Supply Chain Inventory
The Fundamentals of Inventory
SUPPLY CHAIN MANAGEMENT
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MANAGEMENT OF THE CHAIN OF SUPPLIES
What is Supply Chain Management?
• Let us first understand What is Supply Chain Management?
A supply chain is a global network used to deliver products and
services from raw materials (point of source of origin) to end
customers (point of source of consumption) through an
engineered flow of information, physical distribution, and cash.
The SCM Network
Topic 1: The Need for Inventory
• Inventory basics
• Inventory Management
• Inventory Management KPIs
• Inventory Policy
Topic 1: The Need for Inventory
INVENTORY BASICS
• Any resource or material that can be stocked or stored
• Items or materials used to satisfy current or future needs
• Most expensive assets of many companies – mostly manufacturing
based (production centric)
• Represents as much as 60% - 70% of total invested capital (major
capital consumption)
• Types: Raw materials, WIP, MRO, Finished goods & Spare parts
• The biggest ENEMY of any Supply Chain
INVENTORY BASICS
Definition
• The APICS Dictionary defines inventory as follows:
Those stocks or items used to support production (raw
materials and work-in-process items), supporting activities
(maintenance, repair, and operating supplies), and customer
service (finished goods and spare parts)
INVENTORY BASICS
• It is a necessary cost of doing business
• Optimum level of inventory that can maximize profits, production
efficiency, and customer service
• If managed correctly, can be a strategic asset to the organization
• Proper management of inventory can provide protection against
variability in either supply or demand
• A major portion of a supply chain’s invested capital – from 20 to 60
percent of total cost on the balance sheet
INVENTORY MANAGEMENT
Definition
• The APICS Dictionary defines inventory management as
“The branch of business management concerned with planning and
controlling inventories”
• Inventory management from supply chain perspective
• Inventory management from internal process perspective
Supply Chain Perspective of Inventory Management
• Concerned with inflows and outflows at each stage
• From ordering of raw materials to customer handoff of finished goods
• Systemwide / network wide or supply chain wide inventory
management
This perspective can get strong benefits from inventory visibility &
supply chain collaboration
Inventory visibility is “the extent to which inventory information is
shared within a firm and with supply chain partners”
Information has replaced inventory
Internal Process Perspective of Inventory Management
• Integrally connected with production management
• Enterprise wide view of inventory processing
• Production feeding / output
• Operations planning & control (production planning, master
production schedule)
Inventory Management KPIs
From supply chain perspective, there are two Key Performance
Indicators for inventory:
• Reduction of inventory costs related to holding, ordering, and
transporting materials, supplies, and finished goods at various points
along the supply chain
• Achievement of customer service targets related to the quality,
availability, and on-time delivery of products and services (which may
depend upon availability of supplies)
Group Discussion…Road to Inventory Policy
Guess the possible answers…
• Why do we hold Inventory?
• Why we do not hold Inventory?
Match your answers
Why do we hold Inventory? Why we do not hold Inventory?
• Improve customer service Certain costs increase such as
• Reduce certain costs such as • Carrying costs, Handling cost
• ordering costs • Labor Cost
• stockout costs • Warehouse Cost
• Lost sale • Logistics Cost
• Contribute to the efficient and • cost of return on investment
effective operation of the production • reduced-capacity costs (Storage,
system warehouse)
• cost of production problems
(Excess Inventory)
Two Fundamental Inventory Decisions
• How much to order of each material when orders are placed with
either outside suppliers or production departments within
organizations
• When to place the orders
Inventory Policy
Organization weigh a number of factors when setting an inventory
policy:
• Customer demand: Customer demand is known in advance of
production and / or is forecasted. Inventory policy must compensate
for variability in demand forecasts.
• Planning horizon: A planning horizon is “the amount of time a plan
extends into the future”. The duration of the planning horizon affects
necessary inventory levels.
• Replenishment lead time: The time required to replenish stock at
various locations in the supply chains is a key inventory policy input,
especially for long and highly variable lead times.
Cont…
• Product variety: Similar products may compete for budget allocations
or retail shelf space and thus need interconnected inventory policies.
Product families are also planned together.
• Inventory Costs: Inventory costs include order costs (production and
transportation) and inventory carrying costs. These costs are
discussed later in this course.
• Customer service requirements: Inventory policy specifies a level of
safety stock per item and location that balances minimizing failure to
fill customer order within an acceptable time (e.g., stockouts) against
increasing inventory costs.
THANK YOU
