1. Retail Inventory ManagementA.

Umar
2. Managing Facilitating Goods Customer Replenishment Replenishment Replenishmen
t Order Order Order Order Factory Wholesaler Distributor Retailer Production Del
ay Customer Shipping Delay Shipping Delay Item Withdrawn Wholesaler Distributor
Retailer Inventory Inventory InventoryA. Umar
3. Think !!! What and Where is the PROBLEM ?A. Umar
4. What is Inventory ?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. ? Th
ese items may be on the shelves of a store, in the backroom or in a warehouse mi
les away from the point of sale. In the case of manufacturing, they are typicall
y 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 g
oods, is a necessity in retail. ? Customers often prefer to physically touch wha
t 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 order
ed from a distributor. ? Every minute that is spent down because the supply of r
aw 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 econom
ic interest of an organization.A. Umar
8. Types of InventoryA. 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) Fin
ished Goods Lying in stock rooms and waiting dispatches
10. Purpose of inventory management ? Stocking the RIGHT PRODUCT ? Able to LOCAT
E the products ? Maintain OPTIMUM LEVEL of inventoryA. Umar
11. Reasons to Hold Inventory ? Meet variations in customer demand: ? Meet unexp
ected demand ? Smooth seasonal or cyclical demand ? Pricing related: ? Temporary
price discounts ? Hedge against price increases ? Take advantage of quantity di
upsets in parts of or our own pr
scounts ? Process & supply surprises ? Internal
ocesses ? External delays in incoming goodsA. 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 shoul
d be made to place an order at the right time with right source to acquire the r
ight quantity at the right price and right qualityA. Umar
13. An Effective Inventory Management Should ? Ensure a continuous supply of raw
materials to facilitate uninterrupted production ? Maintain sufficient stocks o
f raw materials in periods of short supply and anticipate price changes ? Mainta
in 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 levelA. Umar
14. An Optimum Inventory Level Involves Three Types of Costs Ordering costs:- Ca
rrying costs:- ? Quotation or tendering ? Warehousing or storage ? Requisitionin
g ? 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 ? T
axes ? Loss of sale ? Cost of capital ? Failure to meet delivery commitmentsA. U
mar
15. Dangers of Over-investment ? Unnecessary tie-up of firm?s fund and loss of p
rofit
involves opportunity cost ? Excessive carrying cost ? Risk of liquidity- d
ifficult to convert into cash ? Physical deterioration of inventories while in s

torage due to mishandling and improper storage facilitiesA. Umar

16. Dangers of Under-investment ? Production hold-ups
loss of labor hours ? Fail
ure 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 t
he firmA. 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 overstoc
king; Factors to be considered: ? Amount of capital available. ? Godown space av
ailable. ? Possibility of loss. ? Cost of maintaining stores; ? Likely fluctuati
on 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 f
ollowing 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 sto
re approaches, the store keeper should initiate the purchase requisition for fre
sh supply of material. ? This level is fixed some where between maximum and mini
mum level.A. Umar
20. Managing Small Items ? Inventory control is simply knowing how much inventor
y 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 w
hole. A items are the top valued 20 percent of the company?s inventory, both in te
rms of the cost of the item and the need for the item in the manufacturing or sa
les 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 rare
ly 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 trackedA. 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 mus
t know what you have in stock to ensure you can meet the demands of customers an
d production and to be sure you are ordering enough stock in the future. ? Count
ing is also important because it is the only way you will know if there is a pro
blem with theft occurring at some point in the supply chain. ? When you become a
ware of such problems you can take steps to eliminate them.A. Umar
22. Cyclical Counting ? Many companies prefer to count inventory on a cyclical b
asis to avoid the need for shutting down operations while stock is counted. ? Th
is means that a particular section of the warehouse or plant is counted at parti
cular times, rather than counting all inventory at once. ? In this way, the comp
any takes a physical count of inventory, but never counts the entire inventory a
t 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 wi
ll 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 salespe
rson, 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 q
uantities which your buyers can order without prior approval. ? This ensures tha
t you are maximizing any volume discounts available through your vendors and pre
venting over-ordering ofA. Umar stock. It is also important to require pre-appro
val on goods with a high carrying cost.
24. Keeping Accurate Records ? Any time items arrive at or leave a warehouse, ac
curate paperwork should be kept, itemizing the goods. ? When inventory arrives,
this is when you will find breakage or loss on the goods you ordered. ? Inventor

y leaving your warehouse must be counted to prevent loss between the warehouse a
nd the point of sale. ? Even samples should be recorded, making the salesperson
responsible for the goods until they are returned to the storage facility. ? Rec
ords should be processed quickly, at least in the same day that the withdrawal o
f stock occurred.A. Umar
25. Managing Employees ? Buyers are the employees who make stock purchases for y
our 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 manag
es. ? 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 he
lp employees keep this in perspective. When they see a difference in their paych
ecks 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 sto
rage location for each and record this information in officialA. Umar procedures
that can easily be accessed by your employees.
26. Contd ? Inventory management should be a part of your overall strategic busin
ess 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 environmenta
lly sound. ? It can also mean putting in place recycling procedures for packagin
g or other materials. ? In this way, inventory management is more than a means t
o 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 RateA. Umar Demand Rate
28. Bullwhip effect Demand information is distorted as it moves away from the en
d-use customer. Higher safety stock inventories to are stored to compensateA. Um
ar
29. Two Forms of Demand ? Dependent ? Demand for items used to produce final pro
ducts ? Tires stored at a Goodyear plant are an example of a dependent demand it
em ? Independent ? Demand for items used by external customers ? Cars, appliance
s, computers, and houses are examples of independent demand inventoryA. Umar
30. Independent and Dependent Demand Inventory Management ? Dependent demand
Requ
irements / planned
Materials Requirements Planning / Just in Time ? Independent d
emand Uncertain / forecasted Continuous Review / Periodic ReviewA. Umar
31. Reasons To Hold Inventory ? Meet variations in customer demand: ? Meet unexp
ected demand ? Smooth seasonal or cyclical demand ? Pricing related: ? Temporary
price discounts ? Hedge against price increases ? Take advantage of quantity di
scounts ? Process & supply surprises ? Internal
upsets in parts of or our own pr
ocesses ? External delays in incoming goodsA. Umar ? Transit
32. Reasons NOT To Hold Inventory ? Carrying cost ? Financially calculable ? Tak
es up valuable factory space ? Especially for in-process inventory ? Inventory c
overs up problems
? That are best exposed and solved Driver for increasing invento
ry turns (finished goods) and lean production/Just in time for work in processA.
Umar
33. Inventory Hides Problems Bad Design Lengthy Poor Setups Quality Machine Inef
ficient Unreliable Breakdown Layout SupplierA. Umar
34. To Expose Problems: Reduce Inventory Levels Bad Design Lengthy Poor Setups Q
uality Machine Inefficient Unreliable Breakdown Layout SupplierA. Umar
35. Remove Sources of Problems and Repeat the Process Poor Quality Lengthy Setup
s Bad Machine Design Inefficient Unreliable Breakdown Layout SupplierA. 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 discountsA. 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 depreci
ation 3% ? Power (1% - 4%) ? Equipment operating cost 3% Manpower cost from extr

a handling and supervision (3% - 5%) Investment costs: ? Borrowing costs 10% ? T
axes on inventory (6% - 24%) ? Insurance on inventory Pilferage, scrap, and obso
lescence 5% (2% - 10%)A. Umar Overall carrying cost (15% - 50%)
38. Inventory Management Systems ? Functions of Inventory Management
Track inven
tory How much to order
When to order ? Prioritization ? Inventory Management App
roach
EOQ
Continuous / PeriodicA. Umar
39. ABC Prioritization ? Based on Pareto concept (80/20 rule) and total usage in d
ollars of each item. ? Classification of items as A, B, or C often based on $ vo
lume. ? Purpose: set priorities for management attention.A. Umar
40. ABC Prioritization ? A? items: 20% of SKUs, 80% of Value ? B? items: 30 % of S
KUs, 15% of Value ? C? items: 50 % of SKUs, 5% of Value ? Three classes is arbitr
ary; could be any number. ? Percents are approximate. ? Danger: Money use may no
t reflect importance of any given SKU!A. Umar
41. Annual Usage of Items by Dollar Value Percentage of Annual Usage in Total Do
llar 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 Cumu
lative PercentageA. 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 valueA
. Umar
44. ABC Analysis Example 100 +Class C +Class B 90
Percentage of dollar value Cla
ss A 80 70 60
50 40
30 20
10 0 10 20 30 40 50 60 70 80 90 100A. Umar Perce
f items
45. Inventory Management Approaches ? A-items Track carefully (e.g. continuous r
eview) Sophisticated forecasting to assure correct levels ? C-items
Track less f
requently (e.g. periodic review) Accept risks of too much or too little (dependi
ng on the item)A. Umar
46. Item Quality Quantity order Checking A Costlier Less Regular system to see t
hat there is no overstocking as well as that there is no danger of production be
ing 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 quan
tity so that cost can be avoidedA. 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 constan
t (no quantity discounts) ? Annual carrying cost is i time the average $ value o
f the inventory ? No stockout allowed. ? Material is ordered or produced in a lo
t or batch and the lot is received all at onceA. Umar
48. EOQ Lot Size Choice ? There is a trade-off between lot size and inventory le
vel. ? Frequent orders (small lot size): higher ordering cost and lower holding
cost. ? Fewer orders (large lot size): lower ordering cost and higher holding co
st.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 Rece
ived Placed ReceivedA. Umar As Q increases, average inventory level increases, b
ut number of orders placed decreases
50. Total Cost of Inventory
EOQ ModelA. Umar
51. Answer to Inventory Management Questions for EOQ Model Keeping track of inve
ntory ? Implied that we track continuously How much to order? ? Solve for when t
he 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 = DLA. Umar
52. Re-order Point Example Demand = 10,000 yds/ year Lead time = L = 10 days Whe
n 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 c
an neglect issues of working days vs weekends, etc.) Don t forget to convert to co
nsistent time units!A. Umar
54. EOQ Summary How much to order? ? Q = sqrt(2DS/iC) When to order? ? R = DLA.
Umar
55. Inventory Control Systems ? Continuous system (fixed-order- quantity) ? cons
tant amount ordered when inventory declines to predetermined level ? Periodic sy
stem (fixed-time-period) ? order placed for variable amount after fixed passage
of timeA. Umar
56. Quantity Discounts Model ? Price per unit decreases as order quantity increa
ses Co D CcQ TC = + + PD Q 2 where P = per unit price of the item D = annual dem
andA. Umar
57. Quantity Discounts Model ORDER SIZE PRICE 0 - 99 $10 TC = ($10 ) 100 199 8 (
d1) 200+ 6 (d2) TC (d1 = $8 ) TC (d2 = $6 ) Inventory cost ($) Carrying cost Ord
ering cost Q(d1 ) = 100 Qopt Q(d2 ) = 200A. 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 s
ee 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 demandA. 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 dow
n for stock taking. -WheldonA. Umar
62. Factors which are helpful to make system successful ? Stores ledger, stores
control, cards or bin cards are properly maintained ; ? Quantity balance store s
hown in the store ledger; stock control and bin cards are reconciled; ? Explorin
g 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 29A. Umar 30 31 TOTALS
64. Daily Readings Product Month Year Pump 1 Pump 2 Pump 3 Pump 4 Total Tank 1 T
ank 2 Total Meter Dip Inventroy Water Dip Dip Inventroy Water Dip Physical Day R
eadings 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 2
2 23 24 25 26 27 28 29 30A. Umar 31
65. Monthly Summary Product Product Product Storage Capacity Storage Capacity St
orage Capacity Total Variation Total Variation Total Variation % Loss % Loss % L
oss Month Sales for Month Sales for Month Sales for MonthA. Umar
66. Inventory Turnover Method It means how many times a company?s inventory is s
old and replaced (finished product) ? Generally calculated as: Sales/ Inventory
? However it may also be calculated as: Cost of goods sold/ Average InventoryA.
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 har
d) ? 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 p
lan to reflect current reality ? Suppliers are hungry, so lock in shorter lead t
imes ? Liquidate your slow moving stock: have a Sale ? Reduce production lot siz
esA. Umar
68. Thank You A. Umar