An Overview of Inventory Management

Inventory can consist of any one or a mix of these types:
─ Raw materials
─ Components
─ Work-in-progress (WIP)
─ Finished goods
─ Distribution inventory
─ Maintenance, repair & operating supplies (MRO)
 

Your inventory is used to fulfill two types of demand:
● Independent demand - usually demand for finished goods that comes from outside customers—usually predicted from forecasts.
● Dependent demand - demand for raw materials, components, etc. needed to produce an item—usually calculated from the Master Production Schedule (MPS).

Inventory are being kept for many purposes:
● Anticipating an increase in demand during certain period of the year or festive season (seasonal inventory).
● Safety stock which serves to buffer against demand fluctuations.
● Lot-size or cycle stock which serves to take advantage of quantity discounts or purchasing efficiencies.
● Pipeline or transportation inventory.
● Speculative strategy or to hedge inventory against some possible future event (labor strike, price hikes,etc)
● Specified list in a contractual Service Level agreement with customer.
● Service parts for products within warranty periods.
● Maintenance, repair, and operating inventories.
 

Various methods and techniques can be used to manage your inventory effectively:
■ ABC material classes
■ Pareto analysis or "80/20" rule
■ Ratios such as Stock Cover, Inventory Turns, Forecast Accuracy
■ Cost of Goods Sold (COGS)
■ Non-Moving and Slow-Moving categorization
■ Consumption events classification
■ Days of Inventory (DOI)
■ Excess and Obsolescence control
■ Excess or surplus transfer or redistribution
■ Reorder point techniques (ROP)
■ Safety stock target levels
■ Order quantities - Lot-for-lot, Fixed-order qty (FOQ), Economic order qty (EOQ), Minimum order qty (MOQ)
■ Demand Forecasting
■ Material requirements planning (MRP)
■ Just-in-time stock control (Pull system)
■ Master Production Scheduling or MPS (Push system)
 

Suppose your boss says to you that the senior management is not happy seeing the high inventory levels, and company is not meeting customers’ service levels. You may have implemented the good inventory policies and strategies, best-in-class planning practices and control measures, but non-performing inventory levels remain high and inventory isn’t turnaround faster. Here will be the right place where you will find many best practices, concepts and methodologies, explanation and examples in managing your inventory, giving your company higher inventory turnover and more cash flow. I will not touch on every subject but only the important components of an effective inventory management. 

Sometimes companies don’t even need to hire big-talk inventory management consultant or specialists for solutions. They don’t have to look further than internally sharing and leveraging the best-in-class concepts and practices from across the different functional divisions and units, and develop their own company-specific world-class practices. The problem remains with those talented workers from the different hierarchies and from the variety of entities and geographical regions, they are not entirely willing to share every of their best practices, techniques, and productivity tools. It is the job of the senior management to drive for multi-echelons co-operation in order that company as a whole can benefit. 

In essence, inventory management consists of a hierarchical set of policy, planning and control elements outlined as follow:

Inventory policies:

─ Guidelines and responsibilities
─ Stocking Level and Inventory Turns
─ MRP explosion and order frequency
─ Service Level agreement
─ Surplus and Excess definition
─ Non-Stocking and Slow-Moving items definition
─ Storage and Handling
─ Stock physical count and adjustments

Inventory planning methodologies:

─ Dependent versus independent demand
─ Re-Order Points and Safety Stock replenishment
─ Economic order quantities
─ Demand forecasting
─ Pre-seasonal buys
─ Inventory allocation
─ Redistributing excess stock to other branches
─ Price breaks sale of excess stock to vendors/competitors

Inventory Control:

─ Issues and Receipts
─ Transfers
─ Cycle counting and adjustments
─ Barcoding and bins location

The inventory guidelines that you structured must be responsive to customers in terms of customer’s production ramp, delivery lead times, availability, and service level. Your inventory strategy should change in focus over time depends on different stages of the product’s life cycle (PLC). In each phase of the product’s life cycle, your inventory policies and forecasting techniques must adapt to the actual market conditions. These elements vary by different product mix for any given customer. Failure to consider these primary drivers will cause loss of potential and long-term customers due to dissatisfaction with early purchases. Lack of availability hinders the company’s penetration strategy to capture market share and to establish early market leadership position. 

The following are a list of challenges faced by inventory management team:

• Stockouts and lost sales while warehouses are bulging with inventory.
• On-hand and available-for-sale quantities in the computer systems are inaccurate.
• Lack of an approved finite stock list.
• Lack of an accurate and comprehensive set of measures and control to monitor against targets that bridge the As-Is baseline and To-Be performance.
• Absence of a link mechanism to measure inventory balances reduction that increases inventory turns, with costs increase in expediting, airfreight and overtime expenses.
• Lack of a thorough understanding of what is stopping the company from achieving the inventory targets.
• Planners lack comprehensive analytical skill in making full use of computer tools.
• Return on investment (ROI) from inventory is not satisfactory.

Many companies focus only on incremental improvements in orders fulfillment, re-order levels, safety stock, and demand forecasting more effectively each quarter or each year. Significant improvement is difficult to achieve if they continue with the old ways of operating. Come to a time when service level deteriorates, voice of customers implying they are finding a second source, or some compelling need forces management to question their current processes, approaches and practices, then someone start to question why maintaining status quo, and some people start to question the planning algorithm and challenge with the reasons “why not other ways..”, and then eventually everybody agrees that they need to re-look at their inventory strategies, policies and guidelines. You can find some examples later in this site that will give you many useful ideas and clues, for example, categorization of material classes in terms of cost, status, historical consumption and criticality.

Next Page >> What is the "right" amount of inventory?
 

This site was created in Feb.2007
by William Tan