The document discusses retail inventory management. It describes the different types of inventory including raw materials, work in progress, finished goods, and scraps. It also discusses inventory control and the objectives of maintaining optimal inventory levels. The key challenges discussed include balancing ordering costs, carrying costs, and stockout costs. ABC classification is presented as a method to prioritize inventory items.
2. Managing Facilitating Goods Customer Replenishment Replenishment Replenishment Order Order Order Order Factory Wholesaler Distributor Retailer Production Delay Customer Shipping Delay Shipping Delay Item Withdrawn Wholesaler Distributor Retailer Inventory Inventory Inventory A. Umar
3. Think !!! What and Where is the PROBLEM ? A. Umar
5. As the cost of logistics increases retailers and manufacturers are looking to inventory management as a way to control costs. Inventory is a term used to describe unsold goods held for sale or raw materials awaiting manufacture. These items may be on the shelves of a store, in the backroom or in a warehouse miles away from the point of sale. In the case of manufacturing, they are typically kept at the factory. Any goods needed to keep things running beyond the next few hours are considered inventory. A. Umar
6. What is Inventory Management Inventory management simply means the methods you use to organize, store and replace inventory, to keep an adequate supply of goods while minimizing costs. Each location where goods are kept will require different methods of inventory management. Keeping an inventory, or stock of goods, is a necessity in retail. Customers often prefer to physically touch what they are considering purchasing, so you must have items on hand. In addition, most customers prefer to have it now, rather than wait for something to be ordered from a distributor. Every minute that is spent down because the supply of raw materials was interrupted costs the company unplanned expenses. A. Umar
7. What is Inventory Control Inventory control is the technique of maintaining the size of the inventory at some desired level keeping in view the best economic interest of an organization. A. Umar
9. Type of Inventory Reason for holding the Inventory (1) Raw materials To reap the price advantage available on seasonal raw materials. (2) Work in progress To balance the production flow. (3) Ready made components When the components are bought rather than made. (4) Scraps They are disposal of in bulk. A. Umar (5) Finished Goods Lying in stock rooms and waiting dispatches
10. Purpose of inventory management ◦ Stocking the RIGHT PRODUCT ◦ Able to LOCATE the products ◦ Maintain OPTIMUM LEVEL of inventory A. Umar
11. Reasons to Hold Inventory Meet variations in customer demand: ◦ Meet unexpected demand ◦ Smooth seasonal or cyclical demand Pricing related: ◦ Temporary price discounts ◦ Hedge against price increases ◦ Take advantage of quantity discounts Process & supply surprises ◦ Internal – upsets in parts of or our own processes ◦ External – delays in incoming goods A. Umar
12. Objective of Inventory Management To maintain a optimum size of inventory for efficient and smooth production and sales operations To maintain a minimum investment in inventories to maximize the profitability The 5 R’s: Effort should be made to place an order at the right time with right source to acquire the right quantity at the right price and right quality A. Umar
13. An Effective Inventory Management Should … Ensure a continuous supply of raw materials to facilitate uninterrupted production Maintain sufficient stocks of raw materials in periods of short supply and anticipate price changes Maintain sufficient finished goods inventory for smooth sales operation, and efficient customer service Minimize the carrying cost and time Control investment in inventories and keep it at an optimum level A. Umar
14. An Optimum Inventory Level Involves Three Types of Costs Ordering costs:- Carrying costs:- Quotation or tendering Warehousing or storage Requisitioning Handling Order placing Clerical and staff Transportation Insurance Receiving, inspecting and storing Interest Quality control Deterioration, shrinkage, Clerical and staff evaporation and obsolescence Stock-out cost Taxes Loss of sale Cost of capital Failure to meet delivery commitments A. Umar
15. Dangers of Over-investment Unnecessary tie-up of firm‟s fund and loss of profit – involves opportunity cost Excessive carrying cost Risk of liquidity- difficult to convert into cash Physical deterioration of inventories while in storage due to mishandling and improper storage facilities A. Umar
16. Dangers of Under-investment Production hold-ups – loss of labor hours Failure to meet delivery commitments Customers may shift to competitors which will amount to a permanent loss to the firm May affect the goodwill and image of the firm A. Umar
17. Maximum Stock Level Quantity of inventory above which should not be allowed to be kept. This quantity is fixed keeping in view the disadvantages of overstocking; Factors to be considered: Amount of capital available. Godown space available. Possibility of loss. Cost of maintaining stores; Likely fluctuation in prices; Seasonal nature of supply of material; Restriction imposed by Govt.; A. Umar Possibility of change in fashion and habit.
18. Minimum Stock Level This represents the quantity below which stocks should not be allowed to fall . The level is fixed for all items of stores and the following factors are taken into account: 1.Lead time- 2. Rate of consumption of the material during the lead time. A. Umar
19. Re-ordering Level It is the point at which if stock of the material in store approaches, the store keeper should initiate the purchase requisition for fresh supply of material. This level is fixed some where between maximum and minimum level. A. Umar
20. Managing Small Items Inventory control is simply knowing how much inventory you have. It is a means to control loss of goods. Businesses that use large quantities of small items often use an “80/20” or ABC rule in which they keep track of 20 percent of the largest value inventory items and use it to represent the whole. “A” items are the top valued 20 percent of the company‟s inventory, both in terms of the cost of the item and the need for the item in the manufacturing or sales process. Controlling this top 20 percent will control 80 percent of their inventory costs. “B” items are those of mid-range value and “C” items are cheap and rarely in demand. The retailer or manufacturer can now categorize all items in the inventory into one of these three classes and then monitor the stock according to value. "A" items would be counted and tracked A. Umar regularly, while "B" and "C" items would be counted only monthly or quarterly.
21. Counting Current Stock All businesses must know what they have on hand and evaluate stock levels with respect to current and forecasted demands. You must know what you have in stock to ensure you can meet the demands of customers and production and to be sure you are ordering enough stock in the future. Counting is also important because it is the only way you will know if there is a problem with theft occurring at some point in the supply chain. When you become aware of such problems you can take steps to eliminate them. A. Umar
22. Cyclical Counting Many companies prefer to count inventory on a cyclical basis to avoid the need for shutting down operations while stock is counted. This means that a particular section of the warehouse or plant is counted at particular times, rather than counting all inventory at once. In this way, the company takes a physical count of inventory, but never counts the entire inventory at once. While this method may be less accurate than counting the whole, it is much more cost effective. A. Umar
23. Controlling Supply and Demand Whenever possible, obtain a commitment from a customer for a purchase. In this way, you ensure that the items you order will not take space in your inventory for long. When this is not possible, you may be able to share responsibility for the cost of carrying goods with the salesperson, to ensure that an order placed actually results in a sale. You can also keep a list of goods that can easily be sold to another party, should a customer cancel. Such goods can be ordered without prior approval. Approval procedures should be arranged around several factors. You should set minimum and maximum quantities which your buyers can order without prior approval. This ensures that you are maximizing any volume discounts available through your vendors and preventing over-ordering of A. Umar stock. It is also important to require pre-approval on goods with a high carrying cost.
24. Keeping Accurate Records Any time items arrive at or leave a warehouse, accurate paperwork should be kept, itemizing the goods. When inventory arrives, this is when you will find breakage or loss on the goods you ordered. Inventory leaving your warehouse must be counted to prevent loss between the warehouse and the point of sale. Even samples should be recorded, making the salesperson responsible for the goods until they are returned to the storage facility. Records should be processed quickly, at least in the same day that the withdrawal of stock occurred. A. Umar
25. Managing Employees Buyers are the employees who make stock purchases for your company. Reward systems should be set in place that encourage high levels of customer service and return on investment for the product lines the buyer manages. Warehouse employees should be educated on the costs of improper inventory management. Be sure they understand that the lower your profit margin, the more sales must be generated to make up for the lost goods. Incentive programs can help employees keep this in perspective. When they see a difference in their paychecks from poor inventory management, they are more likely to take precautions to prevent shrinkage. Each stock item in your warehouse or back room should have its own procedures for replenishing the supply. Find the best suppliers and storage location for each and record this information in official A. Umar procedures that can easily be accessed by your employees.
26. Contd… Inventory management should be a part of your overall strategic business plan. As the business climate evolves towards a green economy, businesses are looking for ways to leverage this trend as part of the “big picture”. This can mean reevaluating your supply chain and choosing products that are environmentally sound. It can also mean putting in place recycling procedures for packaging or other materials. In this way, inventory management is more than a means to control costs; it becomes a way to promote your business. A. Umar
27. Water Tank Analogy for Inventory Inventory Level Supply Rate Buffers Demand Inventory Level Rate from Supply Rate A. Umar Demand Rate
28. Bullwhip effect Demand information is distorted as it moves away from the end-use customer. Higher safety stock inventories to are stored to compensate A. Umar
29. Two Forms of Demand Dependent ◦ Demand for items used to produce final products ◦ Tires stored at a Goodyear plant are an example of a dependent demand item Independent ◦ Demand for items used by external customers ◦ Cars, appliances, computers, and houses are examples of independent demand inventory A. Umar
30. Independent and Dependent Demand Inventory Management Dependent demand – “Requirements” / planned – Materials Requirements Planning / Just in Time Independent demand – Uncertain / forecasted – Continuous Review / Periodic Review A. Umar
31. Reasons To Hold Inventory Meet variations in customer demand: ◦ Meet unexpected demand ◦ Smooth seasonal or cyclical demand Pricing related: ◦ Temporary price discounts ◦ Hedge against price increases ◦ Take advantage of quantity discounts Process & supply surprises ◦ Internal – upsets in parts of or our own processes ◦ External – delays in incoming goods A. Umar Transit
32. Reasons NOT To Hold Inventory Carrying cost ◦ Financially calculable Takes up valuable factory space ◦ Especially for in-process inventory Inventory covers up “problems” … ◦ That are best exposed and solved Driver for increasing inventory turns (finished goods) and lean production/Just in time for work in process A. Umar
33. Inventory Hides Problems Bad Design Lengthy Poor Setups Quality Machine Inefficient Unreliable Breakdown Layout Supplier A. Umar
34. To Expose Problems: Reduce Inventory Levels Bad Design Lengthy Poor Setups Quality Machine Inefficient Unreliable Breakdown Layout Supplier A. Umar
35. Remove Sources of Problems and Repeat the Process Poor Quality Lengthy Setups Bad Machine Design Inefficient Unreliable Breakdown Layout Supplier A. Umar
36. Inventory Cost Structures Ordering (or setup) cost Carrying (or holding) cost: ◦ Cost of capital ◦ Cost of storage ◦ Cost of obsolescence, deterioration, and loss Stock out cost Item costs, shipping costs and other cost subject to volume discounts A. Umar
37. Typical Inventory Carrying Costs Costs as % of Inventory Value Housing cost: ◦ Building rent or depreciation 6% ◦ Building operating cost (3% - 10%) ◦ Taxes on building ◦ Insurance Material handling costs: ◦ Equipment, lease, or depreciation 3% ◦ Power (1% - 4%) ◦ Equipment operating cost 3% Manpower cost from extra handling and supervision (3% - 5%) Investment costs: ◦ Borrowing costs 10% ◦ Taxes on inventory (6% - 24%) ◦ Insurance on inventory Pilferage, scrap, and obsolescence 5% (2% - 10%) A. Umar Overall carrying cost (15% - 50%)
38. Inventory Management Systems Functions of Inventory Management – Track inventory – How much to order – When to order Prioritization Inventory Management Approach – EOQ – Continuous / Periodic A. Umar
39. ABC Prioritization Based on “Pareto” concept (80/20 rule) and total usage in dollars of each item. Classification of items as A, B, or C often based on $ volume. Purpose: set priorities for management attention. A. Umar
40. ABC Prioritization „A‟ items: 20% of SKUs, 80% of Value „B‟ items: 30 % of SKUs, 15% of Value „C‟ items: 50 % of SKUs, 5% of Value Three classes is arbitrary; could be any number. Percents are approximate. Danger: Money use may not reflect importance of any given SKU! A. Umar
41. Annual Usage of Items by Dollar Value Percentage of Annual Usage in Total Dollar Item Units Unit Cost Dollar Usage Usage 1 5,000 $ 1.50 $ 7,500 2.9% 2 1,500 8.00 12,000 4.7% 3 10,000 10.50 105,000 41.2% 4 6,000 2.00 12,000 4.7% 5 7,500 0.50 3,750 1.5% 6 6,000 13.60 81,600 32.0% 7 5,000 0.75 3,750 1.5% 8 4,500 1.25 5,625 2.2% 9 7,000 2.50 17,500 6.9% 10 3,000 2.00 6,000 2.4% Total $ 254,725 100.0% A. Umar
42. ABC Chart For Previous Slide 45.0% 120.0% 40.0% 100.0% Cumulative % Usage 35.0% A B C Percent Usage 30.0% 80.0% 25.0% 60.0% 20.0% 15.0% 40.0% 10.0% 20.0% 5.0% 0.0% 0.0% 3 6 9 2 4 1 10 8 5 7 Item No. Percentage of Total Dollar Usage Cumulative Percentage A. Umar
43. ABC Classification Class A ◦ 20 % of Inventory ◦ 80 % of value Class B ◦ 30 % of Inventory ◦ 15 % of value Class C ◦ 50 % of Inventory ◦ 5 % of value A. Umar
44. ABC Analysis Example 100 — +Class C +Class B 90 — Percentage of dollar value Class A 80 — 70 — 60 — 50 — 40 — 30 — 20 — 10 — 0— 10 20 30 40 50 60 70 80 90 100 A. Umar Percentage of items
45. Inventory Management Approaches A-items – Track carefully (e.g. continuous review) – Sophisticated forecasting to assure correct levels C-items – Track less frequently (e.g. periodic review) – Accept risks of too much or too little (depending on the item) A. Umar
46. Item Quality Quantity order Checking A Costlier Less Regular system to see that there is no overstocking as well as that there is no danger of production being interrupted for unwanted material. B Less costlier Order may be on Position being viewed review basis. in each month C Economical Larger Order in large quantity so that cost can be avoided A. Umar
47. Economic Order Quantity (EOQ) Model Demand rate D is constant, recurring, and known Amount in inventory is known at all times Ordering (setup) cost S per order is fixed Lead time L is constant and known. Unit cost C is constant (no quantity discounts) Annual carrying cost is i time the average $ value of the inventory No stockout allowed. Material is ordered or produced in a lot or batch and the lot is received all at once A. Umar
48. EOQ Lot Size Choice There is a trade-off between lot size and inventory level. ◦ Frequent orders (small lot size): higher ordering cost and lower holding cost. ◦ Fewer orders (large lot size): lower ordering cost and higher holding cost. A. Umar
49. EOQ Inventory Order Cycle Demand rate Order qty, Q Inventory Level ave = Q/2 Reorder point, R 0 Lead Lead Time time time Order Order Order Order Placed Received Placed Received A. Umar As Q increases, average inventory level increases, but number of orders placed decreases
51. Answer to Inventory Management Questions for EOQ Model Keeping track of inventory ◦ Implied that we track continuously How much to order? ◦ Solve for when the derivative of total cost with respect to Q = 0: -SD/Q^2 + iC/2 = 0 ◦ Q = sqrt ( 2SD/iC) When to order? ◦ Order when inventory falls to the “Reorder Point-level” R so we will just sell the last item as the new order comes in: ◦ R = DL A. Umar
52. Re-order Point Example Demand = 10,000 yds/ year Lead time = L = 10 days When inventory falls to R, we order so as not to run out before the new order comes in. R=? A. Umar
53. Re-order Point Example Demand = 10,000 yds/year Daily demand = 10,000 / 365 = 27.4 yds/day Lead time = L = 10 days R = D*L = (27.4)(10) = 274 yds (usually can neglect issues of working days vs weekends, etc.) Don’t forget to convert to consistent time units! A. Umar
54. EOQ Summary How much to order? ◦ Q = sqrt(2DS/iC) When to order? ◦ R = DL A. Umar
55. Inventory Control Systems Continuous system (fixed-order- quantity) ◦ constant amount ordered when inventory declines to predetermined level Periodic system (fixed-time-period) ◦ order placed for variable amount after fixed passage of time A. Umar
56. Quantity Discounts Model Price per unit decreases as order quantity increases Co D CcQ TC = + + PD Q 2 where P = per unit price of the item D = annual demand A. Umar
58. Quantity Discounts Model QUANTITY PRICE Co = $2,500 1 - 49 $1,400 Cc = $190 per computer 50 - 89 1,100 D = 200 90+ 900 2CoD 2(2500)(200) Qopt = = = 72.5 PCs Cc 190 For Q = 72.5 CoD CcQopt TC = + 2 + PD = $233,784 Qopt For Q = 90 CcQ CoD A. Umar TC = + 2 + PD = $194,105 Q
59. EOQ Exercise Now you do it See Excel Spreadsheet: Excel_Inv_Examples.xls, EOQ tab Compute the values of R and Q and compare to the simulation Next see what happens when you have volume discounts (EOQ w Discount Tab) A. Umar
60. Safety Stocks Safety stock ◦ buffer added to on hand inventory during lead time Stockout ◦ an inventory shortage Service level ◦ probability that the inventory available during lead time will meet demand A. Umar
61. Perpetual Inventory System It is a method of recording stores balances after every receipt and issue, to facilitate regular checking and obviate closing down for stock taking. -Wheldon A. Umar
62. Factors which are helpful to make system successful Stores ledger, stores control, cards or bin cards are properly maintained ; Quantity balance store shown in the store ledger; stock control and bin cards are reconciled; Exploring the cause of discrepancies if any physical balances and book balances. A. Umar
63. Daily Inventory Balance Record Product Month Year 1 2 3 4 5 6 7 Day Opening Physical Deliveries Meter Sales Inventory Should Be Physical Inventory Variation Today Variation This Inventory Month 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 A. Umar 30 31 TOTALS
64. Daily Readings Product Month Year Pump 1 Pump 2 Pump 3 Pump 4 Total Tank 1 Tank 2 Total Meter Dip Inventroy Water Dip Dip Inventroy Water Dip Physical Day Readings Sales Readings Sales Readings Sales Readings Sales Sales cm. litres cm. cm. litres cm. Inventory 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 A. Umar 31
65. Monthly Summary Product Product Product Storage Capacity Storage Capacity Storage Capacity Total Variation Total Variation Total Variation % Loss % Loss % Loss Month Sales for Month Sales for Month Sales for Month A. Umar
66. Inventory Turnover Method It means how many times a company‟s inventory is sold and replaced (finished product) Generally calculated as: Sales/ Inventory However it may also be calculated as: Cost of goods sold/ Average Inventory A. Umar
67. Reduce your inventory NOW!!! Things you can do to free up some cash right now: Adjust safety stock Reduce safety lead time Cut PO quantities in half and double the number of receipts Implement supplier kanban (its not that hard) Rebalance your A, B, C items and cut back on the C‟s Put Purchasing on a strict diet – limit monthly spend to 1/10 of the annual plan Revise the annual plan to reflect current reality Suppliers are hungry, so lock in shorter lead times Liquidate your slow moving stock: have a Sale Reduce production lot sizes A. Umar