Inventory Management 101

Lim Grace - Supply Chain Specialist

Forecast Planning
For years, I was working for a multi-level marketing company for materials planning
and control.

Inventory forecast and reorder plan has been the frequently asked questions
during the weekly material planning cycle.

For the Business environment where forecast accuracy is less than 30%, what is the
forecast planning key elements?  

Accurate inventory demand planning enables near to accurate of inventory holding

without over or under stocking.  Historical sales trends and market knowledge of
the event or timeline of which could influence the demand fluctuation is crucial.

What is Forecast Planning for Inventory Management?

Inventory Demand Forecast planning is the analytical process of analysis the

demand of an inventory item over a defined period of time.  The period of time
could be ranging for 4-8 weeks for a more accurate planning.

What are variables to be considered?

1. Lead time
a. Lead time covers from the time Purchase Orders were place till the
Inventory to reach the door.
b. There should be sufficient inventory to cover the whole duration of lead
time
2. Minimum Order Quantity (MOQ)
a. The minimum order quantity to reach the economics of scale for the
purchase.
b. Evaluation is needed if the MOQ
3. Inventory SKUs with seasonal mode
 a. Further evaluation would need for items that could be increase in sales
during any festive seasons. These especially applicable for multi-cultural
society.
4. Items that are bound for import and export regulations
5. Items that has shelf-life restrictions

The formula for Inventor Forecast Planning, is 1+1 always equal to 2? 

Data Mining Model

Inventory Management is A MUST for companies focusing primarily on, but not
limited to Manufacturing, Trading, Workshop, Distribution, and Online (B2B, B2C)
business.

Inventory management should compute and analyze various data sources,

including:

1. Business Forecast, which includes short term (1-3 months), mid-term (3-6
months) and long term (6 -12 months) forecasts.

2. History Sales data for forecast benchmark, monitoring and evaluation of

Product Life Cycle Planning, safety stock planning and a dynamic inventory
planning

3. Safety stock evaluation and planning to ensure that high demand products
will not face material shortage 

4. SHORT TERM Changes in customer demands which will impact the flow of
material and capacity

5. Changes IN customer demands that will influence the level of safety stock

Various Data Modelling techniques have been used for effective data analysis to
ensure an effective inventory planning. Data Modelling allows concise summaries
of large and complex data sets.

1. Data Categorization
Categorized data will enable data analyst to effectively define data types, grouping,
values and demand.  Pareto? and group analysis via values and demand allows
inventory categorization and enables an effective inventory planning model

2. Data Clustering

Clustering is a way to model data. Clustering is the process of grouping similar

points (values, types) together. 

In the field of data management, Data Categorization and Clustering techniques

allows organization to effective answer the following questions:

1. What data types are available?

2. What are the total value and quantity?

3. where are the certain data quantity located?

Inventory Data Mining helps to enable an effective Inventory Planning Model,

which allows an organization to adopt the optimal quantity as well as timing, with
the objective of achieving LEAN practice and improve sales.

Lead time Calculation

Lead time is the time between the initiation and completion of a production
process.

Total Lead time is the total time that need perform production till completion.
These includes Supply chain management, manufacturing, logistics transportation
and clearance

How to calculate lead time?

Sample of Total lead time for production and export

Total Lead time (for incoming and outgoing inventory or SKUs)

= Supply Chain Management + Manufacturing + Logistics + Transportation

How to calculate total lead time in Excel 

1. Input your date (in this example is either at Purchase Order Creation date or
Sales Order Creation date).
2. Input the Supply Chain Management and Production Lead time. This should be
in days (in this example enter the total days at Supplier Lead time or Kitting and
Production Lead time).
3. Input the Logistics and Transportation Lead time. This should be in days (in this
example enter the total days at Logistics).
4. Total Lead time (Days) is the sum of Supply Chain Management, Production
Lead time and Logistics) (e.g., D6=B6+C6).
5. Create a formula to add the days to the date (e.g., E6=A6+D6).
6. Estimate Arrival date (ETA) is the either Purchase Order Creation Date or Sales
Order Creation Date. Format the result as a date.

Aging Inventory
An Aging Inventory is the inventory that has been identify as slow-moving base
on Demand Forecast Planning, plus an additional cost to the warehouse or stores
for storage of the inventory until it is used or sole.

The role of inventory management is to maintain a desired stock level of specific

products or items. The desired level is for fulfillment of demand, while minimized
the inventory holding cost.
Analysis of the Aging Inventory base on Table 1

1. Aging Days Categories

a. To Categorize the Aging Days Categories (Column J)
b. Excel Formula of Nested IF  =IFS(I2<=50,"1-50days", I2<=100,"51-
100days", I2<=150,"101-150days", I2<=200,"151-200days",
I2>=200,">200days")
2. Based on the aging days, compute the total amount (Cell H24)
3. Provision of inventory aging amount base on Pareto, 80/20 rules
4. This example, the inventories of ITEM A_1 to ITEM A_5, can be provision for
further disposition.
5. Further Inventory disposition plan can be via the following methods
 Scrap
 Cross sales
 Reduce future buy, if possible, based on forecast

Perishable Inventory
Aged inventory is basically the products which are either slow-moving and in very
low demand, or barely sell at all. To add to the complication of age inventory
management is Perishable inventory.

A perishable good is any product in which will be expiry date or due to

environmental conditions through time, such as meat and meat by-products, fish
and seafood, dairy products, fruit and vegetables, flowers,
pharmaceutical products, and chemicals.

For the inventory with expiry windows after inventory has been received for sales
and process, the expiry windows could be computed and monitored.
The example: A simple computation to monitor the inventory’s shelf life.

 Aging Days is the count days from creation date (inventory received) to current
date

 Aging Days formula in excel  I3=DAYS(TODAY(),E3)

 Expired (180 days after Creation Date) – this is the shelf life of inventory is 180
days after the creation date.  =IF(I3<$K$1,"OK","Expired")
 Item A_4, Item A_5, Item A_6 is expired base on the 180 days of shelf life
standard.

Reorder Point
Two common questions always asked from Supply Chain practitioner is

“What is the quantity I should order?”

“When should I place the order?”

The formula for Reorder Point is

(Average Daily Usage X Lead time in Days) + Safety Stock

Table 1 illustrate the formula for calculation and analysis.

 Reorder quantity
 Reorder decision
1. Daily Run rate: Average daily run rate base on either weekly working days or
calendar days
2. Safety stock: Daily run rate *lead time  (F2*H2)
3. Reorder Quantity: (Average Daily Usage X Lead time in Days) + Safety Stock 
(F2*H2) + G2
4. Reorder Analysis: If Reorder quantity is more than Balance Quantity plus Safety
Stock, the decision is to order. As the inventory on hand will not be sufficient to
cover the daily run rate for the duration of lead time.
(=IF(I2>(E2+G2),"order","enough")

Min Max Inventory Calculation

The Min/Max inventory ordering method is the basic method of inventory
control. There are two lines

a. Min – Minimum amount of inventory is the value represents a stock level that
triggers a reorder process
b. Max- Maximum value represents the target stock level, will not trigger to
ordering activities.
Table 1 illustrate the formula for calculation and analysis. This example includes
one week of safety stock

 Reorder quantity. The Reorder Quantity

 Reorder decision. Either to order or not to order
 Min value. The level which will trigger the reordering process
 Max value. The reorder quantity.
 Safety Stock. The level of safety stock

 1.   Daily Run rate: Average daily run rate base on either weekly working days or
calendar days

2.   Safety stock: Daily run rate *lead time (=F2*G2)

3.   Min: (Daily Run Rate X Lead time) + Safety Stock ((F2*G2) + H2)

4.   Max: 2 cycles of Safety Stock (Daily Run Rate X Lead time) * 2. (=H2*2)

5.   Reorder Quantity: Reorder quantity with Safety Stock (=H2+I2)

Reorder Analysis: If Reorder quantity is more than Balance Quantity plus Safety
Stock, the decision is to order. As the inventory on hand will not be sufficient to
cover the daily run rate for the duration of lead time.

=IF(K2>(E2+H2),"order","enough")

ABC Inventory Analysis

ABC analysis is an approach for classifying inventory items based on the items'
consumption values.
Consumption value is the total value of an item consumed over a specified time
period. The period could be weeks, months or years.

The Steps to conduct an ABC Analysis are as follows:

1.   Determine periodical usage or sales for each item.

2.   Determine the percentage of the total usage or sales by item.

3.   Rank the items from highest to lowest percentage.

We will illustrate the determine of ABC via periodical usage.

1.   A classification items are very important and sometimes business critical. These
typically sold in large volumes.

2.   B classification items are important, but less important than ‘A’ items and more
important than ‘C’ items. These are typically mid-range volume

3.   C classification items are lower demand than ‘B’ items

 Table 1

Table 1 illustrated the formula

1. Total Monthly Run Rate for all the items  =SUM(D2:D10)

2. ABC% (Total Usage), is the item usage divide by Total Monthly Run Rate 
=D2/$D$11
3. ABC Classification, to classify the ABC base on ABC% (Total Usage). If Item ABC
% (Total Usage) > 20%, will be A item,). If Item ABC% (Total Usage) > 10%, will
 be B item,. If Item ABC% (Total Usage) < 5%, will be C item.  =IFS(E2>20%,
"A", E2>10%,"B",E2<5%,"C")

ABC Inventory Cycle Count Method

Cycle Count is a periodic inventory audit practice. Inventory are counted or may be
physically checked on a continuous schedule. The portion and frequency are
predefined to ensure counting of each item is at least once in a fiscal year cycle

To implement a cycle count plan, inventory is usually defined in classes A, B and C

item

Item A: are usually scheduled to be count at least once a month. The

characteristics:

 These items are subjected to a strict inventory control and is usually stored at a
secured area in terms of storage
 These items are holding high inventory cost or high demand for sales

Item B: are usually scheduled to be count at least once every two months. The
characteristics are

 These items have less inventory cost than Item A

 These items have a less strict control than Item A

Item C: are usually scheduled to be count at every three months or longer

 These items are usually lower inventory cost than Item B

 These items have high usage rate with high Reorder Point value and
frequencies
 These items are usually with bulk purchases mechanism

Table 1 illustrates how to define ABC and Cycle Count Frequencies via an Excel
Spreadsheet.
Table 1 illustrated the formula

1. Total Cost is Total of each inventory item  =D2*E2

2. ABC% (Total Usage), is the item usage divide by Total Monthly Run Rate 
=G2/$G$11
3. ABC Classification, to classify the ABC base on inventory unit cost. If Inventory
Cost more than $1000, is item A, if inventory Cost more than $100, is Item B, if
Inventory Cost less than $100, is Item C  =IFS(D2>=1000, "A",
D2>100,"B",H2<100,"C")
4. Count Period if each item. Item A is every month, Item B is every two months,
Item C is very three months.  =IFS(I2="A", "every month", I2="B","every two
months",I2="C","every three months")