INVENTORY MANAGEMENT AND DEMAND

FORECASTING

INVENTORY MANAGEMENT
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INVENTORY (Stock) - materials in supply

chain or in a segment of supply chain,
expressed in quantities, locations and/or
values, not used at present, but kept for future
use (consumption/sale)
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• INVENTORY MANAGEMENT
– is a systematic approach to sourcing, storing, and selling
inventory—both raw materials (components) and finished
goods (products).
– In business terms, inventory management means the right
stock, at the right levels, in the right place, at the right time, and
at the right cost as well as price.
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• INVENTORY MANAGEMENT TECHNIQUES
1. Economic order quantity.
2. Minimum order quantity.
3. ABC analysis.
4. Just-in-time inventory management.
5. FIFO and LIFO.
6. Reorder point formula.
7. Batch tracking.
8. Consignment inventory.
9. Safety stock.
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• INVENTORY MANAGEMENT TECHNIQUES
10. Perpetual inventory management.
11. Dropshipping.
12. Lean Manufacturing.
13. Six Sigma.
14. Lean Six Sigma.
15. Demand forecasting.
16. Cross-docking.
17. Bulk shipments.
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• 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.
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• 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.
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• 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.
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• 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.
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• 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.
• 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.
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• 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.
• 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.
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• 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 favorite 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.
• 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.
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• Dropshipping
– Dropshipping is an inventory management fulfillment 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.
• Lean Manufacturing
– Lean is a broad set of management practices that can be applied
to any business practice. It’s goal is to improve efficiency by
eliminating waste and any non value-adding activities from daily
business.
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• 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.
• 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.
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• 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.
• Cross-docking
– Cross-docking is an inventory management technique whereby
an incoming truck unloads materials directly into outbound
trucks to create a JIT shipping process. There is little or no
storage in between deliveries.
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• Bulk shipments
– Bulk shipments is a cost efficient method of shipping when you
palletize inventory to ship more at once.
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STOCK CLASSIFICATION
by type and position in a pipeline
– Material stock (raw material, components)
– Work-in-progress stock/ Semifinished Products and Components
– Finished products stock
– Spare parts and auxiliary materials stock
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• RAW MATERIAL
– The raw materials purchase category includes items such as
petroleum, coal, and lumber, and metals such as copper and
zinc. It can also include agricultural raw materials.
– A key characteristic of a raw material is a lack of processing by
the supplier into a newly formed product. Any processing that
occurs makes the raw material saleable.
– Another key characteristic is that raw materials are not of equal
quality. Raw materials often receive a grade indicating the
quality level. This allows raw materials purchases based on the
required grade.
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• SEMI- FINISHED PRODUCTS
– Semifinished products and components include all the items
purchased from suppliers required to support an organization’s
final production. This includes single part number components,
subassemblies, assemblies, subsystems, and systems.
– Semi- finished products and components purchased by an
automobile producer include tires, seat assemblies, wheel
bearings, and car frames.
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• SEMI-FINISHED PRODUCTS
– Managing the purchase of semifinished components is a critical
purchasing responsibility because components affect product
quality and cost. Outsourcing product requirements increases
the burden on purchasing to select qualified suppliers, not only
for basic components, but also for complex assemblies and
systems.
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• FINISHED PRODUCTS
– All organizations purchase finished items from external
suppliers for internal use. This category also includes
purchased items that require no major processing before resale
to the end customers.
– An organization may market under its own brand name an item
produced by another manufacturer.
– The purchase of finished products also allows a company to
offer a full range of products. Purchasing (or engineering) must
work closely with the producer of a finished product to develop
material specifications.
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• SPARE PARTS / AUXILIARY MATERIAL
– is an interchangeable part that is kept in an inventory and used
for the repair or replacement of failed units. Spare parts are an
important feature of logistics engineering and supply chain
management, often comprising dedicated spare parts
management systems.
– Spare parts are an outgrowth of the industrial development of
interchangeable parts and mass production.
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STOCK CLASSIFICATION
by the reasons of keeping
• Cycle Stock
• Safety Stock
• Seasonal Stock
• “Speculation” Stock
• Strategic Stock
• Surplus Stock
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• CYCLE STOCK
– cycle stock is the amount of inventory that is planned to be
used during a given period. The period is often defined as the
time between orders (for raw materials), or the time between
production cycles (for work in process and finished goods).
• SAFETY STOCK
– Safety stock can be thought of as buffer inventory, or inventory
that is not planned to be consumed but is held in case of an
emergency. Safety stock is typically dipped into if actual
demand exceeds forecast, or if production output is less than
planned.
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• HOW TO CALCULATE SAFETY STOCK?
1. Multiply your maximum daily usage by your maximum lead
time in days.
2. Multiply your average daily usage by your average lead time in
days.
3. Calculate the difference between the two to determine your
Safety Stock
Lead time is the delay between the time the reorder point is reached and renewed availability.
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• SEASONAL STOCK
– Seasonal stock is stock which is in high demand during
particular times of the year. These periods of time often
coincide with the different seasons, and managers need to be
proactive in preparing for the waxing and waning of demand
during these key times.
– Seasonal commodities are products that are either. (i) not
available in the marketplace during certain seasons of the year
or (ii) are available throughout. the year but there are regular
fluctuations in prices. or quantities that are synchronized with
the season.
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• SPECULATION STOCK
– A speculative stock is a stock that a trader uses to speculate.
The fundamentals of the stock do not show an apparent
strength or sustainable business model, instead the trader
expects that such things may one day come about for one
reason or another.
– Traders select stocks that appear to have great potential that is
not yet realized.
– Speculative stocks tend to be clustered into sectors or in
various types: penny stocks, emerging market stocks, rare
materials stocks, pharmaceutical stocks, and others.
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• STRATEGIC STOCK
– Strategic stock is a type of long-term storage (for a period of
one year and more) to save a quantity or quantities of goods in
order to account for fluctuations in environmental, political or
natural conditions or due to natural market fluctuations.
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• SURPLUS STOCK
– A surplus describes the amount of an asset or resource that
exceeds the portion that's actively utilized.
– A surplus can refer to a host of different items, including
income, profits, capital, and goods. In the context of
inventories, a surplus describes products that remain sitting on
store shelves, unpurchased.
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STOCK CLASSIFICATION
by rotation
• Fast moving (rotating) stock
• Slow moving (rotating) stock
• Not moving (rotating) stock
- Obselete Stock
- Emergency Stock
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Why do we keep inventories?
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Stock maintaining, replenishment and its quantity result from:
• uncertainty of real demand • expected difficulties with an
• uncertainty of real quantity, access to some goods
quality and timing of (expected rise of prices)
deliveries • discount offered for
• seasonal access to some purchases of larger
materials and goods quantities
• service level required by • some technical and/or
customer organizational conditions of
delivery
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Having invetories, GOOD or BAD???
GOOD, because they: BAD, because they:
• Guarantee a continuous access to all kinds • Take space (warehouses)
of goods when supplies are discontinuous • Cost money (space, losses,
• Guarantee access to goods in periods when capital); carrying stock may
they are not available cost annually up to 30% of
• Ensure required service level compensating its value
random variations of demand
• Ensure required service level compensating
delays of deliveries random vaiations and
reflenishment lead time