Best Practice in Inventory Management

Best Practice in Inventory Management, Third Edition offers a simple, entirely

jargon-free and yet comprehensive introduction to key aspects of inventory man-
agement. Good management of inventory enables companies to improve their cus-
tomer service, cash flow and profitability. This text outlines the basic techniques,
how and where to apply them, and provides advice to ensure they work to provide
the desired effect in practice.
With an unrivalled balance between qualitative and quantitative aspects of
inventory control, experienced consultant Tony Wild portrays the many ways in
which stock management is more nuanced than simple ‘number crunching’ and
mathematical modelling.
This long-awaited new edition has been substantially and thoroughly updated.
The product of decades of experience and expertise in the field, Best Practice in
Inventory Management, Third Edition provides students and professionals, even
those with no prior experience in the area, with an unbiased and honest picture of
what it takes to effectively manage stocks in a firm.

Tony Wild, PhD, is Managing Director of Dawson Berkeley & Partners Ltd, UK.
Tony is a leading expert on Inventory Management, developing and introducing
new ideas in large and small companies in their Supply Chains. He is also lecturing
at the University of Warwick. Tony would now like to pass on his secrets of success
to generations of students and practitioners, who can use them and take up this
exciting and challenging profession.
Best Practice in Inventory
Management
Third Edition

Tony Wild
First published 2018
by Routledge
2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
and by Routledge
711 Third Avenue, New York, NY 10017
Routledge is an imprint of the Taylor & Francis Group, an informa business
© 2018 Tony Wild
The right of Tony Wild to be identified as author of this work has been
asserted by him in accordance with sections 77 and 78 of the Copyright,
Designs and Patents Act 1988.
All rights reserved. No part of this book may be reprinted or reproduced or
utilised in any form or by any electronic, mechanical, or other means, now
known or hereafter invented, including photocopying and recording, or in
any information storage or retrieval system, without permission in writing
from the publishers.
Trademark notice: Product or corporate names may be trademarks or
registered trademarks, and are used only for identification and explanation
without intent to infringe.
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging-in-Publication Data
Names: Wild, Antony, author.
Title: Best Practice in Inventory Management/Tony Wild.
Description: 3 Edition. | New York: Routledge, 2017. | Revised edition of
the author’s Best Practice in Inventory Management, [2002] | Includes
bibliographical references and index.
Identifiers: LCCN 2017023467 (print) | LCCN 2017025095 (ebook) |
ISBN 9781315231532 (eBook) | ISBN 9781138294424 (hbk.: alk. paper) |
ISBN 9781138308077 (pbk.: alk. paper) | ISBN 9781315231532 (ebk)
Subjects: LCSH: Inventory control.
Classification: LCC TS160 (ebook) | LCC TS160.W495 2018 (print) |
DDC 658.7/87–dc23
LC record available at https://lccn.loc.gov/2017023467

ISBN: 978-1-138-29442-4 (hbk)

ISBN: 978-1-138-30807-7 (pbk)
ISBN: 978-1-315-23153-2 (ebk)

Typeset in Times New Roman

by Sunrise Setting Ltd, Brixham, UK

Visit the companion website www.routledge.com/cw/Wild

Contents

List of figures ix
Preface xii
Introduction xiv

1 The basis of inventory control 1

1.A The role of inventory management 1
1.B Objectives for inventory control 4
1.C Profit through inventory management 7
1.D Reasons for the current stock 9

2 Customer service 16
2.A Customer relations 16
2.B Measuring availability 17
2.C Demand management 24
2.D Consuming forecast demand and supply lead time 28

3 Shaping inventory 33
3.A Using Pareto Analysis for control 33
3.B ABC analysis 36
3.C Stock cover 43
3.D Pareto stock balance 48

4 Practical methods for reducing

stockholding 51
4.A Approach to inventory reduction 51
4.B The reduction project 55
4.C Obsolete and excess stock 58
vi Contents
5 Management and control 62
5.A Where stock control fits into the organisation 62
5.B Responsibilities and targets 64
5.C Skills and systems 71
5.D Inventory valuation 75

6 Lean supply 80
6.A Lean supply philosophy 80
6.B Lean principles 84
6.C Implementing lean 89
6.D Operational benefits of lean supply 93
6.E Developing lean operations 96

7 Safety stocks 98
7.A Learning from history 98
7.B Normal demand patterns 101
7.C Evaluating safety stocks 106

8 Setting the right stock levels 113

8.A Simple assessment of review levels 113
8.B Managing lead times 117
8.C Supplier delivery frequency effects 122
8.D Target stock levels 124

9 Procurement 128
9.A The role of supply chain procurement 128
9.B The purchasing environment 131
9.C Single sourcing 132
9.D Supply partnerships 133
9.E Vendor appraisal 135
9.F Pricing methods 138

10 Delivery quantities 140

10.A Supply and suppliers 140
10.B Organising repetitive supply 141
10.C Order types 142
10.D Order quantities 143
10.E Delivery quantities 144
 Contents vii
10.F Scheduling supply 148
10.G Supply co-ordination 153
10.H Purchasing processes 153

11 Forecasting demand 156

11.A Options for assessing demand 156
11.B Causes of forecasting inaccuracy 162
11.C Methods of improving forecasting 166

12 Historical forecasting techniques 169

12.A Basic forecasting techniques 169
12.B Moving average 171
12.C Exponentially weighted averages 173
12.D Improved values for mean absolute deviation 178
12.E Choosing the best forecast – focus forecasting 179

13 Improved forecasting methods 188

13.A More forecasting tools 188
13.B Forecasting for seasonal sales 194

14 Dependent demand 201

14.A Avoiding uncertainty 201
14.B Material requirements planning 203
14.C Master planning 210
14.D Master scheduling 210

15 Supply chain inventory management 217

15.A The basis of the lean supply chain 217
15.B Co-ordination 219
15.C Supply chain operations 222
15.D Replenishment techniques 226
15.E Managing distribution 230
15.F Recycling and reverse logistics 236

16 Meeting the challenges 238

16.A Review 238
16.B Collaboration 240
16.C Information structures 240
16.D Recipe for success 243
viii Contents
Questions and answers 246
Questions 246
Answers 257

Index 276
Figures

1.1 Which direction? 2

1.2 Cost element 8
2.1 Availability of a stock item 18
2.2 Alternative measurements of availability 20
2.3 On time or in full (OTIF) 22
2.4 Comparison of despatches for companies A and B 22
2.5 Despatch performance for companies A and B 22
2.6 Distribution of arrears 23
2.7 Managing arrears 23
2.8 Order processing options 27
2.9 Consuming the forecast 29
3.1 Pareto curve 34
3.2 ABC analysis 37
3.3 ABC inventory control 38
3.4 Example of Pareto Analysis 39
3.5 Classification by usage value 39
3.6 Summary of ABC analysis 39
3.7 The cumulative Pareto curve 40
3.8 Stock cover 44
3.9 Ranges of stock cover 46
3.10 Expected and actual stock profiles 47
3.11 Minimising stock value the easy way 47
4.1 Stock levels 52
4.2 Measuring obsolete and excess 58
4.3 Strategies avoiding surplus stock 59
4.4 Avoiding surplus inventory 59
4.5 Sequence for dealing with surplus stock 60
5.1 Evolution of supply chain operations 63
5.2 Management controls 66
5.3 Planning inventory value 70
5.4 Controlling total spend 71
5.5 Achieving better inventory control 72
5.6 KPI records for each stores 74
x Figures
5.7 Standard cost and variances 76
5.8 Alternative methods of determining unit stock value 78
6.1 Contrasts between conventional and JIT inventory control 81
6.2 Warehouse stockholding 81
6.3 Effect of throughput time on manufacturing inventory 82
6.4 Ideal situation for just-in-time operations 86
6.5 Continuous supply cycle times 87
6.6 Cyclic production 95
7.1 Demand history of item T15 99
7.2 Demand distribution 100
7.3 Normal distribution curve 100
7.4 Availability of a stock item 102
7.5 Demand history of item T26 102
7.6 Stock and availability 103
7.7 Summary of deviation measurement techniques 105
7.8 Customer service factors (assuming a normal distribution) 106
7.9 Stock record of item T26 108
7.10 Lead time multiplier for safety stock 109
7.11 Definition of excess and obsolete stock 111
8.1 Inventory level 114
8.2 Items with average demand of 31 114
8.3 Review levels 115
8.4 Varying the conditions 116
8.5 Safety stock and delivery frequency 122
8.6 Effect of supply batch size on availability 123
8.7 Safety stock correction for delivery quantity 124
8.8 Periodic review level 125
9.1 Kraljic’s Matrix 129
9.2 Supplier attitudes 130
9.3 Single sourcing advantages and disadvantages 134
9.4 Partner selection checklist 135
9.5 Classification of suppliers 137
9.6 Vendor appraisal 138
10.1 Supplier characteristics 141
10.2 Review of supply agreements 143
10.3 Pareto-based delivery quantities 145
10.4 Pareto order patterns for 1,000 stock lines 146
10.5 Classical evaluation of order quantity 147
10.6 The quantity required by the horizon cover calculation 148
10.7 Relative quantities 152
11.1 Product life cycle 160
11.2 Forecasting new products 161
11.3 Effect of amount of history on accuracy of forecast 166
12.1 Moving averages 171
12.2 Contribution from each period to the average 174
 Figures xi
12.3 Exponential forecasting sensitivity 175
12.4 Exponential smoothing 176
12.5 Contributions of historical data to the forecast 177
12.6 Exponentially weighted MAD 180
12.7 Focus forecasting 181
12.8 Tracking signals 184
12.9 Trigg’s method 185
12.10 Forecasting with Trigg’s method 186
13.1 Improved forecasting through double exponential smoothing 189
13.2 Double exponential model 190
13.3 Double exponential smoothing process 191
13.4 Double exponential calculation 192
13.5 Double exponential smoothing forecasts 192
13.6 Effects of sudden demand changes 193
13.7 Creating the base series 196
13.8 Forecasting with base series 197
13.9 Baysian approach 199
13.10 Forecasting models 199
14.1 Contrasting independent and dependent demand 202
14.2 Inventory and MRP 202
14.3 Process sequence 204
14.4 Contrasting dependent and independent demand approaches 204
14.5 MRPII structure 205
14.6 Basic MRP calculation 207
14.7 Bills of materials 208
14.8 Simple master schedule layout 211
14.9 Master schedule supply planning 212
14.10 Control of supply and demand 214
14.11 Available to promise 215
15.1 Inventory location options 223
15.2 The 9-box model 224
15.3 9-box structure for supply 225
15.4 Availability structure 225
15.5 Central and local management of inventory 226
15.6 Supply inventory options 228
15.7 DRP stock and forecast demand 232
15.8 Inventory available for fair shares 235
15.9 Fair shares allocation 235
Preface

You are looking at this book because of an interest in solving a problem. This book
is written for the practitioner who wants to improve inventory performance and
the student or new inventory manager who needs to understand which techniques
to choose to get the best results, and how they work.
In the distant past, when I ascended from being a scientist to the heights of
inventory analyst, I was surprised at the lack of helpful written work on the subject.
Although there are now many books, manuals and papers, there is not much writ-
ten on the very important subject of how to do inventory control faced with the
real inventory, customers and an assortment of inventory records and styles of
suppliers. We have ‘big data’, but what do we do with it? Better control of stock
(inventory) can give major benefits to the profitability of all companies in a supply
chain. My experience in using the simple ideas in this book has been that avail-
ability and profits have improved whilst inventory value has been reduced (in
several cases by millions of pounds sterling).
This book explains how to use good techniques in the right combination to
improve performance in practice. It distils techniques which have been tried out
and proven to work. It is a result of working continuously on inventory control
with a large number of companies over many years.
This book will prove invaluable to:

• students of supply chains, operations management or even purchasing;

• inventory managers who need to enhance their status by improving results.

Many people do not understand that professional expertise is required to control

inventory. This book is a driver’s manual for inventory controllers. It will cover:
the working of the engine (how inventory control techniques work); how to use the
controls (what the techniques do and how to manage them); and how to get the best
out of the vehicle (how to optimise inventory). Understand the text and it will
show the way to guaranteed improved inventory control, reduced stock levels and
higher availability. The software will not do it properly unless an expert is in the
driving seat.
This book is the result of contributions from the many thousands of people with
whom I have worked, lectured, debated and implemented the techniques. Thanks
 Preface xiii
are due to those companies who have let me loose on their inventory, carrying out
consultancy projects which have extended my knowledge and helped to hone the
concepts.
I lecture for the University of Warwick and CILT (previously IOM and BPICS),
so my students have been able to question and develop the ideas, especially at a
time of change where communications are excellent and many supply chains are
becoming closely integrated.
This third evolution of the book has been a two handed operation. The concepts
have been blended into a logical text, and I am indebted to Elaine Duckworth, who
has shared the task of developing a useful and readable handbook.
Dr Tony Wild
Introduction

• Why we need professional inventory management.

• Structure of the book.
• Focus on developing theory that works in practice.

Everyone is an inventory controller, at home and at work. We all keep food,

clothes, domestic items, images, tools and many other goods. We also have
shortages and emergency purchases. Some people regularly have to throw out the
contents of the ’fridge because it has been there a while and changed in character:
so, inventory control is a natural occupation which everyone does, some more
successfully than others.
There are many other activities which people do, such as sport, music, cookery
and medicine, and for these it is generally accepted that a level of technical exper-
tise is needed. In music and cooking there are people who become highly skilled
through their natural talents. Success appears to come from a mixture of talent,
determination, practice and knowledge. In medicine, particularly in surgery, we
are more likely to rely on those who have studied the subject and have a deep
knowledge of both theory and practice. Lawyers cannot function without
knowledge; often a common-sense approach does not work for them.
As with any profession, inventory control (or the subject, Professional Inven-
tory Management) has a body of techniques and knowledge which differentiates
the professional from the DIY enthusiast. This expertise is the result of 100 years
of development and refining. There are still colleagues who believe that inventory
can be managed using a clear brain, good communication and common sense. It is
unlikely that they would be happy with the same competency in their doctor or
financial advisor. Many executives are unaware that inventory expertise even
exists and so miss out on operating excellence.

Inventory management is a well-developed science, not simple

common sense.
 Introduction xv
This book is for inventory control practitioners and students. The techniques
described here have enabled many people to manage their inventory so that their
customers are happier, and so are their accountants. The reduction of inventory
value, the avoidance of unnecessary work and the improvement of customer
service can be accomplished at the same time through simple application of the
combination of techniques discussed in the following chapters. The effect could
be to halve stocks and improve service at the same time.
The techniques described are the concepts that inventory controllers and
students should have at their fingertips. The more complex theoretical approaches
can be left to those developing sophisticated systems, or those with excellent
inventory control (and over the years I have not met any of these!). Inventory
practitioners should be able to use this book to understand the best approaches and
then to apply them to their own circumstances. Direct application of the methods
through the latest software, using spreadsheets or basic controls is most successful:
usually modifications result in less effective outcomes.
This book covers the academic requirements for many supply chain and operations
management courses, including inventory and supply chain theory and the practical
application of the techniques. The structure of the book is to begin with inventory
structure through target setting in Chapters 1 and 2, and how to structure inventory in
Chapter 3. Chapter 3 shows how a big impact on inventory levels can be made easily.
However, in practice, businesses end up with excess stock, so Chapter 4 shows how
to get rid of it. These chapters enable operators to gain kudos using the techniques;
however, the achievement must be focused by the correct management targets within
the appropriate management structure, which is the topic for Chapter 5.
Within this framework, lean supply could feature as the best way to organise
(Chapter 6) or, failing that, the classic approach to inventory levels is best, so
Chapters 7 and 8 are the elixir of item-level stock control – the secret recipe for
success. Chapter 7 concentrates on how to keep out of trouble – a rational approach
to the risks of stock-outs – and Chapter 8 shows how to set stock levels. Repetitive
supply requires close supplier relationships and delivery structures, which are
covered in Chapters 9 and 10.
An aspect of inventory management that is usually carried out poorly is fore-
casting. Forecasting methods are relatively reliable, but not well used in practice.
This is an opportunity, introduced in Chapter 11 and detailed in Chapters 12 and 13.
The techniques are not too mathematically complex, but have been proven to give
good results in practice. Ways to ensure that forecasts and safety stocks produce
sensible results are also described.
Manufacturers use items in balanced sets, and this dependent demand can be
useful in many other situations by creating a master for associated demands and
sticking to it. Chapter 14 describes requirements planning and how to use it.
The cumulative effect of the techniques used throughout the supply chain will
have beneficial effects, but co-ordinating activities along the supply chain has
much more potential. In Chapter 15 the risks are identified and the discussion
there shows how to achieve the potential benefits, built upon the expertise
developed throughout the book.
xvi Introduction
For people who want to ensure their understanding of the concepts and
quantitative solutions, there is a selection of questions (with answers) to test this
at the back of this book.
As the information in this book has been gleaned from many discussions and
conferences, interpreted and used successfully by the author, and from very little
literature, there is a dearth of direct links to references of previous work. Inventory
expertise is based on blending the excellence and understanding of colleagues,
practitioners and academics.
Readers outside the UK may find that a little translation is required. For instance,
in America the term ‘inventory management’ is applied to the whole subject,
whereas in the UK it is normally known as ‘stock control’. The terms ‘inventory’
and ‘stock’ are both used in the text to mean the same thing (in the UK inventory
has a financial flavour and stock an operational context). It is hoped that this and
other nuances of translation do not cloud the understanding of this technical and
fascinating subject, whatever it is called.
If readers would like presentation material or video, then it is available on the
companion website: www.routledge.com/cw/Wild. A complete set of PowerPoint
slides of the figures and some additional material is also available to registered
readers at the same website.
The author is available for discussion by email at dawsonberkeley@btinternet.
com.