Inventory reduction strategies

Inventory performance

models are wrong, but some are us

So said the statisticianGeorge Box
Toate modelele sunt greite, dar unele sunt
utile

Methods for inventory reduction (1):

1. Improve forecast and demand planning use an integrated
approach S&OP(Sales and Operations Planning) or SIOP (Sales and
Inventory Operations Planning) process to better coordinate sales,
marketing, finance and manufacturing or MEIO (multi echelon inventory
optimization)

2. Inventory segmentation and segment strategy definition reduce variability demand

3. Use Pull-Push model or use Postponement strategies reduce variability demand

4. Use technology to gain real-time supply chain visibility,

such as:
supply chain inventory levels (this helps you to
synchronize supply with demand)
Order Status - Order management hub
5. Inventory Control:
a. Continuous or periodic review for replenishment
b. Managing inventory in the SC use MEIO or Transfer the excess
stock to another company location where the inventory is needed
c. Periodic review to identify slow-moving and obsolete products
(SLOB) decide selling strategies
d. Perform ABC analysis on the products to identify fast movers and
slow movers

Methods for inventory reduction (2):

5. Inventory control (continued from previous slide)
e. Improve Inventory Record Accuracy by continuous or periodic
review
Replaces an annual inventory physical inventory count by a
system where part of the inventory is counted every day, and
each item is counted several times per year

6. Supply Contracts Working with suppliers to improve

reliability (fiabilitatea) by developing a win to win relationship to
reduce supply lead times variability or how to manage demand
uncertainty.
7. Strategic Alliances how you manage supplier-buyer partnership
Collaborative Planning, Forecasting and Replenishment (CPFR)
Quick Response (QR)
Vendor Managed Inventory (VMI) to shift inventory, etc

8. Add some technology and reduce transaction delays

(inbound, in-store and outbound transactions).
9. Reduction of the product portfolio
10. Encourage product substitution
11. Encourage more vendor consignment stock.

Methods for inventory reduction (3):

12. Reduce safety stock levels by:

Reduce order supply cycle time -find closer suppliers and

negotiate smaller, more frequent deliveries from suppliers

Pool safety stock for multiple locations stoc de siguranta

care sa deserveasca mai multe centre de distributie (stocul de
siguranta pentru acelas nivel de servire creste odata cu cresterea
numarului centrelor de distributie din retea stoc de siguranta in
depozitele centrale pentru produse care au cerere mica) see
Inventory multi-stage optimization

13. Quantitative approaches

Approaches similar to determining the right balance
between inventory holding cost and ordering cost
14. Change the safety stock service level from 98% (or
where ever you have it) to 95% sau reducerea diferentiata in
corelatie cu marja de profit a nivelul de servire pentru
produsele din clasa A (marja mica-nivel mai mic de servire).
15. Inventory measurements by Key Performance
Indicators you can't improve what you don't measure monitorizarea stocurilor pentru imbunatatirea proceselor de
gestiune a stocurilor

The concept of
Closed Loop
Inventory
management

Event
managem
ent

Conclusions

Inventory management is not a stand-alone business process that occurs

after other processes are complete.
It is a high-level process that should be integrated into other supply chain
planning processes including, at a minimum, sales and operations planning,
master production scheduling and supply action management. Inventory
managers should support multiple business objectives and should have
business integrated targets related to inventory levels, customer service
levels, total inventory cost, andinventory quality.

Inventory Management
1. When to place an order
2. How much to order
System criteria
Strategic

Customer
Service
objectives

Structure of inventory
management system

Tactical
Demand
Control variables
Lead time
Customer service level
How should inventory be managed
(point to reorder, how much to
order, ..)?
Why does inventory fluctuate and
what strategies minimize this

Cost

objectives

Inventory costs
- ordering
- holding
- purchasing
- shortage

Inventory Management Objectives

Customer Service
i.e., Stock Availability (service level)

Service

objectives

Inventory costs (Carrying, Order,

Stock-out)

Cost

objectives

1. How often to review?

2 When to place an order?

3.
How much to order?
4.
How much stock to keep?
Inventory management is afinancial trade-off between cost objectives
(inventory costs) and customer service level (shortage costs stock availability) . Theobjectiveof inventory management is :
toprovideuninterruptedproduction,sales, and/orcustomer-servicelevels at
the minimumcost.
. The more stock, the more working capital is needed and the more stock depreciation
you get.
.On the other hand if you do not have enough stock, you get inventory stock-outs,
missing potential sales, possibility interrupting the whole production process.

What drives inventory in the supply chain?

(Factorii care influenteaza nivelul stocului)

Service level what is the commitment internally and to the

customer? Higher service level requires more inventory than
lower? What do you really need to succeed? What are the
desired transportation modes? Are you expediting shipments?
Lead times (durata aprovizionarii) inventory is
maintained to cover for the wait to replenish it.
Demand and variability of course forecast and variability
impact inventory - the higher the variability the more inventory
is needed.
Reorder frequency and quantity
Transportation times and variability
Inventory positioning across the supply chain where
you keep the inventory in the supply chain can make a big
difference.
Risk in the system how much inventory do you need to

CURRENT SCM PRIORITIES

Inventory Is a Cost to Be Managed?

American Productivity and Quality

Center

A frequent mistake made in the management of inventory - a

corporate mandate to reduce inventory. Inventory should never be managed
to a financial target. Instead, it needs to be based on the requirements

CURRENT SCM PRIORITIES

Inventory Is a Cost to Be Managed?

American Productivity and Quality

Center

A frequent mistake made in the management of inventory - a

corporate mandate to reduce inventory. Inventory should never be managed
to a financial target. Instead, it needs to be based on the requirements

for inventory reduction selectively reducing the level of custom

The trade-offs between inventory
investment and customer service
(fill rate)?

Safety Stock - managing

uncertainty in the Supply Chain
Cycle Stock Stocul curent
Safety Stock Stocul de

Sevice Level Gradul de Onorare

a Cererii

Variante de calcul Nivel de Servire (Fill Rate or Availability):

1. Item Fill Rate (98.5%) : Total number of items shipped or supplied/ the total number of
items ordered.In tabel din totalul de 1010 produse comandate nu s-au livrat 15, adica: Item Fill
Rate=(1010-15)/1010*100=98.5%.
Cat la % din articolele comandate au fost livrate?
2. The line item fill rate: the percentage of line items on the order shipped in their entirety.
Exemplu: o comanda are 10 linii de produse. Din acestea 5 linii au fost livrate complet.
Line Item Fill Rate = 5/10 = 50% ; 2 este mai restrictiv decat 1.
Cat la % din liniile unei comenzi sunt complet livrate?
3. Order fill rate (80%): the percentage of orders shipped completely. In tabel din 5 comenzi,
o comanda a fost livrata incomplet. Order fill rate=(5-1)/5=4/5*100=80%.
Cat la % din numarul comenzilor au fost complet livrate?
Order fill rate este cel mai restrictiv indicator de masurarea a nivelului de servire.

Conclusion: It is important to agree a common goal between suppliers and customers and to
establish what the customers need in terms of availability.
The appropriate measure can then be used for monitoring.

COST OBJECTIVES
- Inventory Costs 1. Ordering Costs: The direct labor costs in Purchasing and
Warehouse operations associated with PO (purchase order) - costs
of placing and receiving an order
-

cost of processing orders : Enter PO/Requisition and any Approval Steps,

such as forms (documents), papers, labor(clerical costs)
cost of tracking orders
cost of receiving and inspecting the purchased items inclusive handling
(unloading) and putaway costs.
Cost of Invoice Process and Vendor Payment

2. Setup Costs: The costs of preparing equipment and facilities so they can be
used to produce a particular product or component

Examples:
setup labour, lost income (from idled facilities), and test
runs. When a firm produces the goods internally, ordering costs
are replaced by setup costs.

3. Carrying Costs: The costs of keeping inventory se calculeaza

pentru o anumita perioada de timp, de obicei un an de zile
It includes: insurance, obsolescence, opportunity cost of funds tied up in
inventory, handling costs and storage space.

Inventory Costs
(continued)
4. Stockout Costs: the costs of not having sufficient inventory (costul de penurie sau
costul rupturii de stoc)
Lost sales and profit, (valoarea vanzarilor nerealizate)
Expediting and back ordering expenses, (cheltuieli suplimentare cu cererea neonorata:
comanda aprovizionare , manipulare, ambalare, expediie, etc)
Cost of reputation and goodwill (lost customers on long terms)
Cheltuieli de penalizare (nerespectarea clauzelor comerciale)
Costurile cu lipsa materiilor prime (sau piese de schimb) ce afecteaz procesul si costurile
de producie.
CS = (NDOS x AUSPD x PPU) + CC
Where,
CS = Cost of a Stockout
NDOS = Number of Days Out of Stock
AUSPD = Average Units Sold Per Day
PPU = Price Per Unit (some use Profit Per Unit)
CC = Cost of Consequences

What is Inventory Carrying Cost?

Inventory carrying cost is a ratio which
describes the relationship between the
cost-of-owning-inventory-per-year and
the inventory value.
For example, if your inventory carrying
cost is 25% and your annual average
inventory is $1Million, then your annual
cost of owning inventory is $250.000.

Many Expenses Contribute to Total Inventory Cost

Interest expense of
money tied up in
inventory (inventory
carrying cost)

Cost of storage
facilities and
maintaining them

Handling costs (to put

products in inventory
and take them out again)

Total Inventory Cost

Costs of damage
to products while
In inventory

Costs of risk such

as theft and fire

Costs of inventory
becoming obsolete

Example of Carrying Cost

(costurile anuale de pastrare a unui articol in stoc)

Percentage of
Product Value
(%)

Annual Cost
Capital Cost (costurile de oportunitate ale capitalului
investit in stocuri-randamentul in investitii
alternative de risc apropiat sau dobanda de
imprumut a capitalului investit in stocuri)

12%

Storage space (amortizare, inchiriere, intretinere,

utilitati, extra cost manipulare stocuri speciale:
perisabile, toxice, inflamabile)

2%

Inventory service (cheltuieli cu forta de munca

pentru manipularea fizica a produselor, asigurare,
impozite (taxe, paza)

3%

Inventory Risk Cost (depreciere, deteriorare, uzura

morala, furturi, incendii, pierderi, relocare)

8%

Total
18

25 %
din valoarea
medie anuala a
stocurilor

The rule of thumb for inventory carrying cost is between

Inventory and Cost Information for

Computer Hard Disks

Vanzarea medie saptamanala=

100 buc
Costul unei comenzi=200$
Pret de achizitie 100$/buc
Carrying cost : 25%

19

Inventorys Conflicting Cost

Interpretare:Patterns
comenzi mai rare prin cresterea cantitatilor pe
o comanda conduce la: reducerea costurilor de
comanda(ordering cost), a costurilor datorate rupturilor de
stoc (stockout cost) deoarece stocul este mai mare decat
cererea dar si la cresterea costurilor de gestiune (carrying
cost).

Cost

Total cost

Minimum cost
reorder quantity
in
y
r
r
Ca t
c os

Ordering cost
Stockout
cost

Order (Replenishment) quantity

Source: CR (2004) Prentice Hall, In

Terminology and calculations

Lead time = supplier or manufacturing lead time + time to
initiate the purchase order or work order including approval
steps + time to notify the supplier + the time to process
through receiving and any inspection operations.
Order cycle. Also called replenishment cycle, order cycle
refers to the time between orders of a specific item. Most
easily calculated by dividing the order quantity by the annual
demand and multiplying by the number of days in the year .
Forecast period. The period of time over which a forecast is
based. The forecast period used in the safety stock
calculation may differ from your formal forecast
periods. For example, you may have a formal forecast
period of four weeks while the forecast period you use for the
safety stock calculation may be one week.

Theoretical Inventory Model

Reorder Point with a Safety Stock

Q order
quantity

Inventory level

Reorder
point, R

Receive order

Place order

Deman
d rate

Order cycle intervalul

de timp
ntre dou
aprovizion
ri
succesive

Safety Stock

Lead Time

(durata de
L
Time
reaprovizion
are)
Variable demand with Safety Stock to satisfy demand that exceeds the amou

Inventory Management Problems

Uncertainty in inventory management

Inventory policy must deal with

uncertainty
Purchasing cycle uncertainty how
long will it take to replenish inventory
with our customers?
Demand uncertainty when and how
much product will our customers order?

Variations must be considered in

both areas to make effective

Both two factors are subject to uncertainties

demand variations: customer behaviors can evolve
in rather unpredictable ways.
lead time variations: suppliers or transporters may
be faced with unplanned difficulties.

Example: Demand Variation

Methods for inventory reduction

- Reduce supply lead times variability Measure supplier lead time performance and put the
information to work

Lead time is a major

factor in determining
inventory levels
Supplier lead time
variability influences
required safety stock level
Measurement of actual
lead time performance
helps ensure adequate
buffer for supply variability
Measurement key for
driving support actions to
improve lead time and
reduce variability

Purchasing cycle uncertainty means operations cannot

assume consistent delivery

xx

(x x)

Calculation of Standard Deviation of Replenishment

Cycle Duration

N=Fi=5
0

(x - x)
=
n
Calculul medianei (punctul central al seriei):

a) Se sorteaza cresc/desc sirul de numere

b) Pentru o serie cu numere pare, D=media valorile care se gasesc pe
locurile din mijlocul seriei
c) Pentru o serie cu numere impare, D se afla in serie pe pozitia (n+1/2).
In cazul nostru avem n=9 si deci media este 10, adica numarul de pe

Purchasing cycle variation analysis

using a normal distribution
=deviaia standard
If = 2 we should expect:
68% of the suppliers
deliveries to be between 8 -12
days
98% of the suppliers
deliveries to be between 6 -14
days
99.88% of suppliers deliveries
to be between 4 16 days
Analysis of suppliers deliveries
History

Normal Distribution

Interpretare statistica: termenele de aprovizionare reale se afla

in intervalul +/- 1 sigma in proportie de aproximativ 68%, in +/- 2
sigma aprox. 95.5% si in +/- 3 sigma in aprox. 99,73% din cazuri

Different Forecast and

Lead Time Intervals
The standard deviation is measured over the lead time for
safety stock calculation
Many items in inventory have different lead times
Sales records and forecasts are usually made on a weekly or
monthly interval so the lead time and the forecast interval
i.e. (sales interval) are different
The standard deviation will change as the interval changes
the longer the interval the higher the variation
Need to adjust the standard deviation for the lead time
Example: FI= 4 weeks, LTI=2

weeks, FI =150 units.

Calculate the standard deviation
LTI = FI
Lead Time Interval
for LTI
Forecast Interval
LTI = 150 * 2/4 = 150 x
0.707 = 106 units
where : *LTI = Lead Time Interval *FI = Forecast Interval

Methods for inventory reduction

- Reduce supply lead times Lead time is a major factor
in determining inventory
levels
Aggressively reduce lead time as
the best offset (compensatie) to
imperfect forecasting
Changes in lead time often do
not get updated in planning
systems
Remarks. Smaller more frequent
orders result in lower average
inventory, but can increase other
additional costs (order cost,
transportation cost, etc).
See also, JIT.

Stoc mediu = cantitatea

comandata/2
Average inventory=Q/2

Inventory Definitions:
More Frequent Orders, Smaller Order
Quantity
Order
Order
Placed for
Arrives
100
products

Demand=10 pcs/day cererea zilnica=

10 buc
The 10-day order Orders se comanda
la 10 zile

100

Average

Inventor

50 produ

0
10

20

30

40

50

Reorder Point
Reorder Po
Reorder Point
Reorder Point
Reorder Point
Average Inventory =Cererea/2=
100/2=50

Methods for inventory reduction

- Reduce demand variability by segment strategy
definitions to make improvements of forecasting Inventory management practices for Inventory
Segmentation
Product/market classification groups products, markets, or customers
with similar characteristics to facilitate inventory management
E.g. classify by sales, profit contribution, inventory value, usage rate or item
category

Segment strategy definition specifies all aspects of inventory

management process for each segment of inventory
E.g. service objectives, forecasting method, management technique, and review
cycle

Policies and parameters must be defined at a detailed level

E.g. data requirements, software applications, performance objectives, and decision
guidelines

Segmentarea produselor din stoc imbunatateste acuratetea

prognozei produselor cu cerere variabila si creste implicit
gradul de onorare a comenzilor clientilor.

Reduce demand variability

by Segment strategy definitions

Supply Chain: No One Size Fits

All
Not all SKUs are the same, not all
orders are the same and not all
vendors are the same. Therefore,
your supply chain cannot be a one
size fits all model. In summary, to
design a Supply Chain able to provide
an optimal cost solution to meet
customers requirements understand

Forecast principle:
1. Forecasts are (almost)
always wrongs.
2. Forecasts are more accurate
for groups than for single
items Risk pooling
(consolidati cererile clientilor
pentru aceleasi produse si apoi
efectuati prognoza, nu efectuati
mai intai prognozele cererilor de
produse pe fiecare client si apoi
insumati prognozele). Pentru
prognoza pe perioade mari de
timp, grupati mai intai
produsele pe diverse criterii si
apoi efectuati prognoza pe
grupele de produse obtinute. In
final, dezagregati prognozele
efectuate pe grupe de produse

Inventory based on product

clasification
Niveluri terapeutice

Segmentarea produselor
Categorii de produse

SKU stratification (A/B/C) is difficult in a fashion business

ABC Inventory Management

It is a commonrule of thumbin business; e.g., "80% of your
sales come from 20% of your clients/products".
Based on Pareto concept (80/20 rule) and annually
demand value of each item (annual demand x unit cost):
Divides on-hand inventory into 3 classes
A class: 20% of SKUs, 80% of value,
B class: 30 % of SKUs, 15% of value
C class: 50 % of SKUs, 5% of value
Percents are approximate.
Policies based on ABC analysis
Develop class A suppliers more
Give tighter physical control of A items
Forecast A items more carefully
Danger: Value use may not reflect importance of any given
SKU!
37

Example of SKU list for 10 items

Item

Annual Sales
Units

5,000

1,500

Unit Price

Annual Sales
Euro

1.50

Percentage
of Total
EURO
Sales

7,500

2.9%

8.00

12,000

4.7%

10,000

10.50

105,000

41.2%

6,000

2.00

12,000

4.7%

7,500

0.50

3,750

1.5%

6,000

13.60

81,600

32.0%

38

ABC Chart for SKU List

A

39

ABC Chart for SKU List

A

40

Sample illustrating segment

strategy definitions
(service objectives, forecasting method, management technique,
and review cycle)

CPFR- a supplier buyer partnership for planning and forecasting

market demand
DRP Distribution Resources Planning a method used for inventory
allocation in a supply chain

Segmentation in Supply Chain

-Inventory segmentation based on customer
service -

Customer who requires a custom part from

manufacturer low volume high variability (Pull model,
make to order)
Customer who requires a commodity high volume,
low variability - (Push model, make to stock)
Customer who permit backorder (after market products
vs. the same products used in making other productsproduction)

Corelatia volum - variabilitate cerere

Segmentation in Supplty Chain using Channel

Segmentation
-Segmentarea pe canale de distributieFor example, a high-tech consumer electronics company typically
deals with multiple channels:
retail,
distributor,
Enterprise customers
Web customers

Each of these channels should have different replenishment programs.

Example:
Enterprise customers might be served through a combination of
configure-to-order and build-to-stock strategies (Push-Pull).
Retail customers, meanwhile, could be served through build-tostock along with a combination of distribution resource planning
(DRP); vendor-managed inventory (VMI); collaborative planning,
forecasting, and replenishment (CPFR); point-of-sale (POS),
analytics-driven collaboration.
The type of replenishment relationship between a manufacturer and a
giant, big-box retail chain will be different than that with smaller
retailers.

- Methods for inventory reduction Periodic review to identify slow-moving

and obsolete products (SLOB) decide
selling strategies
Analiza calitatii stocurilor decizii
referitoare la strategia de vanzare stocurilor
Analizati periodic calitatea stocurilor (viteza
de rotatie si vechime) pentru:
Elaborarea propunerilor de valorificare a
acestora (vanzari, donatii, etc) catre
departamentului de marketing si vanzari
Analiza cauza-efect stocuri in exces si
rupturi de stocuri, elaborare de actiuni
corective

Analiza calitatii stocurilor pe baza vitezei de

rotatie
Evolutia lunara a stocurilor (valori absolute)

Analiza calitatii stocurilor pe baza vitezei de rotatie

Evolutia lunara a stocului (valori relative)

Analiza Calitate stocuri

-metoda vitezei de rotatieOferta speciala pentru vanzarea produselor cu miscare lenta

Analiza calitatii stocurilor pe baza vechimii

(termene de expirare)

Analiza detaliata pe produse va extrage oferta de vanzare a produselor

cu termene de expirare apropiate

Masuri Urgente Valorificare Stoc

-dupa aplicarea analizei calitatii stocurilor-

Evaluarea calitatii stocurilor prin

analiza cauza efect

Minimum order quantities drive to higher

inventory levels (excess stock)
Minimum Order Quantities (MOQ) on
low volume items may require you to
order more than an optimal
quantity
Items with high MOQ can lead to
excess on-hand inventory
but the order frequency is greatly
reduced resulting in fewer
exposures to the minimum stock
level and fewer potential stock-outs
Safety stocks based on the lower
volume orders should not be applied
to high MOQ items
High MOQ items can be planned with
lower relative safety stocks without
impacting fill rates over the long
term

Methods for inventory

reduction
Use Push-Pull Strategy
MakeTo
to Order
by Posponement
strategy
reduce
inventory
level
Determine how much inventory to carry in
semifinished mode or as components to help offset
higher demand variability or to reduce costs for
products that have different service requirements.
A push-pull strategy: the manufacturer builds to
order. This implies that component inventory is
managed based on forecast (push-based), but final
assembly is in response to a specific customer
request (pull-based). This push-pull boundary is at
the beginning of assembly.

Choosing Between Push/Pull Strategies Appropriate Supply Chain

High Industries where:

Customization is High
Demand is uncertain
Scale economies are Low

Demand Uncertainty

Pull

Push

Demand is uncertain
Scale economies are
High

Computer
equipment

Furniture

Industries where:

Industries where:

Uncertainty is low
Low economies of scale
Push-pull supply chain

Standard processes are

the norm
Demand is stable
Scale economies are
High

Books,
CDs

Low
Low

5/30/16

Industries where:

Pull

Where do the
following industries
fit in this model:
Automobile?
Aircraft?
Fashion?
Petroleum
refining?
Pharmaceuticals?
Biotechnology?
Medical Devices?

Grocery,
Beverages

Economies of Scale

High
Push

55
Source:

Simchi-Levi

SUPPLY CHAIN MANAGEMENT

SYSTEMS
Push- versus Pull-Based Supply Chain Models

Push-Pull Supply Chain

Generic Product

Customized Product

A typical push system: PC manufacturers who build to stock

and make all production and distribution decisions based on
forecast.
A push-pull strategy: the manufacturer builds to order. This
implies that component inventory is managed based on
forecast (push-based), but final assembly is in response to a
specific customer request (pull-based). This push-pull
boundary is at the beginning of assembly.
The interface between the push-based stages and the pull-

Methods for inventory reduction

- Reduce safety stock levels -

Pool safety stock for multiple

locations
Inventory
positioning across the supply chain where you
keep the inventory in the supply chain can make a big difference.

Methods for inventory reduction

-Inventory Record Accuracy Inaccurate inventory records can cause:
Lost sales
Disrupted operations
Poor customer service
Lower productivity
Planning errors and expediting
Two methods are available for checking record
accuracy
Periodic counting-physical inventory (inventarierea anuala)
Cycle counting-daily counting of pre-specified items
provides the following advantages (Inventar ad-hoc sau
Inventarierea zilnica selectiva):
Timely detection and correction of inaccurate records
Elimination of lost production time due to unexpected
stock outs
Structured approach using employees trained in cycle
counting
59

Inventory Accuracy using WMS

The Warehouse Management System
(WMS) component have to support the
following inventory methods:

Annual inventory count (also called

periodic inventory)
Continuous inventory
Continuous inventory during stock
placement
Continuous inventory based on zero stock
check
Cycle counting
Inventory sampling
Adhoc (Select and Count)
Quant (A single material # in mixed
storage bin)

WMS - Annual Inventory

You use this inventory method for storage
types, for example, for which the
continuous inventory method should not be
used. You can also use this method to take
an inventory of the storage bins and bin
quantities that are normally subject to a
continuous inventory method but had no
movement in the current fiscal year.

WMS - Continuous Inventory

With the continuous inventory method you take inventory on a
selected number of storage bins in a storage type. The
inventory can take place at any time during the fiscal year.

The effort for the inventory is not concentrated on a

certain day or days but is distributed over the entire year. This
can result in a better leveling of the workload in the
warehouse.

Inventory can be conducted during slow times in the

warehouse, for example, during summer vacation.

When an inventory is carried out on a continuous basis,

up-to-date information about the correspondence between the
warehouse stock and the book inventory is always available.

WMS- Cycle Counting

Cycle counting in the Warehouse
Management System (WMS)
component makes it possible for you
to separate materials into classes
(such as A, B, C...) and take inventory
for each class separately several times
throughout the year.

Cycle Counting Example

A distribution company wishes to
count A items 4 times per year, B
items 2 times per year, and C
items 1 time per year. There are
500 A items, 3,500 B items, and
11,000 C items. Plan a cycle
counting procedure.
64

Cycle Counting Example

Number
Count Number of
Class of Items Frequency Counts

Per
Cent

500

2,000

10%

Counts per
Day
8
(2,000/250)

3,500

7,000

35%

28

11,000

11,000

55%

44

Totals

15,000

20,000

100%

80

Note: Daily Count = 20,000 / 250 = 80, where 250= no of

working days
65

Methods for inventory reduction

Supply Contracts

Supply Contracts
Buyers and suppliers typically agree on supply contracts

Contracts address issues that arise between a buyer and

a supplier
Buyers and suppliers may agree on

Pricing and volume discounts

Minimum and maximum purchase quantities
Delivery lead time
Product or material quality
Product return policies - the best time to negotiate the
terms for the return of product with a vendor is
before you agree to take on a new product line or
place a very large purchase order.

Supply contracts are very powerful tools that can be used

for far more than to ensure adequate supply of, and
demand for, goods

Supply Contracts Risk Sharing

A variety of supply contracts will allow for risk
sharing, and increase profits across the SC

Buy-back contracts
Revenue-sharing contracts
Quantity-flexibility contracts
Sales rebate contracts (manufacturer offers a
rebate to all who purchase its product, such as
tickets or coupon).
Global Optimization

Methods for inventory reduction

Strategic Alliances

Collaborative Inventory Replenishment

Quick Response (QR)
Collaborative planning, forecasting, and replenishment
(CPFR)
Vendor Managed Inventory (VMI)

Retailer-Supplier Relationships - RSP

Cooperative relationship between suppliers and
retailers to use one anothers knowledge
Suppliers have better knowledge of lead times and
production capacities
Retailers have better knowledge of demands

Types of RSP
Quick Response Strategy
Suppliers receive POS data from
retailers
Suppliers use this information to
synchronize their production and
inventory activities with actual sales
at the retailer.
Retailers still prepare individual
orders
POS data are used by suppliers to
improve forecasting and scheduling
and to reduce lead time

Types of RSP
Vendor Managed System (VMI)
Also called vendor-managed replenishment (VMR) system
Supplier decides on the appropriate inventory levels and
the appropriate inventory policies to maintain these levels.
Supplier suggestions initially approved by retailer
Goal of many VMI programs is to eliminate retailer
oversight on specific orders.
Wal-Mart and Procter & Gamble VMI
Partnership, begun in 1985
Has improved P&Gs on-time deliveries to Wal-Mart while
increasing inventory turns
Advanced form of VMI: Supplier co-location or JIT II
No longer referred to as JIT II
Suppliers employee is officed in buyers
purchasing department to forecast demand,
monitor inventory & place orders with access to
sensitive files & records

VMI Vendor Managed Inventory

RSP - Retailer
Supplier
Relationships

Strategies to combat the

bullwhip effect

Vendor Managed Inventory (VMI) :

vendors/suppliers are responsible for
replenishment / inventory service level of customers
5/30/16

72

Virtual Stock Management

RSP-Retailer Supplier
Relationships
Strategies to combat the
bullwhip effect

Remarks: Companies moving more and more towards

centralized inventory planning and away from decentralization
of planning activities
5/30/16

73

RSP Requirements
Presence of advanced information
systems
Top management commitment
Especially because information will be
shared across companies

A level of trust among partners

Supplier manages retailers inventory
Retailer provides sales information to
supplier
Reduced inventory leads to space
savings
Should not be given to competitors

RSP Inventory Ownership

Who makes the replenishment decisions?

Who owns the inventory until it is sold?

Consignment relationship in VMI programs
Supplier owns the inventory until it is sold

Methods for inventory reduction

Encourage more vendor consignment stock
Produse in Consignatie/Custodie

Consignee- Beneficiar ; Consignor-f

Methods for inventory reduction

Reduce Tranzit Inventory
Stocul in Tranzit
Bunuri care au fost livrate de catre vanzator dar nu au ajuns inca la
cumparator.
Bunurile trebuiesc inregistrate, in a cest caz, in posesia uneia din cele 2
parti: vanzator sau cumparator in functie de termenii si conditiile
generale ale vanzarii. Conform standardelor IFRS stocurile pot
reprezenta un activ al entitatii numai daca si compania are control
asupra respectivului stoc.
Controlul asupra stocurilor este asimilat cu dreptul de proprietate.
In termeni generali produsele vor fi incluse in stocurile partii care este
responsabila cu costurile de transport. Aceasta responsabilitate este
mentionata in termenii de livrare ai vanzarii cum ar fi: FOB, FAS, CIF, etc.
In momentul in care are loc transferul titlului legal, riscurile si beneficiile
legate de stocuri trec de la vanzator la cumparator.

Goods in Tranzit
-Produse in Tranzit exemplu pentru livrare FOB

Una dintre erorile care se fac in privinta stocurilor este

de a considera catitlul de proprietateasupra
stocurilor este identic cuposesia fizica a stocurilor.

Methods for inventory reduction

Change the safety stock service level

Change the safety stock service level

from 98% (or where ever you have it)
to 95%. Example:
Example:
What is the service level for an item with annual
demand of 25,000 units and an order quantity of
5,000 units? Management will tolerate only 1
order stockout per year.
N= 25,000 / 5,000 = 5

What if the
order Quantity
was 1,000?

Service Level = 5 1 x 100% = 80%

5

96%

Inventory
Key Performance Indicators

Measure tomanage
your
inventory
Total
Inventory
Cost:

Inventory vs. targets: It should be possible to break

down the SKU into various segments, like ABC
classification, make vs. buy parts, or by categories
specific to your organization. This will help you
understand the driving forces behind the data trends and
identify key opportunities.
Its also important to understand what portion of your
inventory is active, slow-moving, excess, and obsolete. I
recommend the inventory quality ratio for this one.
Depending on your industry, it can also be valuable to
understand your inventory picture by customer or by
supplier.

Customer service level vs. targets: Your big

investment in inventory has one purpose: to provide your
customers with exceptional service. Its important to
understand the relationship between your inventory levels
and customer service levels. Your targets should be high
enough to satisfy your customers without being too high
that it cuts into your margins by driving your inventory
up. Id consider graphing this as a % variance from target
as the first thing most people would do is a comparison
between the actual and target lines anyways. Another
way to look at this would be to measure stock-out
performance.

Cash-to-cash cycle time: This

can be thought of as a
measurement of how long it takes
for your inventory investment to
pay itself back with a profit. The
shorter the cycle time, the more
often you collect.
Measure your input processes:
Its impossible for an inventory
manager to succeed unless he
understands the performance of all
the upstream processes. Inventory
records accuracy, supply action
management, quality, supply
variability, and engineering change
management all play an important
role in keeping the organization on
track with theinventory plan. The
inventory manager needs to know
where he needs to collaboratewith
other managers to keep his plan on

Inventory Performance Measures

A Company has annual cost of goods sold of $10,000,000. The average inventory
value at any point in time is $384,615. Calculate inventory turnover and weeks/days
of supply.

Inventory Turnover:
annual cost of goods sold $10,000,000
Turnover

26 turns
average inventory value
$384,615

Stock turns in businesses are different such as spare parts will be very low,
say 1-3 times per year, in an FMCG business can be as high as 20 to 30
times per year.

Viteza de rotatie in zile: 365/Inventory Turnover arata numarul mediu

de zile in care produsul sta in depozit sau Days of Supply.

Weeks/Days of Supply :

average inventory value

$384,615

2 weeks(14 days)
average weekly COGS $10,000,000/52
Obs. Viteza de rotatie este
$384,615
Days of Supply
10 days mai mica in cazul utilizarii
$10,000,000 / 260
numarului de zile lucratoare

Weeks of Supply

ale perioadei, respectiv

10 days vs. 14 days

COGS- costul bunurilor vandute la pretul de achizitie (RON)

Average inventory value valoare medie stoc=(stoc initial+n*stoc final
perioada)/n+1 (RON/luna)
n=numar de perioade (luni, saptamani, etc)
82
260=nr zile lucratoare=52*5 zile

Inventory Turnover Remarks

Viteza de rotatie se calculeaza pe o serie de 1 an de
zile pentru nivelarea trendului si a sezonalitatii din
seria de date.
Viteza de rotatie depinde si de lungimea perioadei de
reaprovizionare. De aceea, in cazul analizelor detaliate
calculati viteza de rotatie in mai multe moduri:
Viteza de rotatie a produselor fabricate intern
Viteza de rotatie a produselor achizitionate de pe piata
interna (domestica)
Viteza de rotatie a produselor achizionate din import
Deoarece timpul de aprovizionare influenteaza nivelul
stocului, se va observa ca produsele din import care au cel
mai lung timp de reaprovizionare vor avea o viteza de
rotatie mai mica.

Days of Supply
How to Assess Inventory Stock Status
-the simplest way-

Days of Supply of on-hand inventory = (Onhand Inventory / Average monthly demand) x 22

working days
Monthly Demand
April
May
June

1,250
1,364
1,255

Total
3,869
Average monthly demand: 3,869 : 3 (three months of data)= 1,290
On-hand Inventory stock = 3,000
Months of on-hand inventory=3,000:1,290 = 2.3 months of stock on hand
Days of Supply=2.3x22=50.6 zile vanzare
Concluzia: stocul disponibil asigura 50.6 zile vanzare.

Stock turns in some businesses such as spare parts will be very low,
say 1-3 times per annum. Whereas stock turns in an FMCG business
can be as high as 20 to 30 times per year.

Viteza de rotatie a stocurilor in zile

Inventory stock status

evaluation

Cash-to-cash cycle time - impacting

Working capital

A financial ratio showing for how long a company has to finance its
own stock/inventory. It is calculated : stock days + debtor days creditor days.
Example: A company which keeps its stock for on average of 20
days, which gets paid by its debtors on average within 30 days and
which pays its creditors on average within 45 days, has a cash-tocash cycle of 5 days. Companies that receive cash from their

Fill Rate part of Perfect Order

(Gradul de onorare a comenzilor)
Item Fill Rate
The item fill rate is the ratio of the total number of items shipped divided by the total
number of items ordered. The line item fill rate measures the percentage of line
items on the order shipped in their entirety. Finally, the order fill rate is a measure of
the percentage of orders shipped completely.

Benchmarking Values:

To illustrate these fill rate measures, consider the order in the exhibit. First, there are
a total of 5036 items on this order. Since 4817 of the items were shipped, the item fill
rate is
Item Fill Rate = 4817/5036 = 95.6 %
A more strict measure is the line item fill rate. There are 10 lines of items ordered,
and of these 10 line items, only 5 of them were filled in their entirety, thus the line
item fill rate is Line Item Fill Rate = 5/10 = 50% (Nr. Linii livrate integral/Nr. Total linii
livrate)
Finally, the order fill rate is the percentage of orders filled completely. Clearly, this
order counts in the unfilled category. This measure is probably the strictest of the
three measures of customer service fill rates discussed above

Inventory related
metrics

Inventory related
metrics (2)