Week 6

Inventory
Management

Readings: Module 2
Unit 1: “Inventory
Essentials”

Pages 105 to 145

7.1 Version
 Module 2: Inventory Management, Reverse Logistics,
The Circular Economy
Readings: Units 1 – 3
Readings:

Week 6
1 Inventory Essentials
Describes inventory levels and techniques for managing them

Week 7
2 Reverse Logistics
Describes the process of recovering value from packaging and products post-consumer

Week 8 Time off to rejuvenate

Week 9
3 The Circular Economy
Describes the circular nature of doing modern business

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 Module Learning Outcomes
Upon successful completion of this module, the individual will be able to:

Build inventory systems through a strategic approach to control inventory levels and
1 financial risks when exporting and/or importing on a global basis.

Incorporate reuse and recycling practices into inventory management systems

2 through strategic reverse logistics processes and circular supply chains.

Examine current business model and supply chain practices to identify the potential
3 value of transitioning to a circular economy business model.

3
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 Lecture Related Videos

Amazon corporate video – 5 minute video about how amazon receives inventory
http://www.youtube.com/watch?v=dAXdeqcHBp4

Amazon Inventory Management

http://www.youtube.com/watch?v=zERrqLFotSY

Challenges When demands outweigh availability

https://www.wsj.com/articles/tsmc-to-build-chip-factory-in-japan-as-it-faces-surgin
g-demand-11634207770?mod=djemlogistics_h

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 Inventory Management: Maximizing Efficiency in
Global Inventory Management
UNIT 1
Inventory Essentials
• Financial Importance of Inventory
• Selective Inventory Management
• Managing the Product Life Cycle
• Inventory Tracking and Information Technology
• Planning Inventory Storage Locations
• Selective Inventory Management Strategies
• Problem Inventories
• Inventory Management Outsourcing
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 Financial Importance of Inventory
Inventory Value - Asset
• Average inventory value
• Inventory carrying cost
• Lost sales cost
• Total policy cost
Demand
• Annual demand
• Forecast annual demand
• Lead time
• Lead time demand
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Inventory Storage Systems /
Warehouse Management System
• Minimizes disruptions
• Allows for tracking and monitoring
• Makes best use of available space
• Meets inventory storage requirements
• Establishes storage locations
• Maintains product traceability
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 Selective Inventory
Selective Inventory Management
Management
Types of Inventory
Raw Finished Work in Progress Service, Repair,
Consumables
Material Product (WIP) Replacement
Items used to Product ready for Items in the process Items used for After-market items
produce the sale and of being converted, maintaining the used to maintain
finished product consumption processed, integrity and the functioning of
assembled or functioning of the existing goods
manufactured plant or operation
Service Pipeline Contingency Safety Efficient
Inventory Inventory Inventory Stock Procurement
Inventory
Inventory to ensure Product in transit Inventory to ensure Inventory to ensure Inventory for
reasonable delivery between against unusual and adequate supply special
time manufacturer and catastrophic events until arrival of new opportunities to
customer sites stock procure supplies at
low cost
Adapted from TABLE 1.1

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 Inventory Levels
Backorder Net Inventory Equals
Customer request for inventory not immediately + On-hand stock
available when first ordered; typically filled as soon as
possible and shipped directly to the customer at + Purchase Orders
supplier’s expense. Risk of not meeting terms and + Pipeline Inventory
conditions of supply contract, or lost revenues if
customer finds alternative. - Back Orders

Net Stock Dead Stock

The amount of inventory in storage • Inventory not used for a period of time
(e.g. design change, past use by date)
On-hand Stock
• Ordered too much for sale or production
Net stock, minus product back orders to be delivered
• Typically enters reverse supply chain
to customers
Stock Out
Insufficient stock to meet demand

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 Inventory Analysis
Inventory Classification System
A-class items move out of inventory faster and should be
Based on Consumption
ABC Value
placed near ‘point in use’. B-Some monitoring may change
to A, C-less demand and low cost
Based onOpportunity
VED Costs of Shortages
Inventory items classified as Vital, Essential or Desirable

Frequency of
Based on Fast moving = high demand; Slow moving = infrequent
FSN Demand demand; Non-moving = dead stock
Based on Source of Government controlled; Outside vendor; Local vendor;
GOLF Supply Foreign
Value of
Based on
XYZ Inventory held for Waste or dead stock
Disposal

HML Based on Unit Cost Used to identify alternatives to high-cost components

Adapted from TABLE 1.2 10
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 Inventory Models
System Definition
Single period Balancing trade-off associated with insufficient order and
ordering ordering too much when supplies are purchased one time
When inventory requires constant instantaneous replenishments;
Static inventory
assumes no shortages

Replenishment Ordering is based on demand. Different models require different

models levels of inventory monitoring. For example: fixed replenishment,
continuous review, periodic review
Economic order A means to determine how much to order while minimizing
quantity holding, ordering or set up costs

Visual inventory Visual cues, such as bins with level lines, indicate when inventory
model needs to be replaced
Adapted from TABLE 1.3

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 Inventory Control Techniques
Backordering - is the process of allowing customers to
purchase products when there is insufficient stock available. This
typically occurs when demand exceeds available inventory levels.
Bulk shipments - are based on the premise that it is cheaper
to purchase and ship goods in bulk. In this situation, reordering is
less frequent, but inventory storage and service costs are high.
Cross docking - is a technique that eliminates the need for
inventory storage warehouses and requires minimal labour costs
and risks involved with inventory handling. Cross docking is when
incoming semi-trailer trucks or railroad cars unload materials
directly onto outbound trucks or rail cars, with little or no
storage time in between.
Just-in-time (JIT) - another inventory control technique,
reduces inventory levels to the minimum possible amount to
maintain customer supplies. Buyers form alliances with suppliers
to deliver products or goods rapidly when needed. They also
ensure that supplied products are quality tested so that the
buyer can minimize inspection of incoming shipments.
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Drop shipping - is similar to cross docking, but eliminates
the cost of holding inventory. Organizations who have drop
shipping agreements with their manufacturers or wholesalers
provide customer orders and shipment details to their
manufacturers or wholesalers, who then ship the goods directly
to the customers.
Consignment inventory - are goods sent by a supplier to
a customer, such as a retail chain, who undertakes to sell the
goods. The cost of this inventory is borne by the customer, but
the inventory is still owned by the supplier.
Vendor managed inventory (VMI) - is a system in
which the vendor or supplier manages the inventory that is
held at the customer’s sites. The supplier monitors inventory
levels and organizes the replenishment of stock when required.
The buyer only pays for the inventory when it is used.
ABC analysis - control measures apply different controls for
each classification to improve inventory cost performance.
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 Inventory Control Techniques - ABC
• Wilfredo Pareto propagated this theory almost a century ago that 80% of the wealth in any
society is held by 20% of its people. This principle got international acclaim as the Pareto
Principle or 80:20 Rule.
• In 1940, Joseph Juran derived ABC Analysis from Pareto Principle wherein he sought to
segregate ‘Critical Few’ from ‘Trivial Many’ of the inventory items. Pareto Principle for
Inventory Management says that 80% of the sales value is derived from 20% of the stock
items. ABC Analysis works on the same principle and recommends the basis for
classification and management of inventory.
• The ABC approach states that, when reviewing inventory, a company should rate items from
A to C, basing its ratings on the following rules:
• A-items are goods which annual consumption value is the highest. The top 70-80% of the annual consumption value
of the company typically accounts for only 10-20% of total inventory items.
• B-items are the interclass items, with a medium consumption value. Those 15-25% of annual consumption value
typically accounts for 30% of total inventory items.
• C-items are, on the contrary, items with the lowest consumption value. The lower 5% of the annual consumption
value typically accounts for 50% of total inventory items.
https://www.lokad.com/abc-analysis-(inventory)-definition#Prioritization_of_the_management_attention_0 13
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 Inventory Control Techniques - ABC

• The annual consumption value is calculated with the formula: (Annual

demand) x (item cost per unit). (i.e. = $ value)

• Through this categorization, the supply manager can identify

inventory hot spots, and separate them from the rest of the items,
especially those that are numerous but not that profitable.

https://www.lokad.com/abc-analysis-(inventory)-definition#Prioritization_of_the_management_attention_0 14
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Cross Docking

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 Cross Docking example #1: Pre-labeled or Labeled at Cross Dock

Skids arrive pre-labeled

Skids labeled on dock

Options
1. Customer orders are labeled before the shipment leaves the vendor, so pallets
arrive at the cross-dock labeled and ready for transfer to local delivery vehicles
2. Full pallet loads are received by warehouse workers at the Crossdock, who
allocate and label the pallets for (local delivery to) each customer

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 Cross Docking Terminal

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 Cross Docking is Cost Effective

CROSSDOCK

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 Managing the Product Life Cycle

Four Main Stages of a Product Life Cycle

• New product first made available

1 Launch
• Few customers, competition is low, sales low, risk high

• Product demand grows, sales start to rise

2 Growth
• Safety stock, reordering points used to optimize cost model

• Well established or saturated demand; growth slows down/levels off

3 Maturity
• Begin to lower inventory levels, with careful monitoring of demand

• Sales fall as demand decreases, often due to competing products

4 Decline
• Actions taken to reduce stock levels to avoid having obsolete stock

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 Inventory Tracking and Information Technology

Enterprise Resource Planning (ERP) System

• Integrated purchasing and manufacturing system (e.g. materials resource planning)
• Distribution system (e.g. distribution requirements planning)
• Integrated financial package
• E-commerce or electronic data interchange (EDI) capacity with suppliers & customers
• Bar coding and RFID tags in warehouses and factories
• Online inventory management (WMS)
• Online transportation data from carriers (TMS)

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 Inventory Tracking and Information Technology, Continued
Electronic Data Interchange (EDI)
o International standard computer system that allows
company-to-company electronic exchange
o EDI = quicker communication, improved science, reduced
paperwork, faster recognition sales
Stock Control System
o Computer inventory system to manage and locate raw
materials, components and finished goods
o Provides detailed information on
o What was sold
o To whom
o How quickly
o For how much
o Can automatically re-order at the right time
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E-Commerce
o Conducting business operations using the Internet
o Advantages:
1. Market access & competition
2. Improved communications
3. Real time access to data
4. Reduced costs
Barcoding and RFID Tags
o Barcodes contain product information
o RFID tags emit radio frequencies detected by reader or
sensors up to 100 metres away
Customer Relationship Management (CRM)
• Collect Customer details, contact,
• Order frequency, Marketing your products
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 Basics of Barcodes

A barcode is a square or
rectangular image
consisting of a series of
parallel black lines and
white spaces of varying
widths that can be read
by a scanner.
https://www.shopify.ca/encyclopedia/barcode
https://www.keyence.com/ss/products/auto_id/barcode_lecture/basic/mechanism/

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There are several different types
of barcode standards for different
purposes - these are called
symbologies.

Each type of symbology (or

barcode type) is a standard that
defines the printed symbol and
how a device, such as a barcode
scanner, reads and decodes the
printed symbol.

https://www.idautomation.com/product-support/barcoding-
for-beginners.html 23
 “RFID High Rack Warehouse”
• Locating
inventory to
pick and ship

• Verification

• Put away

• Physical
Inventory
(Quarterly, Bi-
annual, Annual)
https://www.youtube.com/watch?v=i_y5spiptdY
https://www.youtube.com/watch?v=R1qtwoPde0U
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https://www.youtube.com/watch?v=aEag4AuGDIY
 Selective Inventory Management Strategies
Improving data collection Avoiding economies of scale
o Know where inventory is, lead times, where cuts can be o Purchasing should match demand for product (lean)
made
o Establish good counting system
Using hedge inventory
o Forecast what is necessary to manage inventories and
Reducing lead times mitigate risks (high opportunity cost items - VED)
o Investigate faster ways to get products to customers o Keep levels aligned with product demand

Increasing production speed Basing inventories on market demand

o Work with less inventory to meet demand by getting o Pair forecast with market demand
goods faster from manufacturer

Using supplier partnerships – (Consignment, or

Having a quick response VMI)
o Collaborate with retailers to minimize inventory o Work with supplier partnerships, e.g. share information,
but avoid ownership until inventory is used

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 Enterprise Resource Planning Software - ERPs The Best Inventory
Modules Management
Software of 2020
The software should integrate
with at least one other back-
end office system, namely,
with either your accounting or
enterprise resource planning
(ERP) package.

Oracle Cloud based Software – Watch Video

https://www.oracle.com/erp/

https://www.pcmag.com/roundup/354755/the-best-i
nventory-management-software 26
 Identify Problem Inventories
Process to Identify Problem Inventories & Limit It’s Impact
1 2 3
Define the Determine value for Develop auditing &
Inventory problem each category reporting procedures

4 5 6
Establish inventory Plan and schedule
Create short-term
levels as standard disposal of problem
cure
measurement stock
7 8 9
Determine root Develop long-term
Look for solutions
causes of problem cure

Once the Problem Inventory

Has Been Identified

WHAT CAN BE DONE?

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 What to do with known Problem Inventories
• Selling the problem stock to:
• Customers
• Brokers
• Inventory clearance houses at discounted prices
• Transferring intra-company • Inventory is an Asset
• Using for R&D, product designs • Cash outlay to buy it
• Disassembling and reusing components • Recovery cash
• Reworking the stock • Cash is King!
• Using for substitutions
• Using for training
• Selling to recycling companies as scrap

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 Inventory Management Outsourcing

• 3PLs & 4PLs are an alternative to the in-house management

of inventory.

• 3PL & 4PL firms can analyze current inventory management

practices and find ways for organizations to find cost savings
throughout their forward supply chains.

• 3PLs & 4PLs can offer companies the benefits of major

Investments in multiple systems, locations, expertise in
analytics and key performance indicators (KPI)
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 “Our Warehousing Solutions
improve inventory efficiency and
accelerate your response to
changing customer demand. Our
experts design, implement, and
operate flexible warehousing and
distribution solutions tailored to
your business needs.”
https://www.logistics.dhl/hk-en/home/our-divisions/supply-chain/solutions/warehousing-solutions.html
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 Inventory Turnover (aka “Inventory Turns”)

• Inventory turnover is a ratio showing how many times a company has sold
and replaced inventory during a period.

• The company can then divide the days in the period by the inventory
turnover formula to calculate the days it takes to sell the inventory on hand.

• It can be calculated as sales divided by average inventory, or COGS (Cost of

Goods Sold) divided by average inventory.

https://www.investopedia.com/terms/i/inventoryturnover.asp 31
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 2 Approaches that firms can use
Sales Divided By Average Inventory
• As an example, assume company A has $1 million in sales and $250,000 in COGS. The average inventory is $25,000. Using
the first equation, the company has an inventory turnover of $1 million divided by $25,000 in average inventory, which
equals 40 turns per year.
• Translate this into days by dividing 365 by inventory turns. The answer is 9.125 days (365 ÷ 40 = 9.125)
• This means under the first approach inventory turns 40 times a year and is on hand approximately nine days.

COGS Divided By Average Inventory

• Using the second approach, inventory turnover is calculated as the cost of goods sold divided by average inventory, which
in this example is $250,000 divided by $25,000, which equals 10 turns per year.
• You can then calculate the number of inventory days by dividing 365 by 10, which is 36.5. Using the second approach,
inventory turns over 10 times a year and is on hand for approximately 36 days.
• The second approach gives a more accurate measure because it does not include non inventory costa & prefit markup.
Only compare inventory turnover that uses the same approach for an apples-to-apples comparison.

https://www.investopedia.com/terms/i/inventoryturnover.asp
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 Industry Turns “Rules of Thumb”

• Try to increase your number of turns

• This should be done slowly to avoid dramatically increasing or
decreasing inventory levels

• Increasing “out of stocks” may be an indication your

inventory is turning too frequently
• Results in a decrease in customer satisfaction

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© 2017 FITT All Rights Reserved http://www.strategosinc.com/articles/inventory/warehouse_inventory_turns.htm
 Why Is This
Important?

Because
inventory
affects financial
performance!

Inventory is
An asset! https://
www.scmr.com/
search/results/
search&keywords=inv
entory+turns+gartner
&category=
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 FINAL CHECK Test your understanding on the knowledge, skills and concepts
presented in this module and practice for other FITT assessments.

35
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 FINAL CHECK Test your understanding on the knowledge, skills and concepts
presented in this module and practice for other FITT assessments.

36
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 FINAL CHECK Test your understanding on the knowledge, skills and concepts
presented in this module and practice for other FITT assessments.

37
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 In-class Week 6 Group Case Study # 2
• REMINDER: Term Project is due Saturday Oct 21at 11:59 PM – Questions???
• REMINDER: Any missed quizzes – Follow the make up process in announcements
• The rest of today’s class is devoted to completing your second in-class Case study
assignment
• Once completed, the class is over
• Week 6 Group Case Study Quiz #2
• This is an open-book group assignment.
• All group members must be present (now) to participate. (In groups)
• This assignment is marked out of 20 points and is worth 3.75% of your course grade.
• Only 1 Group Member submits
• Others submit blank quiz
• PASSWORD is _______
• Next Class Reading: Reverse Logistics Pages 147 to 182 38
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