TABLE OF CONTENTS-

S.no Topic Page no.

1. Abstract

2. Introduction
3. About Company
4. Research Problem
5. Literature Review
6. Optimization of Inventory Levels

7. Questionnaire

8. Findings and Analysis

9. Conclusion

10. Reference and Apprendieces

1.Abstract-

Inventory planning aims to optimize inventory levels, balancing reduced holding and
maintenance costs with high customer satisfaction. Effective inventory optimization minimizes
excess stock, lowering storage expenses and avoiding obsolescence, while ensuring prompt
product availability. Just-In-Time (JIT) stocking is a key strategy in inventory optimization. JIT
involves ordering inventory only as needed to meet immediate demand, reducing holding costs
and improving cash flow. However, JIT carries risks, such as supply chain disruptions leading to
stockouts and potential customer dissatisfaction. Despite these risks, many businesses benefit
from the cost savings and efficiency of JIT. With careful planning and strong supplier
relationships, JIT can effectively reduce costs and improve service levels, enhancing overall
profitability and competitiveness.

2.Introduction-

Inventory management is the process of ordering, storing, using, and selling a company's
inventory. This includes the management of raw materials, components, and finished products,
as well as warehousing and processing such items. Effective inventory management underpins a
thriving business. It ensures the right products are available at the right time, minimizing
stockouts, managing demand fluctuations, and preventing excessive inventory that consumes
capital. This research project explores key strategies to achieve this balance and unlock
sustainable growth.

A fundamental concept is Economic Order Quantity (EOQ). This method calculates the optimal
order size to minimize total inventory costs, balancing ordering expenses (processing and
shipping) with holding costs (warehousing and insurance). By implementing EOQ, businesses
can avoid frequent small orders that inflate ordering costs and infrequent large orders that incur
high holding costs. This approach optimizes inventory levels, ensuring sufficient stock to meet
demand without overstocking, thereby improving cash flow and profitability. Safety stock acts as
a buffer against unexpected variations in demand or lead times, preventing stockouts. Its
calculation considers demand variability, lead time fluctuations, and the desired service level (the
probability of not having stockouts during lead time). While higher safety stock levels increase
carrying costs, they reduce the risk of stockouts and lost sales. Conversely, lower safety stock
levels decrease carrying costs but raise the risk of stockouts and customer dissatisfaction.
Effective safety stock management requires balancing these trade-offs to achieve optimal
inventory levels, guaranteeing reliable customer service while minimizing overall inventory
costs.

Accurate demand forecasting is crucial for optimizing inventory levels and production planning.
Techniques like historical data analysis, market research, and statistical modeling (including time
series analysis and machine learning) help predict future customer demand for products or
services.

Inventory turnover, measured by how often a company's inventory is sold and replaced over a
period, reflects inventory management efficiency. A high inventory turnover ratio indicates
efficient inventory management with quick inventory sales, suggesting strong sales performance.
Conversely, a low ratio suggests potential overstocking or poor sales performance. However,
interpreting inventory turnover requires industry context and company size comparisons.
Businesses aim for a high enough turnover to minimize holding costs without causing stockouts
or lost sales.

Cost-benefit analysis (CBA) is a valuable tool for evaluating the economic viability of inventory
management decisions. It involves identifying and quantifying all relevant costs inventory levels,
ensuring sufficient stock to meet demand without overstocking, thereby improving cash flow and
profitability.

Safety stock acts as a buffer against unexpected variations in demand or lead times, preventing
stockouts. Its calculation considers demand variability, lead time fluctuations, and the desired
service level (the probability of not having stockouts during lead time). While higher safety stock
levels increase carrying costs, they reduce the risk of stockouts and lost sales. Conversely, lower
safety stock levels decrease carrying costs but raise the risk of stockouts and customer
dissatisfaction. Effective safety stock management requires balancing these trade-offs to achieve
optimal inventory levels, guaranteeing reliable customer service while minimizing overall
inventory costs.
Accurate demand forecasting is crucial for optimizing inventory levels and production planning.
Techniques like historical data analysis, market research, and statistical modeling (including time
series analysis and machine learning) help predict future customer demand for products or
services.

Inventory turnover, measured by how often a company's inventory is sold and replaced over a
period, reflects inventory management efficiency. A high inventory turnover ratio indicates
efficient inventory management with quick inventory sales, suggesting strong sales performance.
Conversely, a low ratio suggests potential overstocking or poor sales performance. However,
interpreting inventory turnover requires industry context and company size comparisons.
Businesses aim for a high enough turnover to minimize holding costs without causing stockouts
or lost sales.

Cost-benefit analysis (CBA) is a valuable tool for evaluating the economic viability of inventory
management decisions. It involves identifying and quantifying all relevant costs (e.g.,
investment, operating, and maintenance) and benefits (e.g., revenue and cost savings) associated
with a particular strategy. CBA helps decision-makers prioritize projects, allocate resources
effectively, and assess the overall economic impact, supporting informed choices.

Businesses also face the challenge of unforeseen events that disrupt supply chains. Proactive
measures like supplier diversification, building safety stock buffers, and establishing contingency
plans can mitigate these risks and enhance supply chain resilience.

Inventory categorization serves as a systematic framework, outlining the specific methods and
criteria a business follows to classify and manage its stock. This includes segmenting items
based on value (ABC analysis), criticality (VED analysis), usage frequency (FSN analysis),
demand variability (XYZ analysis), unit price (HML analysis), and availability (SDE analysis).
A well-structured inventory categorization is crucial for optimizing inventory management,
enhancing decision-making, and aligning inventory practices with overall business objectives.

Just-in-time (JIT) inventory is a manufacturing strategy that minimizes waste by receiving

materials only when needed for production. This eliminates the need for storing excess
inventory, reducing storage costs and freeing up space. However, JIT requires a stable supply
chain, accurate demand forecasting, and a focus on quality control to function effectively.
By implementing these comprehensive strategies and tools, businesses can establish an
optimized inventory management framework that minimizes costs while ensuring product
availability. This ultimately promotes business growth, profitability, and a competitive edge in
today's dynamic market landscape.

3. About Company

Somani Automobile Components Pvt Ltd is a leading distributor of spare parts

established in February 2013, with its headquarters in Wadki, Pune. The company
specializes in providing efficient sales and service solutions to the automotive industry.
As an authorized distributor of TATA Spare Parts and TATAMOTORS Genuine Oil,
they offer just-in-time deliveries to meet the precise requirements of our clients. With a
robust network encompassing Pune, Nashik, Nagpur, Kolhapur, Solapur, and
Sambhajinagar, supported by four strategically located warehouses and two retail outlets,
they are committed to delivering exceptional customer service.

Legal Name Somani Automobile Components PVT

LTD
Headquarter Wadki,Pune
Founded in February 2013
No. Of Employees 100 - 120
CEO Kisan Hursale
 Founder Subhash Somani

Vision – Become No.1 service distributor by FY 26 with partnership and Sustainable growth of
our channel partners and creating engaging workforce.

Mission – Empowering progress through exceptional distribution: improvement in facility

process, infrastructure , built a range and building healthy relations with channel partners.

Awards and recognition-

3. RESEARCH PROBLEM-

In the dynamic and competitive landscape of modern business, companies face significant
challenges in managing their inventory efficiently. Ineffective inventory management can lead to
high holding costs, stockouts, overstock situations, and ultimately reduced profitability and
customer satisfaction. The primary research problem addressed in this study is:

RESEARCH PROBLEM-

" An Investigation into the Synergistic Integration of Economic Order Quantity, Safety
Stock, Demand Forecasting, Inventory Turnover, and Cost-Benefit Analysis for Optimal
Inventory Management and Supply Chain Performance. "

The research focusing on optimizing inventory management through EOQ, safety stock, demand
forecasting, inventory turnover, and cost-benefit analysis offers substantial value in MBA
Operations and Supply Chain Management.

Foundational Knowledge

The research builds a solid basis in priesthood inventory management principals. This course
has strategic, long-term impact as students learn how these elements interact to affect overall
supply chain performance. Knowing this is imperative for good decision-making and successful
inventory planning.

Technical and Research Skills

Students strengthen their problem-solving and analytical skills; analyzing the relationship of
different inventory management variables. They are taught how to use quantitative models and
tools for testing stock levels, costs, and hazards. At the same time, this gives them better insights
into operational decision making and inventory performance.

Improved Supply Chain Efficiencies

Balancing inventory costs vs service levels and demand variability is becoming a more critical
topic to get right for supply chain efficiencies. The study provides some very interesting trial
results on how to keep these holding costs in check while avoiding (or simply having) stockouts
or overstocking. And by coming from a place of these rules, we can positively impact
productivity and supply chain resilience.

Strategic Insights

The paper lays out a foundation of how to build broad-scale bill of materials management
strategies. They will be taught to align inventory decisions with the goals of a business. This
strategic view will help find opportunities to reduce costs, increase customer happiness and get a
head of the competition.

4. LITERATURE REVIEW

4.1 Economic Order Quantity (EOQ)

The Economic Order Quantity (EOQ) model, introduced by Harris (1913), is a fundamental tool
in inventory management that aims to determine the optimal order quantity that minimizes the
total holding and ordering costs. The EOQ formula has been widely studied and applied across
various industries due to its simplicity and effectiveness. Subsequent research has extended the
basic EOQ model to incorporate factors such as quantity discounts, multiple items, and varying
demand rates (Silver, Pyke, & Peterson, 1998). More recent studies have explored the
integration of EOQ with modern supply chain practices, emphasizing the importance of aligning
EOQ with overall business strategies (Ravindran, 2016).
4.2 Safety Stock

Safety stock serves as a buffer against demand variability and supply chain uncertainties,
ensuring product availability and preventing stockouts. The classical approach to safety stock
calculation involves statistical methods based on demand and lead time variability (Brown,
1967). Recent advancements in safety stock management focus on dynamic models that adapt to
changing market conditions and incorporate real-time data analytics (Chopra & Meindl, 2016).
Research highlights the need for a balanced approach to safety stock that considers both service
level requirements and cost implications (Simchi-Levi, Kaminsky, & Simchi-Levi, 2008).

4.3 Demand Forecasting

Accurate demand forecasting is critical for effective inventory management. Traditional

forecasting methods such as moving averages, exponential smoothing, and ARIMA models have
been widely used (Makridakis, Wheelwright, & Hyndman, 1998). The advent of machine
learning and big data analytics has introduced more sophisticated forecasting techniques,
including neural networks, support vector machines, and ensemble methods (Chen et al., 2010).
Comparative studies have shown that machine learning approaches often outperform classical
methods in terms of accuracy, especially in complex and volatile markets (Hyndman &
Athanasopoulos, 2018).

4.4 Inventory Turnover

Inventory turnover ratio is a key performance indicator that measures how efficiently a company
utilizes its inventory. High turnover rates generally indicate efficient inventory management and
strong sales performance, while low turnover rates may signal overstocking or weak demand
(Gaur, Fisher, & Raman, 2005). Research has explored the relationship between inventory
turnover and financial performance, demonstrating that optimizing turnover can lead to
significant cost savings and improved profitability (Rumelt, 2011). Additionally, industry-
specific studies have identified best practices for achieving optimal turnover ratios
(Christopher, 2016).

4.5 Cost-Benefit Analysis

Cost-benefit analysis in inventory management involves evaluating the trade-offs between
holding costs, stockout costs, and order costs. Traditional cost-benefit frameworks emphasize the
importance of balancing these costs to achieve overall efficiency (Tersine, 1994). Recent studies
have incorporated more complex cost structures, including environmental and social costs, to
provide a holistic view of inventory-related expenditures (Dekker et al., 2012). The integration
of cost-benefit analysis with advanced analytical tools has enabled more precise and actionable
insights for decision-makers (Heizer, Render, & Munson, 2017).

4.6 Supply Chain Disruptions-

Supply chain disruptions have garnered significant attention from both academia and industry
due to their profound impact on global business operations. These disruptions can arise from
various sources, including natural disasters, geopolitical tensions, pandemics, and operational
inefficiencies, leading to substantial economic losses and operational challenges. The literature
highlights the importance of resilience and risk management strategies to mitigate the adverse
effects of such disruptions. Key strategies include diversifying suppliers, implementing advanced
technologies like blockchain for better transparency, and adopting flexible manufacturing
systems. Additionally, demand forecasting and inventory management practices are critical in
preparing for and responding to unexpected disruptions. The COVID-19 pandemic, in particular,
has underscored the vulnerability of global supply chains and has driven significant research into
more robust and adaptable supply chain frameworks.

4.7 Inventory Categorization-

Inventory categorization is essential for effective inventory management, allowing organizations

to prioritize stock based on demand, value, and turnover rates. ABC analysis divides inventory
into three categories: A (high value), B (moderate value), and C (low value). Studies by Gupta
and Jain (2013) and Saxena and Srinivasan (2016) show that ABC analysis reduces costs and
improves stock control. VED analysis categorizes items as Vital, Essential, or Desirable,
focusing on criticality to operations. Mitra and Pal (2011) and Ramanathan (2015) emphasize its
importance in healthcare and suggest combining it with ABC for better prioritization. FSN
analysis classifies inventory based on usage frequency into Fast, Slow, and Non-moving items,
enhancing stock turnover and minimizing obsolescence.
4.8 JIT (Just in Time) Inventory-

A review of Just-in-Time (JIT) inventory literature highlights a system focused on minimizing

waste and acquiring materials only when needed (Pillai & Thonakkot, 2014). This approach
reduces inventory costs and improves lead times and quality (Krajewski et al., 2009). However,
JIT requires strong supplier relationships, information systems, and a predictable environment
(Pillai & Thonakkot, 2014). While its applicability may vary, research continues on adapting
JIT to a globalized supply chain and its financial impact (Gupta, 2016).

Integration of Inventory Management Components

The integration of EOQ, safety stock, demand forecasting, inventory turnover, and cost-benefit
analysis into a cohesive inventory management framework has been the subject of extensive
research. Multi-echelon inventory models and integrated supply chain management approaches
emphasize the interconnectedness of these components and their collective impact on overall
performance (Axsäter, 2006). Case studies from various industries have demonstrated the
practical benefits of such integrated frameworks, including reduced costs, improved service
levels, and enhanced competitive advantage (Lee & Billington, 1992).

RESEARCH METHODOLOGY

The research is the foundation of any thesis and can be conducted using various methods.
Among these, two primary methodologies stand out: qualitative and quantitative research
methods. These methods serve as essential tools for the research process. The selection of a
research method should align with the research plan and objectives. Additionally, research can
be conducted using two different reasoning approaches: deductive and inductive reasoning.
Deductive reasoning is useful for further research on existing matters, while inductive reasoning
involves creating a new topic and conducting research as needed.

For this research, both primary data and secondary sources have been utilized. Primary data has
been collected via interviews with inventory managers. Secondary data has been gathered from
various books, articles, journals, theses, research literature, and internet sources. Additionally,
data available from annual reports of the company have been included in the present study.

5.1 Data Collection-

 Primary Data:
• Face to face Interviews: Gather detailed qualitative data from industry
professionals about their inventory management strategies and challenges.
Secondary Data:
• Literature Review: Conduct a thorough review of existing literature on inventory
management theories, models, and best practices.
• Company Reports: Analyze historical sales data, inventory records, demand
forecasts, and supplier performance reports from company databases.
• External Sources: Utilize industry reports, academic journals, and market
research publications to supplement primary data.
SCOPE
This research will conduct a comprehensive analysis of Somani Automobile Components Pvt
Ltd's inventory management practices with the aim of optimizing inventory levels. The study
will encompass an evaluation of current inventory levels, demand forecasting methodologies,
inventory categorization techniques, and cost implications. Through proper analysis, the
research will identify opportunities to reduce inventory holding costs, improve inventory
turnover, and enhance customer service levels.

OBJECTIVE
The primary objective of this research is to develop and implement a strategic approach to
inventory management that maximizes operational efficiency and profitability for Somani
Automobile Components Pvt Ltd.

6.OPTIMIZATION OF INVENTORY LEVELS

Inventory management is a critical aspect of supply chain management that can significantly
impact a company's operations and profitability. Optimizing inventory levels is essential for
businesses to meet customer demand, minimize holding costs, and improve overall efficiency. In
this paper, we will explore the factors influencing inventory levels, techniques for optimizing
inventory levels, and the role of technology and tools in inventory optimization.

Inventory levels are influenced by several key factors, including demand variability, lead time
variability, and holding costs. Demand variability refers to the fluctuations in customer demand
for a product over a specific period. A company must consider factors such as seasonality,
market trends, and promotional activities when determining the appropriate inventory levels to
meet customer demand while avoiding stockouts or excess inventory. Lead time variability, on
the other hand, pertains to the inconsistency in the time it takes for suppliers to deliver inventory
once an order is placed. Longer lead times can result in higher safety stock levels to account for
potential delays, increasing holding costs for the business. Holding costs encompass expenses
such as storage, insurance, and depreciation, which can accumulate as a company maintains
excess inventory levels to mitigate stockouts.

To optimize inventory levels, businesses often employ techniques such as the Economic Order
Quantity (EOQ) model. The EOQ model calculates the optimal order quantity that minimizes
total inventory costs, considering factors such as ordering costs, holding costs, and demand rate.
The formula for EOQ is derived from balancing the costs of holding excess inventory with the
costs of ordering too frequently. Variables involved in the EOQ formula include order quantity,
annual demand, ordering costs, and holding costs. While the EOQ model provides a useful
framework for inventory optimization, it comes with certain assumptions and limitations. For
instance, the model assumes constant demand and lead times, which may not always reflect real-
world dynamics accurately.

In today's digital age, technology plays a crucial role in optimizing inventory levels. Inventory
management software provides businesses with tools to track inventory levels, monitor demand
patterns, and streamline ordering processes. These software solutions offer features such as real-
time inventory visibility, demand forecasting, and automated replenishment, enabling companies
to make data-driven decisions to optimize their inventory levels. Furthermore, inventory
management software can integrate with other systems, such as Enterprise Resource Planning
(ERP) systems and Customer Relationship Management (CRM) software, to provide a holistic
view of the supply chain and enhance operational efficiency. By leveraging technology and tools
for inventory optimization, businesses can improve inventory accuracy, reduce carrying costs,
and enhance customer satisfaction.

6.1 Importance of Optimized inventory levels

Eliminate Variability-

Inventory optimization could lead to more efficient operations by providing better visibility into
the material that needs to be procured, production cost forecasts, and service requirements. It
helps to maintain a consistent flow of production, and ensure that the product reaches the market
and the customer on time.

Prevents Overstocking-
When you lack the resources to make informed inventory decisions, it’s common to overstock
inventory as a precaution. However, this approach can lead to several issues, including higher
carrying costs and the risk of deadstock. Carrying costs refer to the expenses associated with
holding inventory, such as storage, insurance, and handling. Overstocking increases these costs,
tying up capital that could be used elsewhere in the business. Deadstock consists of items that
become unsellable due to various factors such as seasonality, expiration dates, or a drop in
demand over time. These unsold items not only take up valuable warehouse space but also
represent a financial loss, as they often need to be discounted heavily or written off entirely.
Balance Inventory Levels-

Knowing which SKUs are available in your warehouse or distribution center at any given time is
crucial for effective inventory accounting, profitability, and meeting customer demand. By
having accurate and real-time visibility into your inventory, you can ensure that products are
available when needed, reducing the risk of stockouts and excess inventory. Balancing inventory
levels can significantly improve cash flow by reducing the capital tied up in excess inventory and
minimizing waste. Additionally, optimizing warehousing capacity ensures that space is used
efficiently, reducing operational costs and allowing for smoother operations. Ultimately,
maintaining balanced inventory levels enables businesses to consistently meet customer demand,
enhancing customer satisfaction and loyalty while also supporting overall profitability.

Customer Loyalty-

Improving inventory management can significantly enhance your delivery and service times,
leading to higher customer satisfaction. Efficient inventory practices ensure that products are
readily available when customers need them, reducing wait times and preventing stockouts. This
reliability fosters a positive customer experience, encouraging repeat business and strengthening
customer loyalty.

Satisfied customers are more likely to recommend your company to others, increasing your
customer base and improving your market share. Additionally, better inventory management can
optimize your supply chain, reduce operational costs, and improve overall business efficiency.
By consistently meeting customer demands and expectations, your company can build a strong
reputation, further solidifying its position in the market.
Lower inventory costs-

Optimizing inventory processes can significantly reduce the amount of capital tied up in
production while simultaneously improving service levels. This enables businesses to better
understand and meet customer demands in a timely manner without overstocking materials.
Efficient inventory management can reduce inventory levels by 10%-30%, representing a
substantial financial benefit. The money saved from these reductions can be reinvested into other
areas of the business, such as enhancing product development, improving customer service, or
expanding marketing efforts. By optimizing inventory, businesses can ensure they have the right
products available at the right time, improving customer satisfaction and loyalty. The improved
cash flow resulting from reduced inventory levels can also provide the financial flexibility
needed to seize new opportunities and drive growth. Overall, effective inventory management is
a powerful tool for improving operational efficiency, financial performance, and competitive
advantage.

Opportunity to meet new partners-

Clarity on inventory levels allows your company to collaborate more effectively with upstream
and downstream supply chain partners and stakeholders. It also helps employees understand how
best home inventory affects various aspects of your business, such as sales and marketing,
customer demand, accounts receivable, and human resources.

Improved time management-

A better understanding of inventory allows you to allocate products strategically within

warehouse locations, reducing delivery times and improving customer satisfaction. This
efficiency lowers delivery costs and ensures that products are readily available, boosting sales
and revenue. By optimizing inventory placement, you can streamline operations, enhance
customer experience, and capitalize on sales opportunities. Effective inventory management
leads to a more agile supply chain, meeting customer demands promptly and accurately,
ultimately driving business growth and profitability.

How to Optimized inventory helps businesses to grow substantially?

Optimized inventory management acts as a silent growth partner, strategically fueling a

business's expansion on multiple fronts. By holding only the necessary stock levels, businesses
free up capital that would otherwise be tied up in excess inventory. This unlocked capital can be
strategically directed towards high-impact areas like marketing campaigns, product development,
or talent acquisition – all crucial elements for achieving sustainable growth. Additionally,
optimized inventory minimizes storage costs, handling expenses, and the risk of obsolete stock,
directly contributing to an improved bottom line. These financial benefits translate into resources
that can be reinvested in growth initiatives, creating a virtuous cycle of financial health and
expansion.

Furthermore, optimized inventory ensures product availability, preventing stockouts and

fostering customer satisfaction. This translates to increased customer loyalty, repeat business,
and ultimately, a growing customer base. Moreover, streamlined inventory management
processes enhance operational efficiency, leading to faster order fulfillment and improved
delivery times. This competitive edge positions the business for increased market share and the
ability to handle larger order volumes, both of which contribute to substantial growth. Finally,
analyzing optimized inventory data yields valuable insights into customer demand patterns. This
empowers businesses to make data-driven forecasting decisions, preventing missed sales
opportunities and maximizing revenue potential. In essence, optimized inventory is a strategic
asset that unlocks resources, improves efficiency, fosters customer satisfaction, and empowers
data-driven decision making – all essential ingredients for substantial and sustainable business
growth. By acting as a springboard for financial health, customer satisfaction, operational
efficiency, and informed decision-making, optimized inventory plays a critical role in propelling
a business towards its full growth potential.

7. Strategies/Tools needed to optimize the inventory levels-

Optimized inventory levels act as a cornerstone for sustainable business growth. It unlocks
capital for strategic investments, minimizes storage and handling costs, and prevents stockouts,
all contributing to a healthier bottom line. Furthermore, optimized inventory management fosters
customer satisfaction and loyalty. To achieve this, businesses leverage tools and strategies.

Here are the tools used by businesses to optimize the inventory levels.

7.1.EOQ (Economic Order Quantity)-

7.1.1 Definition
Economic Order Quantity (EOQ) is an inventory management system that demonstrates the
quantity of an item to reduce the total cost of both handling of inventory (Handling Cost) and
order processing (Ordering Cost). EOQ as a model has been introduced in 1913 by Ford W.
Harris; and R. H. Wilson and K. Andler are given credit for their in-depth analysis and
application of the EOQ model (Hax and Candea, 1984). With respect to an item to be ordered,
from a business point of view, the EOQ model establishes the amount of quantity to be placed in
an order in consideration of minimizing the annual total cost of inventory handling and order
processing. In this context, these specific two types of costs are the main categories of
determining the EOQ in its basic explanation. However, the model has been presented with
certain assumptions for the initial understanding; and from that point onward, its extensions are
used widely in businesses, especially in inventory management.

7.1.2 Assumptions for Basic model of economic order quantity

The determination of EOQ consists of the following assumptions:

a) The EOQ will be determined for every product individually in a business.

b) Annual requirement (Demand) for product in units is known with certainty.

c) Ordering cost is known and constant throughout the year.

d) Inventory handling cost is known and constant throughout the year. Notably, if the handling
cost of an item is given as the percentage of price of the item, the unit price of the item remains
same throughout the year.

e) No cash or quantity discount is allowed.

f) The ordered quantity of the product is delivered at once as a single batch.

g) Immediate replenishment of ordered quantity on time (No delay and stock shortage).

h) Constant lead time is only allowed (no fluctuation is permitted).

7.1.3 Annual demand of the product

The annual requirement of a product is constant and known in its measurement units and this
known as annual demand of the product (D). Using various forecasting technique, it is important
for a business to predict the annual demand for the specific item, for which the business need to
know the EOQ. As the demand produces the primary purchasing cost of the item, the total
purchasing cost is irrelevant in determining the EOQ.

7.1.4 Order Processing cost

The Ordering Cost refers to the cost of orders to be placed for the product in consideration of
order communication, allowances to purchase officers, order printing and stationery, costs of
inspection, receiving the product, and transport cost, etc. Notably, these costs remain constant
and unchanged for the period, irrespective the number of orders to be placed. As the ordering
cost per order is constant, the relationship between the quantity ordered and number of orders to
be placed is negative, i.e., higher the quantity ordered (Q) per order, lower the number of orders
to be placed; and lower the quantity ordered (Q) per order, higher the number of orders to be
placed. This implies the negative relationship between the quantity ordered (Q) and total cost of
order processing (TOC) as in Figure 1.

7.1.5 Inventory handling cost

This cost refers to the handling and maintaining the product inventory in workplace in
consideration of warehousing costs, shrinkage loss, evaporation, deterioration and spoilage costs,
insurance, warehouse rent, obsolescence, and other related overhead cost of warehouse. As these
costs are constant to maintain the total demand (annual requirement) of the product, the handling
cost per unit remains same. Therefore, total cost of handing has positive relationship with the
number of products handled in the workplace (warehouse), i.e., higher the number of products
(Q) in store, higher the total cost of handling (THC); and lower the number of products in store,
lower the total handling cost (THC) as in Figure 2. It is notable that handling of stock would be a
half the number of quantities to be ordered throughout the year; and therefore, the average stock
to handle would be Q/2.
7.1.6 The Economic order quantity model

The basic EOQ model, with all assumptions in consideration, deal with two types of costs: Total
Ordering Cost (TOC) and Total Handling (THL). It is obvious from the above explanation that
these costs are moving in opposite directions, when certain number of quantities are ordered for
storage purpose. Therefore, it is important for a business to find a trade-off point of ordering
quantity in order to minimize the total cost of both: TOC plus THC. In this context, the quantity
to be ordered to minimize the total cost of both TOC and THC is known as the Economic Order
Quantity (EOQ).

As TOC has negative relationship to quantity to be ordered and THC has positive relationship to
quantity to be ordered, the total minimum cost of both TOC and THC is the intersection point of
both cost lines that can produce: (a) the total cost of both TOC and THC as minimum as
possible; and (b) the number of quantities to be ordered (known as EOQ) to meet the minimized
cost (see Figure 3).
In Somani Automobile there are total of 21000-line items of various TATA motors commercial
vehicles and out of this only 3500–4000-line items are of great demand, so they maintain the
economic order quantity of those line items.

7.2. Safety Stock

Definition- Safety stock is defined as inventory that is carried to prevent stock out and back-
order situations. Safety stock protects against various deviations, such as delivery date variances
(when the replenishment lead time varies), requirement variances (when the forecast is
inaccurate) delivery quantity variances (when the vendor does not deliver enough materials or
the quality of delivered materials is poor) and inventory variances (when inventory recognizes a
deviation between the plan and actual inventory). Figure 1 summarizes these deviations and
shows the relationships among them.
Based on the consumption behavior of a product, the literature distinguishes between two
variants to determine the safety stock. The safety stock can be calculated either based on
historical distribution of demand or on the basis of a future distribution of the demand (forecast
error).

The formula for the standard method is as follows:

Safety stock = safety factor * average replenishment lead time

Assumptions-

• Demand Variability: There's an inherent assumption that demand for your product
fluctuates over time. The calculation aims to provide a buffer against these unpredictable
fluctuations.
• Lead Time Consistency: The lead time, which is the time it takes to receive new
inventory after placing an order, is assumed to be relatively consistent. Significant
variations in lead time can render the safety stock calculation inaccurate.
• Normal Distribution of Demand: Many safety stock formulas assume demand follows a
normal distribution (bell curve). This implies most demand falls around the average, with
fewer instances of very high or low demand.
• Service Level Target: The calculation often incorporates a desired service level, which
is the percentage of customer demands you aim to fulfill without a stockout. A higher
service level typically requires a larger safety stock.
 • Static Product Prices: The calculation typically doesn't account for potential price
fluctuations of the product or raw materials.

7.2.1 Reorder Point-

The reorder point tells you when to reorder inventory, so that you won’t run out of stock. It
usually triggers the purchase of a predetermined amount of replenishment inventory. If the
purchasing process and supplier fulfillment work as planned, the reorder point should result in
the replenishment inventory arriving just as the last of the on-hand inventory is used up. The
result is no interruption in production and fulfillment activities, while minimizing the total
amount of inventory on hand. The reorder point can be different for every item of inventory,
since every item may have a different usage rate, and may require differing amounts of time to
receive a replenishment delivery from a supplier. For example, a company can elect to buy the
same part from two different suppliers; if one supplier requires one day to deliver an order and
the other supplier requires three days, then the company's reorder point for the first supplier
would be when there is one day's supply left on hand, or three days' supply for the second
supplier.

The basic formula for the reorder point is to multiply the average daily usage rate for an
inventory item by the lead time in days to replenish it. However, this formula for the reorder
point is only based on average usage; in reality, demand may spike above or decline below the
average level, so there may still be some inventory on hand when the replenishment order
arrives, or there may have been a stockout condition for several days that has interfered with
production or sales. To guard against the latter condition, a company may alter the reorder
formula to add a safety stock, so that the formula becomes:

(Average daily usage rate x Lead time) + Safety stock = Reorder point
Importance of Safety stock in inventory management-

Spike in Demand

There are certain times of the year when retailers can expect an influx of sales, the holiday
season being the most prominent. Then, there are times when the market is unpredictable and
demand for certain goods spikes without notice, and/or the cost of manufacturing the goods
increases. This may be the result of resource or supplier scarcity or increasing competition, in
addition to a number of other unforeseen circumstances. The importance of safety stock in
inventory management is to prepare for these events without losing profits or experiencing issues
with pipeline inventory or last mile logistics delays.

Inaccurate Forecasting

Although there are ways to manage demand variability, inaccurate inventory forecasting can
leave you without the supplies required to meet customer demand. Safety stock serves as a
cushion, particularly for popular items that sell out fast. Rather than set a certain amount across
the board, knowing how to calculate safety stock level per item or SKU allows you to better
manage an accurate inventory level based on the current and predicted demand.

Avoiding Stockouts

Even with data-driven inventory forecasting, there are unforeseen delays that can still result in a
stockout. Changes in and challenges with suppliers can leave you high and dry for longer than
anticipated, leaving you with no extra stock to support customer demand. This can be due to
many reasons, including weather delays and worker shortages, two of the biggest factors
affecting supply chains today. Safety stock allows you to maintain order fulfillment while you
wait for the supply chain to return to a better state of normalcy and a regular schedule.

How safety stock is determined in the spare parts inventory?

At Somani Automobiles, the Spare parts of TATA motors commercial vehicles are ordered for
12 months. There are many parts which gets sold in every 4 months are marked as essential items
and only those items are kept in safety stock.

When the stock of those particular items reaches the re order level point, then the order of those
parts is placed in different warehouses of TATA motors commercial vehicles from where the
parts are being delivered in Somani automobile. The average lead time is approximately 7 days.

7.3. Demand Forecasting/ Inventory Forecasting

Definition-

Inventory forecasting also known as demand planning is the practice of using past data, trends
and known upcoming events to predict needed inventory levels for a future period. Accurate
forecasting ensures businesses have enough product to fulfill customer orders while not tying up
cash in unnecessary inventory. Forecasting is more than just setting a reorder point — it’s using
data analysis to identify patterns and trends to adapt to dynamic conditions and meet customer
demand. Inventory forecasting uses data to drive decision making. It’s the application of
information and logic to make sure you have enough product on hand to meet customer demand
without overdoing it and ordering too much that you then must pay to warehouse. Forecasters are
creating more complex tools like advanced computer-based simulations and futures markets to
create demand forecasts.

Methods of demand forecasting-

Qualitative Methods-
Qualitative methods involve gathering insights from expert opinions, market surveys, and
customer feedback to predict future demand. These methods are particularly useful in situations
where historical data may be limited or unreliable.

Quantitative Methods

Quantitative methods rely on statistical models and mathematical algorithms to analyze historical
data and extrapolate future demand patterns. Common techniques include time series analysis,
regression analysis, and machine learning algorithms.

Trend Forecasting-

Trends are changes in demand for a product over time. This method projects possible patterns
and excludes seasonal effects and irregularities using past sales and growth data. More granular
sales data helps this forecasting technique by showing how specific customers, as well as types
of customers, will likely purchase in the future. Analysts can find new ways to market and offer
sales from this data.

Graphical Forecasting-

The same data that a forecaster analyzes in trend forecasting can be graphed to show sales peaks
and valleys. Some forecasters prefer the graphical method because of its visual nature and
insights available. They can discern patterns from a series of data points and add sloped trend
lines to graphs to examine possible directions that might otherwise be missed.

Importance of demand forecasting in inventory management

Cost Savings-

It all comes down to efficiency. By ordering the optimum amount of product you can take
advantage of bulk ordering without tying up money in unnecessary inventory. Those unneeded
products or parts also require warehousing space, which adds costs.

Customer and Supplier satisfaction

Having stock on hand helps keep customers happy and improves the likelihood of repeat
business. And understanding supplier processes and timelines helps you minimize stock-outs and
keep healthy relationships with them with fewer emergency orders and better communication.

Back-end Improvements

Inventory and supply chain are intrinsically connected. Improved demand forecasting improves
your supply chain management by looking ahead to ensure the right amount of stock.
Additionally, it can decrease the amount of manual labor that goes into inventory and supply
chain management. Reorder points and other steps can be automated. Advanced inventory
management software can keep forecasts up to date with new information as it’s fed into your
platform.

Strategic insights

Improved communication across your enterprise can help you meet company goals and inventory
forecasting can play a key role in driving that communication. For example, by looking at past
performance and expected outcomes of a marketing campaign, your inventory managers can
ensure there is enough product on hand to meet customer demand, while also possibly cutting
some costs with bulk buying. In this manner, your inventory management team can impact key
performance indicators (KPIs) such as profit margins.

How does demand forecasting works in a Spare part inventory?

In order to determine which parts to order in the near future or what parts will be in high demand
in the future, we need to focus on some parameters.

1. Identify the stock in hand - In order to identify the stock in hand, we need to add three
parameters, namely on hand storage in the warehouse, stock ordered and already in
transit, and stock on order, which refers to stock ordered but not yet shipped. When these
three parameters are added together, we obtain the stock in hand, which is the stock in
our warehouse or on its way to our warehouse.
2. Identify your stock requirements - Once we have determined our stock at hand, we
need to determine our stock requirements, which is determined by two parameters: the
 average quantity of the product consumed in the past six months, and the number of
months during which the product was consumed in the past year.
3. Re-order eligibility- Re-order eligibility requires that the stock in hand is less than the
average quantity consumed in the previous 6 months and that the HIT count is more than
half of previous months. As an example, if sales data for a product are provided for 14
months, then the HIT count must be greater than or equal to 7 months.
4. Quantity to be ordered - The quantity to be ordered is determined by calculating
(Average quantity consumed in the past six months - Stock in hand). Thus, it is possible
to determine the exact number of parts that should be ordered to maintain sales.

4. Inventory Turnover-

Definition- The inventory turnover ratio is a financial ratio showing how many times a company
turned over its inventory relative to its cost of goods sold (COGS) in a given period. A company
can then divide the days in the period, typically a fiscal year, by the inventory turnover ratio to
calculate how many days it takes, on average, to sell its inventory.

The inventory turnover ratio can help businesses make better decisions on pricing,
manufacturing, marketing, and purchasing. It is one of the efficiency ratios measuring how
effectively a company uses its assets.

The inventory turnover ratio is a really useful financial metric, especially for those companies
that has inventory. It measures the number of times a company's inventory is sold and replaced
over a specific period, typically a year. A higher inventory is usually better, though there may be
downsides to a high turnover.

Like most other ratios, analyzing the inventory turnover ratio in conjunction with industry
benchmarks and historical trends provides valuable insights into a company's operational
efficiency and competitiveness. On its own, the turnover ratio may not mean much. However,
tracking it over time or comparing it against another company's ratio can be more insightful.

The inventory turnover ratio is calculated as follows:

Inventory Turnover= Average Value of Inventory/ COGS

where: COGS=Cost of goods sold

Cost of goods sold (COGS) is also known as cost of sales. Analysts use COGS instead of sales
in the formula for inventory turnover because inventory is typically valued at cost, whereas the
sales figure includes the company’s markup. Some companies may use sales instead of COGS in
the calculation, which would tend to inflate the resulting ratio.

Importance of Inventory turnover ratio-

What Is a Good Inventory Turnover?

Inventory turnover ratio is a key performance indicator that measures the efficiency with which a
company manages its inventory. It represents the frequency with which inventory is sold and
replenished over a specific period. While a higher turnover generally indicates strong inventory
management, the optimal rate varies significantly across industries. Companies selling low-
priced products typically exhibit higher turnover ratios compared to those dealing in high-value
items.

For businesses operating in sectors such as consumer packaged goods, inventory turnover is a
critical metric. In conjunction with accounts receivable turnover, it offers valuable insights into
operational efficiency, cash flow management, and overall financial health.

Is High Inventory Turnover Good or Bad?

Companies will almost always aspire to have a high inventory turnover. After all, high inventory
turnover reduces the amount of capital that they have tied up in their inventory. It also helps
increase profitability by increasing revenue relative to fixed costs such as store leases, as well as
the cost of labor. In some cases, however, high inventory turnover can be a sign of inadequate
inventory that is costing the company sales.
Importance of inventory turnover ratio

1. The inventory turnover ratio is critical for assessing how fast a company sells its inventory.
This information is used to compare the company’s efficiency against industry standards.

2. Inventory turnover ratio analysis helps assess if a company has cleared inventories faster than
its competitors. This allows investors to decide if the company is a good investment.

3.The importance of the inventory turnover ratio can also be attributed to its ability to measure a
company’s liquidity. A high inventory turnover ratio means that the company receives cash more
frequently and thus can maintain sufficient liquidity. Hence, organizations always try to
maintain a higher ratio to stay financially fit.

How Inventory turnover ratio is calculated in spare parts inventory?

5. Cost Benefit Analysis-

Definition- A cost-benefit analysis involves comparing the explicit and implicit costs of taking
an action versus expected benefits. The process of gathering that information may be
enlightening because it may require the business to assign monetary value to factors that don’t
have explicit costs. The resulting analysis allows decision-makers to weigh all information and
make rational choices.
Each action a business takes has explicit cost and revenue expectations. But there are also
implicit costs, often expressed as the opportunity cost that is, the money or other benefit lost by
pursuing one option over another or of taking no action. Opportunity cost is not an accounting
concept, it’s an economic one, but it can be associated with a quantitative value.

A cost-benefit analysis adds up the benefits and costs of a program or purchase, extracts a CBA
ratio and then compares that result with both stasis and alternative programs or purchases. A
CBA requires considering both monetary and opportunity costs over a period of time. To
compare multiple CBAs, extract a CBA ratio from each. The formula for a cost-benefit analysis
ratio can be expressed as:

Projected benefits / projected costs = Benefit cost ratio

If the Cost benefit analysis ratio is more than 1.0, it states that a project should be financially
successful; a reading of 1.0 suggests that the benefits equal the costs; and a reading below 1.0
suggests that the costs trump the benefits.

The benefit-cost ratio (BCR) is used in a cost-benefit analysis to get a summary of the overall
relationship between the relative costs and benefits of a proposed project. A project with a BCR
greater than 1.0 is expected to deliver a positive net present value (NPV) to a firm and its
investors.

Inputs included in the cost benefit analysis-

Costs

Explicit costs: These are accounting costs with explicit monetary value and may include direct
costs such as labor, manufacturing and the cost of software or machinery and indirect costs, such
as utilities or rent.

Intangible costs: These are qualitative items, such as lost productivity or reduced customer
satisfaction if an existing product is retired because a new SKU is being introduced.

Implicit costs: These are opportunity costs, both financial and non-financial, like purchasing a
capital asset versus investing free cash, or of pulling employees off one project to work on the
new initiative.
Benefits

Direct benefits: This is the accounting profit from the decision and could include, for instance,
cost savings or increased revenue from a new product or service.

Indirect: These are tangential benefits. For instance, as a result of a new technology
implementation, customers may be incentivized to spend more.

Intangible: These benefits could include, for instance, improved customer satisfaction,
employee morale or employee safety.

Sensitivity Analysis Template

Below is a sample sensitivity analysis worksheet a CIO might use to evaluate a product purchase
alongside a CBA — it’s overly simplified for the sake of space. It combines product attributes,
like suitability for the task, with business considerations. Criteria sets may be added and
customized.

When Should a Business Conduct a Cost-Benefit Analysis?

CBAs are useful anytime there are priorities competing for limited resources. But companies do
need to set some ground rules for analyses. For example, all stakeholders should understand the
company’s expectation on whether a CBA will address short-, mid or long-term impacts. The
further into the future analysis extends, the more difficult it is to accurately forecast costs and
benefits.
In general, most companies should do a cost-benefit analysis for major decisions in these five
areas:

Capital investments: Should the business purchase a new delivery vehicle, production
machinery, computer hardware or office furniture, or invest in renovating a building? Assign
costs with the understanding that the benefit of the investment is derived from the use of the
asset, not from its market value. For instance, an investment in new manufacturing equipment
should allow me to produce more goods at a lower cost, resulting in more revenue and better
margins. I'll retain this benefit even as the value of the equipment declines.

Business process change: A business process is any defined set of actions that are repeated
often and produce a desired result. A company may think that a task that’s high volume, high
touch, repetitive and prone to error is a candidate for business process automation. A CBA can
help prove the theory. For example, should you purchase software that automatically adds
inventory receipts to the inventory ledger and the asset column on the balance sheet versus
manual entry? Or, a growing company may run a CBA and find that hiring a third-party to
manage the payroll process now makes sense and is a source of savings. In any cost-benefit
analysis, ensure the stakeholder asks: How can we drive inefficiency out of this business
function? And how do we attach a dollar value to that?

Organizational change: This is often related to business process change and refers to human
capital. An example is comparing hiring staff versus outsourcing. Adding an indirect sales
channel, for example, is a significant organizational change. For a CBA, you’ll need to consider
that a productive on-staff sales rep might cost more on a per-sale basis versus indirect, but
turnover is high. Commissions may be a wash. Will you need to hire a channel manager
(organizational change), set up a portal for functions such as deal registration (a business process
change) and/or allocate marketing development funds?

Adjusting pricing or introducing new product or service: Managers in companies that use
cost accounting have pretty granular data on the total costs and revenue attached to a good or
service and thus have a head start on cost-benefit analyses. Factors to quantify may include
whether the company should introduce a subscription model, or whether it should discontinue a
certain product or service because of poor sales before adding a new SKU.
Entering into a merger, acquisition or divestiture: Decisions around whether to acquire or
merge with a company or sell parts of the business are among the most complex analyses, and
the most important. A merger that may seem desirable at first glance, upon further consideration,
may come with significant process and organizational changes, legal fees, costly layoffs and
other factors which may diminish the relative value of the merger.

How cost benefit analysis is done in spare part inventory?

6. Inventory Categorization-

Definition-

Inventory categorization is a strategic process that involves grouping inventory items into
distinct categories based on shared characteristics. These classifications often consider factors
such as product value, demand rate, usage patterns, and profit margins. The primary objective of
categorization is to optimize inventory management by enabling businesses to allocate resources,
implement appropriate control strategies, and make informed decisions about purchasing,
storage, and replenishment. By understanding the characteristics of different inventory groups,
organizations can tailor their inventory policies to meet specific needs, reduce carrying costs,
prevent stockouts, and improve overall supply chain performance.

Methods for classification of inventory-

1.ABC Analysis- ABC (Always Better Control) analysis is one of the most commonly used
inventory management methods. ABC analysis groups items into three categories (A, B, and C)
based on their level of value within a business.Classifying inventory with ABC analysis helps
businesses prioritize their inventory, optimize operations, and make clear decisions.

ABC analysis sorts inventory into three main buckets:

A items: This is your inventory with the highest annual consumption value. It should be your
highest priority and rarely, if ever, a stockout.
B items: Inventory that sells regularly but not nearly as much as A items. Often inventory that
costs more to hold than A items.

C items: This is the rest of your inventory that doesn’t sell much, has the lowest inventory value,
and makes up the bulk of your inventory cost.

Why ABC analysis is important for inventories?

1. More accurate demand forecasting

Using ABC analysis, inventory planners can predict the demand for specific products and
manage their inventory accordingly. This insight minimizes carrying costs for obsolete items,
thus improving your supply chain management.

2. Better control of high-value inventory

The success of many businesses hinges on A-class inventory. ABC analysis enables you to
identify those items in real-time, monitor demand for them, and ensure they’re never out of
stock. By channeling your resources towards high-priority inventory, you can rest assured you’re
putting the odds of success in your favor.

3. Strategic pricing

ABC analysis can optimize your pricing strategy for products that bring the most value to your
business. Once you understand which products are in high demand, you can increase their price,
which can significantly impact profits.

What are the shortcomings of ABC analysis?

Regular oversight required

To get the full benefits of ABC analysis, you must analyze inventory regularly to ensure A-
inventory still consists of high-priority items. Otherwise, you risk squandering resources on
lower-value items. Data collection and analysis can put a strain on businesses that don’t have
proper accounting software.

Lacks precision
An ABC analysis can overvalue frequently purchased items that get people in the door over
luxury goods with a lower purchase frequency but higher profit margin. ABC analysis can also
miss swings in demand for seasonal items or new items that haven’t accrued much sales volume
data.

2.FSN Analysis- FSN analysis refers to an inventory management technique which divides
goods into three categories – fast-moving, slow-moving, and non-moving – based on how fast
they are used or sold and how long they stay in storage. By conducting an FSN analysis,
ecommerce businesses can easily identify dead stock and prevent it from accumulating. It also
allows them to make strategic procurement decisions to save valuable warehousing and storage
space, minimize holding costs, and better meet customer demand.

FSN analysis divides inventory in 3 parts-

Fast-moving inventory – These SKUs sell quickly and do not remain in stock for long, meaning
that they’re also replenished most often. Typically, fast-moving inventory has an inventory
turnover ratio of at least 3 and accounts for less than 20% of the total inventory.

Slow-moving inventory – These SKUs move more slowly through the supply chain and are
replenished less often. They generally have an inventory turnover ratio between 1 and 3 and
make up about 35% of the total inventory. Some surplus inventory may be included in this
category.

Non-moving inventory – These items rarely move (if at all) and have an inventory turnover ratio
below 1. Non-moving inventory can constitute as much as 60-65% of the total inventory. It may
include deadstock and other items that are ready for disposal.

To determine which products should be included in each category, every SKU is measured on 3
parameters:

Consumption rate – The rate at which an item is consumed or expended during a specific period.

Average stay – The average duration that a specific item stays in the warehouse until it’s sold.

Period of analysis – The time period for which the analysis is being conducted.
Why FSN analysis is important?

Timely inventory control

Because an FSN analysis takes every SKU into account, it forces a business to audit their
inventory and evaluate their product mix, inventory levels, and more. This deeper visibility helps
improve your inventory control, as it gives you the data you need to move deadstock and surplus
inventory off your shelves and optimize stock levels.

Better procurement planning

When you know how long inventory is likely to stay on shelves before it sells, you are much
more equipped to time inventory replenishment. An FSN analysis and its resulting insights
enable you to plan procurement to avoid unnecessary purchases while quickly replenishing
popular products. This is particularly helpful when navigating seasonal spikes and dips in
demand, so that you don’t accidentally end up with more or less stock than you need.

Improved warehouse space utilization

Warehouse space is expensive and usually limited. FSN analyses reveal which items are sitting
in storage and taking up space, which in turn allows a merchant to take steps to free up that
valuable square footage. This may involve reducing order quantities or frequencies for those
items to prevent further accumulation, or moving them out altogether through heavy discounting,
donations, or disposal.

What are the cons of FSN analysis?

Potential for human error

The FSN technique is a form of SKU analysis that requires a person to provide their own data
and perform formula calculations. This makes it susceptible to human error, which can result in
miscalculations and faulty outcomes. Even a small error in the information provided could affect
the accuracy of your results, meaning that there’s a higher risk of making decisions based on
faulty information.

Inconsistency with demand fluctuation

It’s difficult to keep up with sudden or frequent changes in trends using an FSN analysis alone. If
you conduct your analysis at a time when a certain SKU is high in demand, it will naturally be
categorized as fast-moving. However, if demand suddenly drops again by the time your
replenishment inventory arrives, you’ll end up with a bunch of excess stock that’s difficult to
sell.

3.Risk Analysis-

Definition- Inventory management is a critical function within any organization, yet it is

inherently exposed to various risks that can significantly impact operational efficiency, financial
performance, and customer satisfaction. A robust risk analysis framework is essential to identify,
assess, and mitigate these potential threats.

Key Steps in Inventory Risk Analysis

Risk Identification: This phase entails a comprehensive assessment of potential threats to the
inventory system. These risks can be categorized into internal and external factors.

Internal factors: Include issues within the organization such as inaccurate demand forecasting,
poor inventory control systems, theft, damage, and employee errors.

External factors: Encompass economic fluctuations, supply chain disruptions, natural disasters,
political instability, and changes in customer preferences.

Risk Assessment: Once risks have been identified, they must be evaluated based on their
potential impact and likelihood of occurrence. Tools such as risk matrices can be used to visually
represent this information.

Impact assessment: Determines the potential financial, operational, and reputational

consequences of a risk materializing.

Probability assessment: Estimates the likelihood of a risk occurring.

Risk Prioritization: Based on the assessment, risks are ranked according to their severity. This
helps focus resources on the most critical threats.
Risk ranking: Prioritizes risks using criteria such as expected loss, impact on business
objectives, and alignment with organizational risk tolerance.

Risk Mitigation: Developing strategies to reduce the impact or likelihood of identified risks is
crucial.

Risk avoidance: Eliminating or avoiding the risk altogether, if possible.

Risk reduction: Implementing measures to lower the probability or impact of the risk.

Risk transfer: Shifting the risk to a third party, such as through insurance.

Risk acceptance: Acknowledging the risk and taking no action, often for low-impact risks.

Monitoring and Review: The risk management process is dynamic and requires continuous
monitoring and evaluation.

Risk monitoring: Tracking changes in the risk environment and identifying new threats.

Risk review: Regularly assessing the effectiveness of risk mitigation strategies and updating the
risk assessment.

Why risk analysis is important?

To avoid financial losses: Inventory risks can lead to a number of financial losses, including:

• Lost sales due to stockouts

• Cost of overstocking, such as storage costs and the risk of obsolescence
• Cost of damaged or spoiled inventory

To maintain customer satisfaction: Stockouts and other inventory-related problems can lead to
frustrated customers and lost sales. Effective inventory risk management can help to ensure that
you always have enough inventory on hand to meet customer demand.

How Inventory categorization is done in spare parts inventory?

Spare parts inventory is commonly segmented into fast-moving, slow-moving, and non-moving
categories, often leveraging ABC analysis for precise classification. A typical storage strategy
involves prioritizing fast-moving A items, characterized by high annual consumption, by placing
them in the most accessible first rack. The second rack is allocated to B items with moderate
consumption rates, enabling efficient retrieval. Non-moving items, exhibiting consumption rates
below 10%, are segregated to optimize space utilization and inventory control. This spatial
arrangement enhances overall inventory management by facilitating rapid fulfillment of high-
demand items while minimizing storage costs associated with low-demand or stagnant stock

7. JIT(Just In Time) inventory-

Definition-

Just in Time (JIT) is a production and inventory control system in which materials are purchased
and units are produced only as needed to meet actual customer demand. In just in time
manufacturing system inventories are reduced to the minimum and in some cases are zero. JIT is
a philosophy of continuous improvement in which non-value-adding activities (or wastes) are
identified and removed for the purposes of reducing cost, improving quality, improving
performance, improving delivery and adding flexibility.

JIT originated in Japan. Its introduction as a recognized technique/philosophy/ way of working

is generally associated with the Toyota motor company, JIT being initially known as the
“Toyota Production System”.

In today’s competitive world shorter product life cycles, customers rapid demands and quickly
changing business environment is putting lot of pressures on manufacturers for quicker response
and shorter cycle times. This can only be done by Just in Time (JIT) philosophy. Under ideal
conditions a company operating at JIT manufacturing system would purchase only enough
materials each day to meet that day’s needs. Moreover, the company would have no goods still
in process at the end of the day, and all goods completed during the day would have been
shipped immediately to customers. As this sequence suggests, “just-in-time” means that raw
materials are received just in time to go into production, manufacturing parts are completed just
in time to be assembled into products, and products are completed just in time to be shipped to
customers.

JIT applies primarily to repetitive manufacturing processes in which the same products and
components are produced over and over again. In JIT workers are multifunctional and are
required to perform different tasks. The just-in-time inventory system focus is having the right
material, at the right time, at the right place, and in the exact amount.
Why just in time inventory is essential for spare part warehouse?

Reduced inventory holding costs: By significantly lowering stock levels, warehouses can
reduce storage costs, insurance premiums, and the risk of product obsolescence. This frees up
capital that can be invested in other areas of the business.

Faster inventory turnover: JIT encourages frequent, smaller orders, leading to a more rapid
inventory turnover rate. This quickens the movement of goods through the warehouse, improving
efficiency and reducing the risk of stock aging.

Enhanced responsiveness to customer demand: With lower inventory levels and a focus on
real-time demand, warehouses can respond more swiftly to customer orders. This agility is
crucial in today's competitive market.

Challanges of just in time inventory-

Increased risk of stockouts: Maintaining minimal inventory levels increases the risk of
stockouts if demand exceeds expectations or supplier deliveries are delayed. Accurate demand
forecasting is crucial to mitigate this risk.

Requirement for accurate demand forecasting: Precise demand prediction is essential for JIT
success. Overestimating or underestimating demand can lead to either excess inventory or
stockouts, respectively.

Need for flexible warehouse operations: Warehouses operating under JIT must be adaptable to
handle fluctuating inventory levels and frequent shipments. This requires a flexible workforce
and efficient processes.

How Just in Time inventory works in a spare part warehouse?

In the event that a customer places an order through the website, then based on the order, pick
tickets are generated for different parts with their location and quantity listed according to what
the customer has ordered. There is a colorful sticker on each part in the warehouse, which
indicates the months of the year in which it will be stored. The worker will check the part and the
sticker once they have received the pick ticket. After that, the worker will follow the FIFO (First
in First Out) method in dispatching the parts. This means that if a part order was placed in
January, it must be dispatched sooner than a part order placed in June. After that the invoice is
created and parts are sent through transport.

QUESTIONNAIRE

A set of 5 questions were prepared by me and given to warehouse managers regarding

optimization of inventory levels.

1. Does categorizing inventory products play an important role in inventory

optimization?
2. How can safety stock levels be accurately determined to buffer against demand
variability and supply chain uncertainties?
3. Which demand forecasting techniques provide the highest accuracy for predicting
future inventory needs?
4. How does inventory turnover ratio impact overall financial performance and
operational efficiency?
5. What are the supply chain disruptions faced by the inventories?

FINDINGS AND ANALYSIS-

1. Categorizing inventory is crucial for effective inventory optimization. By classifying products
based on criteria such as value, demand, and sales velocity, organizations can implement targeted
management strategies. This approach allows for precise resource allocation, demand
forecasting, and stock level determination, ultimately enhancing inventory turnover, reducing
carrying costs, and improving overall supply chain performance.

2. Safety stock levels are maintained for those items whose demand is consistent throughout the
year. A stock is ordered for 12 months and the material that are being sold within 4 months are
considered to be kept for safety stock. Safety stock ensures that there is always availability of
certain materials so that the sales are not lost and also customer retention and satisfaction are
maintained.

3. TATA Motors provides a CRM Software (Siebel Distribution) for identifying the products
with the highest future demand, which is called TOPS (Transformation of Parts Supply System).
Each TOPS is automatically updated daily, predicting the accurate demand for that part and
automatically placing the order.

4. Inventory turnover ratio is a critical metric reflecting the efficiency with which inventory is
managed and converted into sales. A high ratio indicates strong sales performance and optimized
inventory levels, contributing positively to overall financial health. Conversely, a low ratio
signals potential issues such as overstocking, slow sales, and increased carrying costs, negatively
impacting operational efficiency and profitability.

5. The Supply chain disruptions faced by inventories are-

• Sometimes the wrong product gets delivered to the client.

• Sometimes even if the right product is dispatched the product gets damaged during
transportation.
• Climate conditions also play a severe role in supply chain disruptions.
• Geographic situations also play a major role.
• The covid-19 pandemic caused a great supply chain disruptions due to lockdown.

CONCLUSION-
In conclusion, effective inventory management is critical for businesses seeking to thrive in a
competitive market. By employing strategies such as Economic Order Quantity (EOQ), safety
stock optimization, and demand forecasting, companies can strike a balance between inventory
costs and customer satisfaction. These methods ensure that the right products are available at the
right time, reducing the risk of stockouts and overstocking while enhancing cash flow and
profitability. Furthermore, understanding inventory turnover ratios and conducting cost-benefit
analyses allow businesses to evaluate their inventory management efficiency and make informed
decisions. By categorizing inventory based on value, criticality, and demand variability,
companies can prioritize resources and streamline operations.

In addition to traditional inventory management techniques, businesses must also be prepared

for unforeseen disruptions by implementing proactive measures such as supplier diversification
and contingency planning. Strategies like just-in-time (JIT) inventory can further optimize stock
levels by minimizing waste and storage costs, provided there is a stable supply chain and
accurate demand forecasting.

Ultimately, a well-structured inventory management system that incorporates these strategies

and tools provides businesses with a competitive advantage, fostering sustainable growth and
profitability in today’s ever-evolving market environment.