Course Title: LogisticsManagement SCM1301

Chapter 7: Inventory

‫المخزون‬
Chapter Contents

1. Why hold inventory?

2. Inventory functionality
3. Inventory strategy
4. Aggregate Inventory
5. Factors influencing service level
6. Factors influencing inventory level
7. Types of inventory
8. Applications in inventory management
Learning Objectives

You should be able to understand :

LO 7.1. The utility of inventory and its functionalities
LO 7.2. The factors influencing inventory management
LO 7.3. How to manage the inventory by using scientific methods
481854 IN assestLiabitig
Inventory Avalible
• Inventory is the total amount of goods or materials a business has on hand.
.‫المخزون هو إجمالي كمية السلع أو المواد التي يمتلكها العمل في يده‬
Example:
• Imagine you run a small bookstore. Your inventory includes all the books you
have in stock, from bestsellers to textbooks. If a customer comes in and buys a
novel, you update your inventory to show that you have one less novel
available.
storybook
Inventory is the stock of products or materials that a business keeps to sell or use
in its operations.
Example:
1
• If you own a bakery, your inventory includes all the flour, sugar, and eggs you
have, as well as the cakes and pastries you’ve baked and are ready to sell.
Why Hold Inventory?
Inventory in logistics management refers to the stock of goods, materials, or
products held by a company at various stages of the supply chain, including raw
materials, work-in-progress, and finished goods.
• Economies of scale Less Investent
– Purchasing advantages
Higher benefits
– Transportation advantages 0.5 1
– Manufacturing advantages

0• Matching supply and demand

– Seasonality
0.5 3

– Speculative
– Maintaining supply sources
• Buffering against uncertainty
– Uncertain demand 0.5
2
– Uncertain supply
Inventory Functionality
Inventory Strategy and Rationale
Inventory Strategy and Rationale (cont.)
Aggregate Inventory
Factors Influencing Service Levels

• Service level objectives

• Average inventory (rate of demand, safety stock)
• Number of products (forecasting, complexity, ICC)
• Supply chain structure
• Inventory cost structure
Factors Influencing Inventory Levels Memorize

im
• Transportation mode
• Warehouse locations/number
• Customer requirements
• Supply availability
• Channel position
• Order costs/requirements
• Cost of Capital
1
Inventory Carrying Cost Inventory investment
Components Capital Insurance
costs
Taxes

Inventory Plant warehouses

service costs Public warehouses
Inventory
carrying Rented warehouses
costs
Storage Company-owned warehouses
space costs
Obsolescence

Damage
Inventory
risk costs Pilferage

Relocation costs
Sample Inventory Carrying Cost Percent
Damage, Interest &
Warehouse Pilferage, Cost of Insurance
Industry Operating Storage Obsolescence Capital & Taxes TOTAL
CPG (1) 6.00% 8.00% 3.00% 6.00% 23.00%
Chemical (1) 3.00% 2.00% 3.00% 10.00% 18.00%
Electronics (1) 2.50% 3.00% 1.50% 13.50% 2.00% 22.50%
CPG (2) 8.92% 2.75% 0.53% 5.25% 0.29% 17.74%
Chemical (2) - - 2.00% 48.00% 50.00%
Electronics (2) - 2.00% 1.00% 12.00% 2.00% 17.00%
Inventory Carrying Cost Components
Sawtooth Inventory Model

Units

Level of Inventory Average Inventory (1/2 Q)

T Leadtime
Types of Inventory

• Cycle or working (work-in-process) stock

• Transit inventory
• Speculative inventory
• Obsolete inventory
finished
• Safety or buffer inventory
• Average inventory =
Order Quantity
+ Transit + Speculative + Obsolete + Safety Stock
2
Inventory Cycle for Typical Product
2 months
Average
Inventory
1.5 months

Cycle
1.0 months
Safety stock Obsolete
In-transit Speculative

1 2
Inventory Cycle for Typical Product
2 months
Average
Inventory
1.5 months

1.0 months

Safety Stock

1 2
Elements Influencing Average Inventory

𝑶𝑸
𝑨𝒗𝒈 = + 𝑺𝑺 + 𝑰𝑻
𝟐

Avg  average inventory level

OQ  average replenishment order quantity
SS  average safety stock level
IT  average in-transit inventory
Economic Order Quantity How much to order?

𝟐𝑪𝒐 𝑫
𝑬𝑶𝑸 =
𝑪𝒊 𝑼

EOQ  Economic Order Quantity

Co  cost per order
Ci  annual inventory carrying cost
D  annual sales volume in units
U  cost per unit
Reorder Point and Safety Stock When to order?

𝑹𝑶𝑷 = 𝑳𝑻𝑫𝑫 + 𝑺𝑺

ROP  reorder point

LT  replenishment lead time
DD  average daily demand
SS  safety stock
Inventory Cycle for Typical Product
2 months
Average
Inventory
1.5 months

1.0 months

Safety Stock

1 2
Impact of Uncertainty on Safety Stock Requirements

𝒈(𝒌) × 𝝈𝒄 𝑶𝑸
𝑺𝑳 = 𝟏 − 𝒈(𝒌) = 𝟏 − 𝑺𝑳 ×
𝑶𝑸 𝝈𝒄

g(k)  Normal loss integral for safety factor k

SL  desired service level in percent unit fill rate
OQ  order quantity
c  standard deviation of lead time demand
Combining Demand and Lead Time Uncertainty

+
Lead Time Demand
LT = 5 days DD = 100 units
LT = 1.0 DD = 20

= Average
Lead Time Demand
LTD = LT  DD = 500
Example Safety Stock Calculation
Key parameters 𝑂𝑄
𝑔 𝑘 = 1 − 𝑆𝐿 ×
SL = 99% availability 𝜎𝑐
200
DD =100 units/day, DD = 20 = 1.0 − 0.99 ×
109
LT = 5 days, LT =1 = 0.0183 → 𝑘 = 0.5 (from table)
OQ = 200 units
𝑆𝑆 = 𝑘 × 𝜎𝑐 = 0.5 109 = 55 units
Combined uncertainty
𝑅𝑂𝑃 = 𝐷𝐷 × 𝐿𝑇 + 𝑆𝑆
𝜎𝑐 = 2
𝐿𝑇 × 𝜎𝐷𝐷 2
+ 𝐷𝐷2 × 𝜎𝐿𝑇 = 500 + 55 = 555 units

= 100 20 + (5)(1.02 ) When inventory-on-hand plus on-order

= 108.45 (round to 109) is less than or equal to 555, order 200.
Table of Normal Loss Integral

k g(k) k gk) k g(k)

0.0 0.3989 0.7 0.1428 1.4 0.0366
0.1 0.3509 0.8 0.1202 1.5 0.0293
0.2 0.3068 0.9 0.1004 1.6 0.0232
0.3 0.2667 1.0 0.0833 1.7 0.0142
0.4 0.2304 1.1 0.0686 1.8 0.0110
0.5 0.1977 1.2 0.0561 1.9 0.0084
0.6 0.1686 1.3 0.0455 2.0 0.0074
Supply Chain Planning

• Software applications used by manufacturers and

distributors to decide what products to build or ship
and when to build or ship them
• Decisions based on forecasts, current orders-in-hand,
and availability of resources
• Plan generation based on multiple constraints,
including materials and capacity
Conceptual Design of Integrated MRP/DRP System
Raw Materials

Part A Part B Part C Part D Part E

Module 1 Module 2

Assembly Operation

Plant Warehouse

Regional Warehouse Direct Warehouse

Local Local
Warehouse A Warehouse B

Retailers/Customers
 Eastern Past Weeks
Distribution Requirements Planning Example Distribution Center due 1 2 3 4 5 6 7 8
Gross requirements 100 120 150 130 100 80 70 90 Safety stock – 100
Scheduled receipts 0 0 400 0 0 0 400 0 Order quantity – 400
Lead time – 2 weeks
Projected on-hand 400 300 180 430 300 200 120 450 360
Planned orders 400 0 0 0 400 0 0 0

Past Weeks
Plant Warehouse due 1 2 3 4 5 6 7 8
Gross requirements 400 150 0 150 550 0 0
0 Safety stock –100
Batch Size – 600
Scheduled receipts 0 600 0 600 0 0 0 0
Lead time – 1 week
Projected on-hand 600 200 650 650 1100 550 550 550 550
Planned orders 600 0 600 0 0 0 0 0

Western Past Weeks

Distribution Center due 1 2 3 4 5 6 7 8
Gross requirements 40 50 60 90 70 100 40 30 Safety stock – 50
Order quantity – 150
Scheduled receipts 0 0 150 0 150 150 0 0
Lead time – 1 week
Projected on-hand 200 160 110 200 110 190 240 200 170
Planned orders 0 150 0 150 150 0 0 0
APS Framework
Advanced
Sample APS Planning Situation
Time Period 1 2 3 4 5
Requirement 200 200 200 600 200
Production capacity 300 300 300 300 300
Alternative 1 (overtime):
Production 200 200 200 600* 200
Inventory carryover - - - - -
Alternative 2 (build ahead):
Production 300 300 300 300 200
Inventory carryover 100 200 300 - -
APS System Modules

Requirements
Resource Management
Optimization

Demand Management Resource Allocation

ERP/Legacy System
Inventory Control

Perpetual review Periodic review

ROP  reorder point P  review period in days
D  average daily demand in units
T  average performance cycle length 𝑃
𝑅𝑂𝑃 = 𝐷 × 𝑇 + + 𝑆𝑆
SS  safety or buffer stock in units 2

𝑅𝑂𝑃 = 𝐷 × 𝑇 + 𝑆𝑆
Collaborative Inventory Replenishment

• Quick response
• Vendor-managed inventory (VMI)
• Profile replenishment
Suggested Inventory Management Logic
Postponement

• Manufacturing postponement
• Geographic postponement
Sample Integrated Strategy
SKU Service Review Inventory Stocking
Category Objective Forecast Period Mgmt Policy
Promotional
100% CPFR Daily APS Scheduled
A

A 99% Top down Daily APS Full line

Bottom up Select
B 98% Weekly APS
Time series locations
Bottom up
C 90% Weekly APS Centralized
Time series
1. Inventory refers to the stock of goods, materials, or products held by a company at a specific
time.
2. Safety stock is the maximum level of inventory that should be held to avoid stockouts.
3. Inventory turnover ratio indicates how many times a company's inventory is sold and
replaced during a period.
4. Just-in-time (JIT) inventory management aims to keep inventory levels as high as possible to
ensure availability.
5. ABC analysis categorizes inventory items based on their importance and value.
6. Cycle counting is a periodic method of inventory counting where a portion of the inventory
is counted every day.
7. Lead time in inventory management refers to the time taken to place an order and receive
the goods.
8. Excess inventory ties up capital and increases holding costs.
9. Inventory carrying costs include costs related to storage, insurance, and obsolescence.
10.Stockout costs refer to the costs associated with holding excess inventory.
➢ Inventory refers only to finished goods held by retailers for sale to customers.

➢ Inventory management is primarily concerned with maximizing inventory levels to ensure product
availability.

➢ Holding excessive inventory can tie up capital and increase storage costs.

➢ Just-In-Time (JIT) inventory management aims to minimize lead times and inventory holding costs by
ordering goods only when needed for production.

➢ Economic Order Quantity (EOQ) is a method used for maintaining inventory levels at a fixed amount.

➢ Safety stock is the minimum level of inventory that should be maintained to avoid stockouts.

➢ ABC analysis categorizes inventory items based on their importance and value to the organization.

➢ Inventory turnover ratio measures how quickly inventory is sold or used up within a specific time period.

➢ Cycle counting is a periodic inventory auditing technique that involves counting a small subset of inventory
items each day.

➢ Just-In-Time (JIT) inventory management is not suitable for industries with high demand variability or
long lead times.
1. What does Safety Stock refer to in inventory management?
1. A) The maximum level of inventory that should be held
2. B) The average level of inventory
3. C) Additional inventory held to mitigate uncertainties in demand and supply
4. D) Inventory that is ready for shipment
5. Answer: C) Additional inventory held to mitigate uncertainties in demand and supply
2. Which of the following methods categorizes inventory based on its value and importance?
1. A) FIFO (First-In, First-Out)
2. B) LIFO (Last-In, First-Out)
3. C) ABC Analysis
4. D) EOQ (Economic Order Quantity)
5. Answer: C) ABC Analysis
3. What is Inventory Turnover Ratio used for?
1. A) To measure the profit margin of inventory
2. B) To calculate the average inventory level
3. C) To evaluate how efficiently inventory is being managed
4. D) To determine the lead time of inventory
5. Answer: C) To evaluate how efficiently inventory is being managed
4. Which inventory management technique aims to minimize the costs associated with holding inventory?
1. A) Safety Stock
2. B) Just-In-Time (JIT)
3. C) Economic Order Quantity (EOQ)
4. D) ABC Analysis
5. Answer: C) Economic Order Quantity (EOQ)
5. What does Lead Time in inventory management refer to?
1. A) The time taken to place an order and receive the goods
2. B) The time taken to sell inventory
3. C) The time taken to manufacture a product
4. D) The time taken to count inventory
5. Answer: A) The time taken to place an order and receive the goods
 Bowersox, Closs, Cooper & Bowersox (2024) “Supply Chain Logistics Management”,
international Edition, McGraw Hill Irwin, Ed. 6th. ISBN 978-1-265-07260-5.

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Course Title: LogisticsManagement SCM1301

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