Inventory Management

❖PLEASE COLLECT YOUR COURSE MATERIAL FROM REPROGRAPHY SECTION.

Reactive Methods

❖ Reactive inventory system responds to channel member’s inventory needs by the drawing the product through the distribution channel.

❖ Reactive system waits for customer demand to pull the product through the system.

❖ Order quantity is a function of safety stock levels and predetermined maximum level

Reactive Methods

I - 250ROP - 200OQ - 400

I - 45ROP - 50OQ - 200D - 5

I - 80ROP - 75OQ - 200D - 14

Distribution Center

Wholesaler A

Wholesaler B

Reactive Methods - Assumptions

❖ All customers, market areas, products contribute equally to profits

❖ It assumes infinite availability at the source

❖ It assumes infinite inventory availability at the supply location too

❖ Performance-cycle (lead time) is constant

❖ Customer demand patterns are relatively stable and consistent - doesn’t apply for lumpy demands

❖ Each distribution center’s timing and quantity of replenishment orders are determined independently of all other sites, including the supply source

Planning Methods - Multistage Inventory

❖ Fair Share Allocation

❖ Distribution Requirements Planning (DRP)

Fair Share Allocation

PLANT WAREHOUSE Inventory 600 units

Safety Stock 100 units

DISTRIBUTIONCENTER 1

DISTRIBUTIONCENTER 2

DISTRIBUTIONCENTER 3

Inventory 50 units

Daily use 10 units

Inventory 100 units

Daily use 50 units

Inventory 75 units

Daily use 15 units

Fair Share Allocation❖ Common Days’ supply DS = (Aj + ∑Ij) / ∑Dj , Where

❖ DS = Common days’ supply for distribution center inventories

❖ Aj = inventory units to be allocated from plant warehouse

❖ Ij = inventory in units for distribution center j

❖ Dj = daily demand for distribution center j

❖ Amount to be allocated to each distribution center is given by,

❖ Aj = (DS - (Ij / Dj)) * Dj

Inputs to DRP

❖ Sales forecast by SKU at each ISL (Inventory Stocking Location)

❖ Customer orders for current and future delivery - Outstanding purchase orders or manufacturing orders

❖ Available inventory for sale by SKU at each ISL

❖ Logistics, manufacturing and purchasing lead times

❖ Modes of transport and deployment frequencies

❖ Safety stock policies by SKU at each ISL

❖ Order quantity by SKU at each ISL

DRP - Marketing Benefits

❖ Improved service levels - On time deliveries and customer complaints

❖ Improved and effective promotional plans

❖ Improved ability to anticipate shortages of right items

❖ Improved inventory coordination with other functions of firm

❖ Customers finally benefit due to all of the above

DRP - Logistics Benefits

❖ Reduction of DC’s freight costs due to coordinated shipments

❖ Reduced inventory levels as what product when it is needed is determined

❖ Decreased warehouse space requirements

❖ Fewer back orders leading to reduction of freight costs

❖ Improved inventory visibility

STRATEGY DEVELOPMENT PROCESS

❖ Product / Market Classification

❖ Segment Strategy Definition

❖ Operationalized Policies and Parameters

PRODUCT / MARKET CLASSIFICATION

Product ID

Annual Sales (000’s)

% total sales

CumulativeCategory

Sales% Products%

1 45000

2 35000

3 25000

4 15000

5 8000

6 5000

7 4000

8 3000

9 2000

10 1000

PRODUCT / MARKET CLASSIFICATION

Product ID

Annual Sales (000’s)

% total sales

CumulativeCategory

Sales% Products%

11

12

13

14

15

16

17

18

19

20

0

SEGMENT STRATEGY DEFINITION

First-line classificati

on

Service objectiv

e

Forecasting

procedure

Review period

Inventory mgmt

Replenishment

monitoring

A - promotion

al99%

Aggregate

SchedulePerpetual DRP Daily

A - regular 98Sales

historyPerpetual DRP Daily

B 95Sales

historyWeekly DRP Weekly

C 90Sales

historyBiweekly ROP Biweekly