

and ending inventory and dividing by two.
Inventory turnover analysis

Inventory turnover is a measure of how efficiently a company can control its merchandise,
so it is important to have a high turn.

• It shows investors how liquid a company’s inventory is.

• It shows how easily a company can turn its inventory into cash.

• This shows the company does not overspend by buying too much inventory and
wastes resources by storing non-salable inventory.

• It also shows that the company can effectively sell the inventory it buys.
 Inventory turnover example
Donny’s Furniture Company sells industrial furniture for office buildings. During the current
year, Donny reported cost of goods sold on its income statement of $1,000,000. Donny’s
beginning inventory was $3,000,000 and its ending inventory was $4,000,000. Donny’s
turnover is calculated like this:

$1,000,000
Inventory turnover ratio = = 0.29 times
($3,000,000 + $4,000,000)/2

As you can see, Donny’s turnover is .29. This means that Donny only sold roughly a third of
its inventory during the year. It also implies that it would take Donny approximately 3 years
to sell his entire inventory or complete one turn. In other words, Danny does not have very
good inventory control.
Inventory coverage
Once you know the inventory turnover ratio, you can use it to calculate the days in
inventory.

Days in inventory is the total number of days a company takes to sell its average inventory.

It also determines the number of days for which the current average inventory will be
sufficient. Companies use this metric to evaluate their efficiency in using their inventory

FORMULA: Number of days in the period (360) = XX days

Inventory turnover ratio.

ALTERNATIVE: Average of Inventory x 365 = XX days

FORMULA COGS
Inventory Terms and
Components
Inventory Terms and
Components
Block storage
It is a storage system by direct stacking of the loads, without
supports or elements of constitution of unit loads without the
need for any shelving.

Article
It is the smallest, indivisible part of an order. All existing items
in a warehouse make up the assortment. A product that
appears in three different packages (for example, a beverage
in bottles of different sizes) is considered as three items.

Exit boxes
They are rooms in the warehouse where prepared orders are
stored.
Inventory Terms and
Components
Distribution Center (CD)
It is the base of operations of storage and processing of the inventory
destined to optimize the distribution under a philosophy of integral
management of the supply chain.

Inventory storage costs

It is a financial measure that calculates all the costs associated with
holding a unit in storage, usually expressed as a percentage of the
value of the inventory. Includes inventory in storage, storage,
obsolescence, deterioration, insurance, taxes, depreciation and
handling cost.

Inventory Deployment
It is a technique to strategically position inventory to meet customer
service levels while minimizing inventory and storage levels
The inventory in excess it is replaced with information derived through
the supervision of supply, demand, and inventory in resting as well as
moving.
 Inventory Terms and
Components
Article Format
It is the sales configuration that an item adopts.

Inventory
It is a list of the assets available, classified according to families,
categories and place of occupation.

Permanent inventory
It is the function that allows, through a debit and a credit, to control
the actual capacity within the warehouse, carrying out an update
process in each movement made.

Warehouse map
It is the list of picking and stock holes that exist in the warehouse.
Also included are unusable gaps.
Inventory Terms and
Components
Merchandise
They are goods of any kind that can be transported,
including live animals, containers or other similar
transport or packaging elements.

Stock level
It is the quantity of stocks of an item stored at a given
time.

Picking
It is the area of ​the warehouse from where the
preparation of the order is made.
Inventory Terms and Components

Point of order
Moment in which it is necessary to make a new order to
replenish the warehouse given the volume of stock.

Average maturation period

It is the time that elapses since the investment is made
(in raw materials, semi-finished products or finished
articles) until these are sold and charged.

Replenishment Period
Time period between two deliveries from the same
supplier.
Inventory Terms and
Components
Warehouse Rotation
It is the number of times that all the genres in
the warehouse have left and have been
replaced, within a certain period of time. The
most common parameter is the economic one,
although the time period in days is also usually
used.

Management software
Like any business process, management can
be optimized with specific software. For
example, the anfix stock control module that
offers an inventory control.
Inventory Terms and Components
Medium stock
Average volume of stocks that we have in the warehouse
over a period of time. It expresses the investment in
stocks that, on average, the company makes.

Possession rate
It is the percentage that represents the cost of storage
with respect to the value of the average stock.

Traceability
It is the monitoring of a product from the moment it is
manufactured until it is located at the point of sale., Being
the most used pallet.
Inventory Terms and Components
Order preparation time
It is the time used and necessary for the preparation of an order.
To determine the overall performance of a maintenance system,
respectively, of a storage system, the average time spent per
position must be calculated.

Pick up time
It includes the movements to remove an item from the truck and
place it on the shelf; or vice versa.

Unitarization
The process of ordering and conditioning correctly merchandise
in cargo units for transport.

Load unit
Set of goods that are grouped together in a single block and
placed on a moving support, the pallet being the most used.
Fifth week
Inventory management
Inventory Control
systems:

- Continuous review
system (Q system)
- Periodic review
system (P system).
Inventory Control
Systems
If the company can manage inventory system effectively
and efficiently, thus it could make a result in a reduction
of operating costs.

Inventory system refers to the solving problems of stock

in the business. Good stock management will maximize
business benefits, and vice versa, the failure to control
the stock will result in a loss benefit of company

There are two replenishment policies used in practice:

1. Continuous review and

2. Periodic review
Continuous review indicates that inventory status is
continues to be tracked and ordering according to lot size
(Q) was done when the level is reached entrusted inventory
reorder point (ROP)

Periodic review indicates that inventory status tracked at

regular periodic intervals and reorder was made to raise the
Continuous
inventory level to the point of a predefined.
review and
These inventory system policies are not comprehensive,
but sufficiently to provide solutions to problems concerning Periodic
the safety of the inventory management system.
review
The advantage of continuous review is to address the
situation where demand is high, but the disadvantage is
variable order quantity. The supplier can make mistakes
more often and they would prefer the customers who
ordered the fixed order quantity. This situation is vice versa
with periodic review policy.
Continuous review (Q) system

- Reorder point system (ROP) and fixed order quantity system

- For independent demand items
- Tracks inventory position (IP)
- Includes scheduled receipts (SR), on-hand inventory (OH), and back orders (BO)

Inventory position = On-hand inventory + Scheduled receipts – Backorders

IP = OH + SR – BO
 The on-hand inventory is only 10 units, and the reorder point R is 100.
There are no backorders and one open order for 200 units. Should a
new order be placed?

SOLUTION

Continuous IP = OH + SR – BO = 10 + 200 – 0 = 210 R = 100

Decision: Place no new order

review (Q) Placing a New Order - EXAMPLE

system Demand for chicken soup at a supermarket is always 25 cases a day

and the lead time is always 4 days. The shelves were just restocked
with chicken soup, leaving an on-hand inventory of only 10 cases. No

Application backorders currently exist, but there is one open order in the pipeline
for 200 cases. What is the inventory position? Should a new order be
placed?

SOLUTION
R = Total demand during lead time = (25)(4) = 100 cases
IP = OH + SR – BO = 10 + 200 – 0 = 210 cases
 Order placed for variable amount
after fixed passage of time
- Four of the original EOQ assumptions
maintained:
• No constraints are placed on lot
Periodic size
Review • Holding and ordering costs only
System (P) • Independent demand
• Lead times are certain

- Order is placed to bring the inventory

position up to the target inventory level, T,
when the predetermined time, P, has
elapsed.
 How Much to Order in a P System

EXAMPLE

Periodic • A distribution center has a backorder for five 36-inch

Review color TV sets. No inventory is currently on hand, and now is

the time to review. How many should be reordered if T =
400 and no receipts are scheduled?

System (P) - SOLUTION

IP = OH + SR – BO = 0 + 0 – 5 = –5 sets
Application T – IP = 400 – (–5) = 405 sets

That is, 405 sets must be ordered to bring the inventory

position up to T sets.
 • The on-hand inventory is 10 units, and T is
400. There are no back orders, but one
scheduled receipt of 200 units. Now is the time
Periodic to review. How much should be reordered?

Review • SOLUTION

System (P) - • IP = OH + SR – BO
• = 10 + 200 – 0 = 210

Application • T – IP = 400 – 210 = 190

• The decision is to order 190 units

 Primary advantages of P systems
– Convenient
– Only need to know IP when review is made
Comparative
Advantages Primary advantages of Q systems
• Review frequency may be individualized
• Fixed lot sizes can result in quantity discounts
• Lower safety stocks
Demand
management process

• Demand management is the process of

managing customer needs for a product
that a company sells. It’s a planning
methodology that tries to forecast what a
customer will want, when they’ll want it
and the logistics of getting that product to
them. By planning, companies can identify
and avoid potential problems, such as
bottlenecks in production or the supply
chain and market volatility.
 Understanding customer demand will benefit any business that
manufactures or sells products. Demand management is a crucial
part of any business strategy, so they have stock on hand to meet
customer needs.

Helps organizations establish their production budget

What is the Allows businesses to meet customer demand

importance of
Demand Prevents excess inventory and overproduction

Management?
Helps with supply chain planning

Informs workforce planning

 Demand Forcasting – Predicting future demand for products or services
based on historical data, market trends and other relevant factors

Demand Planning - Translating demand forecast into actionable plans

for production, purchasing, and distribution

Demand
Demand Sensing – Monitoring real-time demand signals and market
trends to identify changes and adjusts plans accordingly.

Management Demand Shaping – Influencing customer demand through pricing

Process strategies, promotions, product innovation, and marketing campaigns

Steps Demand fulfillment – Meeting customer demand by delivering products

or services on time according to specification.

Demand review and analysis – Evaluating the accuracy of demand

forecast, identifying areas for improvement, and adjusting strategies
based on performance metrics.
 • Improved Customer Satisfaction: Meeting customer
demand consistently, reducing stockouts, and providing
timely delivery.

Demand • Reduced Costs: Optimizing inventory levels, minimizing

waste, and streamlining processes.

management • Increased Profitability: Maximizing revenue, improving

resource utilization, and reducing operational costs.
process • Enhanced Supply Chain Resilience: Adapting to market
benefits fluctuations, mitigating risks, and ensuring business
continuity.

Effective demand management is essential for achieving

business success. By following these steps, organizations can
gain a competitive advantage by accurately forecasting
demand, planning effectively, and meeting customer needs
efficiently.
Different forecasting methods
• Different methods of demand forecasting are used to try to estimate what the future
requirements for a product or SKU might be so that it is possible to closely meet customer demand.

• Forecasting, thus, helps in the inventory-holding decision process

• to answer questions about
• what to stock,
• how much to stock and
• what facilities are required.

• It is often said that ‘all mistakes in forecasting end up as an inventory problem – whether too
much or too little!’
 Different demand forcasting methods.

Review Rushton, A., Croucher, P., & Baker, P. (2022). The handbook of logistics and distribution management:
Understanding the supply chain. Kogan Page Publishers - from p. 248 to 255
Push systems

• A ‘push’ system of manufacturing is

one where goods are produced
against the expectation of demand,
which includes both known demand
in the form of existing orders and
forecast demand

• A push system is where inventory

replenishment is used to anticipate
future demand requirements (build-
to-stock).
Pull systems

 A ‘pull’ system of manufacturing is one

where goods are only produced against
known customer orders. This is because
only actual orders from customers are
being produced on the production line.
None of the goods are being made to
keep as finished product stocks that
Make all we can just in case Make what´s needed when needed
may be sold at a later date. Make-to-stock Make-to-order

 Production is approximated Production is precise

 A pull system is where the actual  Based on anticipation Based on actual consumption
 Inventories are high Inventories are low
demand for a product is used to ‘pull’  There is waste Waste is reduced
the product through the system (build-
to-order).
Inventory is shown to be held at different points in the supply chain dependent on the type of
manufacturing and how this relates to different customer demand. Key manufacturing types are
represented as:

 Make-to-stock: here, customers are serviced from finished goods inventory. The finished
goods stock is manufactured ready for use by the final customer. Inventory may then be held
by a variety of players within the distribution system (distributors, wholesalers, retailers) and
at a variety of locations (finished goods warehouses, distribution centers, satellite depots).
This positioning is determined in line with the choice of distribution channel and choice of
logistics location.

 Assemble-to-order: a number of pre-assembled modules and different products are

combined to satisfy a customer requirement. Key to this is to bring together the complete
order, of which some may be specially ordered, and some may be from stock.

 Make-to-order: whereby the products that are ordered are made specifically for the
customer from raw materials and component parts.

 Engineer-to-order: this alternative takes one further step back as the products are also
designed with the customer and are then manufactured by the supplier (and/ or by other
suppliers)
Inventory planning parameters
Definition: Inventory planning parameters are key metrics and factors that influence inventory decisions,
helping to determine optimal stock levels, reorder points, and safety stock.

Key Parameters:
• Demand: The rate at which products are sold or consumed.
• Lead Time: The time it takes to receive an order from a supplier.
• Holding Cost: The cost of storing inventory, including storage space, insurance, and obsolescence.
• Ordering Cost: The cost associated with placing an order, including processing, transportation, and
handling.
• Stockout Cost: The cost of not having enough inventory to meet demand, including lost sales,
customer dissatisfaction, and production delays.
• Service Level: The desired probability of meeting customer demand on time.
• Safety Stock: Extra inventory held to buffer against unexpected demand fluctuations or supply
disruptions.
• Reorder Point: The inventory level at which a new order is placed.
Inventory planning parameters
Impact:
• Inventory Levels: Parameters influence the amount of inventory held to balance costs and service
levels.
• Ordering Frequency: Parameters determine how often orders are placed to optimize costs and
minimize stockouts.
• Supply Chain Resilience: Parameters help to create a buffer against disruptions and ensure consistent
product availability.
Importance:
• Cost Optimization: Minimizing inventory holding and ordering costs while maintaining adequate
service levels.
• Customer Satisfaction: Ensuring product availability and meeting customer expectations.
• Supply Chain Efficiency: Streamlining processes, reducing waste, and improving overall performance.

Conclusion:
Understanding and effectively managing inventory planning parameters is crucial for achieving optimal
inventory levels, minimizing costs, and maximizing customer satisfaction.
Safety Stock

This is the stock that is used to cover the unpredictable daily or weekly fluctuations in
demand. It is sometimes known as ‘buffer’ stock, as it creates a buffer to take account
of this unpredictability.
The safety stock is a term used to describe the level of stock that is required to avoid
stockouts, which might be caused by uncertainties in supply and demand
Safety Stock
Safety stock can be calculated based on the following factors:

● the demand rate: the number of items used by customers over a given period

● the lead time: the time until the new stock is received

● the variability in lead time: supply lead times are likely to vary about an average

● the service level: the level of service based on the probability that a chosen level of safety stock
will not lead to a stockout
● the forecast error: a statistical estimate of how forecast demand may differ from actual demand
 REORDER Cantidades en
Inventario

POINT Max level when

order arrives

Time when it is necessary to (a)

place an order again. Point of reorder

The goal is that the levels

never reach “zero”, to avoid
stock ruptures.
(b)

The reorder point must be Comportamiento en el tiempo

placed before stocks run out
completely. (a) Areas of high inventory Lead time –
management and possession Tiempo de
cost espera
(b) Low-cost areas for Managing Safety Stock
and holding inventories Inventario de
Seguridad

Reorder Point (ROP) = Demand during lead time +

Maximum and Minimum Graph
Safety Margin Chart
Inventory planning for
manufacturing
 DDMRP, or Demand Driven Material Requirements Planning,
uses buffers as a key element of its inventory management
strategy. These buffers are not traditional safety stock, but
DDMRP = rather strategic inventory positions designed to address specific
supply chain risks and uncertainties.

Demand Types of DDMRP Buffers:

Driven • Buffer 1 (Strategic Buffer): This buffer is positioned at

Material the demand point (where the customer order originates)
and is the largest buffer in the system. It's designed to
handle demand variability and ensure that the company can
Requirements meet customer orders even if demand exceeds forecasts.

Planning • Buffer 2 (Transit Buffer): This buffer is placed at

the supplier's location and accounts for the time it takes to
receive materials from the supplier. It helps mitigate the risk
of supply disruptions or delays in delivery.
 • Buffer 3 (Safety Buffer): This buffer is positioned at
DDMRP = the production or assembly point and is used
to protect against internal production issues such
as machine breakdowns or quality problems.
Demand
Driven • Buffer 4 (Cycle Buffer): This buffer is used to cover
the time it takes to replenish inventory from the
supplier. It's especially important for items
Material with long lead times.

Requirements • Buffer 5 (Emergency Buffer): This buffer is a last

resort and is only used in extreme situations such
Planning as natural disasters or unforeseen supply chain
disruptions.
Key Principles of DDMRP
Buffers
• Dynamic: Buffers are constantly adjusted based on real-time demand
and supply information. This ensures that the company is always
prepared for potential disruptions.

• Strategic: Buffers are not simply safety stock but are strategically
placed to address specific risks.

• Focused: Buffers are targeted at specific points in the supply

chain where they are most needed.

• Data-Driven: DDMRP relies on accurate data to determine the

appropriate buffer levels.
 Benefits of Using
DDMRP Buffers
• Improved customer service: By ensuring that the company can meet
customer orders even during periods of high demand, DDMRP buffers help
to improve customer satisfaction.

• Reduced inventory costs: By optimizing inventory levels and reducing the

need for safety stock, DDMRP buffers can help to lower inventory carrying
costs.

• Increased supply chain resilience: By addressing potential risks and

disruptions, DDMRP buffers help to make the supply chain more resilient.

In summary, DDMRP buffers are a powerful tool for managing inventory and
mitigating supply chain risks. By strategically positioning and adjusting these
buffers, companies can improve customer service, reduce costs, and build a
more resilient supply chain.
MRP I and II

• MRP = materials requirements planning (MRP),

A computerized system for forecasting materials
requirements based on a company’s master
production schedule and bill of material for each
product.

• MRPII = manufacturing resource planning

(MRPII)
A broader-based system, used to calculate the time-
phased requirements for components and materials
with respect to production schedules, considering
replenishment lead times, etc. This approach
enables inventory levels to be significantly reduced,
and service levels, in terms of shorter production
lead times, to be improved.
DRP, ERP and SCP
• DRP = distribution requirements planning.
DRP systems are designed to take forecast demand and reflect
this through the distribution system on a time-phased
requirements basis. DRP thus acts by pulling the product
through the distribution system once demand has been
identified. It is particularly useful for multi-echelon
distribution structures to counter the problems of
requirements occurring as large chunks of demand.

• ERP = enterprise resource planning and supply chain

planning (SCP).
These are the most recent systems that adopt an even
broader planning approach. These are time-phased and
enable planning across a whole business and even across
complete supply chains
Optimize Distribution
Requirement Planning (DRP)
Optimizing Distribution Requirements Planning (DRP) is crucial for ensuring
efficient and cost-effective distribution of goods.

A comprehensive approach to achieve this is:

1. Data Accuracy and Visibility
2. Network Optimization
3. Inventory Management
4. Technology and Automation
5. Continuous Improvement

By implementing these strategies, you can:

• optimize your DRP processes,
• improve supply chain efficiency,
• reduce costs, and
• enhance customer satisfaction.
Optimize Distribution
Requirement Planning
(DRP)
1. Data Accuracy and Visibility:

• Accurate Demand Forecasting: Use historical data, market trends,

and customer insights to generate reliable demand forecasts.
Consider incorporating statistical forecasting models and
collaborative forecasting techniques.

• Real-Time Inventory Tracking: Implement a robust inventory

management system that provides real-time visibility into
inventory levels at all distribution centers and warehouses. This
enables accurate stock status updates and timely replenishment
decisions.

• Accurate Lead Times: Maintain accurate lead times for suppliers,

transportation, and internal processes. This ensures realistic
delivery schedules and prevents stockouts or delays.
 Optimize Distribution
Requirement Planning
(DRP)
2. Network Optimization:

• Distribution Center Location: Analyze factors like customer

concentration, transportation costs, and labor availability to
determine the optimal location and number of distribution
centers.

• Warehouse Layout and Design: Optimize warehouse layout and

design to maximize space utilization, minimize handling time, and
facilitate efficient picking and packing processes.

• Transportation Network Design: Analyze transportation routes,

carrier options, and delivery frequencies to minimize
transportation costs and delivery times. Consider using route
optimization software to identify the most efficient delivery paths.
Optimize Distribution
Requirement Planning (DRP)

3. Inventory Management:

• Inventory Control Strategies: Implement inventory control strategies

like ABC analysis, reorder point systems, and safety stock calculations
to manage inventory levels effectively and minimize holding costs.

• Inventory Turnover Optimization: Aim for optimal inventory turnover

rates by balancing stock availability with minimizing holding costs.
Analyze slow-moving items and consider strategies to reduce their
inventory levels.

• Just-in-Time (JIT) or Lean Inventory: Explore the feasibility of

implementing JIT or lean inventory principles to reduce inventory
holding costs and improve responsiveness to demand fluctuations.
 Optimize Distribution
Requirement Planning
(DRP)

4. Technology and Automation:

• DRP Software: Utilize specialized DRP software that

automates key processes like demand forecasting,
inventory planning, transportation scheduling, and
warehouse management.

• Warehouse Management Systems (WMS): Integrate a

WMS to manage warehouse operations, track inventory,
and optimize picking, packing, and shipping processes.

• Transportation Management Systems (TMS): Implement

a TMS to manage transportation routes, carrier
selection, and delivery scheduling.
Optimize Distribution
Requirement Planning (DRP)

5. Continuous Improvement:

• Regular Performance Monitoring: Regularly monitor DRP

performance metrics like on-time delivery, inventory turnover,
and transportation costs.

• Process Analysis and Optimization: Continuously analyze DRP

processes to identify areas for improvement and implement
changes to enhance efficiency and effectiveness.

• Collaboration and Communication: Foster strong

communication and collaboration between departments
involved in DRP, including sales, marketing, operations, and
logistics.
Inventory obsolescence =
The Silent Killer
• Definition: Inventory obsolescence occurs when items in stock become
outdated, unusable, or unsaleable due to:
• Technological advancements: New products replace older ones.
• Changes in customer preferences: Demand shifts away from certain
items.
• Product lifecycle: Products reach the end of their lifecycle.
• Damage or spoilage: Products deteriorate over time.
• Impact:
• Financial losses: Tied-up capital, write-offs, and disposal costs.
• Reduced profitability: Lower sales and margins.
• Wasted resources: Storage space and handling costs.
• Mitigation Strategies:
• Accurate demand forecasting: Predict future demand and adjust
inventory levels accordingly.
• Effective inventory management: Implement systems to track
inventory age and rotate stock.
• Agile production: Adopt flexible production processes to respond to
changing market demands.
• Product diversification: Offer a wider range of products to reduce
reliance on single items.
 Redundancy of actions –
Wasteful repetition
Definition: Redundancy of actions occurs when the same task or activity is performed multiple times within a
process, leading to inefficiencies and wasted resources.
Causes:
• Lack of communication and coordination: Different departments or individuals work in silos.
• Unclear processes and responsibilities: Overlapping roles and unclear ownership.
• Outdated systems and procedures: Inefficient workflows and manual processes.
Impact:
• Increased costs: Duplicated effort, wasted time, and unnecessary resources.
• Delayed delivery: Slower turnaround times and reduced productivity.
• Reduced quality: Errors and inconsistencies due to repeated tasks.
Mitigation Strategies:
• Process mapping and analysis: Identify and eliminate redundant steps.
• Cross-functional collaboration: Improve communication and coordination between teams.
• Automation and technology: Implement systems to streamline processes and eliminate manual
tasks.
• Standardization and best practices: Define clear processes and procedures to ensure consistency.
 Definition: Inventory optimization tools are software applications
and methodologies designed to analyze and manage inventory
levels, reduce costs, and improve supply chain efficiency.

Inventory Types of Tools:

• Demand Forecasting

optimization • Inventory Planning and Control

• ABC Analysis
• Inventory Turnover Analysis

tools • Warehouse Management Systems (WMS)

• Transportation Management Systems (TMS)
• Supply Chain Planning Software
definition Benefits:
• Reduced inventory costs: Lower holding costs,
obsolescence, and waste.
• Improved customer service: Increased product availability
and on-time delivery.
• Enhanced supply chain resilience: Better preparedness for
disruptions and demand fluctuations.
• Increased profitability: Improved efficiency, reduced costs,
and optimized resource utilization.
Vendor managed inventory (VMI) process
Definition: Vendor Managed Inventory (VMI) is a collaborative inventory management approach
where the supplier takes responsibility for managing the inventory levels of its products at the
customer's location.

Process:
• Data Sharing: The customer provides real-time data on inventory levels, demand forecasts,
and sales data to the vendor.
• Inventory Management: The vendor analyzes the data, determines optimal inventory levels,
and manages replenishment orders.
• Delivery and Replenishment: The vendor delivers inventory to the customer's location based
on agreed-upon schedules and thresholds.
• Performance Monitoring: Both parties monitor key performance indicators (KPIs) to ensure
efficient inventory management and meet agreed-upon service levels.
Vendor managed inventory (VMI) process
Benefits:
• Reduced Inventory Costs: Lower holding costs, obsolescence, and waste for the customer.
• Improved Customer Service: Increased product availability and on-time delivery for the customer.
• Enhanced Supply Chain Efficiency: Streamlined processes, reduced lead times, and better
communication.
• Stronger Vendor Relationships: Increased collaboration and trust between vendor and customer.

Considerations:
• Trust and Data Security: Requires strong trust and secure data sharing between parties.
• Process Integration: Requires seamless integration of systems and processes between vendor and
customer.
• Clear Communication: Open and transparent communication is crucial for success.
QUESTIONS?
Reading

Rushton, A., Croucher, P., & Baker, P. (2022). The handbook of logistics and distribution
management: Understanding the supply chain. Kogan Page Publishers.

Christopher, M. (2016). Logistics and Supply Chain Management: Logistics & Supply
Chain Management. Pearson UK.

Chapter 5 - From: Edward Frazelle, Ph.D. Supply Chain Strategy: The Logistics of Supply
Chain Management (McGraw-Hill Education: New York, Chicago, San Francisco,
Athens, London, Madrid, Mexico City, Milan, New Delhi, Singapore, Sydney,
Toronto, 2002).

Economic Order Quantity videos

https://www.youtube.com/watch?v=A88uoWbxG2M
https://www.youtube.com/watch?v=ru-r5kMGwko
Barcode.
EDI.
 Bar Codes and Bar Code Scanners

A bar code system is an automatic Identification Technology, it includes a bar

Bar Codes and code symbology to represent a series of alphanumeric characters, bar
code readers to interpret the bar code symbology, and bar code printers to
reliably and accurately print bar codes on labels, cartons, and/or
Bar Code picking/shipping documents. Bar code systems are the foundation of many
paperless warehousing systems.

Scanners Bar Code Symbologies

A bar code is a series of printed bars and intervening spaces. The structure of
unique bar/space patterns represents various alphanumeric characters. The
same pattern may represent different alphanumeric characters in different
codes.
 Bar Codes
The primary codes or symbologies for which standards have been developed include:

• Code 39 - An alpha-numeric code adopted by a wide number of industry and

government organizations for both individual product identification and shipping
package/container identification.

• Interleaved 2 of 5 Code - A compact, numeric-only code still used in a number of

applications where alpha-numeric encoding is not required.

• Universal Product Code (UPC) - Used to record the unique product identifier on retail
products.

• Codabar - One of the earlier symbols developed, this symbol permits encoding of the
numeric-character set, six unique control characters, and four unique stop/start
characters that can be used to distinguish different item classifications. It is primarily
used in non-grocery retail point of sale applications, blood banks and libraries.

• Code 93 - Accommodating all 128 ASCII characters plus 43 alpha-numeric characters

and four control characters, Code 93 offers the highest alpha-numeric data density of
the six standard symbologies. In addition to enabling for positive switching between
ASCII and alpha-numeric, the code uses two check characters to ensure data integrity.
Bar Codes
• The primary codes or symbologies for which standards have been developed
include:

• Code 128 - Provides the architecture for high density encoding of the full 128-
character ASCII set, variable length fields and elaborate character-by-character
and full symbol integrity checking. Provides the highest numeric-only data density.
Adopted in 1989 by the Uniform Code Council (U.S.) and the International Article
Number Association (EAN) for shipping container identification.

• UPC/EAN - The numeric-only symbols developed for grocery supermarket

point-of-sale applications and now widely used in a variety of other retailing
environments. Fixed length code suitable for unique manufacturer and item
identification only.

• Two-Dimensional Codes - Two-dimensional bar codes, sometimes referred to as

high-density bar codes, are the latest development in a rapidly advancing field.
Two-dimensional codes are overlapping linear bar codes, one horizontal and the
other vertical in the same field. These codes permit the automatic encoding of
nearly a printed page's worth of text in a square inch of page space. Examples
include Code 49, Code 16k, PDF 417, Code One, Datamatrix, and UPS's
Maxicode.
Bar Codes

Bar codes can be and are used for:

• Product identification
• Container identification
• Location identification
• Operator identification
The key to success is to minimize the amount of bar
• Equipment identification
coding required to achieve the automatic
• Document identification communications objectives of logistics. If there is too
much bar coding and too much bar code scanning,
the costs and time to print and scan all the codes
can quickly negate potential productivity and
accuracy benefits.
EDI – Electronic Data Interchange
EDI systems are used to share data between suppliers and customers in standardized
formats over value-added computer networks.

Electronic Data Interchange (EDI) is the computer-to-computer exchange of

business documents in a standard electronic format between business
partners.

Is a process which allows one company to send information to another company

electronically rather than with paper.

Electronic data interchange (EDI), electronic fund transfer (EFT) and automatic
transaction machines (ATMs) are common examples of such systems.
EDI – Electronic Data Interchange

From To
Benefits of EDI

• Cost savings: Expenses associated with paper, printing, reproduction,

storage, filing, postage and document retrieval are all reduced or eliminated;
Reduced the cost of processing an order manually ($38 compared to just $1.35
for an order processed); Errors due to illegible faxes, lost orders or incorrectly
taken phone orders are eliminated.

• Speed and Accuracy: Exchange transactions in minutes instead of the days

or weeks; Improves data quality, reduction in transactions with errors (illegible
handwriting, lost faxes/mail and keying/re-keying errors)

• Increase in business efficiency: Quick processing of accurate business

documents leads to less re-working of orders, fewer stock outs and fewer
cancelled orders; Real time tracking order status; Shortening the order
processing and delivery times means that organizations can reduce their
inventory levels

• In terms of the strategic business level: Enables real-time visibility into

transaction status, faster decision-making and improved responsiveness to
changing customer and market demands and allows businesses to adopt a
demand-driven business model rather than a supply-driven one. Shortens the
lead times for product enhancements and new product delivery
QUESTIONS?