Inventory Management

• Inventory management


  The continuing process of planning, organizing, and controlling inventory with the aim to minimize investment in inventory while balancing supply and demand
• Aims of inventory management


  • Accurately forecast demand to avoid overstocking or stockouts
  • Improve visibility of inventory levels across the supply chain for better planning
  • Maintain stock levels to meet customer demand
  • Slash costs through optimized ordering and efficient stock handling
• Key economic factors in inventory


  • Acquisition cost
  • Holding cost
  • Stock-out cost
• Acquisition cost


  The cost of making a purchase order, which is the same regardless of order size
• Holding cost


  Costs related to storing unsold goods; these are dependent on the value and physical characteristics of the inventory. This includes costs like storage, insurance, and spoilage
• Stock-out cost


  Costs incurred when inventory runs out, potentially leading to lost sales, dissatisfied customers, and damage to brand reputation
• Purpose (benefits) of inventory management


  • Streamlines Management
  • Increases Savings
  • Matches Supply and Demand
  • Promotes Specialization
  • Limits Uncertainty Risks
  • Eases Distribution
• Signs of poor inventory management

  • Rising inventory levels yet constant back orders
  • High customer turnover
  • Cancelled orders due to unavailability of products
  • Large quantities of outdated inventory
  • Insufficient storage indicating overstocking
• Buffer/safety stock


  The required stock to cover shortages due to the agreed lead time being exceeded or the actual demand being greater than anticipated
• Benefits of buffer/safety stock

  • Secure supply (ensure extra supply incase deliveries are late)
  • Avoid stockouts and losing sales
  • Fast response to any shortages
  • Emergency backup against unforeseen events (Covid)
  • Timely recovery from disruptions
  • Year round preparedness for seasonal demand
• Drawbacks of buffer/safety stock

  • Ties up working capital
  • Increases costs such capital, storage space, and service costs
  • Risk of obsolescence
  • Space constraints
  • Moves away from lean and JIT principles
• Inventory decisions


  • Volume decision
  • Timing decision
  • Controlling the system
• EOQ (Economic Order Quantity)


  A mathematical formula that helps businesses determine the optimal order quantity to minimize total inventory costs. It considers holding costs and ordering costs
• EOQ Assumptions


  • Demand is constant and known in advance
  • Lead time (time between order and delivery) is constant
  • No stockouts occur (inventory never runs empty)
  • Order quantity received is instantaneous and complete
  • There is no inventory in transit
• Fixed order quantity system


  Order a constant amount, whenever inventory reaches reorder point
• Fixed order interval system


  Reorder at fixed intervals, but order quantity changes depending on stock levels
• Reorder point


  The minimum level of inventory that triggers a new order to ensure there's enough stock to meet demand until the next order arrives
• Inventory management approaches


  • JIT
  • ABC
  • VMI
• Benefits of JIT


  • Cost reduction by reducing storage needs
  • Cost Saving by focusing on high value items
  • Reduce risk of holding obsolete goods
  • Efficient resource allocation
  • Streamlines production
  • Better inventory management
• Disadvantages of JIT


  • Supply chain vulnerability /No buffer stock
  • Time consuming
  • Risk of stockouts
  • Limited Scope (focuses on monetary value not quality factors)
• Benefits of VMI


  • Stable demand patterns
  • Long term customer relationship
  • Operational flexibility
  • More working capital
  • Faster order fulfillment
  • Reduced administrative cost
• Disadvantages of VMI


  • Transfer customer cost to Supplier
  • Dependant demand reduces working capital
  • Sharing sensitive information
  • Increased risk of disruptions