MAN203
Logistics and Supply
Chain Management
Week 5
Managing Inventories
Copyright Notice
COPYRIGHT
COMMONWEALTH OF AUSTRALIA
Copyright Regulations 1969
WARNING
This material has been reproduced and communicated to you by or on behalf of Kaplan Higher
Education pursuant to Part VB of the Copyright Act 1968 (the Act). The material in
this communication may be subject to copyright under the Act. Any further reproduction
or communication of this material by you may be the subject of copyright protection under the Act.
Do not remove this notice
2
Today’s Big Idea
Inventory is money sitting around in a
different form.
Adams, R as cited in Wisner Joel, 2016. Operation Management: a
supply chain process approach. SAGE Publications, Singapore.
Learning Objectives
• Describe the different concepts and
strategies related to inventory
• Examine how inventory is managed
Agenda
Inventory: The Basics
• Inventory Management Strategies
• Improving Inventory Management
Types of Inventory
• Raw materials
– Ingredients
– Parts
– Packaging
• Sub-assemblies (partly manufactured)
• Finished goods
Stock-Keeping Unit
(SKU)Treatment
• SKU is a product or service identification
code.
• Products do not have the same supply and
demand variability patterns.
SKU Example
Purpose of Inventory
• The maintain independence of operations
• To meet variation in product demand
• To allow flexibility in production scheduling
• To provide a safeguard for raw material deliveries
• To take advantage of economic order size
Cost of Inventory
• Holding (or carrying) costs
• Setup (or production
change) costs
• Ordering costs (i.e.
purchasing)
• Shortage costs
Materials Requirement Planning
(MRP)
Determining how much ‘material’ (inputs)
are required, and when:
• Bill of Material (BOM) – the ‘recipe’
• Lead times for re-ordering
• Re-order Quantity (ROQ)
• Safety levels – minimum stock level
• Production forecast
Bill of Material (BOM)
Lead Times
• The time between the initiation and completion
of a process
– Example: The time between placing an order
with a supplier and the receipt of goods
Re-Order Quantity
• Re-order point (ROP)
– The ‘time’ in the production cycle that triggers a re-
order event (a requisition to purchase)
• Minimum buy quantity (MBQ)
– The minimum quantity a supplier will produce
– e.g. 5,000 labels
• Re-order quantity (ROQ)
– The optimum quantity to purchase to fulfill needs
– e.g. 7,000 labels are needed
Safety Levels
• Volume of stock needed to avoid running out
• Tied to lead times
Production Planning
Production Forecasts
• Sales demand forecast
• Drives production plan
– Volume to produce,
– Based on need and equipment
• Gives rise to material availability
Production Scheduling
Inventory Accuracy
• Inventory record
– Recording stock movement
• Perpetual record
• Cycle counting: verifying inventory
– High moving stock counted frequently
– Low moving stock counted annually
Activity 5.1
Watch video
Consider: How would this system reduce inventory?
Source: https://www.youtube.com/watch?time_continue=3&v=quAqpmDNgGQ
Agenda
• Inventory: The Basics
Inventory Management Strategies
• Improving Inventory Management
An Extended Supply Chain
Value Chain or Supply Chain
Supply Push
• Products are
manufactured /
assembled in batches in
anticipation of demand.
• Positioned in the supply
chain as ‘buffers’
between various
functions and entities
Demand Pull
• Products are manufactured/assembled in
batches in anticipation of demand.
• Positioned in the supply chain as ‘buffers’
between various functions and entities.
Just-in-Time
• A philosophy and a
technique
• Based upon the idea that
wherever possible, no
activity should take place
until there is a need for it
• Demand pulls products
towards the market
Just-in-Time
• A strategy aimed at increasing efficiency and
decreasing waste.
• Companies receive goods only as they are
needed in the production process, reducing
inventory costs.
• However, it relies on good forecasts and the
entire process can be brought down by one
supplier.
Just-in-Time: Advantages
Production runs remain short, manufacturers
can move from one type of product to another
very easily
Reduces costs by eliminating warehouse
storage needs
Companies spend less money on raw
materials; they buy just enough to make the
products and no more
Just-in-Time: Disadvantages
• May result in disruptions in the supply chain
• One supplier can shut down the entire
process
Kanban
Kanban
• Pull system by ‘cards’
• Authorises movement of material
• Controls flow of material from suppliers through
to manufacturing
• Reduces stockpiling and WIP
• Often used with JIT
7 R’s of Inventory
Ensure the availability:
• of the right product
• in the right quantity
• and the right condition
• at the right place
• at the right time
• for the right customer
• at the right cost
Activity 5.2
Watch video
Consider: How difficult might I be to implement
Kanban?
Source: https://www.youtube.com/watch?v=4VO0MExafGs
Agenda
• Inventory: The Basics
• Inventory Management Strategies
Improving Inventory Management
Guidelines for Improving Inventory
Management
1. Consider inventory optimisation tools.
2. Don’t treat all stock-keeping units the same.
3. Manage your suppliers.
4. Leverage mobile devices.
5. Be smart about your slow-moving and
obsolete items.
Optimisation Tools
• Software: Enterprise Resource Management
• Technology:
– EDI and barcoding
– Voice-directed picking
– Robotics
• Methods:
– Kanban
– JIT
– TQM
Classify SKUs
• A – Might be high value or high moving
– Require tight control
• B – Less important inventory requiring lower control
• C – Might be low value or low moving
– Require low control
Managing Suppliers
• Suppliers are not always reliable on delivery
times and quantities.
• It is important to track the inbound receipt of an
item:
– Promise date, actual receipt date quantity
ordered/received are all metrics that can be
tracked to determine reliability.
Leverage Mobile Devices
• Mobile technologies are
ubiquitous for capturing data
on inventory
• Allows quick access to
accurate information
• Can eliminate errors associated
with paper-based operation
Slow-Moving / Obsolete Stock
• Slow-moving items occupy
space
• Can become obsolete
• Well-managed operations
may put them on sale or
sell them to off-price
retailers
Activity 5.3
Working in pairs, identify all the issues that
Woolworths needs to consider for the supply of
fresh fruit and vegetables (e.g. lettuce or apples).
Summary
• The carrying costs of inventory are
significant.
• The pull system reduces inventory handing
and costs.
• The entire flow of inventory from supplier to
warehouse to manufacturing to customer
needs to be managed.
Any Questions?
