Module 2 : Inventory and Materials Optimization

Supply Chain Network Design - Drivers and Metrics of Global Supply Chain - Overview
of Materials Management - Demand Forecasting Techniques - Inventory - Concepts
and principles - Inventory Control Techniques and Methods - Collaborative Inventory
Optimization - VMI - A Solution for Bull Whip Impacts in Inventory - Vendor Managed
Inventory and JIT - ERP Solutions for Inventory Systems - Industry Best Practices for
Inventories - Industry Case–Problem Analysis
RECOMMENDED TEXT
Sunil Chopra and Peter Meindl, - Supply Chain Management, Strategy, Planning,
Operation, Pearson Publications, 6 th Edition.
Paul R Murphy, A. Michael Knemeyer, - Contemporary Logistics, Pearson
Publications, 12th Edition
Martin Christopher – Logistics & Supply Chain Management, Pearson Publication,
4th Edition
Stake-holders of Supply Chain
Supply Chain Network Design: Structure
 Supply Chain Network Design: Structure, Analysis

Manufacturer storage with direct shipping

Manufacturer storage with
direct shipping, in-transit
merge

Question:
Where does On-line fall?

Distributor storage with carrier delivery

 Supply Chain Framework Design: Structure, Analysis

Distributor storage with Manufacturer/distributor storage

last-mile delivery with customer pickup
 Drivers of Global Supply Chain
Driver Detail
Manufacturing sites,
Facilities Storage sites
Inventory RM, WIP, and F G
Modes of moving
Transportion inventory
data and analysis
concerning facilities,
inventory, transportation,
costs, prices, and
Information customers
choice of who will
perform a particular
Sourcing supply chain activity,
What is the charge for the
Pricing Goods and Services

The goal is to structure the drivers to achieve the desired level of responsiveness at the lowest
possible cost, thus improving the supply chain and the firm’s financial performance.
Facilities Inventory
Metrics of Supply
Transportation Information
Chain
Sourcing Pricing
Days of payble
Capacity Average Inventory Inbound Cost Forecast Horizon outstanding Profit margin
Products with
morethan specified Incoming shipment Days of sales
Utilization inventory days size Forecast errors Avg purchase price outstanding
Theoretical Cycle Avg Replenishment Inbound cost per Range of purchase Incremental Fixed
time batch size shipment Seasonal Factor price cost per order
Incremental Variable
Actual cycle time Avg Safety Inventory Outbound cost Variance from Plan Avg purchase Qty cost per Unit
Ratio of Demand
Outbound shipment Variability to Order
Flow time efficiency Seasonal Inventory size variability On time deliveries Avg sales price
Outbound cost per
Product variety Fill rate shipment Supply lead time Avg Order size
Volume contribution
to top 20 Time out of stock Part shipment Supply quality Range of Sales price
Range of periodic
Processing time Special deliveries Sales
Set up time
Idle time
Down time
Average age Page 62 to73 in TB
 Demand Forecasting
Demand Forecasting is the process of estimating future demand in terms of the quantity,
timing, quality, and location for desired products.

Forecasting is the first level activity. Demand of a particular product must be available before
taking up any other decisions like materials planning, scheduling, implementation of
production system, etc..

Why ? - Forecasts are needed to plan the future.

What ? - Forecasting includes product demand, supplies, costs, prices, and lead times, etc.
When ? - Forecasts are prepared on some periodic basis, and second in which forecasts are
prepared whenever some new historical data are available.
With periodic system, a balance should be made between the benefits of a new forecast and
the cost of forecasting.

Period ? - For the purpose of inventory control, the forecasting of product demand can be
made on short term basis. For the purpose of production planning, product demand
forecasting may be over a longer term – say months in the coming year. However, for
facilities planning, product demand forecasts are of still longer term – say 5 to 10 years.
 Demand Forecasting
Demand forecasts can be classified according to the length of planning period and use.

• Short term Horizon – one to five weeks. It serves as guides to current operations.

• Medium / Intermediate Horizon – one month to two years . More comprehensive and
aggregate in nature

• Long term Horizon – More comprehensive and aggregate in nature

 Forecasting Techniques

● What : It 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. Reorder points are one
important piece, but there is much●more to inventory forecasting.
Trend Forecasting :Trend forecasting is the process of using market
research and consumer data to create predictions about customers'
● Types of Forecasting : future buying habits and preferences. Trend forecasting provides
product designers with insight that may help them design an item that
● Trend forecasting: their target audience likes and purchases.

● Graphical forecasting: The same data that a forecaster analyzes in trend

● Graphical forecasting: forecasting can be graphed to show sales peaks and valleys. Some
forecasters prefer the graphical method because of its visual nature and
● Qualitative forecasting: 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.
Quantitative forecasting:
Trend Forecasting

Graphical Forecasting
 Quantitative Forecasting
● Time-Series Analysis
Quantitative forecasting are widely used
● Time-series analysis is a method of forecasting that uses historical data
in businesses to make predictions about to predict future trends. This method assumes that future patterns will
future trends. These methods rely on resemble past patterns. Time-series analysis involves analyzing
mathematical models and historical data historical data, identifying patterns and trends, and using this
information to make predictions about the future. This method is
to make informed predictions.
useful when there is a consistent pattern in the data and when the data
Quantitative forecasting methods are best is not affected by external factors.
used when historical data is available, and ● Regression Analysis
● Regression analysis is a method of forecasting that uses historical data
the relationships between variables are
to predict future trends. This method is used when there is a
clearly defined. There are various types of
relationship between two or more variables. Regression analysis
quantitative methods of forecasting, involves analyzing historical data, identifying the relationship between
including time-series analysis, regression variables, and using this information to make predictions about the
analysis, and econometric modeling. future. This method is useful when the data is affected by external
factors.
● Econometric Modeling
● Econometric modeling is a method of forecasting that uses economic
data to predict future trends. This method involves analyzing economic
data, identifying patterns and trends, and using this information to
make predictions about the future. This method is useful when there
are economic factors that can affect the data
 Qualitative Forecasting

Qualitative forecasting: When they lack

historical data, some companies go
straight to the source: their customers.
Qualitative forecasting often involves
complex data collection, such as focus
groups and market research. Forecasters
then flesh out models from this type of
data.

Primarily, these are used when data is

scarce—for example, when a product is
first introduced into a market. They use
human judgment and rating schemes to
turn qualitative information into
quantitative estimates.
 Advantages and Limitations of Quantitative
● Advantages :
• Accuracy: Quantitative methods of forecasting rely on data analysis and
mathematical models, which make predictions more accurate.
• Objectivity: Quantitative methods of forecasting are objective and based on
historical data, which reduces the impact of personal bias.
• Consistency: Quantitative methods of forecasting are consistent and can be used
repeatedly, making them reliable.
• Ease of Use: Quantitative methods of forecasting are relatively easy to use and
require minimal expertise in statistics and mathematics.
• Limitations :
• Data Availability: Quantitative methods of forecasting rely on historical data,
which may not always be available or reliable.
• Assumptions: Quantitative methods of forecasting make assumptions about
future patterns based on past data, which may not always hold true.
• External Factors: Quantitative methods of forecasting may not account for
external factors that can affect future trends.
 Types of Inventory
Sl No Type Detail
Materials used to produce or manufacture Finished Goods.
Not recognizable from their original form when the Finished Products
1 Raw Materials are ready
Almost similar to Raw Materials.
These remain recognizable in their original form in the Finished product,
2 Components e.g. bolt and nut

It is the materials in the stage of producing Finished Product. It includes

3 Work In Progress Raw materials, Components, overhead, labor, packing materials

4 Finished Goods Goods that are ready to be sold to customer for a price
M R O materials are the supportive to the production of Finished Goods
5 M R O (Maintenance) or even the maintenance of the business

Packing and These are used to protect the product. It is Primary, Secondary and
6 Packaging materials Tertiary types.
https://golocad.com/inventory/inventory-types/
 Types of Inventory
Sl No Type Detail
Safety stock is additional inventory to meet unexpected spikes in demand
or spikes in the price.
Safety / Anticipation Anticipation stock is to take care of changing trends in sales and
7 Stock production
These are the extra items at production line to prevent hinderance in
8 Decoupling inventory work due to varying speeds
This is the inventory to get the right amount of stock for the most
9 Cycle Inventory affordable price

10 Service Inventory It defines how much service a business can offer during a given period

11 Transit Inventory It is the inventory on the move between manufacturerer, D C, Warehouse

It is the least amount of stock a business needs to complete any process

12 Theoretical Inventory without waiting. Mainly used in Food industry and production.
13 Excess / Obsolete This includes unsold or unused raw materials or goods
https://golocad.com/inventory/inventory-types/
 Inventory Classification methods
Definition:
Inventory Classification is
classifying the products in
an inventory as per their
demands, value, the revenue
they bring in, Source, etc.
Benefits:
a) Optimized Inventory
control
b) Better Demand
Planning
c) Improved Ordering
Decisions
d) Cost Optimization
e) Enhanced Supplier
Relationships
f) Space Utilization
g) Cycle Count Accuracy
h) Resource Allocation
 What, Why and Scope of Inventory Control
● What -Inventory Control is the involvement of management for the levels of stock in an organization's Warehouse. This
stock monitoring starts from ordering the goods to their arrival at the Warehouse, including storage and sale. The Inventory
of a business reflects on it balance sheet as one of the principal current assets. Hence inventory control has to be done
effectively to minimize losses for the organization or to eliminate negative impact.

● Why – ● Benefits –
○ ○ Determination of Economic Order Quantity
Guarantees flawless production of the final stocks
○ Prevents Stoppage of production due to stock out
○ Formulation of Policy
○ To meet urgent requirements during
contingencies
○ Determination of Lead time
○ Faster customer Service
○ To boost business and sales
○ Effectiveness towards running of Stores
○ Helps efficient use of machinery and manpower
○ Helps to understand the emerging trends ○ Organization Structure
○ To control overall cost.
○ https://khatabook.com/blog/inventory-control/ ○ Determination of Safety Stock

○ Minimum Material Handing and Storage Cost

https://www.shareyouressays.com/knowledge/7-main-scopes-of-inventory-control-and-management/116410
 Types of Inventory Control

Periodic Inventory Control System Perpetual Inventory Control System

The perpetual inventory control system provides an accurate
count of inventory levels in real-time. It utilizes technology,
such as barcodes and Radio Frequency Identification (RFID)
The periodic inventory control system pertains to a recurring count of tags, for tracking products. The information is then logged in
goods at specific intervals. In this system, warehouse managers manually a centralized database that warehouse managers can easily
count their inventory on a monthly, quarterly, or annual basis. The exact access.
period depends on an organization’s needs and business activities
Pros: This method removes the need for manual counting. It
Pros: It’s relatively simple and easy to manage for smaller inventories. It gives warehouse managers a snapshot of their inventory
doesn’t require any specialized technology and equipment, making it easier counts over a specific period of time. Doing so drives data-
to train individuals in. driven decision-making for sales, ordering, and inventory
management.

Cons: It becomes a lengthy process for companies with expansive Cons: An inventory control software can be expensive to
inventories. The manual counting process is also highly prone to human maintain. Moreover, it might not capture discrepancies due to
error. product theft, loss, damage, and scanning errors.

Best for: The periodic system is ideal for small companies with minimal Best for: The perpetual system works best for companies
inventory. It also works best for businesses selling niche products and with multiple locations. It’s also great for businesses
counting larger-sized goods. maintaining large inventories

https://safetyculture.com/topics/inventory-management-system/inventory-control/
 Inventory Optimization
Inventory optimization is an inventory management process that aims to improve inventory
availability throughout the supply chain and production while enhancing cash flow by carefully
planning inventory purchase and reducing excess stock.

Below are the needs for Inventory Optimization.

1. Demand Fluctuation
Whether it is the change in market trends, seasonal factors or weak economic conditions, demand is always fluctuating and
businesses must find a way to adapt to changing demand patterns. Fluctuations in demand can be best handled with optimized
inventory management to ensure customer satisfaction.

2. Complex Supply Chain

Global supply chains can get very complex. By forecasting demand and calculating safety stock, pharma ERP software helps
them minimize the impact of disruptions.

3. Complex Products
Product configurations and customization make inventory optimization complicated. Make-to-order manufacturing operations
have to account for specific customer requirements before starting the production line, which may involve securing unique parts
from different suppliers.

4. Evolving Business Models

Your business model can evolve over time which requires you to be one step ahead in your inventory optimization. Whether you
adopt a just-in-time inventory system or open multiple sales channels, you must automate inventory management using ERP
system to improve operational efficiency.
Inventory Optimization Techniques

https://www.sagesoftware.co.in/blogs/what-is-inventory-optimization/
Advantages of Inventory Optimization
 Economic Order Quantity (E O Q)
The EOQ is the quantity that results in the lowest total of variable costs
 Safety Stock / Safety Inventory
Safety inventory is inventory carried to satisfy demand that exceeds the amount forecasted
for a given period. Safety inventory is carried because demand is uncertain and a product
shortage may result if actual demand exceeds the forecast demand.

Safety stock acts as a buffer amount that accounts for uncertainties

such as:

• Excess / Unexpected increase in demand

• Inaccurate demand or inventory forecasts
• Failure or delay to place timely reorders
• Financial constraints
Safety stock mitigates the risks and consequences of stockouts, allowing your
supply chain to proceed as usual even after cycle stock runs out.
 Need for Safety stock
 Offset demand uncertainty
 Avoid stock out
 Minimize effects of supply Chain disruptions
 Reduce Admin and staff hours
 Compensate for forecast inaccuracies
 Limit rushed shipping
 Ensure customer satisfaction
 Maintain market share
 Increase efficiency
 Improved Supplier and Retailer Relationships
 Vendor Managed Inventory - V M I
VMI, also known as supplier-managed inventory from a customer’s point of view,
is a data-driven initiative where suppliers manage the inventory levels of their
own products, components, or materials.
A customer (e. g. retailer) puts his manufacturer ("vendor-") in charge for planning and
controlling (“managed”) the inventory. The vendor decides date and quantity regarding the
replenishments
 Features and Benefits of V M I
The customer (Retailer) transfers the responsibility for inventory control to the manufacturer.
The customer provides the manufacturer with forecast and actual demand data without time
delays.

The manufacturer generates production and transport planning.

The manufacturer defines minimum and maximum levels of inventory available at any time
at the customer

Benefits
1. Removal / Lowered Safety Stock
2. Lowered Inventory Levels
3. Improved Supply and Demand
4. Better Data Insights
5. Enhanced Sales and Better Customer Relations
6. Lower Purchasing-Related Admin Costs
 Just In Time
The just-in-time concept is widely employed in manufacturing and production
units. It involves production scheduling according to demand without rushing the
process. As a result, firms can minimize wastage and reduce warehouse costs by
producing only necessary goods in response to demand, automatically reducing
the holding cost in a just-in-time method.
Benefits Limitations
Reduces wastage as inventory levels are low. It is difficult to forecast future demand and start production.
Increases efficiency since the focus of the firm is on Hurdles arise when there is a sudden rise in market
quality. demand.
Optimum utilization resources as production takes place During times of global crises, it becomes imperative to
only when the demand arises. establish enhanced control over the supply chain.
Firms incur no holding costs as the inventory is supplied
A strong supply chain and coordination team is required.
immediately.
Improves customer service as firms provide a faster and
Difficult to match the customer's expectations.
speeder delivery of goods.
Production errors are easily noticeable in smaller batches. Need for multiple or flexible suppliers.
The inventory turnover is also high.
The production process occurs smoothly.
 Implementation steps for J I T
1. Get your staff involved – Training and Development, Enhanced commitments,
Handle Fear and anxiety
It's crucial to involve your workforce in the transition to JIT because their cooperation and
understanding are essential for the success of this strategy. Investing in cross-training your
employees is beneficial, it increases the flexibility of your workforce, allowing staff to perform
multiple tasks and adapt to changing production needs.
2. Build healthy supplier relationships – Enhancing commitments
Establishing strong, mutually beneficial relationships with suppliers is also key, as successful JIT
manufacturing depends on its ability to deliver smaller batches of materials more precisely and
frequently when needed.
3. Implement real-time inventory tracking – Data sharing – Read only, restricted
access, etc
A robust inventory management system is also critical, as traditional methods may not support
the dynamic nature of JIT. Implementing a pull system, where production is driven by customer
demand rather than forecasts, is a fundamental aspect of JIT.
4. Improve production processes - Technology
Streamlining the production layout to reduce movement and handling can also contribute to
greater JIT efficiency. Minimising unnecessary movement and handling aligns with lean
manufacturing principles, which focus on eliminating non-value-added activities and ensuring
that every step in the production process adds value to the final product.
5. Factory layout optimization – Flexible, Visual (transparent)
A well-organised production design facilitates better inventory management, reduces the risk
of damage to materials and products, and can improve worker safety by reducing clutter and
potential hazards.
 ERP Solutions
ERP inventory management is a comprehensive approach to overseeing a
company's inventory levels, orders, and deliveries. It combines various functions
like finance, human resources, sales, and inventory into a single system.

Through interdepartmental collaboration, ERP inventory management helps to

streamline processes and improve visibility across the entire organization.

Features of ERP Solutions for Inventory Management..

 Centralised Database
 Perpetual Inventory Management
 Automation
 Analytics and reporting
 Integration Capabilities
 Scalability
 User access
 Inventory Optimization
 Procurement, Supplier Relationship Management
 Warehouse Management
Industry best practices for Inventory
 Cross Docking
 FIFO, LIFO, FMFO, FEFO
 Tracking
 MOQ
 T C O – Total Cost of Ownership
 Omnichannel
 Communication and Transparency - Visibility
 Automation and Technology deployment
 Empowerment
 Returns Management
 Slotting
 Labelling
 Investments, R O I
 Talent building
End of Module 2