Inventory Management – Important Points – Summary – Krajewski – 12th Edition

Learning Goals –  Inventory Management

Inventory Trade-offs 
  • Identify the advantages, disadvantages, and costs of holding inventory.
Types of Inventory 
  • Define the different types of inventory and the roles they play in supply chains.
Inventory Reduction Tactics 
  • Explain the tactics for reducing inventories in supply chains.
ABC Analysis 
  • Use ABC analysis to determine the items deserving most attention and tightest inventory control.
Economic Order Quantity 
  • Calculate the economic order quantity and apply it to various situations.
Continuous Review System 
  • Determine the order quantity and reorder point for a continuous review inventory control system.
Periodic Review System 
  • Determine the review interval and target inventory level for a periodic review inventory control system


Ford’s Smart Inventory Management System (SIMS)

Inventory Trade-offs 
Pressures for Small Inventories
Pressures for Large Inventories
Managerial Practice 9.1 Inventory Management at Netflix

The challenge in inventory management is not to pare inventories to the bone to reduce costs or to have plenty around to satisfy all demands, but to have the right amount to achieve the competitive priorities of the business most efficiently.
This of efficiency can only happen if the right amount of inventory is flowing through the supply chain—through suppliers, the firm, warehouses or distribution centers, and customers. A very important issue of  inventory management is lot sizing, which is the determination of how frequently and in what quantity to order inventory.
Is inventory a boon or a bane? Inventory has a cost and therefore holding it  reduces profitability. But, too little inventory  creates shortages in the supply chain, leads to loss of contribution & profit and  damages customer confidence. Inventory planning has to be done by taking into consideration conflicting trade-offs. Overall inventory cost in the system can be reduced only by reducing the conflicting costs individually.  Industrial engineering or productivity analysis and improvement have to be done on the ordering/set-up cost and warehousing costs. 

Types of Inventory

Accounting Inventories: Heads of accounts under which accounting entries are made for inventory purchases and issues.

Raw materials  are the basic material items  needed for the production of components or for doing a service.
Work-in-process (WIP) consists of items, such as components or sub-assemblies, needed to produce a final product in manufacturing.
Finished goods (FG) in manufacturing plants, warehouses, and retail outlets are the items sold
to the customers.

Operational Inventories

Inventories are classified as independent demand items (items demanded by customers) and
dependent demand items (items required to produce finished goods bought by customers).,

Inventories are also classified based on the reason why they are  created. In this classification , inventory is in four ways: (1) cycle, (2) safety stock, (3) anticipation, and (4) pipeline. The determination of inventory based on trade-offs or conflicting costs differs for each type of inventory.

Inventory Reduction Tactics 

Cycle Inventory 

Reduce lot size.

Simplify the methods for placing orders and reduce ordering cost (Important example: Kanban – zero cost communication of order or component requirement). Implement setup time reduction method study (industrial engineering)  to reduce setup costs (SMED, Reduction of tool change time in CNC machines).
Increase repeatability or standardization in multiple products.: If a component is used in many products, its cycle inventory will be less compared to the cycle inventory that held for number of different components for different products.
For Supply Chain Management Book Chapter
Managing Economies of Scale in the Supply Chain: Cycle Inventory – Chopra and Meindl’s book chapter

Safety Stock Inventory 

Safety stock can be reduced by reducing uncertainty about demand information. supply lead times and quantities, and quality problems. This reduction is achieved through

1. Improving e demand forecast methods. Supply chain design to increase collaboration with customers to get information for changes in demand levels.
2. Cutting down the lead times of purchased or produced items to reduce demand uncertainty over the long lead times. This is achieved by flexible production facilities which allow small batch sizes.. Local suppliers may be able to supply small lots with shorter lead times.
3. Reduce supply uncertainties by partnerships on long term contract basis and sharing of production plans. The mechanisms to increase collaboration with suppliers help. Collaboratively reduce
unexpected scrap or rework by improving manufacturing processes to six sigma levels. Promote preventive maintenance of equipment to  minimize unexpected downtime.
4. Create equipment and labor buffers and develop cross-trained workers to cater to increased demands instead of carrying safety inventories. Potential overtime is a buffer of this nature.

Managing Uncertainty in the Supply Chain: Safety Inventory – Review Notes on Chopra and Meindl’s BooK

Anticipation Inventory 

The primary lever  is to match increased demand for a product  with increase in production.

1. Produce multiple products with different demand cycles so that a peak in the demand for one product compensates for the seasonal low for another and thus increase in demand is satisfied by increase in production for that item.

Secondary levers can be used to influence and even out customer demand by providing off-season promotional campaigns or by offering seasonal pricing plans

Pipeline Inventory

Inventory in production and transport pipelines is a function of demand during the lead time. Hence the primary way is to reduce the lead time and throughput time of the process. The line or lean manufacturing process give less pipeline inventories.

The other ways that  can help managers cut lead times:
1. Find  suppliers and carriers who offer lower lead times. Improved materials handling within the plant also will help. Improving the information system could reduce information transmission, processing, action and confirmation between supply chain tiers.
2. Reduce lot size in those cases where the lead time depends on the lot size.

ABC Analysis based Inventory Planning

ABC analysis based inventory planning is the process of dividing the inventory items, termed store keeping units (SKUs) into three classes according to their dollar usage and using three different planning methods to minimize total inventory. A typical breakup is items accounting for 80% of the total dollar value are A items. Items accounting for the next 15% are B items. Rest are C items. For A items, month demand is forecasted and orders are placed to receive the material at the beginning of the period. B items are ordered based on continuous period system or periodic review system. C items are ordered in bulk once or twice a year. 

This method is the equivalent of creating a Pareto chart and focusing on important factors except that it is applied to inventory rather than to process error causes.

Economic Order Quantity
Calculating the EOQ
Managerial Insights from the EOQ

The EOQ is a reasonable approximation for determination of the appropriate lot size, even when several of the assumptions of the model do not quite apply. To determine the EOQ begin by formulating the total cost for any lot size Q for a given SKU. Next,  derive the EOQ, which is the Q that minimizes total annual cycle-inventory cost.

The simple formula that will come is
EOQ = SQRT of (2DS/H)

The insight:  The reduction of ordering  or setup cost reduces lot size. It is  especially important important insight that lead to development of lean systems. This relationship explains why manufacturers are taking steps to reducing setup time and costs. It makes small lot production economic.

Continuous Review System 
Selecting the Reorder Point when Demand and Lead Time Are Constant
Selecting the Reorder Point when Demand Is Variable and Lead Time Is Constant
Selecting the Reorder Point when Both Demand and Lead Time Are Variable
Systems Based on the Q System
Calculating Total Q System Costs
Advantages of the Q System

A continuous review also called Q system or  a reorder point (ROP) system or fixed order quantity system, tracks the remaining inventory of a SKU each time a withdrawal is made to determine whether it is time to reorder. In practice, these reviews are done daily for the issues made on that day. 

When the inventory position of a SKU reaches a predetermined minimum level, called the reorder point level (R), a fixed quantity Q (EOQ) of the SKU is ordered.

Periodic Review System
Selecting the Time Between Reviews
Selecting the Target Inventory Level when Demand Is Variable and Lead Time Is Constant
Selecting the Target Inventory Level when Demand and Lead Time Are Variable
Systems Based on the P System
Calculating Total P System Costs
Advantages of the P System

An alternative inventory control system is the periodic review (P) system. It is also  called a fixed interval reorder system or periodic reorder system. In this system of inventory ordering an item’s inventory position is reviewed periodically and order is placed for each SKU for a quantity equal to maximum specified stock for the SKU and the current stock level. Therefore, a new order for each SKU is always placed at the end of each review, but  the lot size, Q, may change from one order to the next for different SKUs.  A simple example of a periodic review system is that of sales persons supplying multiple items to a retailer. They make a daily or weekly rounds of grocery stores and based on review stocks for various items in the store, restocks the store with enough items.  This is based on the concept of maximum stock for each item to meet expected demand for coming period. Maximum level is determined based on cycle stock inventory and safety stock inventory models.

Learning Goals in Review
Video Case Inventory Management at Crayola
Experiential Learning 9.1 Swift Electronic Supply, Inc.
Case Parts Emporium 369

SUPPLEMENT C Special Inventory Models
Noninstantaneous Replenishment
Quantity Discounts
One-Period Decisions
Learning Goals in Review

PART III: MANAGING SUPPLY CHAINS – Krajewski 12 Edition Chapters

12. Supply Chain Design

13. Supply Chain Logistic Networks

14. Supply Chain Integration

15. Supply Chain Sustainability

Supply Chain Management: Chopra and Meindl’s Book Chapters – Important Points

Top Global Companies for Supply Chain Excellence – Supply Chain Strategies and Initiatives

Index to Summaries of all Chapters of Krajewski’s Book

Operations Management – Krajewski – 12th Edition – Chapter Summaries – Important Points